<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus Dated September 6, 1996)
$330,000,000
(Approximate)
Advanta Mortgage Loan Trust 1996-4
$210,000,000 Class A-1 Group I Certificates
$120,000,000 Class A-2 Group II Certificates
Mortgage Loan Asset-Backed Certificates, Series 1996-4
Advanta Mortgage Conduit Services, Inc.
Sponsor of the Trust
Advanta Mortgage Corp. USA
Master Servicer
The Mortgage Loan Asset-Backed Certificates, Series 1996-4 (the
"Certificates") offered hereby will consist of two classes of variable rate
Class A Certificates, the Class A-1 Group I Certificates (the "Class A-1
Certificates") and the Class A-2 Group II Certificates (the "Class A-2
Certificates" together with the Class A-1 Certificates, the "Class A
Certificates" or the "Offered Certificates"). The Certificates will also include
one or more classes of subordinate certificates (the "Class R Certificates").
Only the Offered Certificates are offered hereby.
The Certificates will represent undivided ownership interests in one of
two groups of closed-end mortgage loans (the "Mortgage Loans") held by the
Advanta Mortgage Loan Trust 1996-4 (the "Trust"). The Trust will be created
pursuant to a Pooling and Servicing Agreement (the "Pooling and Servicing
Agreement") among Advanta Mortgage Conduit Services, Inc., in its capacity as
the sponsor (the "Sponsor") of the Trust, Advanta Mortgage Corp. USA, in its
capacity as master servicer (the "Master Servicer") of the Mortgage Loans and
Bankers Trust Company of California, N.A., as trustee (the "Trustee"). On or
prior to the Closing Date the Sponsor will acquire the Mortgage Loans from the
Originators, as described herein. The obligations of the Sponsor and of the
Master Servicer with respect to the Certificates will be limited to their
respective contractual obligations under the Pooling and Servicing Agreement.
The assets of the Trust will include two groups (each, a "Mortgage Loan Group"
or "Group", and together the "Mortgage Loan Pool") of Mortgage Loans secured by
mortgages or deeds of trust (the "Mortgages") on one-to-four family residential
properties (the "Mortgaged Properties") to be conveyed to the Trust on the
Closing Date. The Class A-1 Certificates will represent undivided ownership
interests in a sub-trust of Mortgage Loans having fixed rates of interest
("Group I"). All of the Group I Mortgage Loans have remaining terms to maturity
of 30 years or less and are secured by Mortgages which may be either in a first
or in a junior lien position. The Class A-2 Certificates will represent
undivided ownership interests in a sub-trust of variable rate Mortgage Loans
("Group II") with a maximum remaining term to maturity of 30 years secured by
Mortgages which may be either in a first or in a junior lien position.
For a discussion of certain risk factors regarding an investment in the
Offered Certificates, see "Risk Factors" on page S-18 herein and on page 13 in
the accompanying Prospectus.
(cover continued on next page)
FGIC LOGO
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS ONLY IN THE TRUST
CREATED BY THE POOLING AND SERVICING AGREEMENT AND DO NOT REPRESENT INTERESTS IN
OR OBLIGATIONS OF ADVANTA MORTGAGE CONDUIT SERVICES, INC., ADVANTA MORTGAGE
CORP. USA, OR ANY ORIGINATOR. NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE
LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Offered Certificates will be offered by the Underwriters from time
to time to the public in negotiated transactions or otherwise at varying prices
to be determined at the time of the related sale. Proceeds to the Sponsor are
anticipated to be approximately $329,122,500 from the sale of the Offered
Certificates before deducting expenses payable by the Sponsor, estimated to be
$500,000. The Underwriters have agreed to reimburse the Sponsor with respect to
certain of such expenses.
The Offered Certificates are offered subject to prior sale when, as,
and if accepted by the Underwriters and subject to the approval of certain legal
matters. It is expected that delivery of the Offered Certificates in book-entry
form will be made on or about December 19, 1996 only through The Depository
Trust Company, Euroclear and Cedel S.A.
PRUDENTIAL SECURITIES INCORPORATED
MORGAN STANLEY & CO.
Incorporated
SALOMON BROTHERS INC
December 6, 1996
<PAGE>
On or before the issuance of the Certificates, the Sponsor will obtain
from Financial Guaranty Insurance Company (the "Certificate Insurer") a
certificate guaranty insurance policy relating to the Offered Certificates (the
"Certificate Insurance Policy"), in favor of the Trustee.
The Offered Certificates will initially be issued in book-entry form.
Persons acquiring beneficial ownership interests in such Offered Certificates
("Beneficial Owners") may elect to hold their interests through The Depository
Trust Company ("DTC"), in the United States, or Centrale de Livraison de Valeurs
Mobiliers, S.A. ("CEDEL") or the Euroclear System ("Euroclear"), in Europe. The
Offered Certificates will be offered in Europe and the United States of America.
Distributions of principal and interest payable on each Class of
Offered Certificates will be made on the 25th day of each month or if the 25th
day is not a business day, the first business day thereafter (each, a "Payment
Date"), beginning January 27, 1997.
An election will be made to treat certain assets of the Trust as one or
more REMICs for federal income tax purposes. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
Prior to their issuance there has been no market for the Offered
Certificates nor can there be any assurance that one will develop, or if it does
develop, that it will provide the Owners of the Offered Certificates with
liquidity or will continue for the life of the Offered Certificates. Prudential
Securities Incorporated, Morgan Stanley & Co. Incorporated, and Salomon Brothers
Inc (the "Underwriters") intend, but are not obligated, to make a market in the
Offered Certificates.
Until 90 days from the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates, whether or not participating
in this distribution, may be required to deliver a prospectus and a prospectus
supplement. This is in addition to the obligation of dealers to deliver a
prospectus and a prospectus supplement when acting as underwriters and with
respect to their unsold allotments or subscriptions.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Sponsor has filed a Registration Statement under the Securities Act
of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") on behalf of the Trust with respect to the Offered
Certificates offered pursuant to the Prospectus dated September 6, 1996 and this
Prospectus Supplement. For further information, reference is made to the
Registration Statement and amendments thereof and to the exhibits thereto, which
are available for inspection without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
7 World Trade Center, 13th Floor, New York, New York 10048; and at The
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of the Registration Statement and amendments thereof and
exhibits thereto may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
S-2
<PAGE>
REPORTS TO THE CERTIFICATEHOLDERS
So long as the Offered Certificates are in book-entry form, monthly and
annual reports concerning the Certificates and the Trust will be sent by the
Trustee to Cede & Co., as the nominee of DTC and as registered holder of the
Offered Certificates pursuant to the Pooling and Servicing Agreement. DTC will
supply such reports to Beneficial Owners in accordance with its procedures. See
"Special Considerations," "Description of the Securities --Form of Securities"
and " -- Reports to Securityholders" in the Prospectus. To the extent required
by the Securities Exchange Act of 1934, as amended, the Trust will provide
financial information to the Owners which has been examined and reported upon,
with an opinion expressed by an independent public accountant; to the extent not
so required, such financial information will be unaudited. The Sponsor has
determined that the financial statements of no entity other than the Certificate
Insurer are material to the offering made hereby. The Trust will be formed to
own the Mortgage Loans, and to issue the Certificates. The Trust will have no
assets or obligations prior to issuance of the Certificates and will engage in
no activities other than those described herein. Accordingly, no financial
statements with respect to the Trust are included in this Prospectus Supplement.
The audited financial statements of the Certificate Insurer are set forth in
Appendix A hereto, and the unaudited interim financial statements of the
Certificate Insurer are set forth in Appendix B hereto.
S-3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Index of Principal Defined
Terms for the location in the Prospectus of the definitions of certain
capitalized terms.
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Issuer ........................................ Advanta Mortgage Loan Trust 1996-4
Securities Offered............................... Class A-1 Group I Certificates (the "Class A-1 Certificates")
and Class A-2 Group II Certificates (the "Class A-2
Certificates" together with the Class A-1 Certificates, the
"Class A Certificates" or the "Offered Certificates").
Sponsor.......................................... Advanta Mortgage Conduit Services, Inc., a Delaware
corporation. The Sponsor's
principal executive offices are
located at 16875 West Bernardo
Drive, San Diego, California
92127, and its phone number is
(619) 674-1800.
Master Servicer.................................. Advanta Mortgage Corp. USA, a Delaware corporation. The
Master Servicer's principal executive offices are located at
16875 West Bernardo Drive, San Diego, California 92127.
Originators...................................... The Mortgage Loans to be acquired by the Trust from the
Sponsor will be acquired by the Sponsor from Affiliated
Originators or from one or more Unaffiliated Originators.
Certain of the Mortgage Loans have been acquired by the
Sponsor in Bulk Acquisitions. See "The Mortgage Loan Pool"
herein.
Cut-Off Date..................................... December 1, 1996.
Closing Date..................................... December 19, 1996.
The Certificates................................. The Mortgage Loan Asset-Backed Certificates, Series 1996-4
(the "Certificates") will consist of the Offered Certificates and
one or more classes of subordinate certificates (the "Class R
Certificates"). The Certificates will be issued pursuant to a
pooling and servicing agreement (the "Pooling and Servicing
Agreement") to be dated as of December 1, 1996 among the
Master Servicer, the Sponsor and Bankers Trust Company of
California, N.A., as Trustee (the "Trustee"). Only the Offered
Certificates are offered hereby.
The assets of the Trust will include two groups of closed-end
Mortgage loans secured by mortgages on one-to-four family
residential properties to be conveyed to the Trust on the
Closing Date. The Class A-1 Certificates will represent
undivided ownership interests in a sub-trust of Mortgage Loans
having fixed rates of interest. All of the Group I Mortgage
Loans have remaining terms to maturity of 30 years or less and
are secured by Mortgages which may be either in a first or in
a junior lien
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S-4
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position, together with certain other rights. The Class A-2
Certificates will represent undivided ownership interests in a
sub-trust of variable rate Mortgage Loans with a maximum remaining
term to maturity of 30 years secured by Mortgages which may be
either in a first or in a junior position, together with certain
other rights.
The final scheduled Payment Date for the Offered Certificates is
November 25, 2026 (the "Final Scheduled Payment Date"). It is
expected that the actual final Payment Date for each class of
Offered Certificates will occur significantly earlier than such
scheduled Payment Dates; see "Prepayment and Yield Considerations."
The Offered Certificates are issuable in original principal amounts
of $1,000 and integral multiples thereof, except that one
certificate for each Class of Offered Certificates may be issued in
a lesser amount.
The Certificate Insurer does not directly or indirectly guarantee
any specified rate of prepayments; see "Special Considerations."
The Mortgage Loans............................... The statistical information presented in this Prospectus
Supplement concerning the pools of Mortgage Loans (such
pools, the "Statistic Calculation Pools") does not reflect all of
the Mortgage Loans which will be included on the Closing
Date in the final pools. The Statistic Calculation Pools reflect
the Mortgage Loans acquired by the Sponsor through the Cut-
Off Date and the statistical information presented herein is
based on the number and the principal balances of such
Mortgage Loans as of the Cut-Off Date. The aggregate
principal balance of the Group I Statistic Calculation Pool is
$195,075,834.30 and of the Group II Statistic Calculation Pool
is $113,090,141.89. The Sponsor expects that the actual pools
as of the Closing Date will represent approximately
$210,000,000 in Mortgage Loans in Group I and approximately
$120,000,000 in Mortgage Loans in Group II. The additional
Mortgage Loans to be included in the final pools will represent
Mortgage Loans acquired or to be acquired by the Sponsor
prior to the Closing Date. In addition, with respect to the
Statistic Calculation Pools, as to which statistical information
is presented herein, some amortization of the Mortgage Loans
in such pools will occur prior to the Closing Date. In addition,
certain loans included in the Statistic Calculation Pools may
prepay in full or may be determined not to meet the eligibility
requirements for the final pools and as a result may not be
included in the final pools. As a result of the foregoing, the
statistical distribution of such characteristics as of the Closing
Date in the final Mortgage Loan pools will vary somewhat
from the statistical distribution of such characteristics in the
Statistic Calculation Pools as presented in this Prospectus
Supplement, although such variance will not be material. In the
event that the Sponsor does not, as of the Closing Date, have the
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S-5
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full amount of Mortgage Loans which the Sponsor expects to sell to
the Trust on such date, (i.e., approximately $210,000,000 with
respect to Group I and approximately $120,000,000 with respect to
Group II) the Sponsor will reduce the size of the offering; the
Sponsor does not expect that the original principal amount of any
class will increase or decrease by more than 5% as a result of such
non-delivery. Even if the full expected amount of Mortgage Loans is
delivered, certain adjustments (plus or minus 5%) may occur between
the class sizes.
Unless otherwise noted, all statistical percentages in this
Prospectus Supplement are measured by the aggregate principal
balance of the related Statistic Calculation Pools.
The Mortgage Loans will be predominantly home equity loans,
i.e., loans used (x) to refinance an existing mortgage loan on
more favorable terms, (y) to consolidate debt, or (z) to obtain
cash proceeds by borrowing against the Mortgagor's equity in
the related Mortgaged Property. The Mortgage Loans to be
sold to the Trust by the Sponsor consisted, with respect to the
Statistic Calculation Pools, of 4,622 Mortgages and the related
Notes on one-to-four family residential properties, including
investment properties (which may be condominiums,
manufactured homes, townhouses or homes in one-to-four
family residences), located in 49 states and the District of
Columbia. The Mortgage Loans are secured by Mortgages of
which 93.02% by principal balance are first mortgages or
deeds of trust and 6.98% are secured by junior mortgages or
deeds of trust. The Mortgage Loans are all closed-end
mortgage loans in that the mortgagee is not required to make
future advances thereunder. 99.99% of the Mortgage Loans
are Actuarial Loans or Date of Payment Loans, as defined
herein under "The Mortgage Loan Pool -- Interest Payments on
the Mortgage Loans."
None of the Mortgage Loans are insured by primary mortgage
insurance policies. There is no pool insurance insuring any of
the Mortgage Loans; however, certain distributions due to the
Owners of the Offered Certificates are insured by the
Certificate Insurer pursuant to the Certificate Insurance Policy.
See "Credit Enhancement" in this Summary and "The
Certificate Insurance Policy" and "The Certificate Insurer"
herein.
The Mortgage Loans are not guaranteed by the Sponsor, the Master
Servicer, any Originator or any of their respective affiliates. The
Mortgage Loans are required to be serviced by the Master Servicer
in accordance with the terms of the Pooling and Servicing Agreement
and with reasonable care, using that degree of skill and attention
that the Master Servicer exercises with respect to comparable
mortgage loans that it services for itself and others, which shall
constitute accepted servicing practices. See "Description of the
Securities --Collection and Other Servicing Procedures" in the
Prospectus.
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S-6
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Original Class A-1 Certifi-
cate Principal Balance......................... $210,000,000.
Original Class A-2 Certifi-
cate Principal Balance......................... $120,000,000.
Class A-1 Pass-Through Rate...................... The Class A-1 Pass-Through Rate will be equal to the lesser
of (i)(a) with respect to any Payment Date which occurs on or
prior to the Step-Up Payment Date, the London interbank
offering rate for one-month United States dollar deposits
("LIBOR") (calculated as described under "Description of the
Certificates -- Calculation of LIBOR") plus 0.295% per annum
or (b) with respect to any Payment Date thereafter, LIBOR
plus 0.59% per annum and (ii) the Class A-1 Available Funds
Pass-Through Rate for such Payment Date. The excess, if any,
of (x) the interest due on the Class A-1 Certificates on any
Payment Date calculated at the Class A-1 Formula Pass-
Through Rate over (y) the interest due on the Class A-1
Certificates calculated at the Class A-1 Available Funds Pass-
Through Rate is the "Class A-1 Supplemental Interest Amount"
for such Payment Date.
If, on any Payment Date, there is a Class A-1 Supplemental
Interest Amount calculated for any Payment Date, the Owners
of certain of the Class R Certificates have agreed to pay such
amount. If the full amount of the Class A-1 Supplemental
Interest Amount is not paid on a Payment Date, then the
amount not paid will accrue interest at the Class A-1 Formula
Pass-Through Rate until such amount is paid on subsequent
Payment Dates.
Class A-2 Pass-Through Rate...................... The Class A-2 Pass-Through Rate will be equal to the lesser
of (i)(a) with respect to any Payment Date which occurs on or
prior to the Step-Up Payment Date, LIBOR plus 0.22% per
annum or (b) with respect to any Payment Date thereafter,
LIBOR plus 0.44% per annum and (ii) the Class A-2 Available
Funds Pass-Through Rate for such Payment Date. The excess,
if any of (x) the interest due on the Class A-2 Certificates on
any Payment Date calculated at the Class A-2 Formula Pass-
Through Rate over (y) the interest due on the Class A-2
Certificates calculated at the Class A-2 Available Funds Pass-
Through Rate is the "Class A-2 Supplemental Interest Amount"
for such Payment Date. The sum of the Class A-1 Supplemental
Interest Amount and the Class A-2 Supplemental Interest Amount is
the "Supplemental Interest Amount." Net Monthly Excess Cashflow
which may be released with respect to one Mortgage Loan Group is
not required to be applied to the payment of a Supplemental
Interest Amount with respect to the other Mortgage Loan Group.
If, on any Payment Date, there is a Class A-2 Supplemental
Interest Amount calculated for any Payment Date, the Owners
of certain of the Class R Certificates have agreed to pay such
amount. If the full amount of the Class A-2 Supplemental
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Interest Amount is not paid on a Payment Date, then the
amount not paid will accrue interest at the Class A-2 Formula
Pass-Through Rate until such amount is paid on subsequent
Payment Dates.
The Certificate Insurer does not guarantee the payment of, nor
do the ratings assigned to the Class A-1 Certificates or the
Class A-2 Certificates address the likelihood of the payment of,
any Supplemental Interest Amount.
The Pooling and Servicing Agreement defines the "Class A-1
Available Funds Pass-Through Rate," as of any Payment Date,
to be an amount, expressed as a per annum rate, equal to
(a)(i) the aggregate amount of interest due on all of the
Mortgage Loans in Group I for the related Remittance Period
minus (ii) the aggregate of the Servicing Fee and the Trustee's
Fee and the premiums due to the Certificate Insurer, in each
case relating to Group I, on such Payment Date and minus (iii)
commencing on the Closing Date, an amount equal to 0.75%
per annum times the aggregate Principal Balance of the
Mortgage Loans in Group I as of the beginning of such related
Remittance Period, divided by (b) the aggregate Principal
Balance of the Mortgage Loans in Group I immediately prior
to such Payment Date calculated on the basis of a 360 day year
and the actual number of days elapsed.
The Pooling and Servicing Agreement defines the "Class A-2
Available Funds Pass-Through Rate," as of any Payment Date,
to be an amount, expressed as a per annum rate, equal to (a)(i)
the aggregate amount of interest due on all of the Mortgage
Loans in Group II for the related Remittance Period minus (ii)
the aggregate of the Servicing Fee and the Trustee's Fee and
the premium due to the Certificate Insurer, in each case
relating to Group II, on such Payment Date and minus (iii)
commencing on the ninth Payment Date following the Closing
Date, an amount equal to 0.75% per annum times the
aggregate Principal Balance of the Mortgage Loans in Group
II as of the beginning of such related Remittance Period,
divided by (b) the aggregate Principal Balance of the Mortgage
Loans in Group II immediately prior to such Payment Date
calculated on the basis of a 360 day year and the actual number of
days elapsed.
The "Step-Up Payment Date" is the second Payment Date
which follows the Clean-up Call Date.
The "Class A-1 Formula Pass-Through Rate" for a Payment
Date is the rate described in clause (i) of the definition of
"Class A-1 Pass-Through Rate" on such Payment Date.
The "Class A-2 Formula Pass-Through Rate" for a Payment
Date is the rate described in clause (i) of the definition of
"Class A-2 Pass-Through Rate" on such Payment Date.
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Distributions, Generally......................... Distributions on the Certificates are required to be made on the
twenty-fifth day of each calendar month, or if such day is not
a business day, the next succeeding business day (each, a
"Payment Date") commencing on January 27, 1997, to the
Owners of record (see "Description of the Certificates --
General"). The Owners of record shall be such Owners of the
Certificates as of the last day of the calendar month
immediately preceding the calendar month in which such
Payment Date occurs, whether or not such day is a business
day (each a "Record Date") in an amount equal to the product
of such Owner's Percentage Interest and the amount distributed
in respect of such Owner's class of such Certificates on such
Payment Date.
Distributions of Interest........................ For each Payment Date, the interest due with respect to the
Class A-1 Certificates will be the interest which has accrued
thereon at the Class A-1 Pass-Through Rate from the preceding
Payment Date (or from December 19, 1996 in the case of the
first Payment Date) to and including the day prior to the
current Payment Date; the interest due with respect to the Class
A-2 Certificates will be the interest which has accrued thereon
at the Class A-2 Pass-Through Rate from the preceding
Payment Date (or from December 19, 1996 in the case of the
first Payment Date) to and including the day prior to the
current Payment Date. Each period referred to in the prior
sentence relating to the accrual of interest is the "Accrual
Period" for the related class of Offered Certificates.
The Pooling and Servicing Agreement defines the "Class A
Interest Distribution Amount" for each class of Offered
Certificates with respect to each Payment Date as being the
aggregate amount of interest accrued on such class of Offered
Certificates during the related Accrual Period at the related
Pass-Through Rate, together with any unpaid interest shortfalls
relating to such class from prior periods; the "Class A Interest
Distribution Amount" for the Offered Certificates does not
include the amount, if any, of the Supplemental Interest
Amount.
The Class A-1 Interest Distribution Amount is sometimes
referred to as the "Group I Interest Distribution Amount"; the
Class A-2 Interest Distribution Amount is sometimes referred
to as the "Group II Interest Distribution Amount" and either
the Group I Interest Distribution Amount or the Group II
Interest Distribution Amount is sometimes referred to as the
related "Group Interest Distribution Amount."
All calculations of interest on the Class A-1 Certificates and
the Class A-2 Certificates will be made on the basis of the
actual number of days elapsed in the related Accrual Period,
divided by 360.
Distribution of Principal........................ The Owners of each class of Offered Certificates will be
entitled to receive certain monthly distributions of principal on
each
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Payment Date which generally reflect collections of principal
during the prior calendar month. On each Payment Date, the Class
A-1 Certificates will be entitled to receive 100% of the Class A
Principal Distribution Amount (as hereinafter defined) with respect
to Group I. On each Payment Date, the Class A-2 Certificates will
be entitled to receive 100% of the Class A Principal Distribution
Amount with respect to Group II.
Any loss on a Liquidated Mortgage Loan (i.e., a Realized
Loss) may or may not be distributed to the Owners of the
Class of Offered Certificates on the Payment Date which
immediately follows the event of loss. However, the Owners
of the Offered Certificates are entitled to receive ultimate
recovery of any Realized Losses which occur in the Mortgage
Loan Pool.
The subordination provisions of the Trust result in a limited
acceleration of principal payments to the Owners of each class
of Offered Certificates. Such subordination provisions are
more fully described under "Description of the Certificates --
Overcollateralization Provisions" and "Description of the
Certificates -- Crosscollateralization Provisions." Such
subordination provisions also have an effect on the weighted
average lives of the Offered Certificates; see "Prepayment and
Yield Considerations." In addition, the following discussion
makes use of a number of defined terms which are defined
under "Description of the Certificates -- Overcollateralization
Provisions" and "Description of the Certificates -- Cross-
collateralization Provisions."
The Pooling and Servicing Agreement defines the "Class A
Principal Distribution Amount" for each Mortgage Loan Group
with respect to each Payment Date as being the lesser of:
(a) the Available Funds for the related Mortgage Loan
Group, plus any related Insured Payment and minus the
related Group Interest Distribution Amount, and
(b) (i)the sum, without duplication of:
(A) the amount of any Subordination Deficit due
from any prior period with respect to the related
Mortgage Loan Group;
(B) the principal actually collected by the Master Servicer with
respect to the Mortgage Loans in the related Mortgage Loan Group
during the related Remittance Period;
(C) the Loan Balance of each Mortgage Loan in the
related Mortgage Loan Group that either was
repurchased by the Sponsor or an Originator or
purchased by the Master Servicer or any
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Sub-Servicer on the related Remittance Date, to
the extent such Loan Balance is actually
received by the Trustee;
(D) any Substitution Amounts delivered by the
Sponsor or an Originator on the related
Remittance Date in connection with a
substitution of a Mortgage Loan in the related
Mortgage Loan Group, to the extent such
Substitution Amounts are actually received by
the Trustee;
(E) all Net Liquidation Proceeds actually collected
by the Master Servicer with respect to the
Mortgage Loans in the related Mortgage Loan
Group during the related Remittance Period (to
the extent such Net Liquidation Proceeds relate
to principal);
(F) the amount of any Subordination Deficit with
respect to the related Mortgage Loan Group for
such Payment Date;
(G) the proceeds received by the Trustee from any
termination of the related Mortgage Loan Group
(to the extent such proceeds relate to principal);
(H) the amount of any Subordination Increase Amount with respect to
the related Mortgage Loan Group for such Payment Date to the
extent of any Net Monthly Excess Cashflow available for such
purpose;
minus
(ii) the amount of any Subordination Reduction Amount
with respect to the related Mortgage Loan Group for
such Payment Date.
In no event will the Class A Principal Distribution Amount for
any class of Offered Certificates and Payment Date (x) be less
than zero or (y) be greater than the then-outstanding Class A
Certificate Principal Balance of the related class of Offered
Certificates.
With respect to any class of Offered Certificates and Payment
Date, the sum of the related Class A Interest Distribution
Amount and the related Class A Principal Distribution Amount
with respect to such Payment Date is the "Class A Formula
Distribution Amount" for such class and Payment Date.
With respect to the Class A-1 Certificates and any Payment
Date, the sum of the Group I Interest Distribution Amount and
the amount of the Group I Subordination Deficit, if any, is the
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<S> <C>
"Group I Insured Distribution Amount." With respect to the
Class A-2 Certificates and any Payment Date, the sum of the
Group II Interest Distribution Amount and the Group II
Subordination Deficit, if any, is the "Group II Insured
Distribution Amount." The Group I Insured Distribution
Amount and the Group II Insured Distribution Amount are
sometimes referred to as the "Insured Distribution Amount".
The actual amount distributed with respect to each class of
Offered Certificates on any Payment Date is the "Class A
Distribution Amount" for such class and Payment Date.
A "Liquidated Mortgage Loan" is, in general, a defaulted
Mortgage Loan as to which the Master Servicer has determined
that all amounts that it expects to recover on such Mortgage
Loan have been recovered (exclusive of any possibility of a
deficiency judgment). Any loss on a Liquidated Mortgage
Loan (i.e., a Realized Loss) may or may not be recovered by
the Owners of the related class of Offered Certificates on the
Payment Date which immediately follows the event of loss.
However, the Owners of the Offered Certificates are entitled
to receive ultimate recovery of any Realized Losses which
occur in the related Mortgage Loan Group, receipt of which
will be no later than the Payment Date occurring after such
Realized Loss creates a Subordination Deficit (as described below). Such
ultimate payment will be in the form of an Insured Payment if not covered
through Net Monthly Excess Spread in the related Mortgage Loan Group or the
other Mortgage Loan Group. A payment by the Certificate Insurer under the
Certificate Insurance Policy is referred to herein as an "Insured Payment."
Insured Payments do not include Realized Losses until such
time as such aggregate, cumulative Realized Losses have
created a Subordination Deficit, nor do Insured Payments cover
the Master Servicer's failure to make Delinquency Advances
until such time as the aggregate, cumulative amount of such
unpaid Delinquency Advances, when added to Realized Losses,
have created a Subordination Deficit.
A "Subordination Deficit" with respect to a Mortgage Loan
Group and Payment Date is the amount, if any, by which (x)
the aggregate Class A Certificate Principal Balance of the
related Group of Offered Certificates, after taking into account
all distributions to be made on such Payment Date (except for
any payment to be made as to principal from the proceeds of
the Certificate Insurance Policy), exceeds (y) the aggregate
principal balance of the Mortgage Loans in the related
Mortgage Loan Group as of the close of business on the last
day of the preceding Remittance Period.
The Pooling and Servicing Agreement requires that the Class
A-1 Certificate Principal Balance and the Class A-2 Certificate
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
Principal Balance, if not previously reduced to zero, be
reduced to zero on the Final Scheduled Payment Date.
Credit Enhancement............................... The Credit Enhancement provided for the benefit of the
Owners of the Offered Certificates consists of (x) the over-
collateralization and crosscollateralization mechanics which
utilize the internal cash flows of the Trust and (y) the
Certificate Insurance Policy.
Overcollateralization and Crosscollateralization.
The subordination provisions of the Trust result in a limited
acceleration of the Offered Certificates relative to the
amortization of the Mortgage Loans in the related Group in the
early months of the transaction. The accelerated amortization
is achieved by the application of certain excess interest to the
payment of Offered Certificates' principal. This acceleration
feature creates, with respect to each Mortgage Loan Group,
overcollateralization which results from the excess of the
aggregate principal balances of the Mortgage Loans in the
related Mortgage Loan Group over the related aggregate Class
A Certificate Principal Balance. Once the required level of
overcollateralization is reached, and subject to the provisions
described in the next paragraph, the acceleration feature will cease, unless
necessary to maintain the required level of overcollateralization.
Subject to certain floors, caps and triggers, the required level
of overcollateralization with respect to a Mortgage Loan Group
may increase or decrease over time. An increase would result
in a temporary period of accelerated amortization of the related
Offered Certificates to increase the actual level of over-
collateralization to its required level; a decrease would result
in a temporary period of decelerated amortization to reduce the
actual level of overcollateralization to its required level.
In addition to the foregoing, the Pooling and Servicing
Agreement provides that such excess interest, together with
certain other excess amounts, generated by one Mortgage Loan
Group may be used to fund shortfalls in Available Funds due
to losses in the other Mortgage Loan Group, subject to certain
prior requirements of such Mortgage Loan Group.
See "Description of the Certificates -- Overcollateralization
Provisions" and "Description of the Certificates -- Crosscol-
lateralization Provisions."
The Certificate Insurance Policy.
The Sponsor will obtain a certificate insurance policy (the
"Certificate Insurance Policy"), with respect to the Offered
Certificates, which is noncancelable, in favor of the Trustee on
</TABLE>
S-13
<PAGE>
<TABLE>
<S> <C>
behalf of the Owners of the Offered Certificates. On each
Payment Date, the Certificate Insurer will be required to make
available to the Trustee the amount, if any, by which the
Group I Insured Distribution Amount or Group II Insured
Distribution Amount exceeds the Group I Available Funds or
the Group II Available Funds, respectively, (after deducting the
amount necessary to pay the related premium amount to the
Certificate Insurer, the Trustee's Fees and certain fees due to
the Master Servicer) as of such Payment Date. The Certificate
Insurance Policy does not guarantee to owners of the Offered
Certificates any specified rate of Prepayments. See "The
Certificate Insurance Policy" and "The Certificate Insurer"
herein and "Description of Credit Enhancement" in the
Prospectus.
Certificate Insurer.............................. Financial Guaranty Insurance Company.
Delinquency Advances
and Compensating
Interest...................................... The Master Servicer will be obligated to make Delinquency Advances
to the extent that such Delinquency Advances, in the Master
Servicer's reasonable judgment, are reasonably recoverable from the
related Mortgage Loan. Delinquency Advances are recoverable from
(i) future collections on the Mortgage Loan which gave rise to the
Delinquency Advance, (ii) Liquidation Proceeds for such Mortgage
Loan and (iii) from certain excess cash flows not applied to any
other purpose. "Delinquency Advances" are amounts deposited in the
Principal and Interest Account by the Master Servicer equal to the
sum of the interest portions (net of the Servicing Fees and certain
other administrative amounts, if any) due, but not collected with
respect to delinquent Mortgage Loans during the related Remittance
Period. The Master Servicer is only obligated to make a Delinquency
Advance if it reasonably believes that such Delinquency Advance
will ultimately be recoverable from the related Mortgage Loan.
In addition, the Master Servicer will also be required to deposit
Compensating Interest in the Principal and Interest Account
with respect to any full Prepayment received on a Mortgage
Loan during the related Remittance Period out of its own funds
without any right of reimbursement therefor. "Compensating
Interest" is an amount equal to the difference between (x) 30
days' interest at the Mortgage Loan's coupon rate on the Loan
Balance as of the first day of the related Remittance Period and
(y) to the extent not previously advanced, the interest paid by
the Mortgagor with respect to the Mortgage Loan. The Master
Servicer will not be required to pay Compensating Interest
with respect to any Remittance Period in an amount in excess
of the aggregate Servicing Fee received by the Master Servicer
for such Remittance Period.
Book-Entry Registration of
</TABLE>
S-14
<PAGE>
<TABLE>
<S> <C>
the Offered Certificates....................... The Offered Certificates will initially be issued in book-entry
form. Persons acquiring beneficial ownership interests in such
Offered Certificates ("Beneficial Owners") may elect to hold
their interests through The Depository Trust Company
("DTC"), in the United States, or Centrale de Livraison de
Valeurs Mobiliers, S.A. ("CEDEL") or the Euroclear System
("Euroclear"), in Europe. Transfers within DTC, CEDEL or
Euroclear, as the case may be, will be in accordance with the
usual rules and operating procedures of the relevant system.
So long as the Offered Certificates are Book-Entry Certificates
(as defined herein), such Offered Certificates will be evidenced
by one or more Offered Certificates registered in the name of
Cede & Co. ("Cede"), as the nominee of DTC, or in the name
of one of the European Depositories. Cross-market transfers
between persons holding directly or indirectly through DTC,
on the one hand, and counterparties holding directly or indirectly
through CEDEL or Euroclear, on the other, will be effected in DTC
through Citibank N.A. ("Citibank") or Morgan Guaranty Trust Company
of New York ("Morgan," and together with Citibank, the "European
Depositaries"), the relevant depositories of CEDEL or Euroclear,
respectively, and each a participating member of DTC. The Offered
Certificates will initially be registered in the name of Cede. The
interests of the Owners of such Offered Certificates will be
represented by book-entries on the records of DTC and participating
members thereof. No Beneficial Owner will be entitled to receive a
definitive certificate representing such person's interest, except
in the event that Definitive Certificates (as defined herein) are
issued under the limited circumstances described herein. All
references in this Prospectus Supplement to any Offered
Certificates reflect the rights of Beneficial Owners only as such
rights may be exercised through DTC and its participating
organizations for so long as such Offered Certificates are held by
DTC. See "Description of the Offered Certificates -- Book-Entry
Registration of the Offered Certificates" herein, and Annex I to
this Prospectus Supplement, and "Description of the Certificates --
Book-Entry Registration" in the Prospectus.
Monthly Servicing Fee............................ Advanta Mortgage Corp. USA will retain a Servicing Fee
equal to 0.50% per annum.
Optional Termination............................. The Master Servicer, acting directly or through a permitted
designee, will have the right to purchase from the Trust all the
Mortgage Loans then held by the Trust at a price at least equal
to par plus accrued interest net of the Servicing Fee and any
amounts owed to the Master Servicer on any Remittance Date
after the Remittance Period during which the outstanding
aggregate Loan Balances of the Mortgage Loans in the Trust
had declined to 10% or less of the aggregate principal balance
of the Mortgage Loans as of the Closing Date. The first such
Remittance Date on which such option may be exercised is the
"Clean-up Call Date".
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
Ratings ........................................ It is a condition of the original issuance of the Offered
Certificates that the Offered Certificates receive ratings of
AAA by Standard & Poor's Ratings Group, a division of The
McGraw Hill Companies ("Standard & Poor's"), and Aaa by
Moody's Investors Service, Inc. ("Moody's"). 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 entity. The ratings issued by Standard & Poor's
and Moody's on the payment of principal and interest do not
cover the payment of the Supplemental Interest Amounts. See
"Prepayment and Yield Considerations" and "Ratings" herein
and "Yield Considerations" in the Prospectus.
Federal Tax Aspects.............................. For federal income tax purposes, an election will be made to
treat certain assets of the Trust as one or more REMICs. Each
of the Class A Certificates and the related rights to receive
Supplemental Interest Payments will be comprised of (i) a
"regular interest" in a REMIC, which will be treated as a debt
instrument of the Trust for federal income tax purposes and
(ii) the right to receive Supplemental Interest Payments having
the characteristics described herein. A class of Class R
Certificates will be designated as the "residual interest" with
respect to each REMIC election made by the Trust. See
"Certain Federal Income Tax Consequences" herein and in the
Prospectus.
ERISA Considerations............................. As described under "ERISA Considerations" herein, the
Offered Certificates may be purchased by employee benefit
plans that are subject to ERISA, as amended, provided that
certain conditions are satisfied. See "ERISA Considerations"
herein and in the Prospectus.
Legal Investment
Considerations................................... Although upon their initial issuance all classes of the Offered
Certificates are expected to be rated AAA by Standard &
Poor's and Aaa by Moody's, no class of Offered Certificates
will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA").
Special Considerations........................... For a discussion of certain factors that should be considered by
prospective investors in the Offered Certificates, see "Special
Considerations" herein and in the Prospectus.
Certain Legal Matters............................ Certain legal matters relating to the validity of the issuance of
the Certificates will be passed upon by Dewey Ballantine, New
York, New York.
</TABLE>
S-16
<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should consider the
following factors (as well as the factors set forth under "Special
Considerations" in the Prospectus) in connection with the purchase of the
Offered Certificates.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments.
20.98% of the Mortgage Loans in the Statistic Calculation Pools by aggregate
principal balance are Balloon Loans. See "Special Consideration --
Risk of Losses Associated with Balloon Loans" in the Prospectus.
Nature of Security. Since the Mortgage Loans are secured in certain
cases by junior liens subordinate to the rights of the mortgagee or beneficiary
under the related senior mortgage(s) or deed(s) 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(s) or beneficiary(ies) 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(s), in which case it must either pay
the entire amount due on the senior mortgage(s) to the senior mortgagee(s) at or
prior to the foreclosure sale or undertake the obligation to make payments on
the senior mortgage(s) in the event the mortgagor is in default thereunder. In
servicing junior mortgages in its portfolio, it is generally the Master
Servicer's practice to satisfy the senior mortgage(s) at or prior to the
foreclosure sale. The Master Servicer may also advance funds to keep the senior
mortgage(s) current until such time as the Master Servicer satisfies the senior
mortgage(s). The Trust will have no source of funds (and may not be permitted
under the REMIC provisions of the Code) to satisfy the senior mortgage(s) or
make payments due to the senior mortgagee(s). The Master Servicer will be
required to advance such amounts in accordance with the Pooling and Servicing
Agreement.
Information is provided under "The Mortgage Loan Pool -- General" with
respect to the LTVs and the CLTVs of the Mortgage Loans in the Statistic
Calculation Pools. As discussed in the Prospectus under "Special
Considerations," 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 CLTVs of such loans, determined
as of a date subsequent to the origination date, will be the same or lower than
the CLTVs for such loans, determined as of the origination date.
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 Master 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 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 mortgages, realizations net of
liquidation expenses on defaulted Mortgage Loans may also be smaller as a
percentage of the principal amount of the Mortgage Loans than would such net
realizations in the case of a typical pool of purchase-money first mortgage
loans.
Investor-owned properties represent (based solely upon statements made
by the borrowers at the time of origination of the related Mortgage Loan), as a
percentage of the aggregate principal balance of the Mortgage Loans in the
Statistic Calculation Pools, 9.04% of the Mortgage Loans. It is possible that
the rate of delinquencies, foreclosures and losses on mortgage loans secured by
non-owner occupied properties could be higher than for loans secured by the
primary residence of the borrower.
S-17
<PAGE>
Effect of Mortgage Loan Yield on Class A-1 Pass-Through Rate and Class
A-2 Pass-Through Rate. The Class A-1 Pass-Through Rate and Class A-2
Pass-Through Rate are based upon the value of an index (one-month LIBOR) which
is different from the value of the indices applicable to the Mortgage Loans in
Group I and Group II, as described under "The Mortgage Pool -- Group I -- Group
II" (either as a result of the use of a different index, rate determination
date, rate adjustment date or rate cap or floor). The Mortgage Loans in Group I
and Group II either do not adjust (in the case of the Group I Mortgage Loans
which have fixed rates of interest) or primarily adjust semi-annually or yearly
(subject, with respect to certain Group II Mortgage Loans, to an initial
fixed-rate period of either three or five years) based upon a six-month LIBOR
index or a one year Constant Maturity Treasury Index ("CMT" and together with
the LIBOR index, the "Indices") whereas the Class A-1 Pass-Through Rate and
Class A-2 Pass-Through Rate adjust monthly based on a one-month LIBOR index and
are limited by the Class A-1 Available Funds Pass-Through Rate and the Class A-2
Available Funds Pass-Through Rate, respectively (unless Supplemental Interest
Amounts (the payment of which is not insured by the Certificate Insurer and the
payment of which is not rated) are funded in full). Consequently, the actual
Class A-1 Pass-Through Rate for such Payment Date may not equal the Class A-1
Formula Pass-Through Rate for such Payment Date and the actual Class A-2
Pass-Through Rate for such Payment Date may not equal the Class A-2 Formula
Pass-Through Rate for such Payment Date. In particular, the interest rates on
the Mortgage Loans in Group I do not adjust, and the interest rates on the
Mortgage Loans in Group II adjust less frequently than monthly, with the result
that the actual Class A-1 Pass-Through Rate may be lower than the Class A-1
Formula Pass-Through Rate and the actual Class A-2 Pass-Through Rate may be
lower than the Class A-2 Formula Pass-Through Rate for extended periods in a
rising interest rate environment. In addition, one-month LIBOR and the Indices
applicable to the Group II Mortgage Loans may respond to different economic and
market factors, and there is not necessarily any correlation between them. Thus,
it is possible, for example, that one-month LIBOR may rise during periods in
which one or more Indices are falling or that, even if both one-month LIBOR and
Indices applicable to the Group II Mortgage Loans rise during the same period,
one-month LIBOR may rise much more rapidly than such Indices. See "Class A-1
Pass-Through Rate" and "Class A-2 Pass-Through Rate" in the Summary to this
Prospectus Supplement.
THE PORTFOLIO OF MORTGAGE LOANS
The Mortgage Loan Pool includes loans which were either originated
directly by the Affiliated Originators or purchased by the Affiliated
Originators from others on a loan-by-loan basis and in either case acquired by
the Sponsor. The Sponsor also acquires loans from Unaffiliated Originators in
acquisitions from Conduit Participants or in bulk acquisitions of loan
portfolios. Such loans are originated by Unaffiliated Originators either
directly or purchased by the Unaffiliated Originators from others on a
loan-by-loan basis.
The Originators which are affiliated with the Sponsor are Advanta
Mortgage Corp. USA, Advanta National Bank USA, Advanta Mortgage Corp.
Midatlantic, Advanta Mortgage Corp. Midatlantic II, Advanta Mortgage Corp.
Midwest, Advanta Mortgage Corp. of New Jersey, Advanta Mortgage Corp. Northeast
and Advanta Finance Corp.
Unaffiliated Originator.
MCA. The Sponsor acquired approximately 7.75% of the Mortgage Loans in
the Statistic Calculation Pools from Mortgage Corporation of America, an
Unaffiliated Originator (such mortgage loans, the "MCA Loans"). Mortgage
Corporation of America is headquartered in Southfield, Michigan and is engaged
in originating mortgage loans through retail and wholesale channels. The MCA
Loans consist of 383 Mortgages representing an aggregate principal balance of
$23,877,660.82 as of the Statistic Calculation Date. Approximately 90% (by
aggregate principal balance as of the Statistic Calculation Date) of the MCA
Loans are included in Group I and approximately 10% of the MCA Loans are
included in Group II. The MCA Loans are related to properties located in
fourteen states.
Prior to its purchase of the MCA Loans, the Sponsor performed or caused
to be performed an operational review of the origination and servicing practices
of MCA.
As of the Statistic Calculation Date, the weighted average CLTV of the
MCA Loans was 75.99%; the weighted average Mortgage Rate was 11.61% per annum;
the weighted average original term to stated maturity was
220 months; the weighted average remaining term to stated maturity was 219
months and all of the MCA Loans were secured by first mortgages.
S-18
<PAGE>
Bulk Acquisitions.
Loans, other than the MCA Loans, representing 10.9% of the aggregate
principal balance of Mortgage Loans in the Statistic Calculation Pools were
purchased in Bulk Acquisitions by the Sponsor in 1996 and such loans were
originated in accordance with the Sponsor's Bulk Guidelines. (See "Mortgage Loan
Program - Underwriting Guidelines - Bulk Guidelines" in the Prospectus.)
Generally, the Bulk Loans were re-underwritten by the Sponsor using the
Sponsor's underwriting guidelines. In addition, the Sponsor applied its credit
grading guidelines in reviewing the Bulk Loans. All of the loans acquired in
these transactions were acquired "servicing released"; i.e., Advanta Mortgage
Corp. USA acts as the Master Servicer. All of the Mortgage Loans so purchased or
to be so purchased are hereinafter referred to as the "Bulk Loans."
Delinquencies
Owned and Managed Servicing Portfolio. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience of
the Master Servicer for its servicing portfolio, excluding certain loans
serviced by the Master Servicer that were not originated or purchased and
reunderwritten by the Sponsor or its Affiliated Originators (the "Owned and
Managed Servicing Portfolio"), of fixed and variable rate mortgage loans as of
September 30, 1996 and for each of the four prior years. The Owned and Managed
Servicing Portfolio includes, but is not limited to, the Mortgage Loans acquired
on or prior to September 30, 1996, which are contained in the Mortgage Loan
Pool. In addition to the Owned and Managed Servicing Portfolio, the Master
Servicer serviced, as of September 30, 1996, approximately 42,000 mortgage loans
with an aggregate principal balance as of such date of approximately $2.1
billion; such loans were not originated by the Sponsor or its Affiliated
Originators and are being serviced for third parties on a contract servicing
basis (the "Third-Party Servicing Portfolio"). No loans in the Third-Party
Servicing Portfolio are included in the tables set forth below.
[Rest of page intentionally left blank]
S-19
<PAGE>
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE
MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Nine Months Ended Year Ending December 31,
----------------------- ---------------------------------------------------
September 30, 1996 1995 1994
----------------------- -------------------------- ------------------------
Number Dollar Number Dollar Number Dollar
of Amount of Amount of Amount
Loans (000) Loans (000) Loans (000)
--------- ------------ ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Portfolio 40,403 $2,334,295 32,592 $1,797,582 26,446 $1,346,100
Delinquency
percentage(1)
30-59 days 2.05% 1.93% 2.67% 2.44% 2.01% 1.57%
60-89 days 0.57% 0.64% 0.72 0.71 0.57 0.45
90 days or more 1.52% 1.33% 1.69 1.23 1.85 1.51
Total 4.14% 3.90% 5.08% 4.38% 4.43% 3.53%
Foreclosure
rate(2) 1.30% 1.48% 1.29% 1.53% 1.35% 1.38%
REO
properties(3) 0.44% -- 0.52% -- 0.47% --
<CAPTION>
Number Dollar Number Dollar
of Amount of Amount
Loans (000) Loans (000)
--------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Portfolio 25,460 $1,149,864 22,318 $908,541
Delinquency
percentage(1)
30-59 days 2.43% 2.22% 2.71% 2.59%
60-89 days 0.77 0.63 0.64 0.64
90 days or more 2.19 2.12 1.52 1.69
Total 5.39% 4.97% 4.87% 4.92%
Foreclosure
rate(2) 1.32% 1.62% 2.13% 2.78%
REO
properties(3) 0.42% -- 0.35% --
</TABLE>
- ----------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude
- loans in foreclosure.
(2) "Foreclosure Rate" is the number of mortgage loans or the dollar amount of
mortgage loans in foreclosure as a percentage of the total number of
mortgage loans or the dollar amount of mortgage loans, as the case may be,
as of the date indicated.
(3) REO Properties (i.e., "real estate owned" properties -- properties relating
to mortgages foreclosed or for which deeds in lieu of foreclosure have been
accepted, and held by the Master Servicer pending disposition) percentages
are calculated using the number of loans, not the dollar amount.
LOAN LOSS EXPERIENCE
OF THE MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS*
<TABLE>
<CAPTION>
Nine Months Ended Year Ending December 31,
----------------- -------------------------------------------------------------------
September 30, 1996 1995 1994 1993 1992
------------------ ---------------- ---------------- --------------- -----------------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount outstanding(1) $2,277,935 $1,540,238 $1,225,529 $1,049,447 $786,178
Gross losses(2) $10,741 $13,978 $20,886 $14,115 $6,069
Recoveries(3) $79 $148 $179 $123 $145
Net losses(4) $10,661 $13,830 $20,707 $13,992 $5,924
Net losses as a percentage of average
amount outstanding 0.62%(5) 0.90% 1.69% 1.33% 0.75%
</TABLE>
- --------------------
(1) "Average Amount Outstanding" during the period is the arithmetic average
of the principal balances of the mortgage loans outstanding on the last --
business day of each month during the period.
(2) "Gross Losses" are amounts which have been determined to be uncollectible
relating to mortgage loans for each respective period.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" represents "Gross Losses" minus "Recoveries".
(5) Annualized
S-20
<PAGE>
The Master Servicer experienced an increase in the net loss rate on its
Owned and Managed Portfolio during the period 1990 through 1994. It believes
that such increase was due to four primary factors: the seasoning of its
portfolio, economic conditions, a decline in property values in certain regions
and the acceleration of charge-offs on loans in 1994. The net loss rates as a
percentage of the average amount outstanding on its Owned and Managed Portfolio,
excluding NIV loans, are 0.82%, 1.42%, 0.88% and 0.45% for the periods ending
December 31, 1995, December 31, 1994, December 31, 1993 and December 31, 1992,
respectively.*
[Rest of page intentionally left blank]
- --------
* Managed portfolio statistics restated to exclude interest advances on serviced
portfolio to be consistent with presentation of owned portfolio.
S-21
<PAGE>
THE MORTGAGE LOAN POOL
General
The Mortgage Loans will be predominantly home equity loans, i.e., loans
used (x) to refinance an existing mortgage loan on more favorable terms, (y) to
consolidate debt, or (z) to obtain cash proceeds by borrowing against the
Mortgagor's equity in the related Mortgaged Property.
The Statistic Calculation Pools contained 4,622 Mortgage Loans to be
sold by the Sponsor to the Trust evidenced by promissory notes (the "Notes")
secured by Mortgages on the Mortgaged Properties, which are located in 49 states
and the District of Columbia. The Mortgaged Properties securing the Mortgage
Loans consist primarily of single-family residences (which may be detached, part
of a two-to four-family dwelling, a condominium unit or a unit in a planned unit
development). The Mortgaged Properties may be owner-occupied (which includes
second and vacation homes) and non-owner occupied investment properties. Unless
otherwise noted, all statistical percentages in this Prospectus Supplement are
measured by the aggregate principal balance of the related Statistic Calculation
Pool.
The Mortgage Loans will be required to satisfy the following criteria
as of the Cut-Off Date: have remaining terms to maturity of no greater than 30
years; will not be 30 or more days delinquent (except that certain Mortgage
Loans, representing in the aggregate not in excess of 1.00% of the aggregate
principal balance of all Mortgage Loans as of the Cut-Off Date, may be 30-59
days delinquent) and, with respect to fixed-rate Mortgage Loans, have a Mortgage
Rate as of the Cut-Off Date of at least 7.50%. Neither the Sponsor nor the
Master Servicer have reason to believe that the delinquency and loss experience
of the Mortgage Loans will differ in any material respect from that of the
Master Servicer's total servicing portfolio, although there can be no assurance
that this will be the case.
4.00% of the Mortgage Loans (as a percentage of the aggregate principal
balance of all Mortgage Loans contained in the Statistic Calculation Pools) are
"simple interest" or "date of payment" loans, 0.01% are "rule of 78" loans, and
the remainder are "actuarial" or "pre-computed" loans. 93.02% of the Mortgage
Loans are secured by first lien mortgages on the related Mortgaged Properties
and 6.98% of the Mortgage Loans are secured by junior liens on the related
Mortgaged Properties.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups ("Group I" and "Group II", respectively, and each a "Mortgage Loan
Group"). The Mortgage Loans contained in Group I will be secured by a Mortgage
having either a first or junior lien position with respect to the related
Mortgaged Property and will have a maximum remaining term to maturity of 30
years. The Mortgage Loans contained in Group II will be secured by a Mortgage
having either a first or a junior lien position with respect to the related
Mortgaged Property and will have a maximum remaining term to maturity of 30
years. The Class A-1 Certificates represent undivided ownership interests in all
Mortgage Loans contained or to be contained in Group I and the Class A-2
Certificates represent undivided ownership interests in all Mortgage Loans
contained or to be contained in Group II.
The CLTVs and LTVs described herein were calculated based upon the
appraised values of the related Mortgaged Properties at the time of origination
(the "Appraised Values"). In general, for purchase money loans, the CLTVs and
LTVs were calculated using the lower of the purchase price or appraised values
of the related Mortgaged Properties at the time of origination. No assurance can
be given that such appraised values of the Mortgaged Properties have remained or
will remain at their levels on the dates of origination of the related Mortgage
Loans. If property values decline such that the outstanding balances of the
Mortgage Loans, together with the outstanding balances of any Senior Liens,
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those heretofore experienced by the Master Servicer, as set forth above under
"The Portfolio of Mortgage Loans," and in the mortgage lending industry.
S-22
<PAGE>
Difference between Statistic Calculation Pools and Closing Date Pools.
The statistical information presented in this Prospectus Supplement is
based on the Statistic Calculation Pools. The Statistic Calculation Pools
reflect the Mortgage Loans acquired by the Sponsor through the Cut-Off Date, and
the statistical information presented herein is based on the number and the
principal balances of such Mortgage Loans as of the Cut-Off Date. These pools
aggregated $195,075,834.30 with respect to Group I and $113,090,141.89 with
respect to Group II. The Sponsor expects that the actual pools as of the Closing
Date will represent approximately $210,000,000 in Mortgage Loans in Group I and
approximately $120,000,000 in Mortgage Loans in Group II. The additional
Mortgage Loans to be included in the final pools will represent Mortgage Loans
acquired or to be acquired by the Sponsor on or prior to the Closing Date. In
addition, with respect to the Statistic Calculation Pools, as to which
statistical information is presented herein, some amortization of the Mortgage
Loans contained in such pools will occur prior to the Closing Date. Moreover,
certain loans included in the Statistic Calculation Pools may prepay in full or
may be determined not to meet the eligibility requirements for the final pools
and as a result may not be included in the final pools. As a result of the
foregoing, the statistical distribution of characteristics as of the Closing
Date for the final Mortgage Loan pools will vary somewhat from the statistical
distribution of such characteristics of the Statistic Calculation Pools as
presented in this Prospectus Supplement, although such variance will not be
material. In the event that the Sponsor does not, as of the Closing Date, have
the full amount of Mortgage Loans which the Sponsor expects to sell to the Trust
on such date, (i.e., approximately $210,000,000 with respect to Group I and
approximately $120,000,000 with respect to Group II) the Sponsor will reduce the
size of the offering. The Sponsor does not expect that the original principal
amount of any class will increase or decrease by more than 5% as a result of
such non-delivery. Even if the full expected amount of Mortgage Loans is
delivered, certain adjustments (plus or minus 5%) may occur between the class
sizes.
Group I
The Mortgage Loans in the Group I Statistic Calculation Pool consist of
3,531 loans under which the related Mortgaged Properties are located in 49
states and the District of Columbia, as set forth herein. The Group I Statistic
Calculation Pool had an aggregate principal balance of $195,075,834.30, the
minimum principal balance of any of the Mortgage Loans in the Group I Statistic
Calculation Pool was $2,288.11, the maximum principal balance thereof was
$638,806.44 and the average principal balance of such Mortgage Loans was
approximately $55,250. The Mortgage Rates on the Mortgage Loans in the Group I
Statistic Calculation Pool ranged from 7.50% to 17.00% per annum, and the
weighted average Mortgage Rate of such Mortgage Loans was 11.25% per annum. The
original term to stated maturity of the Mortgage Loans in the Group I Statistic
Calculation Pool ranged from 36 months to 360 months, the remaining term to
stated maturity ranged from 2 months to 360 months, the weighted average
original term to stated maturity was 225 months, the weighted average remaining
term to stated maturity was 223 months and the weighted average seasoning was 2
months. No Mortgage Loan in the Group I Statistic Calculation Pool had a stated
maturity later than December 15, 2026. 67.16% of the Mortgage Loans in the Group
I Statistic Calculation Pool by aggregate principal balance require monthly
payments of principal that will fully amortize the Mortgage Loans by their
respective maturity dates, and 32.84% of such Mortgage Loans by aggregate
principal balance are Balloon Loans.
The weighted average CLTV of the Mortgage Loans included in the Group I
Statistic Calculation Pool was 74.42%. The weighted average Junior Lien Ratio
(as defined below) of the Mortgage Loans in the Group I Statistic Calculation
Pool was 36.62%; the weighted average LTV was 69.19%. Approximately 89% of the
Mortgage Loans in the Group I Statistic Calculation Pool by aggregate principal
balance were secured by first mortgages and 11% by junior mortgages.
The "Junior Lien Ratio" of a Mortgage Loan which is in a junior lien
position is equal to the ratio (expressed as a percentage) of the original
principal balance of such Mortgage Loan to the sum of (i) the original principal
balance of such Mortgage Loan and (ii) the principal balance at the time of
origination of the Mortgage Loan of any Senior Liens (computed at the time of
origination of such Mortgage Loan).
The following tables describe the Group I Mortgage Loans and the
related Mortgaged Properties based upon the Group I Statistic Calculation Pool
as of the opening of business on the Cut-Off Date.
S-23
<PAGE>
GROUP I
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
State Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Alabama.................. 47 $ 1,568,102.48 0.80%
Arizona.................. 83 3,583,186.04 1.84
Arkansas................. 13 523,751.91 0.27
California............... 202 16,145,829.65 8.28
Colorado................. 91 5,556,001.36 2.85
Connecticut.............. 37 3,410,905.63 1.75
Delaware................. 17 1,323,184.06 0.68
District of Columbia..... 17 1,133,764.75 0.58
Florida.................. 201 10,648,410.60 5.46
Georgia.................. 86 4,414,376.64 2.26
Hawaii................... 10 1,380,437.64 0.71
Iowa..................... 7 335,100.08 0.17
Idaho.................... 9 554,008.09 0.28
Illinois................. 193 12,471,108.18 6.39
Indiana.................. 156 7,469,813.81 3.83
Kansas................... 38 1,664,958.59 0.85
Kentucky................. 15 889,096.86 0.46
Louisiana................ 42 1,878,074.10 0.96
Maine.................... 3 176,959.34 0.09
Maryland................. 125 7,853,376.13 4.03
Massachusetts............ 50 3,638,914.01 1.87
Michigan................. 231 12,865,475.05 6.60
Minnesota................ 17 900,528.99 0.46
Mississippi.............. 24 768,620.19 0.39
Missouri................. 129 5,761,968.06 2.95
Montana.................. 2 150,875.00 0.07
Nebraska................. 11 476,254.25 0.24
Nevada................... 20 1,082,940.63 0.56
New Hampshire............ 1 147,867.83 0.07
New Jersey............... 97 7,297,415.17 3.74
New Mexico............... 15 901,465.25 0.46
New York................. 130 8,217,779.40 4.21
North Carolina........... 229 12,777,866.70 6.55
North Dakota............. 1 19,962.73 0.01
Ohio..................... 306 15,523,144.19 7.96
Oklahoma................. 22 753,128.65 0.39
Oregon................... 35 2,097,098.36 1.08
Pennsylvania............. 295 12,931,449.54 6.63
Rhode Island............. 14 788,942.21 0.40
South Carolina........... 136 6,184,440.58 3.17
South Dakota............. 3 130,593.50 0.07
Tennessee................ 50 2,851,529.62 1.46
Texas.................... 16 854,732.81 0.44
Utah..................... 63 2,928,246.61 1.50
Vermont.................. 5 310,076.98 0.16
Virginia................. 118 5,365,621.71 2.75
Washington............... 68 3,854,238.58 1.98
West Virginia............ 12 586,280.76 0.30
Wisconsin................ 28 1,398,298.45 0.72
Wyoming.................. 11 529,632.55 0.27
------ ----------------- -------
TOTAL................. 3,531 $195,075,834.30 100.00%
===== =============== =======
</TABLE>
S-24
<PAGE>
GROUP I
DISTRIBUTION OF CLTVs
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
CLTV Ratios Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
95.01 - 100%.............. 3 $ 82,925.49 0.04%
90.01 - 95.00............. 17 1,357,589.23 0.70
85.01 - 90.00............. 161 9,686,451.18 4.97
80.01 - 85.00............. 972 57,587,592.84 29.51
75.01 - 80.00............. 701 42,055,203.43 21.56
70.01 - 75.00............. 533 31,221,286.72 16.00
65.01 - 70.00............. 307 17,784,518.70 9.12
60.01 - 65.00............. 210 10,047,384.42 5.15
55.01 - 60.00............. 139 6,295,035.58 3.23
50.01 - 55.00............. 105 4,603,707.09 2.36
00.01 - 50.00............. 383 14,354,139.62 7.36
----- -------------- ------
TOTAL.................. 3,531 $195,075,834.30 100.00%
===== ============== ======
</TABLE>
GROUP I
DISTRIBUTION OF LTVs
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
LTV Ratios Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
95.01 - 100%.............. 1 $ 15,300.00 0.01%
90.01 - 95.00............. 14 1,262,341.19 0.65
85.01 - 90.00............. 120 8,615,996.08 4.42
80.01 - 85.00............. 657 47,899,943.44 24.54
75.01 - 80.00............. 579 38,559,405.04 19.76
70.01 - 75.00............. 453 28,826,695.41 14.78
65.01 - 70.00............. 269 16,788,857.01 8.61
60.01 - 65.00............. 191 9,517,317.82 4.88
55.01 - 60.00............. 131 6,514,026.42 3.34
50.01 - 55.00............. 102 4,906,676.93 2.52
00.01 - 50.00............. 1,014 32,169,274.96 16.49
----- -------------- ------
TOTAL.................. 3,531 $195,075,834.30 100.00%
===== ============== ======
</TABLE>
S-25
<PAGE>
GROUP I
DISTRIBUTION OF JUNIOR LIEN RATIOS
(Junior Liens Only)
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
Junior Lien Ratios Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
0.00 - 10.00%......... 14 $ 184,815.03 0.89%
10.01 - 20.00.......... 151 2,687,010.65 13.00
20.01 - 30.00.......... 231 6,474,395.82 31.33
30.01 - 40.00.......... 130 4,779,473.99 23.13
40.01 - 50.00.......... 66 2,179,052.35 10.54
50.01 - 60.00.......... 36 1,371,577.22 6.64
60.01 - 70.00.......... 27 1,274,537.54 6.17
70.01 - 80.00.......... 25 1,155,393.65 5.59
80.01 - 90.00.......... 8 394,339.79 1.91
90.01 - 100.00......... 6 163,753.16 0.80
---- -------------- -------
TOTAL............... 694 $20,664,349.20 100.00%
==== ============== =======
</TABLE>
GROUP I
DISTRIBUTION OF MORTGAGE RATES
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
7.01 - 8.00%........................ 21 $ 1,693,652.53 0.87%
8.01 - 9.00......................... 191 10,471,694.36 5.37
9.01 - 10.00........................ 553 37,701,903.97 19.33
10.01 - 11.00........................ 768 51,068,574.47 26.17
11.01 - 12.00........................ 645 37,710,147.12 19.33
12.01 - 13.00........................ 679 30,961,010.44 15.87
13.01 - 14.00........................ 382 15,997,008.09 8.20
14.01 - 15.00........................ 206 6,561,537.67 3.36
15.01 - 16.00........................ 73 2,510,010.51 1.29
16.01 - 17.00........................ 13 400,295.14 0.21
------ --------------- ------
TOTAL............................. 3,531 $195,075,834.30 100.00%
===== ============== ======
</TABLE>
S-26
<PAGE>
GROUP I
REMAINING TERM TO MATURITY DISTRIBUTION
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Months Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
0 - 12................. 6 $ 325,086.45 0.17%
13 - 24................. 9 623,746.23 0.32
25 - 36................. 8 343,471.13 0.18
37 - 48................. 9 295,862.39 0.15
49 - 60................. 66 1,721,501.23 0.88
61 - 72................. 16 478,291.42 0.25
73 - 84................. 49 1,730,882.50 0.89
85 - 96................. 47 1,522,288.98 0.78
97 - 108................. 16 462,619.47 0.24
109 - 120................. 245 7,098,232.85 3.64
121 - 132................. 6 615,558.24 0.32
133 - 144................. 35 1,474,535.82 0.76
145 - 156................. 11 387,383.61 0.20
157 - 168................. 8 258,217.65 0.13
169 - 180................. 1,988 107,749,930.07 55.22
181 - 192................. 4 290,005.84 0.15
193 - 204................. 1 61,870.40 0.03
205 - 216................. 5 415,821.84 0.21
217 - 228................. 122 7,680,945.40 3.94
229 - 240................. 189 11,313,333.28 5.80
253 - 264................. 1 50,946.42 0.03
277 - 288................. 1 44,993.06 0.02
289 - 300................. 12 758,811.22 0.39
313 - 324................. 2 281,660.50 0.14
325 - 336................. 7 416,409.71 0.21
337 - 348................. 3 133,352.06 0.07
349 - 360................. 665 48,540,076.53 24.88
----- -------------- ------
TOTAL.................. 3,531 $195,075,834.30 100.00%
===== ============== ======
</TABLE>
S-27
<PAGE>
GROUP I
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
Principal Balances Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
$ 1 - 5,000.......... 2 $ 7,090.40 0.00%
5,001 - 10,000.......... 33 272,772.61 0.14
10,001 - 15,000.......... 155 2,085,553.21 1.07
15,001 - 20,000.......... 237 4,251,130.23 2.18
20,001 - 25,000.......... 256 5,848,869.64 3.00
25,001 - 30,000.......... 264 7,358,970.27 3.77
30,001 - 35,000.......... 271 8,914,290.26 4.57
35,001 - 40,000.......... 289 10,935,028.47 5.61
40,001 - 45,000.......... 241 10,327,667.10 5.29
45,001 - 50,000.......... 233 11,128,202.50 5.70
50,001 - 55,000.......... 205 10,763,196.53 5.52
55,001 - 60,000.......... 206 11,875,459.18 6.09
60,001 - 65,000.......... 167 10,486,341.86 5.38
65,001 - 70,000.......... 139 9,419,310.06 4.83
70,001 - 75,000.......... 119 8,631,624.32 4.42
75,001 - 80,000.......... 84 6,503,536.36 3.33
80,001 - 85,000.......... 77 6,381,759.48 3.27
85,001 - 90,000.......... 72 6,331,016.27 3.25
90,001 - 95,000.......... 54 5,010,366.90 2.57
95,001 - 100,000.......... 52 5,094,332.00 2.61
100,001 - 150,000.......... 275 32,596,746.47 16.71
150,001 - 200,000.......... 64 10,944,961.30 5.61
200,001 - 250,000.......... 21 4,779,834.18 2.45
250,001 - 300,000.......... 8 2,181,400.82 1.12
300,001 - 350,000.......... 2 660,000.00 0.34
350,001 - 400,000.......... 2 766,496.66 0.39
400,001 - 450,000.......... 2 881,070.78 0.45
600,001 - 650,000.......... 1 638,806.44 0.33
------ --------------- ------
TOTAL................... 3,531 $195,075,834.30 100.00%
===== ============== ======
</TABLE>
S-28
<PAGE>
GROUP I
DISTRIBUTION OF PROPERTY TYPES
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Property Type Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
SF Detached/DeMin PUD..................... 3,154 $174,937,998.60 89.68%
SF Row House/Townhouse/Condo.............. 119 5,305,656.04 2.72
Two to Four Family Home................... 160 10,014,540.78 5.13
Other..................................... 98 4,817,638.88 2.47
----- ------------ ------
TOTAL................................... 3,531 $195,075,834.30 100.00%
===== ============== ======
</TABLE>
GROUP I
DISTRIBUTION OF OCCUPANCY STATUS
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Occupancy Status Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Owner occupied*.................... 3,219 $178,450,442.04 91.48%
Investor owned..................... 312 16,625,392.26 8.52
----- -------------- ------
TOTAL........................... 3,531 $195,075,834.30 100.00%
===== ============== =======
</TABLE>
- ---------------
* Includes vacation and second homes.
GROUP I
DISTRIBUTION OF SEASONING
<TABLE>
<CAPTION>
Months
Elapsed Since Number of Aggregate % of Aggregate
Origination Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
0 - 6........... 3,415 $189,193,249.66 96.98%
7 - 12........... 28 1,457,587.59 0.75
13 - 24........... 16 691,410.69 0.35
25 - 36........... 18 1,147,105.96 0.59
37 - 48........... 14 947,749.36 0.49
49 - 60........... 7 704,083.24 0.36
61 - 72........... 7 185,918.27 0.10
73 - 84........... 9 247,465.61 0.13
85 - 96........... 5 131,146.11 0.07
97 - 108........... 7 240,503.05 0.12
109 - 120........... 4 122,638.09 0.06
145 - 156........... 1 6,976.67 0.00
------ -------------- ------
TOTAL............ 3,531 $195,075,834.30 100.00%
====== ============== ======
</TABLE>
S-29
<PAGE>
Group II
The Mortgage Loans in the Group II Statistic Calculation Pool consist
of 1,091 loans under which the related Mortgaged Properties are located in 42
states, as set forth herein. The Mortgage Loans in the Group II Statistic
Calculation Pool had an aggregate principal balance of $113,090,141.89, the
minimum principal balance of any of such Mortgage Loans was $1,996.80, the
maximum principal balance thereof was $825,000 and the average principal balance
of such Mortgage Loans was approximately $103,700. The weighted average current
Mortgage Rate of the Mortgage Loans in the Group II Statistic Calculation Pool
was 10.28% and the weighted average margin was 5.70%.
The Mortgage Loans in the Group II Statistic Calculation Pool have
original terms to stated maturity from 60 months to 360 months, remaining terms
to stated maturity from 57 months to 360 months, a weighted average remaining
term to stated maturity of 350 months, a weighted average original term to
stated maturity of 354 months and a weighted average seasoning of 4 months. No
Mortgage Loan in the Group II Statistic Calculation Pool had a stated maturity
later than December 15, 2026. 99.48% of the Mortgage Loans in the Group II
Statistic Calculation Pool by aggregate principal balance require monthly
payments of principal that will fully amortize such Mortgage Loans by their
respective maturity dates. 0.52% of the Mortgage Loans in the Group II Statistic
Calculation Pool by aggregate principal balance are represented by Balloon Loans
having a 30-year amortization schedule and a 7-year maturity.
The weighted average LTV of the Mortgage Loans included in the Group II
Statistic Calculation Pool was 77.61%. 99.26% of the Mortgage Loans in the Group
II Statistic Calculation Pool were secured by first mortgages.
88.71% of the Mortgage Loans in the Group II Statistic Calculation Pool
bear interest (in some instances, following an initial fixed-rate period) at a
six-month LIBOR rate, plus a margin. 82.53% are indexed on the average of the
six-month LIBOR rates based on quotations at five major banks as set forth in
the "Money Rates" section of The Wall Street Journal, Western Edition, on the
first business day of the month; 1.71% are indexed on the average of the
six-month LIBOR rates based on quotations of major banks, as published by the
Federal National Mortgage Association ("FNMA"), on the first business day of the
month; 3.89% are indexed on the average of the six-month LIBOR rates based on
quotations at five major banks as set forth in the "Money Rates" section of the
Wall Street Journal, Western Edition, on the most recent daily quote available;
0.57% are indexed on the average of the six-month LIBOR rates based on
quotations at five major banks as set forth in the "Money Rates" section of The
Wall Street Journal, Western Edition, on the fifteenth day of the month; and
11.21% are indexed on the weekly average of the one-year constant maturity
treasury. Less than 0.10% have indices other than 6-month LIBOR and the one-year
constant maturity treasury.
With respect to the Mortgage Loans in the Group II Statistic
Calculation Pool, 18.38% of such Mortgage Loans bear interest at a fixed rate of
interest for a three-year period following origination, and 30.08% of such
Mortgage Loans bear interest at a fixed rate of interest for a five year period
following origination; after such initial periods, such Mortgage Loans bear
interest at adjustable rates, as described above.
88.49% of the loans in the Group II Statistic Calculation Pool have
semi-annual interest rate and semi-annual payment adjustment frequencies. 11.47%
of the loans in the Group II Statistic Calculation Pool have annual interest
rate and annual payment adjustment frequencies. The Mortgage Loans in the Group
II Statistic Calculation Pool have a weighted average margin of 5.70%. The
margins for the Mortgage Loans in the Group II Statistic Calculation Pool range
from 2.50% to 9.00%. 58.05% of the Mortgage Loans in the Group II Statistic
Calculation Pool have a periodic rate adjustment cap of 1.00%, 26.98% of such
Mortgage Loans have a periodic rate adjustment cap of 1.25%; 2.77% of the
Mortgage Loans in the Group II Statistic Calculation Pool have a periodic rate
adjustment cap of 1.50% and 12.20% have a periodic rate adjustment cap of 2.00%.
90.19% of the Mortgage Loans in the Group II Statistic Calculation Pool have a
lifetime cap of 7.00%; 8.34% have a lifetime cap of 6.00%; 0.86% have a lifetime
cap of 6.50%; and 0.04% have a lifetime cap of 5.0%. The weighted average number
of months until the next reset date is approximately 27 months. The weighted
average maximum Mortgage Rate was 17.01%, with maximum Mortgage Rates that range
from 10.50% to 21.75%. The weighted average minimum Mortgage Rate was 9.51%,
with minimum Mortgage Rates that range from 2.50% to 14.49%.
S-30
<PAGE>
The following tables describe the Group II Mortgage Loans and the
related Mortgaged Properties based upon the Group II Statistic Calculation Pool
as of the opening of business on the Cut-Off Date.
GROUP II
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
State Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Alabama................... 4 $ 207,205.13 0.18%
Arizona................... 15 1,197,478.65 1.06
Arkansas.................. 1 22,312.10 0.02
California................ 166 24,108,850.59 21.32
Colorado.................. 30 3,913,140.61 3.46
Connecticut............... 7 584,316.26 0.52
Delaware.................. 4 257,385.60 0.23
Florida................... 21 2,759,685.15 2.44
Georgia................... 11 1,566,228.20 1.38
Idaho..................... 10 682,327.85 0.60
Illinois.................. 49 4,983,251.30 4.41
Indiana................... 30 2,150,137.28 1.90
Iowa...................... 4 197,471.77 0.17
Kansas.................... 1 22,970.83 0.02
Kentucky.................. 17 1,072,924.33 0.95
Louisiana................. 11 796,488.43 0.70
Maine..................... 2 207,700.00 0.18
Maryland.................. 29 3,256,204.62 2.88
Massachusetts............. 13 1,570,985.76 1.39
Michigan.................. 49 4,602,902.39 4.07
Minnesota................. 2 143,149.47 0.13
Missouri.................. 8 491,909.68 0.43
Montana................... 3 261,668.42 0.23
Nebraska.................. 2 111,775.00 0.10
Nevada.................... 17 2,434,915.17 2.15
New Hampshire............. 1 74,833.11 0.07
New Jersey................ 29 3,450,467.17 3.05
New York.................. 19 2,133,165.09 1.89
North Carolina............ 12 1,219,801.09 1.08
Ohio...................... 132 9,744,381.94 8.62
Oklahoma.................. 13 719,700.54 0.64
Oregon.................... 78 8,789,079.08 7.77
Pennsylvania.............. 59 5,154,644.50 4.56
Rhode Island.............. 2 335,868.81 0.30
South Carolina............ 3 513,654.93 0.45
Tennessee................. 4 255,039.40 0.23
Texas..................... 12 1,202,233.86 1.06
Utah...................... 40 4,451,579.61 3.94
Virginia.................. 38 3,517,294.66 3.11
Washington................ 135 13,213,226.34 11.68
Wisconsin................. 7 659,816.76 0.58
West Virginia............. 1 51,970.41 0.05
------ --------------- -------
TOTAL.................. 1,091 $113,090,141.89 100.00%
===== ============== ======
</TABLE>
S-31
<PAGE>
GROUP II
DISTRIBUTION OF LTVs
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Range of LTV Ratios Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
90.01 - 95.00%........... 3 $ 377,450.58 0.34%
85.01 - 90.00............ 33 3,778,214.30 3.34
80.01 - 85.00............ 402 43,974,772.25 38.88
75.01 - 80.00............ 276 30,243,338.97 26.74
70.01 - 75.00............ 160 16,128,309.22 14.26
65.01 - 70.00............ 64 7,412,052.14 6.55
60.01 - 65.00............ 50 4,057,536.87 3.59
55.01 - 60.00............ 24 1,913,871.69 1.69
50.01 - 55.00............ 17 1,240,954.67 1.11
00.01 - 50.00............ 62 3,963,641.20 3.50
-------------- -------
TOTAL.................. 1,091 $113,090,141.89 100.00%
===== ============== ======
</TABLE>
GROUP II
DISTRIBUTION OF CURRENT MORTGAGE RATES
<TABLE>
<CAPTION>
Range of Current Number of Aggregate % of Aggregate
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
6.01 - 7.00% ........... 1 $ 145,000.00 0.13%
7.01 - 8.00............. 14 1,999,595.96 1.77
8.01 - 9.00............. 119 14,726,280.45 13.02
9.01 - 10.00............. 317 36,424,603.91 32.21
10.01 - 11.00............. 323 33,303,799.06 29.45
11.01 - 12.00............. 202 17,824,277.90 15.76
12.01 - 13.00............. 94 7,069,043.11 6.25
13.01 - 14.00............. 18 1,411,710.44 1.25
14.01 - 15.00............. 3 185,831.06 0.16
----- -------------- ------
TOTAL.................. 1,091 $113,090,141.89 100.00%
===== ============== ======
</TABLE>
S-32
<PAGE>
GROUP II
REMAINING TERM TO MATURITY DISTRIBUTION
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Months Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
49 - 60................. 4 $ 200,549.21 0.18%
73 - 84................. 4 465,841.38 0.41
109 - 120................. 2 112,854.59 0.10
133 - 144................. 1 59,207.25 0.05
169 - 180................. 26 1,300,621.86 1.15
217 - 228................. 4 301,744.80 0.27
229 - 240................. 23 1,596,207.86 1.41
241 - 252................. 1 13,376.58 0.01
253 - 264................. 1 29,506.75 0.03
289 - 300................. 2 144,150.37 0.13
313 - 324................. 2 237,343.92 0.21
337 - 348................. 43 4,164,229.16 3.68
349 - 360................. 978 104,464,508.16 92.37
----- -------------- ------
TOTAL.................. 1,091 $113,090,141.89 100.00%
===== ============== ======
</TABLE>
S-33
<PAGE>
GROUP II
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
Principal Balances Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
$ 1 - 5,000... 1 $ 1,996.80 0.00%
10,001 - 15,000... 4 55,227.56 0.05
15,001 - 20,000... 8 143,068.65 0.13
20,001 - 25,000... 12 281,218.42 0.25
25,001 - 30,000... 23 647,064.23 0.57
30,001 - 35,000... 22 730,283.11 0.65
35,001 - 40,000... 30 1,123,129.72 0.99
40,001 - 45,000... 35 1,490,119.89 1.32
45,001 - 50,000... 47 2,242,157.93 1.98
50,001 - 55,000... 50 2,609,601.97 2.31
55,001 - 60,000... 56 3,209,182.86 2.84
60,001 - 65,000... 56 3,516,731.75 3.11
65,001 - 70,000... 52 3,525,681.36 3.12
70,001 - 75,000... 51 3,706,036.98 3.28
75,001 - 80,000... 53 4,126,731.54 3.65
80,001 - 85,000... 46 3,800,297.30 3.36
85,001 - 90,000... 33 2,891,649.54 2.56
90,001 - 95,000... 46 4,272,973.10 3.78
95,001 - 100,000... 41 4,012,015.99 3.55
100,001 - 150,000... 240 29,378,901.20 25.97
150,001 - 200,000... 104 17,776,266.11 15.71
200,001 - 250,000... 43 9,595,298.56 8.48
250,001 - 300,000... 11 3,066,802.09 2.71
300,001 - 350,000... 14 4,544,082.57 4.02
350,001 - 400,000... 4 1,502,008.99 1.33
400,001 - 450,000... 2 851,461.35 0.75
450,001 - 500,000... 5 2,467,514.18 2.18
650,001 - 700,000... 1 697,638.14 0.62
800,001 - 850,000... 1 825,000.00 0.73
----- -------------- ------
TOTAL............ 1,091 $113,090,141.89 100.00%
===== ============== ======
</TABLE>
S-34
<PAGE>
GROUP II
DISTRIBUTION OF PROPERTY TYPES
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Property Description Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
SF Detached/De Min PUD............. 982 $101,946,943.89 90.15%
SF Row House/Townhouse/Condo....... 35 2,944,755.07 2.60
Two to Four Family Home............ 64 7,393,175.86 6.54
Other.............................. 10 805,267.07 0.71
------ --------------- -------
TOTAL........................... 1,091 $113,090,141.89 100.00%
===== ============== ======
</TABLE>
GROUP II
DISTRIBUTION OF OCCUPANCY STATUS
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Occupancy Status Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
Owner occupied*.................... 978 $101,849,450.06 90.06%
Investor owned..................... 113 11,240,691.83 9.94
------ --------------- -------
TOTAL........................... 1,091 $113,090,141.89 100.00%
===== ============== ======
</TABLE>
- ---------------
* Includes vacation and second homes.
GROUP II
DISTRIBUTION OF SEASONING
<TABLE>
<CAPTION>
Months Elapsed Number of Aggregate % of Aggregate
Since Origination Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
0 - 6........... 839 $ 88,248,566.45 78.03%
7 - 12........... 233 23,194,484.68 20.51
13 - 24........... 14 1,244,971.42 1.10
25 - 36........... 1 121,892.09 0.11
37 - 48........... 2 237,343.92 0.21
97 - 108........... 1 29,506.75 0.03
109 - 120........... 1 13,376.58 0.01
------ ---------------- ------
TOTAL............... 1,091 $113,090,141.89 100.00%
===== ================ ======
</TABLE>
S-35
<PAGE>
GROUP II
DISTRIBUTION OF MAXIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
Range of Maximum Number of Aggregate % of Aggregate
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
10.50 to 10.99%........... 1 $ 159,146.43 0.14%
11.50 to 11.99............ 1 78,197.49 0.08
13.00 to 13.49............ 2 365,664.31 0.32
13.50 to 13.99............ 1 146,187.41 0.13
14.00 to 14.49............ 11 1,116,381.05 0.99
14.50 to 14.99............ 21 2,264,761.21 2.00
15.00 to 15.49............ 63 8,249,515.97 7.29
15.50 to 15.99............ 131 16,640,635.09 14.71
16.00 to 16.49............ 116 13,327,795.03 11.79
16.50 to 16.99............ 179 20,297,638.28 17.95
17.00 to 17.49............ 139 13,571,492.10 12.00
17.50 to 17.99............ 128 12,426,243.92 10.99
18.00 to 18.49............ 88 7,768,037.27 6.87
18.50 to 18.99............ 97 8,167,757.31 7.22
19.00 to 19.49............ 47 3,396,621.97 3.00
19.50 to 19.99............ 45 3,497,584.20 3.09
20.00 to 20.49............ 8 401,384.62 0.35
20.50 to 20.99............ 10 1,029,267.17 0.91
21.00 to 21.49............ 2 157,784.22 0.14
21.50 to 21.99............ 1 28,046.84 0.03
----- -------------- ------
TOTAL.................. 1,091 $113,090,141.89 100.00%
===== ============== ======
</TABLE>
S-36
<PAGE>
GROUP II
DISTRIBUTION OF MINIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
Range of Minimum Number of Aggregate % of Aggregate
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
<S> <C> <C> <C>
2.50 to 2.99%............... 1 $ 159,146.43 0.14%
3.50 to 3.99 ............... 1 78,197.49 0.07
4.00 to 4.49 ............... 2 177,126.74 0.16
4.50 to 4.99 ............... 8 695,813.18 0.62
5.00 to 5.49 ............... 10 1,012,616.28 0.90
5.50 to 5.99 ............... 10 865,794.53 0.77
6.00 to 6.49 ............... 7 770,854.30 0.68
6.50 to 6.99 ............... 12 907,761.62 0.80
7.00 to 7.49 ............... 13 1,589,912.50 1.41
7.50 to 7.99 ............... 15 1,876,288.85 1.66
8.00 to 8.49 ............... 60 7,370,344.23 6.52
8.50 to 8.99 ............... 117 14,728,571.80 13.02
9.00 to 9.49 ............... 260 27,967,836.66 24.73
9.50 to 9.99 ............... 168 18,313,165.94 16.19
10.00 to 10.49 .............. 123 12,547,892.33 11.10
10.50 to 10.99 .............. 120 11,319,611.49 10.01
11.00 to 11.49 .............. 78 6,637,594.91 5.87
11.50 to 11.99 .............. 44 3,386,198.32 2.99
12.00 to 12.49 .............. 25 1,826,213.86 1.61
12.50 to 12.99 .............. 10 511,332.05 0.45
13.00 to 13.49 .............. 4 196,014.14 0.17
13.50 to 13.99 .............. 2 117,832.08 0.10
14.00 to 14.49 .............. 1 34,022.16 0.03
------ ---------------- -------
TOTAL................... 1,091 $113,090,141.89 100.00%
===== ============== ======
</TABLE>
GROUP II
DISTRIBUTION OF MARGINS
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
Margins Mortgage Loans Principal Balance Principal Balance
- -------- -------------- ----------------- ------------------
<S> <C> <C> <C>
2.01to 3.00%.............. 3 $ 493,797.52 0.44%
3.01 to 4.00............... 11 808,066.83 0.71
4.01 to 5.00............... 234 24,534,364.13 21.69
5.01 to 6.00............... 455 50,251,628.60 44.44
6.01 to 7.00............... 306 29,476,532.84 26.06
7.01 to 8.00............... 63 5,901,073.01 5.22
8.01 to 9.00............... 19 1,624,678.96 1.44
------ --------------- -------
TOTAL................... 1,091 $113,090,141.89 100.00%
===== ============== ======
</TABLE>
S-37
<PAGE>
GROUP II
NEXT INTEREST ADJUSTMENT DATE DISTRIBUTION
<TABLE>
<CAPTION>
Next Interest Number of Aggregate % of Aggregate
Adjustment Date Mortgage Loans Principal Balance Principal Balance
- --------------- --------------- ----------------- -----------------
<S> <C> <C> <C>
December, 1996............ 42 $5,187,465.02 4.59%
January, 1997............. 25 3,098,323.82 2.74
February, 1997............ 48 5,170,740.14 4.57
March, 1997............... 67 7,251,831.60 6.41
April, 1997............... 75 8,888,962.98 7.85
May, 1997................. 74 9,450,817.60 8.35
June, 1997................ 12 1,635,813.61 1.45
July, 1997................ 6 496,366.00 0.44
August, 1997.............. 10 958,071.82 0.85
September, 1997........... 18 2,161,607.80 1.91
October, 1997............. 22 2,589,287.68 2.29
November, 1997............ 23 3,853,201.65 3.41
December, 1997............ 7 767,126.58 0.68
January, 1998............. 1 157,346.79 0.14
June, 1998................ 1 215,545.61 0.19
August, 1998.............. 8 1,151,198.86 1.02
September, 1998........... 15 1,875,172.47 1.66
October, 1998............. 17 2,148,115.99 1.90
November, 1998............ 17 1,202,601.17 1.06
December, 1998............ 1 93,600.00 0.08
March, 1999............... 1 64,397.01 0.06
April, 1999............... 6 551,785.43 0.49
May, 1999................. 13 1,438,985.96 1.27
June, 1999................ 2 130,534.96 0.12
July, 1999................ 4 439,991.45 0.39
August, 1999.............. 18 1,444,865.93 1.28
September, 1999........... 28 2,569,387.56 2.27
October, 1999............. 60 5,328,656.94 4.71
November, 1999............ 64 6,695,357.77 5.91
December, 1999............ 21 1,955,411.00 1.73
October, 2000............. 6 496,498.64 0.44
November, 2000............ 17 1,606,245.28 1.42
December, 2000............ 33 2,792,378.84 2.47
January, 2001............. 35 3,565,610.20 3.15
February, 2001............ 26 1,866,910.90 1.65
March, 2001............... 13 987,521.11 0.87
April, 2001............... 3 141,997.45 0.13
June, 2001................ 1 67,254.30 0.06
July, 2001................ 1 23,299.36 0.02
August, 2001.............. 46 4,427,956.97 3.92
September, 2001........... 77 7,229,280.10 6.39
October, 2001............. 60 5,188,287.36 4.59
November, 2001............ 47 4,375,090.48 3.87
December, 2001............ 17 1,244,075.00 1.10
June, 2003................ 1 51,920.63 0.05
July, 2003................ 1 30,931.97 0.03
August, 2003.............. 1 22,312.10 0.02
------ --------------- -------
TOTAL.................. 1,091 $113,090,141.89 100.00%
===== ============== ======
</TABLE>
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par, the
yield to maturity on an Offered Certificate will be directly related to the rate
of payment of principal of the Mortgage Loans in the related Mortgage Loan
Group, including for this purpose voluntary payment in whole or in part of
Mortgage Loans in the Mortgage Loan Group prior to stated maturity (a
"Prepayment"), liquidations due to defaults, casualties and condemnations, and
repurchases of Mortgage Loans in the related Mortgage Loan Group by the Sponsor,
the Originators, the Master Servicer or the Certificate Insurer. The actual rate
of principal prepayments on pools of mortgage loans is influenced by a variety
of
S-38
<PAGE>
economic, tax, geographic, demographic, social, legal and other factors and
has fluctuated considerably in recent years. In addition, the rate of principal
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.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. In general, the
earlier the payment of principal of the Mortgage Loans the greater the effect on
an investor's yield to maturity. As a result, the effect on an investor's yield
of prepayments occurring at a rate higher (or lower) than the rate anticipated
by the investor during the period immediately following the issuance of the
Offered Certificates will not be offset by a subsequent like reduction (or
increase) in the rate of principal prepayments. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase any of the Offered Certificates. The Sponsor makes no
representations or warranties as to the rate of prepayment or the factors to be
considered in connection with such determination.
Projected Prepayments and Yields for Offered Certificates
If purchased at other than par, the yield to maturity on an Offered
Certificate will be affected by the rate of the payment of principal of the
Mortgage Loans in the related Mortgage Loan Group. If the actual rate of
payments on the Mortgage Loans in the related Mortgage Loan Group is slower than
the rate anticipated by an investor who purchases an Offered Certificate of the
related class at a discount, the actual yield to such investor will be lower
than such investor's anticipated yield. If the actual rate of payments on the
Mortgage Loans in the related Mortgage Loan Group is faster than the rate
anticipated by an investor who purchases an Offered Certificate of the related
class at a premium, the actual yield to such investor will be lower than such
investor's anticipated yield.
The Mortgage Loans in Group I are fixed-rate mortgage loans. The rate
of prepayments with respect to conventional fixed rate mortgage loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates on fixed rate mortgage loans,
such mortgage loans are likely to be subject to higher prepayment rates than if
prevailing rates remain at or above the interest rate on such mortgage loans.
However, the monthly payment on mortgage loans similar to the Mortgage Loans is
often smaller than the monthly payment on a purchase-money first mortgage loan.
Consequently, a decrease in the interest rate payable as a result of a
refinancing would result in a relatively small reduction in the amount of the
Mortgagor's monthly payment, as a result of the relatively small loan balance.
Conversely, if prevailing interest rates rise appreciably above the interest
rates on fixed rate mortgage loans, such mortgage loans are likely to experience
a lower prepayment rate than if prevailing rates remain at or below the interest
rates on such mortgage loans. 66.17% of the Mortgage Loans in the Group I
Statistic Calculation Pool by aggregate principal balance had prepayment
penalties.
All of the Mortgage Loans in Group II are adjustable rate mortgage
loans. As is the case with conventional fixed rate mortgage loans, adjustable
rate mortgage loans may be subject to a greater rate of principal prepayments in
a declining interest rate environment. For example, if prevailing interest rates
fall significantly, adjustable rate mortgage loans could be subject to higher
prepayment rates than if prevailing interest rates remain constant because the
availability of fixed-rate mortgage loans at competitive interest rates may
encourage mortgagors to refinance their adjustable rate mortgage loans to "lock
in" a lower fixed interest rate. However, no assurance can be given as to
the level of prepayments that the Mortgage Loans will experience. 69.78% of the
Mortgage Loans in the Group II Statistic Calculation Pool by aggregate principal
balance had prepayment penalties.
The Final Scheduled Payment Date for the Offered Certificates is
November 25, 2026, which is the Payment Date on which the Pooling and Servicing
Agreement requires that the Class A-1 Certificate Principal Balance and the
Class A-2 Certificate Principal Balance be reduced to zero. The original
principal amounts of the Class A-1 Certificates and the Class A-2 Certificates,
as of the Closing Date, less all amounts previously distributed to the Owners of
such Offered Certificates (other than the Certificate Insurer) on account of
principal shall be the "Class A-1 Certificate Principal Balance" and the "Class
A-2 Certificate Principal Balance", respectively.
S-39
<PAGE>
The actual final Payment Date with respect to each class of Offered
Certificates could occur significantly earlier than the final scheduled Payment
Date because (i) Net Monthly Excess Cashflow will be used to make accelerated
payments of principal (i.e., Subordination Increase Amounts) to the Owners of
each class of Offered Certificates, which payments will have the effect of
shortening the weighted average lives of the Offered Certificates of each class,
(ii) Prepayments are likely to occur which shall be applied to the payment of
the Class A Certificate Principal Balances and (iii) the Master Servicer may
cause a termination of the Trust when the aggregate outstanding principal amount
of the Mortgage Loans in the Trust has declined to 10% or less of the aggregate
principal balance of the Mortgage Loans in the Trust as of the Closing Date.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of the
Offered Certificates of each class will be influenced by the rate at which
principal payments on the Mortgage Loans in the related Mortgage Loan Pool are
paid, which may be in the form of scheduled amortization, accelerated
amortization or prepayments (for this purpose, the term "prepayment" includes
Prepayments and liquidations due to default) or as a result of an early
termination of the Trust.
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement with
respect to Group I is the Home Equity Prepayment ("HEP") assumption. HEP assumes
that a pool of loans prepays in the first month at a constant prepayment rate
that corresponds in CPR (as defined herein) to one-tenth the given HEP
percentage and increases by an additional one-tenth each month thereafter until
the tenth month, where it remains at a CPR equal to the given HEP percentage.
The model used in this Prospectus Supplement with respect to Group II is the
Constant Prepayment Rate ("CPR") assumption. The CPR represents an assumed
constant rate of prepayment each month, expressed as an annual rate, relative to
the then outstanding principal balance of a pool of mortgage loans for the life
of such mortgage loans. Neither model purports to be either an historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any mortgage loans,
including the Mortgage Loans.
The tables set forth below were prepared on the basis of the
assumptions in the following paragraph (the "Structuring Assumptions") and there
may be differences between the characteristics of the Mortgage Loans and the
characteristics of the mortgage loans assumed in preparing the tables below. Any
such difference may have an effect upon the percentage of the Class A-1
Certificate Principal Balance and the Class A-2 Certificate Principal Balance
outstanding and weighted average lives of the Class A-1 Certificates and Class
A-2 Certificates set forth in the tables below. In addition, since the Mortgage
Loans may have characteristics which differ from those mortgage loans assumed in
preparing the tables set forth below, the distributions of principal on the
Class A Certificates may be made earlier or later than indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the
Mortgage Loans consist of synthetic mortgage loans having the characteristics
set forth below; (ii) the Closing Date is December 19, 1996; (iii) distributions
on the Certificates are made on the 25th day of each month regardless of the day
on which the Payment Date actually occurs, commencing in January, 1997, in
accordance with the priorities described herein; (iv) all prepayments are
prepayments in full and include 30 days' interest thereon; (v) the "Specified
Subordinated Amounts" (as defined under "Description of the Certificates --
Overcollateralization Provisions") are set initially as specified by the
Certificate Insurer, and thereafter decrease as permitted by the Certificate
Insurer; (vi) no synthetic mortgage loan referenced in clause (i) of this
paragraph is ever delinquent; (vii) the assumed levels of one-month
LIBOR, six-month LIBOR, and one year CMT are 5.6055%, 5.5313% and 5.4100%,
respectively; (viii) all of the additional Mortgage Loans are delivered to the
Trust by the Closing Date and (ix) an optional termination is exercised by the
Master Servicer when the aggregate principal has declined to 10% or less of the
aggregate principal balance of the Mortgage Loans as of the Closing Date.
MORTGAGE POOLS
Group I
S-40
<PAGE>
<TABLE>
<CAPTION>
Original Remaining Original
Gross Term to Term to Amortization
Principal Coupon Maturity Maturity Term Amortization
Balance Rate (months) (months) (months) Method
Mortgage Loans as of the Closing Date
<S> <C> <C> <C> <C> <C>
$2,015,353.65 9.875% 59 31 351 Balloon
68,755,957.81 11.637 177 175 358 Balloon
10,786,125.74 11.845 106 105 106 Level Pay
56,637,723.62 11.424 179 176 179 Level Pay
21,832,774.56 10.683 234 233 234 Level Pay
55,489,306.00 10.744 359 357 359 Level Pay
</TABLE>
S-41
<PAGE>
Group II
<TABLE>
<CAPTION>
Original Remaining
Gross Term to Term to
Principal Coupon Maturity Maturity First Reset
Balance Rate (months) (months) (months) Margin
------- ------ -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Mortgage Loans as of the Closing Date
$ 5,712,943.90 9.789% 360 352 1 5.747%
$ 3,412,177.26 10.024% 360 350 2 5.473%
$ 5,694,524.82 9.851% 360 355 3 5.759%
$ 7,986,426.30 9.528% 354 350 4 5.669%
$ 9,789,395.52 9.785% 358 355 5 5.752%
$12,462,889.97 9.825% 346 342 6 5.784%
$ 7,370,361.06 10.225% 360 358 22 6.144%
$21,043,981.23 10.433% 355 354 35 5.244%
$17,519,906.83 11.113% 357 349 52 5.849%
$19,538,845.64 10.971% 346 345 59 5.698%
$11,906,450.08 9.528% 355 354 11 6.023%
$ 1,593,170.05 10.417% 360 358 34 5.059%
$ 514,853.65 10.525% 311 309 59 5.342%
<CAPTION>
Principal Periodic Net Life Net Life Reset
Balance Rate Cap Cap Floor Frequency Index
------- ---------- ----- ----- --------- -----
Mortgage Loans as of the Closing Dage
<S> <C> <C> <C> <C> <C>
$ 5,712,943.90 1.250% 15.719% 8.719% Semi-annual 6 mo LIBOR
$ 3,412,177.26 1.242% 15.282% 8.315% Semi-annual 6 mo LIBOR
$ 5,694,524.82 1.102% 15.636% 8.163% Semi-annual 6 mo LIBOR
$ 7,986,426.30 1.085% 15.542% 8.633% Semi-annual 6 mo LIBOR
$ 9,789,395.52 1.088% 15.705% 8.521% Semi-annual 6 mo LIBOR
$12,462,889.97 1.225% 15.767% 8.522% Semi-annual 6 mo LIBOR
$ 7,370,361.06 1.052% 16.162% 8.982% Semi-annual 6 mo LIBOR
$21,043,981.23 1.029% 16.915% 9.605% Semi-annual 6 mo LIBOR
$17,519,906.83 1.180% 17.607% 9.887% Semi-annual 6 mo LIBOR
$19,538,845.64 1.002% 17.468% 9.054% Semi-annual 6 mo LIBOR
$11,906,450.08 2.000% 16.008% 8.742% Annual 1 Year CMT
$ 1,593,170.05 1.961% 16.917% 7.579% Annual 1 Year CMT
$ 514,853.65 2.000% 17.025% 8.706% Annual 1 Year CMT
</TABLE>
S-42
<PAGE>
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV
<S> <C> <C> <C> <C>
Group I(1)................. 0% 20% 23% 28%
Group II(2)................ 0% 20% 25% 30%
</TABLE>
(1) As a percentage of HEP
(2) As a percentage of CPR
The following tables, which are based on the Structuring Assumptions,
indicate (i) the percentages of the initial Class A-1 Certificate Principal
Balance that would be outstanding after each of the dates shown at various
percentages of HEP, in the case of Group I, and at various percentages of CPR,
in the case of Group II, and the corresponding weighted average life of the
Class A-1 Certificates and (ii) the percentages of the initial Class A-2
Certificate Principal Balance that would be outstanding after each of the dates
shown at various percentages of HEP, in the case of Group I, and at various
percentages of CPR, in the case of Group II, and the corresponding weighted
average life of the Class A-2 Certificates. It is not likely that (i) all of the
Mortgage Loans will have the characteristics assumed and (ii) the Mortgage Loans
will prepay at the specified percentages of HEP, CPR or at any other constant
percentage. Moreover, the diverse remaining terms to maturity of the Mortgage
Loans could produce slower or faster principal distributions than indicated in
the tables set forth below, even if the weighted average remaining term to
maturity of the Mortgage Loans is consistent with the remaining terms to
maturity of the synthetic mortgage loans referenced in clause (i) of the
Structuring Assumptions set forth above.
[Rest of page intentionally left blank]
S-43
<PAGE>
PERCENTAGE OF INITIAL CLASS A-1 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Dates Scenario 1 Scenario 2 Scenario 3 Scenario 4
----- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Initial Balance 100 100 100 100
12/25/1997 96 80 78 74
12/25/1998 94 62 58 51
12/25/1999 91 47 42 34
12/25/2000 89 36 31 24
12/25/2001 87 28 23 17
12/25/2002 84 22 17 12
12/25/2003 81 17 13 0
12/25/2004 78 13 10 0
12/25/2005 74 10 0 0
12/25/2006 71 0 0 0
12/25/2007 67 0 0 0
12/25/2008 63 0 0 0
12/25/2009 58 0 0 0
12/25/2010 53 0 0 0
12/25/2011 22 0 0 0
12/25/2012 22 0 0 0
12/25/2013 20 0 0 0
12/25/2014 19 0 0 0
12/25/2015 17 0 0 0
12/25/2016 16 0 0 0
12/25/2017 15 0 0 0
12/25/2018 14 0 0 0
12/25/2019 12 0 0 0
12/25/2020 11 0 0 0
12/25/2021 10 0 0 0
12/25/2022 8 0 0 0
12/25/2023 6 0 0 0
12/25/2024 0 0 0 0
12/25/2025 0 0 0 0
11/25/2026 0 0 0 0
Weighted Average
Life (years):(1) 13.4 3.7 3.2 2.7
Weighted Average
Life (years):(2) 13.4 3.9 3.5 2.9
</TABLE>
(1) To 10% Call. This assumes that an optional termination is exercised by the
Master Servicer when the aggregate principal balance has declined to 10% or
less of the aggregate principal balance of the Mortgage Loans as of the
Closing Date.
(2) To Maturity
The weighted average life of the Class A-1 Certificates has been determined by
(i) multiplying the amount of the reduction, if any, of the Class A-1
Certificate Principal Balance on each Payment Date by the number of years from
the date of issuance to the related Payment Date, (ii) adding the results and
(iii) dividing the sum by the aggregate amount of the reductions in the Class
A-1 Certificate Principal Balance referred to in clause (i).
S-44
<PAGE>
PERCENTAGE OF INITIAL CLASS A-2 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Dates Scenario 1 Scenario 2 Scenario 3 Scenario 4
----- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Initial Balance 100 100 100 100
12/25/1997 98 77 72 67
12/25/1998 97 60 52 45
12/25/1999 96 47 38 31
12/25/2000 96 37 28 22
12/25/2001 95 29 21 15
12/25/2002 94 23 16 10
12/25/2003 93 18 12 0
12/25/2004 92 15 9 0
12/25/2005 91 11 0 0
12/25/2006 89 0 0 0
12/25/2007 88 0 0 0
12/25/2008 86 0 0 0
12/25/2009 84 0 0 0
12/25/2010 82 0 0 0
12/25/2011 80 0 0 0
12/25/2012 77 0 0 0
12/25/2013 74 0 0 0
12/25/2014 71 0 0 0
12/25/2015 68 0 0 0
12/25/2016 63 0 0 0
12/25/2017 59 0 0 0
12/25/2018 54 0 0 0
12/25/2019 48 0 0 0
12/25/2020 42 0 0 0
12/25/2021 36 0 0 0
12/25/2022 29 0 0 0
12/25/2023 21 0 0 0
12/25/2024 0 0 0 0
12/25/2025 0 0 0 0
11/25/2026 0 0 0 0
Weighted
Average Life
(years):(1) 20.6 3.7 3.0 2.4
Weighted
Average Life
(years):(2) 20.7 4.1 3.2 2.6
</TABLE>
(1) To 10% Call. This assumes that an optional termination is exercised by the
Master Servicer when the aggregate principal balance has declined to 10% or
less of the aggregate principal balance of the Mortgage Loans as of the
Closing Date.
(2) To Maturity
The weighted average life of the Class A-2 Certificates has been determined by
(i) multiplying the amount of the reduction, if any, of the Class A-2
Certificate Principal Balance on each Payment Date by the number of years from
the date of issuance to the related Payment Date, (ii) adding the results and
(iii) dividing the sum by the aggregate amount of the reductions in the Class
A-2 Certificate Principal Balance referred to in clause (i).
S-45
<PAGE>
USE OF PROCEEDS
The Sponsor will cause the Trust to acquire the Mortgage Loan
concurrently with the sale of the Offered Certificates. The net proceeds from
the sale of the Offered Certificates will be paid over to the Originators in
consideration of the Transfer of the Mortgage Loans. Such amount will be
determined as a result of the pricing of the Offered Certificates through the
offering described in this Prospectus Supplement. The net proceeds to be
received from the sale of the Mortgage Loans will be added to the Originators'
general funds and will be available for general corporate purposes, including
the repayment of debt and the purchase of new mortgage loans.
THE SPONSOR AND THE MASTER SERVICER
The Sponsor, Advanta Mortgage Conduit Services, Inc. is a direct
subsidiary of Advanta Mortgage Corp. USA, the Master Servicer, and is an
indirect subsidiary of Advanta Corp., a Delaware corporation ("Advanta Parent"),
a publicly-traded company based in Horsham, Pennsylvania with assets as of
September 30, 1996 in excess of $5.6 billion. Advanta Parent, through its
subsidiaries (including the Master Servicer) managed assets (including mortgage
loans) in excess of $18.3 billion as of September 30, 1996. See "The Sponsor and
the Transferor" in the Prospectus.
As of September 30, 1996, the Master Servicer and its subsidiaries were
servicing approximately 40,000 Mortgage Loans in the Owned and Managed Servicing
Portfolio representing an aggregate outstanding principal balance of
approximately $2.3 billion, and approximately 42,000 mortgage loans in the
Third-Party Servicing Portfolio representing an aggregate outstanding principal
balance of approximately $2.1 billion. See "The Master Servicer" in the
Prospectus.
As of September 30, 1996, the Sponsor or its affiliates have issued,
and the Master Servicer services, 28 issues of mortgage pass-through securities
with an original balance of approximately $3.7 billion.
The Trustee and the Certificate Insurer may remove the Master Servicer,
and the Master Servicer may resign, only in accordance with the terms of the
Pooling and Servicing Agreement. No removal or resignation shall become
effective until the Trustee or a successor servicer shall have assumed the
Master Servicer's responsibilities and obligations in accordance therewith. See
"The Pooling and Servicing Agreement -- Removal and Resignation of the Master
Servicer" in the Prospectus.
The Master Servicer may not assign its obligations under the Pooling
and Servicing Agreement, in whole or in part, unless it shall have first
obtained the written consent of the Trustee and the Certificate Insurer, which
consent is required not to be unreasonably withheld; provided, however, that any
assignee must meet the eligibility requirements for a successor servicer set
forth in the Pooling and Servicing Agreement. See "The Pooling and Servicing
Agreement -- Removal and Resignation of the Master Servicer" in the Prospectus.
The Master Servicer may enter into Sub-Servicing Agreements with
qualified Sub-Servicers with respect to the servicing of all or any portion of
the Mortgage Loans. The Pooling and Servicing Agreement will provide that
affiliates of the Master Servicer which are qualified to service mortgage loans
are qualified Sub-Servicers. No Sub-Servicing Agreements discharge the Master
Servicer from its servicing obligations. See "Mortgage Loan Program --
Sub-Servicers" in the Prospectus.
Upon removal or resignation of the Master Servicer, the Trustee may
solicit bids for a successor servicer and, pending the appointment of a
successor Servicer as a result of soliciting such bids, will be required to
serve as Master Servicer. If the Trustee is unable to obtain a qualifying bid
and is prevented by law from acting as servicer, the Trustee will be required to
appoint, or petition a court of competent jurisdiction to appoint, an eligible
successor. Any successor is required to be a housing and home finance
institution, bank or mortgage servicing institution which has shareholders'
equity of not less than $10,000,000 as determined in accordance with generally
accepted accounting principles, and which is acceptable to the Certificate
Insurer and shall assume all or any part of the responsibilities, duties or
liabilities of the Master Servicer.
The Certificates will not represent an interest in or obligation of,
nor are the Mortgage Loans guaranteed by, the Sponsor, the Master Servicer or
Advanta Parent, nor will they be insured or guaranteed by the Federal Deposit
Insurance Corporation (the "FDIC") or any other governmental agency or
instrumentality.
S-46
<PAGE>
DESCRIPTION OF THE CERTIFICATES
General
Persons in whose name a Certificate is registered in the Register
maintained by the Trustee are the "Owners" of the Certificates. For so long as
the Offered Certificates are in book-entry form with DTC, the only "Owner" of
the Offered Certificates as the term "Owner" is used in the Pooling and
Servicing Agreement will be Cede. No person acquiring a beneficial interest in
an Offered Certificate (a "Beneficial Owner") will be entitled to receive a
definitive certificate representing such person's interest in the Trust, except
in the event that Physical Certificates are issued under limited circumstances
set forth in the Pooling and Servicing Agreement. All references herein to the
Owners of Offered Certificates shall mean and include the rights of Beneficial
Owners, as such rights may be exercised through DTC and its participating
organizations, except as otherwise specified in the Pooling and Servicing
Agreement. See "Description of the Securities -- Form of Securities" in the
Prospectus.
Each class of Offered Certificates will evidence the right to receive
on each Payment Date the Class A Distribution Amount for such class of Offered
Certificates, in each case until the related Certificate Principal Balance has
been reduced to zero. The Owners of the class of Class R Certificates will be
entitled to receive distributions of residual Net Monthly Excess Cashflow not
required for other purposes pursuant to the Pooling and Servicing Agreement.
Payment Dates
The Pooling and Servicing Agreement will require that the Trustee
create and maintain a Distribution Account. See "Description of the Securities
- -- Payments on Mortgage Loans; Deposits to Distribution Account" in the
Prospectus.
On the eighteenth day of each month (or, if such day is not a Business
Day, the immediately following Business Day) (the "Remittance Date") the Master
Servicer is required to withdraw from the Principal and Interest Account and
remit to the Trustee, for deposit in the Distribution Account, the Monthly
Remittance Amount. The Monthly Remittance Amount is the sum of the amounts
collected by the Master Servicer in respect of the Mortgage Loans during the
period beginning on the first day of the calendar month immediately preceding
the month in which the related Remittance Date occurs and ending on the last day
of such month (the "Remittance Period") plus any related Loan Purchase Prices,
Substitution Amounts, Delinquency Advances and Compensating Interest, less the
sum of certain amounts the Master Servicer is permitted to withdraw from the
Principal and Interest Account, as described under "Description of the
Securities -- Withdrawals from the Principal and Interest Account."
Book Entry Registration of the Offered Certificates
The Offered Certificates will be book-entry certificates (the
"Book-Entry Certificates"). The Beneficial Owners may elect to hold their
Offered Certificates through DTC in the United States, or CEDEL or Euroclear (in
Europe) if they are participants of such systems ("Participants"), or indirectly
through organizations which are Participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates per class of Offered
Certificates which in the aggregate equal the principal balance of such Offered
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and Morgan
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Investors
may hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $1,000 and in integral multiples
in excess thereof. Except as described below, no Beneficial Owner will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate"). Unless and until definitive Certificates are issued,
it is anticipated that the only "Owner" of such Offered Certificates will be
Cede & Co., as nominee of DTC. Beneficial Owners will not be Owners as that term
is used in the Pooling and Servicing Agreement. Beneficial Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's Ownership of such Book-Entry
S-47
<PAGE>
Certificate will be recorded on the records of DTC (or of a participating firm
that acts as agent for the Financial Intermediary, whose interest will in turn
be recorded on the records of DTC, if the Beneficial Owner's Financial
Intermediary is not a DTC Participant and on the records of CEDEL or Euroclear,
as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Certificates from the Trustee through DTC and DTC
Participants. While such Offered Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Offered Certificates.
Participants and indirect participants with whom Beneficial Owners have accounts
with respect to Offered Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates, the Rules 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
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Offered Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Offered Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Offered
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Offered Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- Foreign Investors" and " -- Backup Withholding" in
the Prospectus and "Global Clearance, Settlement and Tax Documentation
Procedures -- Certain U.S. Federal Income Tax Documentation Requirements" in
Annex I to this Prospectus Supplement.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
S-48
<PAGE>
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 27 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Offered Certificates held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Because DTC can
only act on behalf of Financial Intermediaries, the ability of a Beneficial
Owner to pledge Book-Entry Certificates, to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity
S-49
<PAGE>
of such Certificates in the secondary market since certain potential investors
may be unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust provided by the Trustee or the
Master Servicer, as the case may be, to Cede, as nominee of DTC, may be made
available to Beneficial Owners upon request, in accordance with the rules,
regulations and procedures creating and affecting the Depository, and to the
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates of
such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. CEDEL or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling and
Servicing Agreement on behalf of a CEDEL Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Offered Certificates which conflict with actions taken with
respect to other Offered Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Sponsor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Sponsor or the
Trustee is unable to locate a qualified successor, (b) the Sponsor, at its sole
option, elects to terminate a book-entry system through DTC or (c) DTC, at the
direction of the Beneficial Owners representing a majority of the outstanding
Percentage Interests of the Offered Certificates, advises the Trustee in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, at the
Sponsor's expense and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Owners under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among Participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
Neither the Sponsor, the Master Servicer nor the Trustee will have any
liability for any actions taken by DTC or its nominee, Euroclear, or CEDEL,
including, without limitation, actions for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Class A
Certificates held by Euroclear, Cedel or Cede & Co., as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Distributions
Distributions on the Certificates are required to be made on each
Payment Date, commencing on January 27, 1997, to the Owners on each Record Date
in an amount equal to the product of such Owner's Percentage Interest and the
amount distributed in respect of such Certificateholders' class of such
Certificates on such Payment Date. See "Description of the Securities --
Distributions" in the Prospectus.
S-50
<PAGE>
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement requires that, on each Payment Date, certain excess cash
flows with respect to a Mortgage Loan Group, consisting of the difference
between (i) the difference between (x) the interest which is collected on the
Mortgage Loans in such Mortgage Loan Group during a Remittance Period (net of
the Servicing Fee and Originator's Retained Yield) plus any Delinquency Advances
and Compensating Interest and (y) the sum of (I) the interest which accrues on
the related Offered Certificates during the related Accrual Period and (II) the
premiums due to the Certificate Insurer with respect to the related Certificate
Insurance Policy, and the Trustee's Fee (such difference, the "Total Monthly
Excess Spread" with respect to the related Mortgage Loan Group), and (ii) any
portion of the Total Monthly Excess Spread which is used to cover any shortfalls
in Available Funds (provided, that this does not apply to any shortfall
attributed to any Supplemental Interest Amount) on such Payment Date in the
related Mortgage Loan Group, or in the other Mortgage Loan Group, or used to
reimburse the Certificate Insurer on account of prior Insured Payments (such
excess cash flows with respect to a Mortgage Loan Group being the "Net Monthly
Excess Spread" with respect to such Mortgage Loan Group), be applied on such
Payment Date as an accelerated payment of principal on the related Offered
Certificates, but only to the limited extent hereafter described.
This has the effect of accelerating the amortization of the Offered
Certificates relative to the amortization of the Mortgage Loans in the related
Mortgage Loan Group. To the extent that any Net Monthly Excess Spread is not so
used, the Pooling and Servicing Agreement provides that it will be used to
reimburse the Master Servicer with respect to any amounts owing to it, or
otherwise applied as directed by the Owners of the Class R Certificates.
With respect to any Mortgage Loan Group and Payment Date, the
difference, if any, between (x) the aggregate principal balances of the Mortgage
Loans in such Mortgage Loan Group as of the close of business on the last day of
the preceding Remittance Period and (y) the aggregate Class A Certificate
Principal Balance of the Offered Certificates issued in respect of the related
Group as of such Payment Date (and following the making of all distributions on
such Payment Date) is the "Subordinated Amount" with respect to such Mortgage
Loan Group as of such Payment Date. Pursuant to the Pooling and Servicing
Agreement relating to the Certificates, each Mortgage Loan Group's Net Monthly
Excess Spread will be applied as an accelerated payment of principal on the
related class or classes of Offered Certificates until the related Subordinated
Amount has increased to the level required with respect to the related Mortgage
Loan Group. Any amount of Net Monthly Excess Spread actually applied as an
accelerated payment of principal is a "Subordination Increase Amount." The
required level of the Subordinated Amount with respect to a Mortgage Loan Group
and Payment Date is the "Specified Subordinated Amount" with respect to such
Mortgage Loan Group and Payment Date. The Specified Subordinated Amount may,
over time, decrease, or increase, subject to certain floors, caps and triggers.
To the extent that any Mortgage Loan Group's Net Monthly Excess Spread
is not required to be applied to the payment of a Subordination Increase Amount
on the Offered Certificates relating to such Mortgage Loan Group because the
Subordinated Amount with respect to such Mortgage Loan Group is equal to or
greater than the then Specified Subordinated Amount with respect to such
Mortgage Loan Group, such Net Monthly Excess Spread (together with the amount of
any Subordination Reduction Amount, as described in the next paragraph) is
permitted to be applied to the payment of Subordination Increase Amounts on the
class or classes of Offered Certificates relating to the other Mortgage Loan
Group, to the extent necessary to increase the Subordinated Amount with respect
to such Mortgage Loan Group to the level of its respective Specified
Subordinated Amount.
In the event that the required level of the Specified Subordinated
Amount with respect to a Mortgage Loan Group is permitted to decrease or "step
down" on a Payment Date in the future, the Pooling and Servicing Agreement
provides that a portion of the principal which would otherwise be distributed to
the Owners of the class or classes of Offered Certificates on such Payment Date
shall be distributed to, or otherwise applied as directed by, the Owners of the
Class R Certificates on such Payment Date. This has the effect of decelerating
the amortization of the Offered Certificates relative to the amortization of the
Mortgage Loans in the related Mortgage Loan Group, and of reducing the related
Subordinated Amount. With respect to any Mortgage Loan Group and Payment Date,
the excess, if any, of (x) the Subordinated Amount that would apply to the
related Mortgage Loan Group on such Payment Date after taking into account all
distributions to be made on such Payment Date (except for any distributions of
related Subordination Reduction Amounts as described in this sentence) over (y)
the related Specified Subordinated Amount is the "Excess Subordinated Amount"
with respect to such Mortgage Loan Group and Payment Date. If, on any Payment
Date, the Excess Subordinated Amount is, or, after taking into account all other
distributions to be made on such Payment Date
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would be, greater than zero (i.e., the Subordinated Amount is or would be
greater than the related Specified Subordinated Amount), then any amounts
relating to principal which would otherwise be distributed to the Owners of the
related class or classes of Offered Certificates on such Payment Date shall
instead be used to reimburse the Master Servicer for certain amounts owing to
it, or otherwise applied as directed by, the Owners of the Class R Certificates
(subject to certain other prior applications as described below under " --
Crosscollateralization Provisions") in an amount equal to the lesser of (x) the
Excess Subordinated Amount and (y) the amount available for distribution on
account of principal with respect to the related Offered Certificates on such
Payment Date; such amount being the "Subordination Reduction Amount" with
respect to the related Mortgage Loan Group for such Payment Date. As a technical
matter regarding the cash flow structure of the Trust, Subordination Reduction
Amounts may result even prior to the occurrence of any decrease or "step-down"
in the related Specified Subordinated Amount. This is because the Owners of the
related Offered Certificates will generally be entitled to receive 100% of
collected principal, even though the related Class A Certificate Principal
Balance will, following the accelerated amortization resulting from the
application of the Net Monthly Excess Spread, represent less than 100% of the
related Mortgage Loan Group's aggregate principal balance. In the absence of the
provisions relating to Subordination Reduction Amounts, the foregoing may
otherwise increase the Subordinated Amounts above their Specified Subordinated
Amount requirements even without the further application of any Net Monthly
Excess Spread.
The Pooling and Servicing Agreement provides that, on any Payment Date,
all amounts collected on account of principal (other than any such amount
applied to the payment of a Subordination Reduction Amount) with respect to a
Mortgage Loan Group during the prior Remittance Period will be distributed to
the Owners of the related class of Offered Certificates on such Payment Date. If
any Mortgage Loan became a Liquidated Mortgage Loan during such prior Remittance
Period, the Net Liquidation Proceeds related thereto and allocated to principal
may be less than the principal balance of the related Mortgage Loan; the amount
of any such insufficiency is a "Realized Loss." In addition, the Pooling and
Servicing Agreement provides that the principal balance of any Mortgage Loan
which becomes a Liquidated Mortgage Loan shall thenceforth equal zero. The
Pooling and Servicing Agreement does not contain any rule which requires that
the amount of any Realized Loss be distributed to the Owners of the related
Offered Certificates on the Payment Date which immediately follows the event of
loss, i.e., the Pooling and Servicing Agreement does not require the current
recovery of losses. However, the occurrence of a Realized Loss will reduce the
Subordinated Amount with respect to the related Mortgage Loan Group, which, to
the extent that such reduction causes the Subordinated Amount to be less than
the related Specified Subordinated Amount applicable to the related Payment
Date, will require the payment of a Subordination Increase Amount on such
Payment Date (or, if insufficient funds are available on such Payment Date, or
subsequent Payment Dates, until the Subordinated Amount equals the related
Specified Subordinated Amount). The effect of the foregoing is to allocate
losses to the Owners of the Class R Certificates by reducing, or eliminating
entirely, payment of Monthly Excess Spread and of Subordination Reduction
Amounts which such Owners would otherwise receive.
Overcollateralization and the Certificate Insurance Policy. The Pooling
and Servicing Agreement defines a "Subordination Deficit" with respect to a
Mortgage Loan Group and Payment Date to be the amount, if any, by which (x) the
aggregate Class A Certificate Principal Balance of the Offered Certificates
issued in respect of the related Group as of such Payment Date, and following
the making of all distributions to be made on such Payment Date (except for any
payment to be made as to principal from proceeds of the Certificate Insurance
Policy), exceeds (y) the aggregate principal balance of the Mortgage Loans in
the related Mortgage Loan Group as of the close of business on the last day of
the preceding Remittance Period. The Pooling and Servicing Agreement requires
the Trustee to make a claim for an Insured Payment under the Certificate
Insurance Policy not later than the third Business Day prior to any Payment Date
as to which the Trustee has determined that a Subordination Deficit will occur
for the purpose of applying the proceeds of such Insured Payment as a payment of
principal to the Owners of the Offered Certificates on such Payment Date. The
Certificate Insurance Policy is thus similar to the subordination provisions
described above insofar as the Certificate Insurance Policy guarantees ultimate,
rather than current, payment of the amounts of any Realized Losses to the Owners
of the related Offered Certificates. Investors in the Offered Certificates
should realize that, under extreme loss or delinquency scenarios applicable to
the related Mortgage Loan Pool, they may temporarily receive no distributions of
principal.
Crosscollateralization Provisions
On each Payment Date, an amount equal to the sum of (x) the Total
Monthly Excess Spread with respect to each Mortgage Loan Group and Payment Date
plus (y) any Subordination Reduction Amount with respect to such Mortgage Loan
Group and Payment Date (such amount being the "Total Monthly Excess Cashflow"
with respect to such Mortgage Loan Group and Payment Date) with respect to each
Mortgage
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Loan Group will be required to be applied in the following order of priority:
(i) such amount shall be used to fund any shortfall on such
Payment Date with respect to the related Mortgage Loan Group and equal to the
difference, if any, between (x) the Insured Distribution Amount for the related
Mortgage Loan Group for such Payment Date and (y) the Available Funds with
respect to the related Mortgage Loan Group for such Payment Date (the amount of
such difference being equal to an "Available Funds Shortfall" with respect to
the related Mortgage Loan Group);
(ii) any remaining amount after the application described in (i)
above shall be used to fund any Available Funds Shortfall with respect to the
other Group for such Payment Date;
(iii) any portion of the Total Monthly Excess Cashflow with respect
to such Mortgage Loan Group remaining after the applications described in clause
(i) and (ii) above shall be paid to the Certificate Insurer in respect of
amounts owed on account of any Insured Payments theretofore made with respect to
the related Mortgage Loan Group (any such amount so owed to the Certificate
Insurer and not theretofore paid, together with accrued interest thereon, the
"Insurer Reimbursable Amount" with respect to the related Mortgage Loan Group);
and
(iv) any portion of the Total Monthly Excess Cashflow with respect
to such Mortgage Loan Group remaining after the application described in clauses
(i), (ii) and (iii) above shall be paid to the Certificate Insurer in respect of
any Insurer Reimbursable Amount with respect to the other Mortgage Loan Group.
The amount, if any, of the Total Monthly Excess Cashflow with respect
to a Mortgage Loan Group on a Payment Date remaining after such applications is
the "Net Monthly Excess Cashflow" with respect to such Mortgage Loan Group for
such Payment Date; such amount is required to be applied in the following order
of priority on such Payment Date:
(i) such amount shall be used to fund the payment of any required
Subordination Increase Amount with respect to the related Mortgage Loan Group as
a portion of the distribution of the Class A Principal Distribution Amount on
such Payment Date;
(ii) any portion of the Net Monthly Excess Cashflow remaining
after the application described in clause (i) above shall be used to make any
required Subordination Increase Amount with respect to the other Mortgage Loan
Group; and
(iii) any remaining Net Monthly Cashflow may then be used to
reimburse the Master Servicer for certain amounts owing to it, or may be
otherwise applied as directed by the Owners of the Class R Certificates.
Credit Enhancement Does Not Apply to Prepayment Risk or Basis Risk
In general, the protection afforded by the subordination provisions and
by the Certificate Insurance Policy is protection for credit risk and not for
prepayment risk or basis risk (the risk that changes in the value of the indices
on the Mortgage Loans will not match the changes in the value of the index
applicable to calculate the interest on the Certificates). The subordination
provisions may not be adjusted, nor may a claim be made under the Certificate
Insurance Policy to guarantee or insure that any particular rate of prepayment
is experienced by the Trust.
Offered Class Distributions and Insured Payments to the Owners of the Offered
Certificates
No later than the third Business Day prior to each Payment Date the
Trustee will be required to determine the amount for each Mortgage Loan Group
(the "Group I Available Funds" with respect to the Class A-1 Certificates and
the "Group II Available Funds" with respect to the Class A-2 Certificates) to be
on deposit in the Distribution Account on such Payment Date (after taking into
account any amounts transferred as a result of the cross-collateralization
mechanics described above). If the Group I Insured Distribution Amount for any
Payment Date exceeds the related Group I Available Funds for such Payment Date,
the Trustee will be required to draw the amount of such insufficiency from the
Certificate Insurer under the Certificate Insurance Policy. Similarly, if the
Group II Insured Distribution Amount for any Payment Date exceeds the Group II
Available Funds for such Payment Date, the Trustee
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<PAGE>
will be required to draw the amount of the insufficiency from the Certificate
Insurer under the Certificate Insurance Policy. The Pooling and Servicing
Agreement provides that amounts which cannot be distributed to the Owners of the
Certificates as a result of proceedings under the United States Bankruptcy Code
or similar insolvency laws will not be considered in determining the amount of
Available Funds with respect to any Payment Date.
On each Payment Date, and following the making by the Trustee of all
allocations, transfers and deposits heretofore described, from amounts
(including any related Insured Payment) then on deposit in the Distribution
Account, the Trustee will be required to distribute to the Owners of each class
of Offered Certificates the Class A Distribution Amount with respect to such
class for such Payment Date.
Calculation of LIBOR
On the second business day preceding each Payment Date or, in the case
of the first Payment Date, on the second business day preceding the Closing Date
(each such date, an "Interest Determination Date"), the Trustee will determine
the London interbank offered rate for one-month U.S. dollar deposits ("LIBOR")
for the next Accrual Period for the Class A-1 and the A-2 Certificates on the
basis of the offered rates of the Reference Banks for one-month U.S. dollar
deposits, as such rates appear on the Reuters Screen LIBO Page, as of 11:00 a.m.
(London time) on such Interest Determination Date. As used in this section,
"business day" means a day on which banks are open for dealing in foreign
currency and exchange in London and New York City; "Reuters Screen LIBO page"
means the display designated as page "LIBO" on the Reuter Monitor Money Rates
Service (or such other page as may replace the LIBO page on that service for the
purpose of displaying London interbank offered rates of major banks); and
"Reference Banks" means leading banks selected as the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market (i)
with an established place of business in London, (ii) whose quotations appear on
the Reuters Screen LIBO Page on the Interest Determination Date in question,
(iii) which have been designated as such by the Trustee and (iv) not
controlling, controlled by, or be under common control with, the Sponsor.
On each Interest Determination Date, LIBOR for the related Accrual
Period for the Class A-1 and the Class A-2 Certificates will be established by
the Trustee as follows:
(a) If on such Interest Determination Date two or more Reference Banks
provides such offered quotations, LIBOR for the related Accrual Period for the
Class A-1 and the Class A-2 Certificates shall be the arithmetic mean of such
offered quotations (rounded upwards if necessary to the nearest whole multiple
of 1/16%).
(b) If on such Interest Determination Date fewer than two Reference
Banks provide such offered quotations, LIBOR for the related Accrual Period for
the Class A-1 and the Class A-2 Certificates shall be the higher of (x) LIBOR as
determined on the previous Interest Determination Date and (y) the Reserve
Interest Rate. The "Reserve Interest Rate" shall be the rate per annum that the
Trustee determines to be either (i) the arithmetic mean (rounded upwards if
necessary to the nearest whole multiple of 1/16%) of the one-month U.S. dollar
lending rates which New York City banks selected by the Trustee are quoting on
the relevant Interest Determination Date to the principal London offices of
leading banks in the London interbank market or, in the event that the Trustee
can determine no such arithmetic mean, (ii) the lowest one-month U.S. dollar
lending rate which New York City banks selected by the Trustee are quoting on
such Interest Determination Date to leading European banks.
The establishment of LIBOR on each Interest Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to the
Class A-1 and the Class A-2 Certificates for the related Accrual Period shall
(in the absence of manifest error) be final and binding. Each such rate of
interest may be obtained by telephoning the Trustee at 1-800-735-7777.
Certain Activities
The Trust has not and will not: (i) issue securities (except for the
Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities
for the purpose of exercising control; (v) underwrite securities; (vi) except as
provided in the Pooling and Servicing Agreement, engage in the purchase and sale
(or turnover) of investments; (vii) offer securities in exchange for property
(except Certificates for the Mortgage Loans); or (viii) repurchase or otherwise
reacquire its securities. See "Description of the Securities -- Reports To The
Securityholders" in the Prospectus for information regarding reports to the
Owners.
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<PAGE>
THE CERTIFICATE INSURANCE POLICY
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement.
The Sponsor will obtain a Certificate Insurance Policy, issued by the
Certificate Insurer, in favor of the Owners of the Offered Certificates. The
Certificate Insurance Policy provides for 100% coverage of the Insured
Distribution Amount.
The Certificate Insurance Policy unconditionally guarantees the timely
payment of interest due and the ultimate payment of principal on the Class A
Certificates. The Certificate Insurer is required to make Insured Payments to
the Trustee as paying agent on the later of the Payment Date or on the business
day next following the day on which the Certificate Insurer shall have received
telephonic or telegraphic notice, subsequently confirmed in writing, or written
notice by registered or certified mail, from the Trustee that an Insured Payment
is due.
The Pooling and Servicing Agreement will provide that the "Available
Funds" do not include Insured Payments and do not include any amounts that can
be distributed to the Owners of any Offered Certificates by the Trustee as a
result of final, non-appealable proceedings under the United States Bankruptcy
Code.
In addition, the Certificate Insurance Policy will provide for payment
of the amount (a "Preference Amount") of any distributions in respect of
principal or interest previously paid to a Class A Certificateholder that are
subsequently recovered from such Certificateholder prior to the expiration date
of the Certificate Insurance Policy pursuant to a final, nonappealable order (a
"Final Order") of a court of competent jurisdiction under the United States
Bankruptcy Code. Any such payments would be made under the Certificate Insurance
Policy on the second business day following receipt by the Certificate Insurer
of a certified copy of such Final Order, assignment to the Certificate Insurer
of such Certificateholder's rights and claims with respect to such Preference
Amount and appointment of the Certificate Insurer as such Certificateholder's
agent in respect of such Preference Amount. No such Certificateholder shall be
entitled to reimbursement for any payment avoided as a preference as to which
the Certificate Insurer previously has made a payment under the Certificate
Insurance Policy, nor is the Certificate Insurer obligated to make any payment
in respect of any Preference Amount which represents a payment of the principal
amount of the Class A Certificates prior to the time the Certificate Insurer
otherwise would have been required to make a payment in respect of such
principal.
The Certificate Insurance Policy is non-cancelable.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Certificate Insurer's obligation under the Certificate Insurance
Policy will be discharged to the extent that funds are received by the Trustee
for distribution to the Class A Certificateholders, whether or not such funds
are properly distributed by the Trustee. For purposes of the Certificate
Insurance Policy, Certificateholder does not include the Trust, the Master
Servicer or the Sponsor. The Certificate Insurance Policy expires and terminates
without any action on the part of the Certificate Insurer or any other person on
the date that is one year and one day following the date on which the Class A
Certificates have been paid in full.
The Certificate Insurance Policy does not guarantee to the owners of
the Offered Certificates any specific rate of prepayments of principal of the
Mortgage Loans. Also, the Certificate Insurance Policy does not guarantee the
payment of any Supplemental Interest Amount.
Pursuant to the Pooling and Servicing Agreement, the Certificate
Insurer is subrogated to the rights of the Owners of the Offered Certificates to
the extent of any such payment under the Certificate Insurance Policy.
THE CERTIFICATE INSURER
General
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Financial Guaranty Insurance Company, the Certificate 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 agencies thereof. The Certificate
Insurer also insures a variety of non-municipal structured debt obligations and
pass-through securities. The Certificate 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 Certificate 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 Certificate
Insurer.
The Certificate 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 Certificate 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 other intercorporate transfers of assets and of transactions
between insurance companies, their parents and affiliates. The Certificate
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 Certificate Insurer is
subject to triennial audits by the State of New York Insurance Department.
The Certificate Insurer considers its role in providing insurance to be
credit enhancement rather than credit substitution. The Certificate Insurer only
insures securities that it considers to be of investment grade quality. With
respect to each category of obligations considered for insurance, the
Certificate Insurer has established and maintains its own underwriting standards
that are based on those aspects of credit quality that the Certificate 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 Certificate Insurer also reviews the security features and reserves
created by the financing documentation, as well as the financial and other
covenants imposed upon the credit backing the issue. In connection with
underwriting new issues, the Certificate 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 Certificate Insurer.
Insurance written by the Certificate 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 such as the Offered Certificates. If the issuer of a security insured
by the Certificate 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 Certificate Insurer will make scheduled insured
payments, without regard to any acceleration of the securities which may have
occurred, and will be subrogated to the rights of security holders to the extent
of its payments. The claims paying ability of the Certificate Insurer is rated
Aaa, AAA and AAA by Moody's, Standard & Poor's and Fitch, respectively.
In consideration for issuing its insurance, the Certificate Insurer
receives a premium which is generally paid in full upon issuance of the policy
or on an annual, semi-annual or monthly basis. The premium rates charged depend
principally on the credit strength of the securities as judged by the
Certificate Insurer according to its internal credit rating system and the type
of issue.
As of September 30, 1996 and December 31, 1995 and 1994 the Certificate
Insurer had written directly or assumed through reinsurance, guaranties of
approximately $197.8 billion, $180.0 billion and 160.2 billion par value of
securities, respectively (of which approximately 86 percent, 88 percent and 89
percent, respectively, constituted guaranties of municipal bonds), for which it
had collected gross premiums of approximately $2.01 billion, $1.95 billion
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and $1.78 billion respectively. As of September 30, 1996, the Certificate
Insurer had reinsured approximately 18 percent of the risks it had written, 34
percent through quota share reinsurance and 66 percent through facultative
arrangements.
Capitalization
The following table sets forth the capitalization of the Certificate Insurer as
of December 31, 1994 and December 31, 1995 and September 30, 1996, respectively,
on the basis of generally accepted accounting principles. No material adverse
change in the capitalization of the Certificate Insurer has occurred since
September 30, 1996.
<TABLE>
<CAPTION>
(Unaudited)
December 31, December 31, September 30,
1994 1995 1996
(in Millions) (in Millions) (in Millions)
------------- -------------- -------------
<S> <C> <C> <C>
Unearned Premiums $ 757 $728 $ 685
Other Liabilities 261 304 332
Stockholder's Equity
Common Stock 15 15 15
Additional Paid-In Capital 334 334 334
Unrealized gains (losses) (42) 64 12
Foreign currency translation
adjustment (1) (2) (2)
Retained Earnings 974 1,137 1,273
--- ----- -----
Total Stockholder's Equity 1,280 1,548 1,632
----- ----- -----
Total Liabilities and
Stockholders Equity $2,298 $2,580 $2,649
===== ===== =====
</TABLE>
For further financial information concerning the Certificate Insurer,
see the audited financial statements of the Certificate Insurer included as
Appendix A and the unaudited interim financial statements of the Certificate
Insurer included as Appendix B of this Prospectus Supplement.
Copies of the Certificate Insurer's quarterly and annual statutory
statements filed by the Certificate Insurer with the 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 Certificate Insurer's telephone number is (212) 312-3000.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of information regarding the Certificate Insurer and the Certificate Insurance
Policy set forth under the headings "The Certificate Insurer" and "The
Certificate Insurance Policy" herein and in Appendix A and Appendix B.
An indemnification agreement among the Certificate Insurer, the
Sponsor, the Seller and the Underwriters provide that each of the parties to
such agreement will indemnify each other for certain liabilities under the 1933
Act.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in this Prospectus Supplement and the Prospectus, there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement.
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Formation of the Trust
The Trust will be created and established pursuant to the Pooling and
Servicing Agreement on the Closing Date. On such date, the Sponsor will cause
the Trust to acquire the Mortgage Loans, and the Trust will issue the Offered
Certificates to the Owners thereof.
The property of the Trust shall include all money, instruments and
other property to the extent such money, instruments and other property are
subject or intended to be held in trust for the benefit of the Owners, and all
proceeds thereof, including, without limitation, (i) the Mortgage Loans, (ii)
such amounts, including Eligible Investments, as from time to time may be held
by the Trustee in the Distribution Account and by the Master Servicer in the
Principal and Interest Account (except as otherwise provided in the Pooling and
Servicing Agreement), each to be created pursuant to the Pooling and Servicing
Agreement, (iii) any Mortgaged Property, the ownership of which has been
effected on behalf of the Trust as a result of foreclosure or acceptance by the
Master Servicer of a deed in lieu of foreclosure and that has not been withdrawn
from the Trust, (iv) any insurance policies relating to the Mortgage Loans and
any rights of the Sponsor or the affiliated Originators under any insurance
policies, and (v) Net Liquidation Proceeds with respect to any Liquidated Loan
(collectively, the "Trust Estate").
The Pooling and Servicing Agreement also establishes an account, the
"Supplemental Interest Account," which is held in trust by the Trustee, but does
not constitute a part of the Trust. The Supplemental Interest Account will hold
certain amounts and other property relating to the funding of Supplemental
Interest Amounts, if any. "Supplemental Interest Amounts" consist of "Class A-1
Supplemental Interest Amounts" and "Class A-2 Supplemental Interest Amounts."
"Class A-1 Supplemental Interest Amounts" are payments due on any Payment Date
which result from any shortfall between Class A-1 Certificate interest
calculated at the Class A-1 Formula Pass-Through Rate, and such interest
calculated at the Class A-1 Available Funds Pass-Through Rate. "Class A-2
Supplemental Interests Amounts" are payments due on any Payment Date which
result from any shortfall between Class A-2 Certificate interest calculated at
the Class A-2 Formula Pass-Through Rate, and such interest calculated at the
Class A-2 Available Funds Pass-Through Rate.
The Trustee will hold the Certificate Insurance Policy with respect to
the Offered Certificates.
Sale of Mortgage Loans
Not later than the Closing Date the Sponsor will cause the Originators
to transfer the Mortgage Loans pursuant to one or more Master Mortgage Loan
Transfer Agreements between the Originators and the Sponsor (the "Master
Transfer Agreements"). In the Master Transfer Agreements the Originators will
make certain representations and warranties; the Sponsor will assign its rights
to enforce such representations and warranties to the Trustee.
Pursuant to the Pooling and Servicing Agreement, the Sponsor on the
Closing Date will cause the Trust to acquire all right, title and interest of
the Originators in each Mortgage Loan listed on the schedule delivered to the
Trustee on the Closing Date (the "Schedule of Mortgage Loans") and all their
right, title and interest in all principal collected and all interest due on
each such Mortgage Loan on or after the Cut-Off Date.
In connection with the sale of the Mortgage Loans on the Closing Date,
the Originators will be required to deliver to the Trustee a file (a "Mortgage
Loan File") consisting of, among other things, (i) the original Notes or
certified copies thereof, endorsed by the Originator thereof in blank or to the
order of the holder, (ii) originals of all intervening assignments, showing a
complete chain of title from origination to the applicable Originators, if any,
including warehousing assignments, with evidence of recording thereon, (iii)
originals of all assumption and modification agreements if any, and, unless such
Mortgage Loan is covered by a counsel's opinion as described in the next
paragraph, (iv) either: (a) the original Mortgage, with evidence of recording
thereon, (b) a true and accurate copy of the Mortgage where the original has
been transmitted for recording, until such time as the original is returned by
the public recording office or (c) a copy of the Mortgage certified by the
public recording office in those instances where the original recorded Mortgage
has been lost. The Trustee will agree, for the benefit of the Owners, to review
each such file within 90 days after the Closing Date to ascertain that all
required documents (or certified copies of documents) have been executed and
received.
The Pooling and Servicing Agreement generally requires that there be
prepared and recorded, within 75 business days of the Closing Date (or, if
original recording information is unavailable, within such later period as is
permitted by
S-58
<PAGE>
the Pooling and Servicing Agreement) assignments of the Mortgages from the
Originators to the Trustee, in the appropriate jurisdictions in which such
recordation is necessary to perfect the lien thereof as against creditors of or
purchasers from the Originators; provided, however, that such requirements may
be waived by the Certificate Insurer under certain circumstances set forth in
the Pooling and Servicing Agreement.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
Termination of the Trust
The Pooling and Servicing Agreement will provide that the Trust will
terminate upon the earlier of (i) the payment to the Owners of all Certificates
from amounts other than those available under the Certificate Insurance Policy
of all amounts required to be paid such Owners upon the later to occur of (a)
the final payment or other liquidation (or any advance made with respect
thereto) of the last Mortgage Loan or (b) the disposition of all property
acquired in respect of any Mortgage Loan remaining in the Trust Estate, or (ii)
any time when a Qualified Liquidation of the Trust Estate is effected.
Optional Termination
By the Master Servicer. At its option, the Master Servicer acting
directly or through one or more affiliates may determine to purchase from the
Trust all of the Mortgage Loans and other property then held by the Trust, and
thereby effect early retirement of the Certificates, on any Remittance Date on
and after the Clean-up Call Date.
Upon Loss of REMIC Status. Following a final determination by the
Internal Revenue Service, or by a court of competent jurisdiction, in each case
from which no appeal is taken within the permitted time for such appeal, or if
any appeal is taken, following a final determination of such appeal from which
no further appeal can be taken to the effect that the Trust does not and will no
longer qualify as a "REMIC" pursuant to Section 860D of the Code (the "Final
Determination"), at any time on or after the date which is 30 calendar days
following such Final Determination, (i) the Owners of a majority in Percentage
Interest represented by the Offered Certificates then outstanding may direct the
Trustee to adopt a plan of complete liquidation with respect to the Trust and
(ii) the Certificate Insurer may notify the Trustee of the Certificate Insurer's
determination to purchase from the Trust all Mortgage Loans and other property
acquired by foreclosure, deed in lieu of foreclosure, or otherwise in respect of
any Mortgage Loan then remaining in the Trust, and thereby effect the early
retirement of the Certificates. Upon receipt of such notice or direction, the
Trustee will be required to notify the Owners of the Class R Certificates of the
determination of the Certificate Insurer or the Owners of the Offered
Certificates to liquidate (the "Termination Notice"). The Owners of a majority
of the Percentage Interest represented by the Class R Certificates then
outstanding may, within 60 days from the date of receipt of the Termination
Notice (the "Purchase Option Period"), at their option, purchase from the Trust
all Mortgage Loans and all property theretofore acquired by foreclosure, deed in
lieu of foreclosure, or otherwise in respect of any Mortgage Loan then remaining
in the Trust as of the date of such purchase plus one month's interest on such
amount at the weighted average Pass-Through Rate.
If, during the Purchase Option Period, the Owners of the Class R
Certificates have not exercised the option described above, then upon the
expiration of the Purchase Option Period the Certificate Insurer may purchase
the Trust Estate within 60 days after the expiration of the Purchase Option
Period or the Trustee will sell the Mortgage Loans and distribute the proceeds
of the liquidation thereof.
Following a Final Determination, the Owners of a majority of the
Percentage Interest represented by the Class R Certificates then outstanding
may, at their option (and upon delivery to the Trustee and the Certificate
Insurer of an opinion of counsel experienced in Federal income tax matters to
the effect that the effect of the Final Determination is to substantially
increase the probability that the gross income of the Trust will be subject to
federal taxation), purchase from the Trust all Mortgage Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
in respect of any Mortgage Loan then remaining in the Trust Estate at a purchase
price equal to the aggregate Class A Certificate Principal Balance as of the
date of such purchase plus interest accrued on the Offered Certificates since
the prior Payment Date at the weighted average Pass-Through Rate net of the
Servicing Fee and less any amounts owed to the Master Servicer. The Pooling and
Servicing Agreement provides that the foregoing opinion shall be deemed
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<PAGE>
satisfactory unless a majority of the Percentage Interest of the Offered
Certificates give the Owners of the Class R Certificates notice that such
opinion is not satisfactory within thirty days after receipt of such opinion.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates is to be considered only in connection with "Certain
Federal Income Tax Consequences" in the Prospectus. The discussion herein and in
the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences 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 Offered Certificates.
REMIC Elections
The Trustee will cause one or more REMIC elections to be made with
respect to certain specified assets of the Trust for federal income tax
purposes. Qualification as a REMIC requires ongoing compliance with certain
conditions. Dewey Ballantine, special tax counsel, will advise that, in its
opinion, for federal income tax purposes, assuming the REMIC elections are made
and compliance with the Pooling and Servicing Agreement. The Trust will be
treated as a REMIC for federal income tax purposes. Each of the Class A
Certificates and the related rights to receive Supplemental Interest Payments
will be comprised of (i) a "regular interest" in a REMIC, which will be treated
as a debt instrument of the Trust for federal income tax purposes and (ii) the
right to receive Supplemental Interest Payments having the characteristics
described below.
For federal income tax purposes, regular interests in a REMIC are
treated as debt instruments issued by the REMIC on the date on which those
interests are created, and not as ownership interests in the REMIC or its
assets. Owners of Offered Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to such
Offered Certificates under an accrual method. The Offered Certificates may be
issued with "original issue discount" for federal income tax purposes. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount on the Offered Certificates is 100% of the "Prepayment
Assumption". See "Payment and Yield Considerations -- Projected Prepayments and
Yields for Offered Certificates." No representation is made that any of the
Mortgage Loans will prepay at such rates or any other rate. See "Payment and
Yield Considerations -- Projected Prepayments and Yields for Offered
Certificates" herein and "Certain Federal Income Tax Consequences -- Discount
and Premium" in the Prospectus.
Special Tax Attributes
The Certificates possess certain special tax attributes by virtue of
the REMIC provisions of the Code. See "Certain Federal Income Tax Consequences
- -- REMIC Securities -- Special Tax Attributes" in the Prospectus. The Small
Business Job Protection Act of 1996 repeals the bad debt reserve method of
accounting for mutual savings banks and domestic building and loan associations
for tax years beginning after December 31, 1995. As a result, Section 593(d) of
the Code is no longer applicable to treat REMIC regular interests, including the
Certificates, as "qualifying real property loans."
Supplemental Interest Amounts
The Beneficial Owners of the Certificates and the related rights to
receive Supplemental Interest Amounts will be treated for tax purposes as owning
two separate investments: (i) the respective Class A Certificates without the
right to receive Supplemental Interest Amounts and (ii) the right to receive the
Supplemental Interest Amounts. The Owners of the respective Class A Certificates
must allocate the purchase price of their Certificates between these two
investments based on their relative fair market values. The purchase price
allocated to the first investment will be the issue price of the respective
Class A Certificates for calculating accruals of original issue discount. See
"Certain Federal Income Tax Consequences -- Discount and Premium" in the
Prospectus.
A Beneficial Owner of a Certificate and the related rights to receive
Supplemental Interest Amounts will be treated for federal income tax purposes as
having entered into a notional principal contract on the date that it purchases
S-60
<PAGE>
its Certificate. Treasury Regulations under Section 446 of the Code relating to
notional principal contracts (the "Notional Principal Contract Regulations")
provide that taxpayers, regardless of their method of accounting, generally must
recognize the ratable daily portion of a periodic payment for the taxable year
to which that portion relates. Any Supplemental Interest Amounts will be
periodic payments. Income with respect to periodic payments under a notional
principal contract for a taxable year should constitute ordinary income. The
purchase price allocated to the right to receive the related Supplemental
Interest Amounts will be treated as a nonperiodic payment under the Notional
Principal Contract Regulations. Such a nonperiodic payment may be amortized
using several methods, including the level payment method described in the
Notional Principal Contract Regulations.
The right to receive the Supplemental Interest Amounts will not
constitute: (i) a "real estate asset" within the meaning of section 858(c)(5)(A)
of the Internal Revenue Code (the "Code") if held by a real estate investment
trust; (ii) a "qualified mortgage" within the meaning of section 860G(a)(3) of
the Code or a "permitted investment" within the meaning of section 860G(a)(5) of
the code if held by a REMIC; or (iii) assets described in section
7701(a)(19)(C)(xi) of the Code if held by a thrift. Moreover, other special
rules may apply to certain investors, including dealers in securities and
dealers in notional principal contracts.
Taxation of Foreign Investors
In general, foreign investors will not be subject to U.S. withholding
on income from the Supplemental Interest Amounts. See "Certain Federal Income
Tax Consequences -- Foreign Investors -- Grantor Trust Securities and REMIC
Regular Securities" in the Prospectus.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing or other employee benefit plan (the "Plans") from engaging in
certain transactions involving "plan assets" with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
the Plan unless a statutory or administrative exemption applies to the
transaction. ERISA also imposes certain duties on persons who are fiduciaries of
Plans subject to ERISA. A violation of these "prohibited transaction" rules may
generate excise tax and other liabilities under ERISA and the Code for such
persons. In addition, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
The United States Department of Labor (the "DOL") has issued a
regulation (the "Plan Asset Regulation") describing what constitutes the assets
of a Plan when the Plan acquires an equity interest in another entity. The Plan
Asset Regulation states that, unless an exception described in the regulation is
applicable, the underlying assets of a corporation, partnership or trust in
which a Plan makes an equity investment will be considered, for purposes of
ERISA, to be assets of the investing Plan. Pursuant to the Plan Asset
Regulation, if the assets of the Trust were deemed to be plan assets by reason
of a Plan's investment in any Offered Certificates, such plan assets would
include an undivided interest in any assets held in such Trust. Therefore, in
the absence of an exemption, the purchase, sale or holding of any Offered
Certificate by a Plan (including certain individual retirement arrangements)
subject to Section 406 of ERISA or Section 4975 of the Code might result in
prohibited transactions and the imposition of excise taxes and civil penalties.
The DOL has issued to the Underwriters individual prohibited
transaction exemptions, (the "Exemptions"), which generally exempt from the
application of the prohibited transaction provisions of Section 406(a), Section
406(b)(1), Section 406(b)(2) and Section 407(a) of ERISA and the excise taxes
imposed pursuant to Sections 4975(a) and (b) of the Code, certain transactions
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 Exemptions. The loans covered by the Exemptions include
mortgage loans such as the Mortgage Loans.
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Among the conditions that must be satisfied for the Exemptions to apply
are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction
with an unrelated party;
(2) the rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
(3) 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 either Standard & Poor's Corporation
("Standard & Poor's"), Moody's Investors Service, Inc. ("Moody's"),
Duff & Phelps Credit Rating Co. ("D&P") or Fitch Investors Service,
Inc. ("Fitch");
(4) the Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
Underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
Originator and the Sponsor pursuant to the assignment of the loans to
the Trust Estate represents not more than the fair market value of such
loans; the sum of all payments made to and retained by any Servicer
represents not more than reasonable compensation for such person's
services under the Pooling and Servicing Agreement and reimbursement of
such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of Standard & Poor's, Moody's,
Fitch or D&P for at least one year prior to the Plan's acquisition of
certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one year
prior to the Plan's acquisition of certificates.
Moreover, the Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust;
provided that, among other requirements, (i) in the case of an acquisition in
connection with the initial issuance of certificates, at least fifty percent of
each class of certificates in which Plans have invested is acquired by persons
independent of the Restricted Group and at least fifty percent of the aggregate
interest in the trust is acquired by persons independent of the Restricted
Group; (ii) 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; (iii) 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 (iv) immediately after the acquisition, no more
than twenty-five percent of the assets of the Plan with respect to which such
person is a fiduciary are invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
Exemptions do not apply to Plans sponsored by the Sponsor, the Certificate
Insurer, the Underwriters, the Trustee, the Master Servicer, any other servicer,
any obligor with respect to Mortgage Loans included in the Trust Estate
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the Trust Estate, or any affiliate of such parties (the
"Restricted Group").
As of the date hereof, there is no single Mortgage Loan included in the
Trust Estate that constitutes more than five percent of the aggregate
unamortized principal balance of the assets of the Trust Estate. Before
purchasing an Offered Certificate based on the Exemptions, a fiduciary of a Plan
should itself confirm (1) that such Certificate
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constitutes a "certificate" for purposes of the Exemptions and (2) that the
conditions and other requirements set forth in the Exemptions would be
satisfied.
Any person purchasing a Class A Certificate and the related right to
receive Supplemental Interest Amounts will have acquired, for purposes of ERISA
and for federal income tax purposes, such Class A Certificate without the right
to receive the Supplemental Interest Amounts, together with the right to receive
the Supplemental Interest Amounts. The Exemptions do not apply to the
acquisition, holding or resale of the right to receive the Supplemental Interest
Amounts. Accordingly, the acquisition of the right to receive the Supplemental
Interest Amounts by a Plan could result in a prohibited transaction unless
another administrative exemption to ERISA's prohibited transaction rules is
applicable. One or more alternative exemptions may be available with respect to
certain prohibited transaction rules of ERISA that might apply in connection
with the initial purchase, holding and resale of the right to receive the
Supplemental Interest Amounts, including, but not limited to: (i) Prohibited
Transaction Class Exemption ("PTCE") 91-38, regarding investments by bank
collective investment funds; (ii) PTCE 90-1, regarding investments by insurance
company pooled separate accounts; (iii) PTCE 84-14, regarding transactions
negotiated by qualified professional asset managers; or (iv) PTCE 75-1, Part II,
regarding principal transactions by broker-dealers (the "Principal Transactions
Exemption"). It is believed that the conditions of the Principal Transactions
Exemption will be met with respect to the acquisition of a right to receive the
Supplemental Interest Amounts by a Plan, so long as such Underwriter is not a
fiduciary with respect to the Plan (and is not a party in interest with respect
to the Plan by reason of being a participating employer or affiliate thereof).
Before purchasing Class A Certificates based on an administrative exemption (or
exemptions), a fiduciary of a Plan should determine whether the conditions of
such exemption (or exemptions) would be met and whether the scope of the relief
provided by such exemption (or exemptions) would cover all acts that might be
construed as prohibited transactions.
Prospective Plan investors in the Offered Certificates should consult
with their legal advisors concerning the impact of ERISA and the Code, the
applicability of the Exemptions, and the potential consequences in their
specific circumstances, prior to making an investment in the Offered
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Offered 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.
In addition to the matters described above, purchasers of an Offered
Certificate that are insurance companies should consult with their counsel with
respect to the recent United States Supreme Court case interpreting the
fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance Co.
v. Harris Trust and Savings Bank, 114 S.Ct. 517 (1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be "plan assets" for ERISA purposes under certain
circumstances. Prospective purchasers using insurance company general account
assets should determine whether the decision affects their ability to make
purchases of the Offered Certificates.
RATINGS
It is a condition of the original issuance of the Offered Certificates
that they receive ratings of AAA by Standard & Poor's and Aaa by Moody's. The
ratings assigned to the Offered Certificates will be based on the claims-paying
ability of the Certificate Insurer. The ratings issued by Standard & Poor's and
Moody's on payments of principal and interest do not cover the payment of the
Supplemental Interest Amounts. Explanations of the significance of such ratings
may be obtained from Moody's Investors Service, Inc., 99 Church Street, New
York, New York 10007 and Standard & Poor's Ratings Group, a division of The
McGraw Hill Companies, 25 Broadway, New York, New York 10004. Such ratings will
be the views only of such rating agencies. There is no assurance that any such
ratings will continue for any period of time or that such ratings will not be
revised or withdrawn. Any such revision or withdrawal of such ratings may have
an adverse effect on the market price of the Offered Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Although upon their initial issuance all classes of Offered
Certificates are expected to be rated AAA by Standard & Poor's and Aaa by
Moody's, no class of the Offered Certificates will constitute "mortgage related
securities" for purposes of SMMEA.
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UNDERWRITING
Under the terms and subject to the conditions set forth in the
Underwriting Agreement for the sale of the Offered Certificates, dated December
6, 1996 the Sponsor has agreed to cause the Trust to sell and the Underwriters
have agreed to purchase the Offered Certificates.
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase the entire principal
amount of each class of Offered Certificates in the amounts with respect to each
Underwriter as set forth below:
<TABLE>
<CAPTION>
Principal Amount Principal Amount
of Class A-1 of Class A-2
Underwriter Certificates Certificates
----------- ------------- -------------
<S> <C> <C>
Prudential Securities Incorporated........................... $70,000,000 $40,000,000
Morgan Stanley & Co. Incorporated............................ $70,000,000 $40,000,000
Salomon Brothers Inc......................................... $70,000,000 $40,000,000
The Underwriters have agreed to reimburse the Sponsor for certain
expenses of the issuance and distribution of the Offered Certificates.
The Underwriters have informed the Sponsor that they propose to offer
the Offered Certificates 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 Underwriters may effect such transactions by
selling the Offered Certificates to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriters. In connection with the sale of the Offered
Certificates, the Underwriters may be deemed to have received compensation from
the Sponsor in the form of underwriting compensation. The Underwriters and any
dealers that participate with the Underwriters in the distribution of the
Offered Certificates may be deemed to be underwriters and any commissions
received by them and any profit on the resale of the Offered Certificates by
them may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933, as amended.
Advanta Mortgage Conduit Services, Inc. has agreed to indemnify the
Underwriters against certain liabilities including liabilities under the
Securities Act of 1933, as amended.
Advanta Mortgage Conduit Services, Inc. has been advised by the
Underwriters that the Underwriters presently intend to make a market in the
Offered Certificates, as permitted by applicable laws and regulations. The
Underwriters are not obligated, however, to make a market in the Offered
Certificates and such market-making may be discontinued at any time at the sole
discretion of the Underwriters. Accordingly, no assurance can be given as to the
liquidity of, or trading markets for, the Offered Certificates.
EXPERTS
The financial statements of Financial Guaranty Insurance Company
included in this Prospectus Supplement in Appendix A and in the related
Registration Statement, as of December 31, 1995 and 1994 and for each of the
years in the three year period then ended, have been included in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing in Appendix A and in the related Registration Statement, upon the
authority of such firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP refers to changes, in 1993, in
accounting methods for multiple-year retrospectively rated reinsurance
contracts, and for the adoption of the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
CERTAIN LEGAL MATTERS
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<PAGE>
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon by Dewey Ballantine, New York, New York.
S-65
<PAGE>
INDEX OF PRINCIPAL DEFINED TERMS
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
1933 Act .........................................................................................................2
Accrual Period ...................................................................................................9
Advanta Parent ..................................................................................................47
Appraised Values ................................................................................................23
Available Funds .................................................................................................56
Available Funds Shortfall .......................................................................................54
Average Amount Outstanding ......................................................................................21
Beneficial Owner ................................................................................................48
Beneficial Owners ............................................................................................2, 15
Book-Entry Certificates .........................................................................................48
Bulk Loans ......................................................................................................20
Business day ....................................................................................................55
Cede ............................................................................................................15
CEDEL ........................................................................................................2, 15
CEDEL Participants ..............................................................................................50
Certificate Insurance Policy .................................................................................2, 14
Certificate Insurer ..............................................................................................2
Certificates ..................................................................................................1, 4
Citibank ........................................................................................................16
Class A Certificates ..........................................................................................1, 4
Class A Distribution Amount .....................................................................................12
Class A Formula Distribution Amount .............................................................................12
Class A Interest Distribution Amount .............................................................................9
Class A Principal Distribution Amount ...........................................................................11
Class A-1 Available Funds Pass-Through Rate ......................................................................8
Class A-1 Certificate Principal Balance .........................................................................41
Class A-1 Certificates ...........................................................................................4
Class A-1 Formula Pass-Through Rate ..............................................................................9
Class A-1 Group I Certificates ...................................................................................1
Class A-1 Supplemental Interest Amount ...........................................................................7
Class A-2 Available Funds Pass-Through Rate ......................................................................8
Class A-2 Certificate Principal Balance .........................................................................41
Class A-2 Certificates ...........................................................................................4
Class A-2 Formula Pass-Through Rate ..............................................................................9
Class A-2 Group II Certificates ..................................................................................1
Class A-2 Supplemental Interest Amount ...........................................................................7
Class R Certificates ..........................................................................................1, 4
Clean-up Call Date ..............................................................................................16
Closing Date .....................................................................................................4
CMT .............................................................................................................19
Code ............................................................................................................62
Commission .......................................................................................................2
Compensating Interest ...........................................................................................15
Cooperative .....................................................................................................50
CPR .............................................................................................................41
Cut-Off Date .....................................................................................................4
D&P .............................................................................................................63
Definitive Certificate ..........................................................................................49
Delinquency Advances ............................................................................................15
DOL ...............................................................................................63
</TABLE>
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<TABLE>
<CAPTION>
Page
<S> <C>
DTC ..........................................................................................................2, 15
DTC Participants ................................................................................................50
Euroclear ....................................................................................................2, 15
Euroclear Operator ..............................................................................................50
Euroclear Participants ..........................................................................................50
European Depositaries .......................................................................................16, 48
Excess Subordinated Amount ......................................................................................53
Exemptions ......................................................................................................63
FDIC ............................................................................................................48
Final Determination .............................................................................................61
Final Order .....................................................................................................56
Final Scheduled Payment Date .....................................................................................5
Financial Intermediary ..........................................................................................49
Fitch ...........................................................................................................63
FNMA ............................................................................................................31
Foreclosure Rate ................................................................................................21
GE Capital ......................................................................................................57
Gross Losses ....................................................................................................21
Group .........................................................................................................1, 4
Group I ...................................................................................................1, 4, 23
Group I Available Funds .........................................................................................55
Group I Certificates .............................................................................................1
Group I Insured Distribution Amount .............................................................................12
Group I Interest Distribution Amount ............................................................................10
Group II ..................................................................................................1, 5, 23
Group II Available Funds ........................................................................................55
Group II Certificates ............................................................................................1
Group II Insured Distribution Amount ............................................................................12
Group II Interest Distribution Amount ...........................................................................10
Group Interest Distribution Amount ..............................................................................10
HEP .............................................................................................................41
Indices .........................................................................................................19
Insured Distribution Amount .....................................................................................12
Insured Payment .................................................................................................13
Insurer Reimbursable Amount .....................................................................................54
Interest Determination Date .....................................................................................55
Junior Lien Ratio ...............................................................................................24
LIBO ............................................................................................................55
LIBOR ........................................................................................................7, 55
Liquidated Mortgage Loan ........................................................................................12
Master Servicer ..................................................................................................1
Master Transfer Agreements ......................................................................................60
Moody's .....................................................................................................16, 63
Morgan ..........................................................................................................16
Mortgage Loan File ..............................................................................................60
Mortgage Loan Group .......................................................................................1, 4, 23
Mortgage Loan Pool ...............................................................................................1
Mortgage Loans ................................................................................................1, 4
Mortgaged Properties ..........................................................................................1, 4
Mortgages .....................................................................................................1, 4
Net Losses ......................................................................................................21
Net Monthly Excess Cashflow......................................................................................54
Net Monthly Excess Spread........................................................................................52
</TABLE>
S-67
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
Notes ...........................................................................................................23
Notional Principal Contract Regulations .........................................................................62
Offered Certificates ..........................................................................................1, 4
Owned and Managed Servicing Portfolio ...........................................................................20
Owner(s) ........................................................................................................48
Participants ....................................................................................................48
Payment Date ..................................................................................................2, 9
Plan Asset Regulation ...........................................................................................63
Plans ...........................................................................................................63
Pooling and Servicing Agreement ...............................................................................1, 4
Preference Amount ...............................................................................................56
Prepayment ......................................................................................................40
Prepayment Assumption ...........................................................................................62
Principal Transactions Exemption ................................................................................64
PTCE ............................................................................................................64
Purchase Option Period ..........................................................................................61
Realized Loss ...................................................................................................53
Record Date ......................................................................................................9
Recoveries ......................................................................................................21
Reference Banks .................................................................................................55
Relevant Depositary .............................................................................................48
REMIC ...........................................................................................................60
Remittance Date .................................................................................................48
Remittance Period ...............................................................................................48
Reserve Interest Rate ...........................................................................................55
Residual interest ...............................................................................................17
Restricted Group ...............................................................................................64
Reuters Screen LIBO page ........................................................................................55
Rules ...........................................................................................................49
Schedule of Mortgage Loans ......................................................................................60
Servicing released ..............................................................................................20
Specified Subordinated Amount ...................................................................................52
Specified Subordinated Amounts ..................................................................................41
Sponsor ..........................................................................................................1
Standard & Poor's ...........................................................................................16, 63
Statistic Calculation Pools ......................................................................................5
Step-Up Payment Date .............................................................................................9
Structuring Assumptions .........................................................................................41
Subordinated Amount .............................................................................................52
Subordination Deficit .......................................................................................13, 53
Subordination Increase Amount ...................................................................................52
Subordination Reduction Amount ..................................................................................53
Supplemental Interest Amount .....................................................................................8
Supplemental Interest Amounts ...................................................................................59
Termination Notice ..............................................................................................61
Terms and Conditions ............................................................................................50
Third-Party Servicing Portfolio .................................................................................20
Total Monthly Excess Cashflow ...................................................................................54
Total Monthly Excess Spread .....................................................................................52
Trust ............................................................................................................1
Trust Estate ....................................................................................................59
Trustee .......................................................................................................1, 4
Underwriters .....................................................................................................2
</TABLE>
S-68
<TABLE>
<CAPTION>
Page
<S> <C>
Weighted average life............................................................................................41
</TABLE>
S-69
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Advanta
Mortgage Loan Trust 1996-3 Class A-1 and Class A-2 Certificates (the "Global
Securities") will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of DTC, CEDEL or
Euroclear. The Global Securities will be tradeable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., 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 CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
Relevant Depository which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global 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 Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least
AI-1
<PAGE>
one business day prior to settlement. CEDEL or Euroclear will instruct the
Relevant Depository, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, on the basis of the actual number of days in such accrual period and a
year assumed to consist of 360 days. For transactions settling on the 31st of
the month, payment will include interest accrued to and excluding the first day
of the following month. Payment will then be made by the Relevant Depository to
the DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the CEDEL Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the CEDEL or Euroclear cash debt will be valued instead as of
the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depository for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depository, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depository, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist to
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 CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). In the event that the CEDEL Participant or Euroclear Participant have
a line of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
AI-2
<PAGE>
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (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).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). 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. Form 1001 may be filed by Certificate Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
On April 22, 1996, the IRS proposed regulations relating to
withholding, backup withholding and information reporting that, if adopted in
their current form would, among other things, unify current certification
procedures and forms and clarify certain reliance standards. The regulations are
proposed to be effective for payments made after December 31, 1997 but provide
that certificates issued on or before the date that is 60 days after
the proposed regulations are made final will continue to be valid until they
expire. Proposed regulations, however, are subject to change prior to their
adoption in final form.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
AI-3
<PAGE>
APPENDIX A
[FGIC audited financial statements as of December, 1995 and December, 1994]
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
Audited Financial Statements
December 31, 1995
Report of Independent Auditors...........1
Balance Sheets...........................2
Statements of Income.....................3
Statements of Stockholder's Equity.......4
Statements of Cash Flows.................5
Notes to Financial Statements............6
<PAGE>
Report of Independent Auditors
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, 1995 and 1994, and the related statements of income,
stockholder's equity, and cash flows for each of the years in the three year
period then ended. 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, 1995 and 1994 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.
As described in notes 6 and 2, respectively, in 1993, the Company changed its
methods of accounting for multiple-year retrospectively rated reinsurance
contracts and for the adoption of the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
January 19, 1996
1
<PAGE>
Financial Guaranty Insurance
Company Balance Sheets
- --------------------------------------------------------------------------------
($ in Thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
Assets 1995 1994
------------ ------------
<S> <C> <C>
Fixed maturity securities available-for-sale
(amortized cost of $2,043,453 in 1995 and $1,954,177 in 1994) $ 2,141,584 $ 1,889,910
Short-term investments, at cost, which approximates market 91,032 75,674
Cash 199 1,766
Accrued investment income 37,347 40,637
Reinsurance recoverable 7,672 14,472
Prepaid reinsurance premiums 162,087 164,668
Deferred policy acquisition costs 94,868 90,928
Property and equipment, net of accumulated depreciation
($12,861 in 1995 and $10,512 in 1994) 6,314 7,912
Receivable for securities sold 26,572 -
Prepaid expenses and other assets 12,627 12,243
----------- -----------
Total assets $ 2,580,302 $ 2,298,210
=========== ===========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $ 727,535 $ 757,425
Loss and loss adjustment expenses 77,808 98,746
Ceded reinsurance balances payable 1,942 2,258
Accounts payable and accrued expenses 32,811 28,489
Payable to Parent 1,647 18,600
Current federal income taxes payable 51,296 82,123
Deferred federal income taxes 99,171 22,640
Payable for securities purchased 40,211 8,206
----------- -----------
Total liabilities 1,032,421 1,018,487
----------- -----------
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 334,011 334,011
Net unrealized gains (losses) on fixed maturity securities available-
for-sale, net of tax 63,785 (41,773)
Foreign currency translation adjustment (1,499) (1,221)
Retained earnings 1,136,584 973,706
----------- -----------
Total stockholder's equity 1,547,881 1,279,723
----------- -----------
Total liabilities and stockholder's equity $ 2,580,302 $ 2,298,210
=========== ===========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
Financial Guaranty Insurance
Company Statements of Income
- --------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Gross premiums written $ 97,288 $ 161,940 $ 291,052
Ceded premiums (19,319) (46,477) (49,914)
--------- --------- ---------
Net premiums written 77,969 115,463 241,138
Decrease (increase) in net unearned premiums 27,309 53,364 (74,902)
--------- --------- ---------
Net premiums earned 105,278 168,827 166,236
Net investment income 120,398 109,828 99,920
Net realized gains 30,762 5,898 35,439
--------- --------- ---------
Total revenues 256,438 284,553 301,595
--------- --------- ---------
Expenses:
Loss and loss adjustment expenses (8,426) 3,646 42,894
Policy acquisition costs 13,072 15,060 19,592
(Increase) decrease in deferred policy acquisition costs (3,940) 3,709 2,658
Other underwriting expenses 19,100 21,182 21,878
--------- --------- ---------
Total expenses 19,806 43,597 87,022
--------- --------- ---------
Income before provision for Federal income taxes 236,632 240,956 214,573
--------- --------- ---------
Federal income tax expense (benefit):
Current 28,913 43,484 59,505
Deferred 19,841 7,741 (7,284)
--------- --------- ---------
Total Federal income tax expense 48,754 51,225 52,221
--------- --------- ---------
Net income before cumulative effect of
change in accounting principle 187,878 189,731 162,352
--------- --------- ---------
Net cumulative effect of change in
accounting principle - - 3,008
--------- --------- ---------
Net income $ 187,878 $ 189,731 $ 165,360
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
Financial Guaranty Insurance
Company Statements of Stockholder's Equity
- --------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses)
on Fixed
Maturity
Securities
Additional Available- Foreign
Common Paid-in For-Sale, Currency Retained
Stock Capital Net of Tax Adjustment Earnings
------ ---------- -------------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 $ 2,500 $ 324,639 $ 7,267 $(1,597) $ 618,615
Net income - - - - 165,360
Capital contribution - 21,872 - - -
Adjustment to common stock par value 12,500 (12,500) - - -
Unrealized gains on fixed maturity securities
previously held at market, net of tax of ($713) - - (1,325) - -
Implementation of change in accounting for
adoption of SFAS 115, net of tax of $45,643 - - 84,766 - -
Foreign currency translation adjustment - - - (668) -
------- --------- --------- ------- -----------
Balance, December 31, 1993 15,000 334,011 90,708 (2,265) 783,975
Net income - - - - 189,731
Unrealized losses on fixed maturity securities
available-for-sale, net of tax of ($71,336) - - (132,481) - -
Foreign currency translation adjustment - - - 1,044 -
------- --------- --------- ------- -----------
Balance, December 31, 1994 15,000 334,011 (41,773) (1,221) 973,706
Net income - - - - 187,878
Dividend paid - - - - (25,000)
Unrealized gains on fixed maturity securities
available for sale, net of tax of $56,839 - - 105,558 - -
Foreign currency translation adjustment - - - (278) -
------- --------- --------- ------- -----------
Balance, December 31, 1995 $15,000 $ 334,011 $ 63,785 $(1,499) $ 1,136,584
======= ========= ========= ======= ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Financial Guaranty Insurance
Company Statements of Cash Flows
- --------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating Activities:
Net income $ 187,878 $ 189,731 $ 165,360
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of change in accounting principle, net of tax - - (3,008)
Change in unearned premiums (29,890) (45,927) 90,429
Change in loss and loss adjustment expense reserves (20,938) 2,648 51,264
Depreciation of property and equipment 2,348 2,689 2,012
Change in reinsurance receivable 6,800 (304) (9,040)
Change in prepaid reinsurance premiums 2,581 (7,437) (15,527)
Change in foreign currency translation adjustment (427) 1,607 (1,029)
Policy acquisition costs deferred (16,219) (18,306) (19,592)
Amortization of deferred policy acquisition costs 12,279 22,015 22,250
Change in accrued investment income, and prepaid
expenses and other assets 2,906 (5,150) (9,048)
Change in other liabilities (12,946) 2,577 7,035
Change in deferred income taxes 19,841 7,741 (7,284)
Amortization of fixed maturity securities 1,922 5,112 8,976
Change in current income taxes payable (30,827) 33,391 30,089
Net realized gains on investments (30,762) (5,898) (35,439)
--------- --------- -----------
Net cash provided by operating activities 94,546 184,489 277,448
--------- --------- -----------
Investing Activities:
Sales and maturities of fixed maturity securities 836,103 550,534 789,036
Purchases of fixed maturity securities (891,108) (721,908) (1,090,550)
Purchases, sales and maturities of short-term investments, net (15,358) (11,486) 4,164
Purchases of property and equipment, net (750) (1,290) (985)
--------- --------- -----------
Net cash used in investing activities (71,113) (184,150) (298,335)
--------- --------- -----------
Financing Activities:
Dividends paid (25,000) - -
Capital contribution - - 21,872
--------- --------- -----------
Net cash provided by financing activities (25,000) - 21,872
--------- --------- -----------
(Decrease) Increase in cash (1,567) 339 985
Cash at beginning of year 1,766 1,427 442
--------- --------- -----------
Cash at end of year $ 199 $ 1,766 $ 1,427
========= ========= ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) Business
Financial Guaranty Insurance Company (the "Company"), a wholly-owned
insurance subsidiary of FGIC Corporation (the "Parent"), 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 88% 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). The prior years financial statements
have been reclassified to conform to the 1995 presentation. Significant
accounting policies are as follows:
Investments
As of December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." The Statement defines three
categories for classification of debt securities and the related accounting
treatment for each respective category. The Company has determined that its
fixed maturity securities portfolio should be classified as
available-for-sale. Under SFAS 115, 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 are earned over the period at risk in proportion to the amount of
coverage provided which, for financial guaranty insurance policies,
generally declines according to predetermined schedules.
When unscheduled refundings of municipal bonds occur, the related unearned
premiums, net of premium credits allowed against the premiums charged for
insurance of refunding issues and applicable acquisition costs, are earned
6
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
immediately. Unearned premiums represent the portion of premiums written
related to coverage yet to be provided on policies in force.
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 are considered in determining the recoverability of
acquisition costs.
Loss and Loss Adjustment Expenses
Provision for loss and loss adjustment expenses is made in an amount equal
to the present value of unpaid 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 $77.8 million and $98.7 million at December 31, 1995 and 1994,
respectively. As of December 31, 1995 and 1994, such reserves included
$28.8 million and $71.0 million, respectively, established based on an
evaluation of the insured portfolio in light of current economic conditions
and other relevant factors. Loss and loss adjustment expenses include
amounts discounted at an interest rate of 5.5% in 1995 and 7.8% in 1994.
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.
7
<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, 1995 and 1994 and revenues and expenses are translated at
average monthly exchange rates. The cumulative translation loss at December
31, 1995 and 1994 was $1.5 million and $1.2 million, respectively, net of
tax, and is reported as a separate component of stockholder's equity.
(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 following are the significant
ways in which statutory-basis accounting practices differ from GAAP:
(a) premiums are earned in proportion to the reduction of the related
risk rather than in proportion to the coverage provided;
(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.
8
<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,
--------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------- ------------------------
Net Stockholder's Net Stockholder's Net Stockholders
Income Equity Income Equity Income Equity
------ ------------- ------ ------------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
GAAP basis amount $ 187,878 $ 1,547,881 $ 189,731 $ 1,279,723 $ 165,360 $ 1,221,429
Premium revenue recognition (22,555) (166,927) (4,970) (144,372) (16,054) (139,401)
Deferral of acquisition costs (3,940) (94,868) 3,709 (90,928) 2,658 (94,637)
Contingency reserve - (386,564) - (328,073) - (252,542)
Non-admitted assets - (5,731) - (7,566) - (8,951)
Case basis loss reserves 4,048 (52) (3,340) (4,100) 1,626 (759)
Portfolio loss reserves (22,100) 24,000 (11,050) 46,100 43,650 57,150
Deferral of income taxes (benefits) 19,842 64,825 7,741 45,134 (7,284) 35,209
Unrealized gains (losses) on fixed maturity
securities held at fair value, net of tax - (63,785) - 41,773 - (90,708)
Recognition of profit commission 3,096 (5,744) (2,410) (8,840) (4,811) (4,811)
Provision for unauthorized reinsurance - - - (266) -
Contingency reserve tax deduction (see Note 2) - 78,196 - 55,496 - 45,402
Allocation of tax benefits due to
Parent's net operating loss to the
Company (see Note 5) 637 10,290 (63) 9,653 - 9,716
--------- ----------- --------- ----------- --------- -----------
Statutory-basis amount $ 166,906 $ 1,001,521 $ 179,348 $ 893,734 $ 185,145 $ 777,097
========= =========== ========= =========== ========= ===========
</TABLE>
9
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
(4) Investments
Investments in fixed maturity securities carried at fair value of $3.2
million and $3.0 million as of December 31, 1995 and 1994, 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
1995 Cost Gains Losses Value
- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 71,182 $ 1,696 - $ 72,878
Obligations of states and political
subdivisions 1,942,001 98,458 $1,625 2,038,834
Debt securities issued by foreign
governments 30,270 152 550 29,872
---------- -------- ------ ----------
Investments available-for-sale 2,043,453 100,306 2,175 2,141,584
Short-term investments 91,032 - - 91,032
---------- -------- ------ ----------
Total $2,134,485 $100,306 $2,175 $2,232,616
========== ======== ====== ==========
</TABLE>
The amortized cost and fair values of short-term investments and of
investments in fixed maturity securities available-for-sale at December 31,
1995, 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.
Amortized Fair
1995 Cost Value
---- ---------- ----------
Due in one year or less $ 99,894 $ 99,984
Due after one year through five years 137,977 141,235
Due after five years through ten years 287,441 300,560
Due after ten years through twenty years 1,406,219 1,476,261
Due after twenty years 202,954 214,576
---------- ----------
Total $2,134,485 $2,232,616
========== ==========
10
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
1994 Cost Gains Losses Value
- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 10,945 $ 8 $ (519) $ 10,434
Obligations of states and political
subdivisions 1,839,566 25,809 (85,200) 1,780,175
Debt securities issued by foreign
governments 103,666 400 (4,765) 99,301
---------- ------- -------- ----------
Investments available-for-sale 1,954,177 26,217 (90,484) 1,889,910
Short-term investments 75,674 - - 75,674
---------- ------- -------- ----------
Total $2,029,851 $26,217 $(90,484) $1,965,584
========== ======= ======== ==========
</TABLE>
In 1995, 1994 and 1993, proceeds from sales of investments in fixed
maturity securities available-for-sale carried at fair value were $836.1
million, $550.5 million, and $789.0 million, respectively. For 1995, 1994
and 1993 gross gains of $36.3 million, $18.2 million and $36.1 million
respectively, and gross losses of $5.5 million, $12.3 million and $1.0
million respectively, were realized on such sales.
Net investment income of the Company is derived from the following sources
(in thousands):
Year Ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
Income from fixed maturity securities $112,684 $108,519 $ 97,121
Income from short-term investments 8,450 2,479 3,914
-------- -------- --------
Total investment income 121,134 110,998 101,035
Investment expenses 736 1,170 1,115
-------- -------- --------
Net investment income $120,398 $109,828 $ 99,920
======== ======== ========
As of December 31, 1995, the Company did not have more than 10% of its
investment portfolio concentrated in a single issuer or industry.
11
<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's effective federal corporate tax rate (20.6 percent in
1995, 21.3 percent in 1994 and 24.3 percent in 1993) is less than the
corporate tax rate on ordinary income of 35 percent in 1995, 1994 and 1993.
Federal income tax expense (benefit) relating to operations of the Company
for 1995, 1994 and 1993 is comprised of the following (in thousands):
Year Ended December 31,
----------------------------
1995 1994 1993
------- ------- --------
Current tax expense $28,913 $43,484 $ 59,505
Deferred tax expense 19,841 7,741 (7,284)
------- ------- --------
Federal income tax expense $48,754 $51,225 $ 52,221
======= ======= ========
The following is a reconciliation of federal income taxes computed at the
statutory rate and the provision for federal income taxes (in thousands):
Year Ended December 31,
--------------------------------
1995 1994 1993
-------- -------- --------
Income taxes computed on income
before provision for federal
income taxes, at the statutory rate $ 82,821 $ 84,334 $ 75,101
Tax effect of:
Tax-exempt interest (30,630) (30,089) (27,185)
Other, net (3,437) (3,020) 4,305
-------- -------- --------
Provision for income taxes $ 48,754 $ 51,225 $ 52,221
======== ======== ========
12
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities at December 31, 1995 and 1994 are
presented below (in thousands):
1995 1994
-------- -------
Deferred tax assets:
Unrealized losses on fixed maturity
securities, available-for-sale - $22,493
Loss reserves $ 8,382 16,136
Deferred compensation 5,735 9,685
Tax over book capital gains 1,069 365
Other 3,248 3,760
-------- -------
Total gross deferred tax assets 18,434 52,439
-------- -------
Deferred tax liabilities:
Unrealized gains on fixed maturity
securities, available-for-sale 34,346 -
Deferred acquisition costs 33,204 31,825
Premium revenue recognition 32,791 24,674
Rate differential on tax and loss bonds 9,454 9,454
Other 7,810 9,126
-------- -------
Total gross deferred tax liabilities 117,605 75,079
-------- -------
Net deferred tax liability $ 99,171 $22,640
======== =======
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, 1995 and 1994. The
company anticipates that the related deferred tax asset will be realized.
Total federal income tax payments during 1995, 1994 and 1993 were $59.8
million, $10.1 million, and $29.4 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 $33.7 million that can be drawn on in the event of
default.
Effective January 1, 1993, the Company adopted the Emerging Issues Task
Force Issue 93-6, "Accounting for Multiple-Year Retrospectively-Rated
Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6
requires that an asset be recognized by a ceding company to the extent a
payment would be received from the reinsurer based on the contract's
experience to date, regardless of the outcome of future events. To reflect
the adoption of EITF 93-6 in the accompanying financial statements, an
initial adjustment of $4.6 million, before applicable income taxes, has
been reflected in the 1993 income statement.
Net premiums earned are presented net of ceded earned premiums of $21.9
million, $39.0 million and $34.4 million for the years ended December 31,
1995, 1994 and 1993, respectively. Loss and loss adjustment expenses
incurred are presented net of ceded losses of $1.1 million, $0.3 million
and $9.1 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
13
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
(7) Loss and Loss Adjustment Expenses
Activity in the reserve for loss and loss adjustment expenses is summarized
as follows (in thousands):
Year Ended December 31,
--------------------------------
1995 1994 1993
-------- -------- --------
Balance at January 1, $ 98,746 $ 96,098 $ 44,834
Less reinsurance recoverable 14,472 14,168 5,128
-------- -------- --------
Net balance at January 1, 84,274 81,930 39,706
Incurred related to:
Current year 26,681 15,133 -
Prior years (1,207) (437) (756)
Portfolio reserves (33,900) (11,050) 43,650
-------- -------- --------
Total Incurred (8,426) 3,646 42,894
-------- -------- --------
Paid related to:
Current year (197) (382) -
Prior years (5,515) (920) (670)
-------- -------- --------
Total Paid (5,712) (1,302) (670)
-------- -------- --------
Net balance at December 31, 70,136 84,274 81,930
Plus reinsurance recoverable 7,672 14,472 14,168
-------- -------- --------
Balance at December 31, $ 77,808 $ 98,746 $ 96,098
======== ======== ========
The changes in incurred portfolio reserves principally relate 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.
(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 $3.2 million, $3.2 million and $1.0 million in
expenses were incurred in 1995, 1994 and 1993, respectively, related to
such transactions.
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 $1.3 million in 1995, $2.5 million in 1994, and $3.3
million in 1993.
The Company insures bond issues and securities in trusts that were
sponsored by affiliates of GE (approximately 1 percent of gross premiums
written in 1995 and 1994 and 2 percent in 1993).
(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 $7.5 million, $12.2 million and $16.7 million in 1995, 1994 and
1993, 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 $2.1 million in 1995 and 1994, 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, 1995 and 1994, the amount of the Company's surplus
available for dividends was approximately $100.2 million and $89.3 million,
respectively.
During 1995, the company paid dividends of $25 million. No dividends were
paid during 1994 or 1993.
14
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
(11) 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.
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, 1995 and 1994 are as follows (in thousands):
1995 1994
----------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets
Cash $ 199 $ 199 $ 1,766 $ 1,766
On hand and in demand acounts
Short-term investments 91,032 91,032 75,674 75,674
Fixed maturity securities 2,131,584 2,141,584 2,141,584 1889,910
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 $412.8 million and $456.2
million compared to a carrying value of $540.6 million as of December 31,
1995 and between $518.1 million and $565.9 million compared to a carrying
value of $585.1 million as of December 31, 1994.
15
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
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.
As of December 31, 1995, the Company's total insured principal exposure to
credit loss in the event of default by bond issuers was $98.7 billion, net
of reinsurance of $20.7 billion. The Company's insured portfolio as of
December 31, 1995 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, 1995, the composition of principal exposure by type of
issue, net of reinsurance, was as follows (in millions):
Net
Principal
Outstanding
-----------
Municipal:
General obligation $43,308.2
Special revenue 38,137.9
Industrial revenue 2,480.0
Non-municipal 14,734.2
---------
Total $98,660.3
=========
16
<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, 1995 by state, net of reinsurance, was as
follows (in millions):
Net
Principal
Outstanding
-----------
California $ 10,440.2
Florida 8,869.3
Pennsylvania 8,653.4
New York 7,706.7
Illinois 5,697.5
Texas 5,478.7
New Jersey 4,181.9
Michigan 3,385.9
Arizona 2,776.9
Ohio 2,327.7
-----------
Sub-total 59,518.2
Other states and International 39,142.1
-----------
Total $ 98,660.3
===========
(12) Commitments
Total rent expense was $2.2 million, $2.6 million and $2.4 million in 1995,
1994 and 1993, respectively. For each of the next five years and in the
aggregate as of December 31, 1995, the minimum future rental payments under
noncancellable operating leases having remaining terms in excess of one
year approximate (in thousands):
Year Amount
---- ------
1996 $ 2,297
1997 2,909
1998 2,909
1999 2,909
2000 2,909
Subsequent to 2000 2,911
-------
Total minimum future rental payment $16,844
=======
17
<PAGE>
APPENDIX B
[FGIC unaudited financial statements as of September 30, 1996]
<PAGE>
FINANCIAL GUARANTY INSURANCE COMPANY
- -------------------------------------------------------------------------------
Unaudited Interim Financial Statements
September 30, 1996
Balance Sheets 1
Statements of Income 2
Statements of Cash Flows 3
Notes to Unaudited Interim Financial Statements. 4
See accompanying notes to interim financial statements
<PAGE>
Financial Guaranty Insurance
Company Balance Sheets
- --------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
September December 31,
30,
1996 1995
--------------------- ---------------------
(unaudited)
<S> <C> <C>
Assets
(Unaudited)
Fixed maturity securities, available for sale,
at fair value (amortized cost of
$2,153,856 in 1996 and $2,043,453 in 1995) $2,172,841 $2,141,584
Short-term investments, at cost, which
approximates market 147,460 91,032
Cash 997 199
Accrued investment income 33,825 37,347
Reinsurance receivable 7,418 7,672
Deferred policy acquisition costs 93,676 94,868
Property, plant and equipment net of
accumulated depreciation of $14,704 in
1996 and $12,861 in 1995 5,032 6,314
Prepaid reinsurance premiums 159,506 162,087
Prepaid expenses and other assets 28,581 39,199
---------- ----------
Total assets $2,649,336 $2,580,302
========== ==========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $ 685,364 $ 727,535
Losses and loss adjustment expenses 72,127 77,808
Ceded reinsurance payable 12,507 1,942
Accounts payable and accrued expenses 48,382 32,811
Due to parent 260 1,647
Current federal income taxes payable 78,818 51,296
Deferred federal income taxes payable 74,195 99,171
Payable for securities purchased 45,796 40,211
---------- ----------
Total liabilities 1,017,449 1,032,421
---------- ----------
Stockholder's Equity:
Common stock, par value $1,500 per share at
September 30, 1996 and at December 31, 1995:
10,000 shares authorized, issued and outstanding 15,000 15,000
Additional paid-in capital 334,011 334,011
Net unrealized gains on fixed maturity securities
available for sale, net of tax 12,340 63,785
Foreign currency translation adjustment (2,296) (1,499)
Retained earnings 1,272,832 1,136,584
---------- ----------
Total stockholder's equity 1,631,887 1,547,881
---------- ---------
Total liabilities and stockholder's equity $2,649,336 $2,580,302
========== ==========
</TABLE>
See accompanying notes to interim financial statements
-1-
<PAGE>
Financial Guaranty Insurance
Company Statements of Income
- -------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
Revenues:
Gross premiums written $ 65,875 $ 66,151
Ceded premiums (14,178) (14,430)
---------- ----------
Net premiums written 51,697 51,721
Decrease in net unearned premiums 39,589 29,428
--------- ----------
Net premiums earned 91,286 81,149
Net investment income 92,957 89,716
Net realized gains 11,132 19,574
--------- ----------
Total revenues 195,375 190,439
Expenses:
Losses and loss adjustment expenses (2,078) 1,191
Policy acquisition costs 13,056 9,013
Other underwriting expenses 10,582 14,925
---------- ---------
Total expenses 21,560 25,129
--------- ---------
Income before provision for federal income taxes 173,815 165,310
Provision for federal income taxes 37,566 33,323
--------- ---------
Net income $136,249 $131,987
======== ========
</TABLE>
See accompanying notes to interim financial statements
-2-
<PAGE>
Financial Guaranty Insurance
Company Statements of Cash Flow
- -------------------------------------------------------------------------------
($ in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
----------------- -----------------
(Unaudited)
<S> <C> <C>
Operating activities
Operating activities:
Net income $ 136,249 $ 131,987
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for deferred income taxes 3,155 14,917
Amortization of fixed maturity securities 606 2,064
Policy acquisition costs deferred (11,864) (14,213)
Amortization of deferred policy acquisition costs 13,056 8,787
Depreciation of fixed assets 1,843 1,686
Change in reinsurance receivable 254 4,574
Change in prepaid reinsurance premiums 2,581 2,930
Foreign currency translation adjustment (1,226) (923)
Change in accrued investment income, prepaid
expenses and other assets 14,140 (969)
Change in unearned premiums (42,171) (32,359)
Change in losses and loss adjustment expense reserves (5,681) (6,439)
Change in other liabilities 24,749 (6,673)
Change in current income taxes payable 27,522 (4,294)
Net realized gains on investments (11,132) (19,574)
--------- ---------
Net cash provided by operating activities 152,081 81,501
--------- ---------
Investing activities:
Sales or maturities of fixed maturity securities 633,347 622,658
Purchases of fixed maturity securities (727,641) (651,424)
Sales or maturities (purchases) of short-term investments, net (56,428) (46,053)
Purchases of property and equipment, net (561) (449)
--------- ---------
Net cash used for investing activities (151,283) (75,268)
--------- ---------
Increase in cash 798 6,233
Cash at beginning of period 199 1,766
--------- ---------
Cash at end of period $ 997 $ 7,999
========= =========
</TABLE>
See accompanying notes to interim financial statements
-3-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
- -------------------------------------------------------------------------------
September 30, 1996 and 1995
(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, 1996 and
1995, (b) the financial position at September 30, 1996 and December
31, 1995, and (c) cash flows for the nine months ended September 30,
1996 and 1995.
These interim financial statements should be read in conjunction with
the financial statements and related notes included in the 1995
audited financial statements. The 1995 financial statements have been
reclassified to conform to the 1996 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") 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) 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 in proportion to the reduction of the
related risk rather than in proportion to the coverage
provided;
(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.
-4-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
- --------------------------------------------------------------------------------
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,
------------------------------------------------------------------
(unaudited)
1996 1995
----------------------------- ----------------------------
Net Stockholder's Net Stockholder's
Income Equity Income Equity
------ ------------- ------ --------------
<S> <C> <C> <C> <C>
GAAP basis amount
$136,249 $1,631,887 $131,987 $1,487,346
Premium revenue recognition
(6,742) (173,669) (15,432) (159,804)
Deferral of acquisition costs
1,192 (93,676) (5,426) (96,354)
Contingency reserve
- (428,798) - (372,683)
Non-admitted assets
- (4,314) - (6,084)
Case-basis losses incurred and salvage recoverable
(3,854) (3,906) 1,586 (2,514)
Portfolio loss reserves
- 24,000 (10,900) 35,200
Deferral of income tax
3,155 67,550 14,917 59,728
Unrealized gains on fixed maturity securities held at
fair value, net of taxes
- (12,340) - (34,463)
Profit commission
1,234 (4,510) 5,228 (3,613)
Contingency reserve tax deduction
- 85,087 - 78,196
Provision for unauthorized reinsurance
- - - (266)
Allocation of tax benefits due to Parent's net
operating loss to the Company
(2) 10,289 118 9,772
---------- ------------- ------------ -----------
Statutory basis amount
$131,232 $1,097,600 $122,078 $994,461
========== ============= ============ ============
</TABLE>
-5-
<PAGE>
Financial Guaranty Insurance
Company Notes to Financial Statements
- --------------------------------------------------------------------------------
September 30, 1996 and 1995
(Unaudited)
(3) Dividends
Under New York Insurance Law, the Company may pay a dividend only from
earned surplus subject to the following limitations:
Statutory surplus after dividends may not be less than the minimum
required paid-in capital, which was $2,100,000 in 1996. 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 New York State Insurance Department.
The amount of the Company's surplus available for dividends at September
30,1996 is approximately $109.8 million.
(4) Income Taxes
The Company's effective Federal corporate tax rate (21.6 percent and 20.2
percent for the nine months ended September 30, 1996 and 1995,
respectively) is less than the statutory corporate tax rate (35 percent in
1996 and 1995) on ordinary income due to permanent differences between
financial and taxable income, principally tax-exempt interest.
(5) Reinsurance
In accordance with Statement of Financial Accounting Standards No. 113
("SFAS 113"), "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts", adopted in 1993, the Company reports assets
and liabilities relating to reinsured contracts gross of the effects of
reinsurance. Net premiums earned are shown net of premiums ceded of $16.8
million and $17.1 million, respectively, for the nine months ended
September 30, 1996 and 1995.
-6-
<PAGE>
EXHIBIT A
Approved financial information
As of September 30, 1996
As of September 30, 1996, December 31, 1995 and 1994 the Certificate Insurer had
written directly or assumed through reinsurance, guaranties of approximately
$197.8 billion, $180.0 billion and $160.2 billion par value of securities,
respectively (of which approximately 86 percent, 88 percent and 89 percent
constituted guaranties of municipal bonds), for which it had collected gross
premiums of approximately $2.01 billion, $1.95 billion and $1.78 billion,
respectively. As of September 30, 1996, the Certificate Insurer had reinsured
approximately 18 percent of the risks it had written, 34 percent through quota
share reinsurance and 66 percent through facultative arrangements.
Capitalization
The following table sets forth the capitalization of the Certificate Insurer as
of December 31, 1994, December 31, 1995 and September 30, 1996, respectively, on
the basis of generally accepted accounting principles. No material adverse
change in the capitalization of the Certificate Insurer has occurred since
September 30, 1996.
(Unaudited)
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1994 1995 1996
(in millions) (in Millions) (in Millions)
------------- ------------- -------------
<S> <C> <C> <C>
Unearned Premiums $757 $728 $685
Other Liabilities 261 304 332
Stockholder's Equity
Common Stock 15 15 15
Additional Paid-in Capital 334 334 334
Unrealized gains (losses) (42) 64 12
Foreign currency translation
adjustment (1) (2) (2)
Retained Earnings 974 1,137 1,273
---------- ---------- ----------
Total Stockholder's Equity 1,280 1,548 1,632
---------- ---------- ----------
Total Liabilities and
Stockholder's Equity $2,298 $2,580 $2,649
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
For further financial information concerning the Certificate Insurer, see the
audited financial statements of the Certificate Insurer included as Appendix A
and the unaudited interim financial statements of the Certificate Insurer
included as Appendix B.
Copies of the Certificate Insurer's quarterly and annual statutory statements
filed by the Certificate Insurer with the 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
Certificate Insurer's telephone number is (212) 312-3000.
The Certificate Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus or any information or disclosure contained
herein, or omitted herefrom, other than with respect to the accuracy of
information regarding the Certificate Insurer and the Certificate Insurance
Policy set forth under the headings "The Certificate Insurance Policy" and "The
Certificate Insurer" and in Appendix A and Appendix B.
<PAGE>
PROSPECTUS
MORTGAGE LOAN ASSET-BACKED SECURITIES, ISSUABLE IN SERIES
ADVANTA
ADVANTA MORTGAGE CONDUIT SERVICES, INC.
Sponsor of the Trusts
ADVANTA
ADVANTA MORTGAGE CORP. USA
Master Servicer
This Prospectus describes certain Mortgage Loan Asset-Backed Securities
(the 'Securities') that may be issued from time to time in series and certain
classes of which may be offered hereby from time to time as described in the
related Prospectus Supplement. Each series of Securities will be issued by a
separate trust (each, a 'Trust'). The primary assets of each Trust will consist
of a segregated pool (a 'Mortgage Pool') of conventional one- to four-family
residential mortgage loans, multi-family residential mortgage loans, mixed use
mortgage loans, revolving home equity loans or certain balances thereof secured
by mortgages primarily on one-to-four-family residential properties, or
certificates of interest or participation therein (collectively, the 'Mortgage
Loans'), to be acquired by such Trust from Advanta Mortgage Conduit Services,
Inc. (the 'Sponsor'). The Sponsor will acquire the Mortgage Loans from one or
more affiliated or unaffiliated institutions (the 'Originators'). In connection
with the establishment of certain Trusts the Sponsor may first transfer the
related Trust Estate to Advanta Mortgage Receivables Inc. (the 'Transferor') and
the Transferor will then transfer such Trust Estate to the related Trust. The
use of the Transferor will not affect the obligations of the Sponsor with
respect to the related Trust or the related Securities. If the Transferor is to
be involved in a particular offering the related Prospectus Supplement will
describe its role in such offering; for purposes of this Prospectus the role of
the Transferor is subsumed in the role of the Sponsor. See 'The Mortgage Pools.'
The Mortgage Loans in each Mortgage Pool and certain other assets described
herein and in the related Prospectus Supplement (collectively with respect to
each Trust, the 'Trust Estate') and in the related Prospectus Supplement will be
held by the related Trust for the benefit of the holders of the related series
of Securities (the 'Securityholders') pursuant to a Pooling and Servicing
Agreement to the extent and as more fully described herein and in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, each Mortgage Pool will consist of one or more of the various types
of Mortgage Loans described under 'The Mortgage Pools.'
(Cover continued on next page)
------------------------
THE ASSETS OF THE RELATED TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
SPONSOR, THE MASTER SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT
AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE
SECURITIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SPONSOR, THE MASTER
SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE
RELATED PROSPECTUS SUPPLEMENT. SEE ALSO 'RISK FACTORS' PAGE 13.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, as more fully described under 'Methods
of Distribution' and in the related Prospectus Supplement. There will be no
secondary market for any series of Securities prior to the offering thereof.
There can be no assurance that a secondary market for any of the Securities will
develop or, if it does develop, that it will offer sufficient liquidity of
investment or will continue.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
------------------------
The date of this Prospectus is September 6, 1996.
<PAGE>
(Cover continued from previous page)
Each series of Securities will include one or more classes. The Securities
of any particular class may represent beneficial ownership interests in the
related Mortgage Loans held by the related Trust, or may represent debt secured
by such Mortgage Loans, as described herein and in the related Prospectus
Supplement. A series may include one or more classes of Securities entitled to
principal distributions, with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no principal distributions. The rights of one or more classes of Securities of
any series may be senior or subordinate to the rights of one or more of the
other classes of Securities. A series may include two or more classes of
Securities which differ as to the timing, sequential order, priority of payment,
interest rate or amount of distributions of principal or interest or both.
Information regarding each class of Securities of a series, and certain
characteristics of the Mortgage Loans to be evidenced by such Securities, will
be set forth in the related Prospectus Supplement.
THE SPONSOR'S AND THE RELATED ORIGINATORS' ONLY OBLIGATIONS WITH RESPECT TO
A SERIES OF SECURITIES WILL BE PURSUANT TO THE SERVICING REQUIREMENTS RELATING
THERETO, AND PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES MADE BY THE
SPONSOR OR BY SUCH ORIGINATORS, EXCEPT AS OTHERWISE DESCRIBED IN THE RELATED
PROSPECTUS SUPPLEMENT. THE PROSPECTUS SUPPLEMENT FOR EACH SERIES OF SECURITIES
WILL NAME ADVANTA MORTGAGE CORP. USA AS MASTER SERVICER (THE 'MASTER SERVICER')
WHICH WILL ACT, DIRECTLY OR THROUGH ONE OR MORE SUBSERVICERS (THE
'SUBSERVICER(S)'). THE PRINCIPAL OBLIGATIONS OF THE MASTER SERVICER WILL BE
PURSUANT TO ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH MAY INCLUDE A LIMITED
OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF DELINQUENCIES IN PAYMENTS ON
THE MORTGAGE LOANS AND INTEREST SHORTFALLS DUE TO PREPAYMENT OF MORTGAGE LOANS).
SEE 'DESCRIPTION OF THE SECURITIES.'
If so specified in the related Prospectus Supplement, the Trust Estate for
a series of Securities may include any combination of a mortgage pool insurance
policy, letter of credit, financial guaranty insurance policy, bankruptcy bond,
special hazard insurance policy, reserve fund or other form of Credit
Enhancement. In addition to or in lieu of the foregoing, Credit Enhancement with
respect to certain classes of Securities of any series may be provided by means
of subordination, cross-support among Mortgage Assets, as defined herein, or
over-collateralization. See 'Description of Credit Enhancement.'
The rate of payment of principal of each class of Securities entitled to
principal payments will depend on the priority of payment of such class and the
rate of payment (including prepayments, defaults, liquidations and repurchases
of Mortgage Loans) of the related Mortgage Loans. A rate of principal payment
lower or higher than that anticipated may affect the yield on each class of
Securities in the manner described herein and in the related Prospectus
Supplement. The various types of Securities, the different classes of such
Securities and certain types of Mortgage Loans in a given Mortgage Pool may have
different prepayment risks and credit risks. The Prospectus Supplement for a
series of Securities or the related Current Report on Form 8-K will contain
information as to (i) types, maturities and certain statistical information
relating to credit risks of the Mortgage Loans in the related Mortgage Pool,
(ii) the effect of certain rates of prepayment, based upon certain specified
assumptions for a series of Securities and (iii) priority of payment and
maturity dates of the Securities. AN INVESTOR SHOULD CAREFULLY REVIEW THE
INFORMATION IN THE RELATED PROSPECTUS SUPPLEMENT CONCERNING THE DIFFERENT
CONSEQUENCES OF THE RISKS ASSOCIATED WITH THE DIFFERENT TYPES AND CLASSES OF
SECURITIES. See 'Yield Considerations.' A Trust may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement.
One or more separate elections may be made to treat a Trust, or one or more
segregated pools of assets held by such Trust, as a real estate mortgage
investment conduit ('REMIC') for federal income tax purposes. If applicable, the
Prospectus Supplement for a series of Securities will specify which class or
classes of the related series of Securities will be considered to be regular
interests in a REMIC and which classes of Securities or other interests will be
designated as the residual interest in a REMIC. Alternatively, a Trust may be
treated as a grantor trust or as a partnership for federal income tax purposes,
or may be treated for federal income tax purposes as a mere security device
which constitutes a collateral arrangement for the issuance of secured debt. See
'Certain Federal Income Tax Consequences' herein.
2
<PAGE>
No dealer, salesman, or any other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or the related Prospectus Supplement, and, if given or made, such
information must not be relied upon as having been authorized by the Company or
any dealer, salesman, or any other person. Neither the delivery of this
Prospectus or the related Prospectus Supplement nor any sale made hereunder or
thereunder shall under any circumstances create an implication that there has
been no change in the information herein or therein since the date hereof. This
Prospectus and the related Prospectus Supplement are not an offer to sell or a
solicitation of an offer to buy any security in any jurisdiction in which it is
unlawful to make such offer or solicitation.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Summary of Prospectus................................................. 4
Risk Factors.......................................................... 13
Risks of the Mortgage Loans....................................... 14
The Trusts............................................................ 18
The Mortgage Pools.................................................... 25
General........................................................... 25
The Mortgage Pools................................................ 25
Mortgage Loan Program................................................. 27
Underwriting Guidelines........................................... 28
Qualifications of Originators..................................... 31
Sub-Servicers..................................................... 32
Representations by Originators.................................... 32
Sub-Servicing by Originators...................................... 33
Description of the Securities......................................... 35
General........................................................... 35
Form of Securities................................................ 37
Assignment of Mortgage Loans...................................... 38
Forward Commitments; Pre-Funding.................................. 39
Payments on Mortgage Loans; Deposits to Distribution Account...... 40
Withdrawals from the Principal and Interest Account............... 43
Distributions..................................................... 43
Principal and Interest on the Securities.......................... 44
Advances.......................................................... 45
Reports to Securityholders........................................ 46
Collection and Other Servicing Procedures......................... 47
Realization Upon Defaulted Mortgage Loans......................... 48
Subordination......................................................... 49
Description of Credit Enhancement..................................... 50
Hazard Insurance; Claims Thereunder................................... 55
Hazard Insurance Policies......................................... 55
The Sponsor and the Transferor........................................ 55
The Master Servicer................................................... 56
The Pooling and Servicing Agreement................................... 56
Servicing and Other Compensation and Payment of Expenses;
Originator's Retained Yield..................................... 56
Evidence as to Compliance......................................... 57
Removal and Resignation of the Master Servicer.................... 57
Amendments........................................................ 58
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Termination; Retirement of Securities............................. 59
The Trustee....................................................... 59
Yield Considerations.................................................. 62
Maturity and Prepayment Considerations................................ 63
Certain Legal Aspects of Mortgage Loans and Related Matters........... 65
General........................................................... 65
Cooperative Loans................................................. 66
Foreclosure....................................................... 67
Foreclosure on Shares of Cooperatives............................. 67
Rights of Redemption.............................................. 68
Anti-Deficiency Legislation and Other Limitations on Lenders...... 68
Environmental Legislation......................................... 69
Enforceability of Certain Provisions.............................. 70
Certain Provisions of California Deeds of Trust................... 70
Applicability of Usury Laws....................................... 71
Alternative Mortgage Instruments.................................. 71
Soldiers' and Sailors' Civil Relief Act of 1940................... 72
Certain Federal Income Tax Consequences............................... 72
General........................................................... 72
Grantor Trust Securities.......................................... 72
REMIC Securities.................................................. 74
Debt Securities................................................... 80
Discount and Premium.............................................. 81
Backup Withholding................................................ 83
Foreign Investors................................................. 84
ERISA Considerations.................................................. 84
Plan Asset Regulations............................................ 85
Prohibited Transaction Class Exemption............................ 85
Tax Exempt Investors.............................................. 87
Consultation With Counsel......................................... 87
Legal Investment Matters.............................................. 87
Use of Proceeds....................................................... 88
Methods of Distribution............................................... 88
Legal Matters......................................................... 89
Financial Information................................................. 89
Additional Information................................................ 89
Index of Principal Definitions........................................ 90
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS AND THE
RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus and by reference to the information with respect to each series of
Securities contained in the Prospectus Supplement to be prepared and delivered
in connection with the offering of such series. Capitalized terms used in this
summary that are not otherwise defined shall have the meanings ascribed thereto
in this Prospectus. An index indicating where certain terms used herein are
defined appears at the end of this Prospectus.
<TABLE>
<S> <C>
Securities
Offered........... Mortgage Loan Asset-Backed Securities.
Sponsor............. Advanta Mortgage Conduit Services, Inc. See 'The
Sponsor and The Transferor.'
Originators......... The Sponsor will acquire the Mortgage Loans from
one or more institutions affiliated with the
Sponsor ('Affiliated Originators') or
institutions unaffiliated with the Sponsor
('Unaffiliated Originators') (the Affiliated
Originators and the Unaffiliated Originators are
collectively referred to as the 'Originators').
The Sponsor will transfer the related Trust
Estate to the related Trust. In connection with
the establishment of certain Trusts the Sponsor
may first transfer the related Trust Estate to
the Transferor and the Transferor will then
transfer such Trust Estate to the related Trust.
The use of the Transferor will not affect the
obligations of the Sponsor with respect to the
related Trust or the related Securities. If the
Transferor is to be involved in a particular
offering the related Prospectus Supplement will
describe its role in such offering; for purposes
of this Prospectus the role of the Transferor is
subsumed in the role of the Sponsor.
Master Servicer..... Advanta Mortgage Corp. USA. See 'The Master
Servicer' and 'The Pooling and Servicing
Agreement--Removal and Resignation of the Master
Servicer.'
Sub-Servicers....... Originators may act as Sub-Servicers for Mortgage
Loans acquired by the Sponsor from such
Originators unless all servicing duties relating
to such Mortgage Loans have been transferred to
the Master Servicer or to a third-party,
unaffiliated contract servicer approved by the
Master Servicer. See 'Mortgage Loan Pro-
gram--Sub-Servicers.'
Trustee............. The trustee (the 'Trustee') for each series of
Securities will be specified in the related
Prospectus Supplement.
The Securities...... Issuance of Securities.
Each series of Securities will be issued at the
direction of the Sponsor by a separate Trust
(each, a 'Trust'). The primary assets of each
Trust will consist of a segregated pool (each, a
'Mortgage Pool') of conventional, one- to
four-family residential mortgage loans or
multi-family residential mortgage loans (the
'Mortgage Loans') or certificates of interest or
participation therein, acquired by such Trust
from the Sponsor. The Sponsor will acquire the
Mortgage Loans from one or more of the
Originators. The Securities issued by any Trust
may represent beneficial ownership interests in
the related Mortgage Loans held by the related
Trust, or may represent debt secured by such
Mortgage Loans, as described herein and in the
related Prospectus Supplement. Securities which
represent beneficial ownership interests in the
related
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Trust will be referred to as 'Certificates' in
the related Prospectus Supplement; Securities
which represent debt issued by the related Trust
will be referred to as 'Notes' in the related
Prospectus Supplement.
Each Trust will be established pursuant to an
agreement (each, a 'Trust Agreement') by and
between the Sponsor and the Trustee named
therein. Each Trust Agreement will describe the
related pool of assets to be held in trust (each
such asset pool, the 'Trust Estate'), which will
include the related Mortgage Loans and, if so
specified in the related Prospectus Supplement,
may include any combination of a mortgage pool
insurance policy, letter of credit, financial
guaranty insurance policy, special hazard
policy, reserve fund or other form of Credit
Enhancement.
The Mortgage Loans held by each Trust will be
master serviced by the Master Servicer pursuant
to a servicing agreement (each, a 'Servicing
Agreement') by and between the Master Servicer
and the related Trustee.
With respect to Securities that represent debt
issued by the related Trust, the related Trust
will enter into an indenture (each, an
'Indenture') by and between such Trust and the
trustee named on such Indenture (the 'Indenture
Trustee'), as set forth in the related
Prospectus Supplement. Securities that represent
beneficial ownership interests in the related
Trust will be issued pursuant to the related
Trust Agreement.
In the case of any individual Trust, the
contractual arrangements relating to the
establishment of the Trust, the servicing of the
related Mortgage Loans and the issuance of the
related Securities may be contained in a single
agreement, or in several agreements which
combine certain aspects of the Trust Agreement,
the Servicing Agreement and the Indenture
described above (for example, a pooling and
servicing agreement, or a servicing and
collateral management agreement). For purposes
of this Prospectus, the term 'Pooling and
Servicing Agreement' as used with respect to a
Trust means, collectively, and except as
otherwise specified, any and all agreements
relating to the establishment of the related
Trust, the servicing of the related Mortgage
Loans and the issuance of the related
Securities.
Securities Will Be Recourse to the Assets of the
Related Trust Only.
The sole source of payment for any series of
Securities will be the assets of the related
Trust (i.e., the related Trust Estate). The
Securities will not be obligations, either
recourse or non-recourse (except for certain
non-recourse debt described under 'Certain
Federal Income Tax Consequences'), of the
Sponsor, the Master Servicer, any Sub-Servicer,
any Originator or any Person other than the
related Trust. In the case of Securities that
represent beneficial ownership interest in the
related Trust Estate, such Securities will
represent the ownership of such Trust Estate;
with respect to Securities that represent debt
issued by the related Trust, such Securities
will be secured by the related Trust Estate.
Notwithstanding the foregoing, and as to be
described in the related Prospectus Supplement,
certain types of Credit Enhancement, such as a
financial guaranty insurance policy or a letter
of
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
credit, may constitute a full recourse
obligation of the issuer of such Credit
Enhancement.
General Nature of the Securities as Investments.
The Securities will consist of two basic types:
(i) Securities of the fixed-income type
('Fixed-Income Securities') and (ii) Securities
of the equity participation type ('Equity
Securities'). No Class of Equity Securities will
be offered pursuant to this Prospectus or any
Prospectus Supplement related hereto.
Fixed-Income Securities will generally be styled
as debt instruments, having a principal balance
and a specified interest rate ('Interest Rate').
Fixed-Income Securities may be either benefi-
cial ownership interests in the related Mortgage
Loans held by the related Trust, or may
represent debt secured by such Mortgage Loans.
Each series or class of Fixed-Income Securities
may have a different Interest Rate, which may be
a fixed or adjustable Interest Rate. The related
Prospectus Supplement will specify the Interest
Rate for each series or class of Fixed-Income
Securities, or the initial Interest Rate and the
method for determining subsequent changes to the
Interest Rate.
A series may include one or more classes of
Fixed-Income Securities ('Strip Securities')
entitled (i) to principal distributions, with
disproportionate, nominal or no interest
distributions, or (ii) to interest
distributions, with disproportionate, nominal or
no principal distributions. In addition, a
series may include two or more classes of
Fixed-Income Securities that differ as to
timing, sequential order, priority of payment,
Interest Rate or amount of distributions of
principal or interest or both, or as to which
distributions of principal or interest or both
on any class may be made upon the occurrence of
specified events, in accordance with a schedule
or formula, or on the basis of collections from
designated portions of the related Mortgage
Pool, which series may include one or more
classes of Fixed-Income Securities ('Accrual
Securities'), as to which certain accrued
interest will not be distributed but rather will
be added to the principal balance (or nominal
principal balance, in the case of Accrual
Securities which are also Strip Securities)
thereof on each Payment Date, as hereinafter
defined and in the manner described in the
related Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a series of Securities may include
one or more other classes of Fixed-Income
Securities (collectively, the 'Senior
Securities') that are senior to one or more
other classes of Fixed-Income Securities
(collectively, the 'Subordinate Securities') in
respect of certain distributions of principal
and interest and allocations of losses on
Mortgage Loans.
In addition, certain classes of Senior (or
Subordinate) Securities may be senior to other
classes of Senior (or Subordinate) Securities in
respect of such distributions or losses.
Equity Securities will represent the right to
receive the proceeds of the related Trust Estate
after all required payments have been made to
the Securityholders of the related Fixed-Income
Securities (both Senior Securities and
Subordinate Securities), and following any
required deposits to any reserve account which
may
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be established for the benefit of the
Fixed-Income Securities. Equity Securities may
constitute what are commonly referred to as the
'residual interest,' 'seller's interest' or the
'general partnership interest,' depending upon
the treatment of the related Trust for federal
income tax purposes. As distinguished from the
Fixed-Income Securities, the Equity Securities
will not be styled as having principal and
interest components. Any losses suffered by the
related Trust will first be absorbed by the
related class of Equity Securities, as described
herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered
pursuant to this Prospectus or any Prospectus
Supplement related hereto. Equity Securities may
be offered on a private placement basis or
pursuant to a separate Registration Statement to
be filed by the Sponsor. In addition, the
Sponsor and its affiliates may initially or
permanently hold any Equity Securities issued by
any Trust.
General Payment Terms of Securities.
As provided in the related Pooling and Servicing
Agreement and as described in the related
Prospectus Supplement, Securityholders will be
entitled to receive payments on their Securities
on specified dates (each, a 'Payment Date').
Payment Dates with respect to Fixed-Income
Securities will occur monthly, quarterly or
semi-annually, as described in the related
Prospectus Supplement; Payment Dates with
respect to Equity Securities will occur as
described in the related Prospectus Supplement.
The related Prospectus Supplement will describe a
date (the 'Record Date') preceding such Payment
Date, as of which the Trustee or its paying
agent will fix the identity of the Securi-
tyholders for the purpose of receiving payments
on the next succeeding Payment Date. Unless
otherwise described in the related Prospectus
Supplement, the Payment Date will be the
twenty-fifth day of each month (or, in the case
of quarterly-pay Securities, the twenty-fifth
day of every third month; and in the case of
semi-annual pay Securities, the twenty-fifth day
of every sixth month) and the Record Date will
be the close of business as of the last day of
the calendar month that precedes the calendar
month in which such Payment Date occurs.
Each Pooling and Servicing Agreement will describe
a period (each, a 'Remittance Period')
antecedent to each Payment Date (for example, in
the case of monthly-pay Securities, the calendar
month preceding the month in which a Payment
Date occurs or such other specified period).
Unless otherwise provided in the related
Prospectus Supplement, collections received on
or with respect to the related Mortgage Loans
during a Remittance Period will be required to
be remitted by the Master Servicer to the
related Trustee prior to the related Payment
Date and will be used to fund payments to
Securityholders on such Payment Date. As may be
described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may
provide that all or a portion of the principal
collected on or with respect to the related
Mortgage Loans may be applied by the related
Trustee to the acquisition of additional
Mortgage Loans during a specified period (rather
than be used to fund payments of principal to
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Securityholders during such period) with the
result that the related securities will possess
an interest-only period, also commonly referred
to as a revolving period, which will be followed
by an amortization period. Any such
interest-only or revolving period may, upon the
occurrence of certain events to be described in
the related Prospectus Supplement, terminate
prior to the end of the specified period and
result in the earlier than expected amortiza-
tion of the related Securities.
In addition, and as may be described in the
related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that
all or a portion of such collected principal may
be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans)
for a specified period prior to being used to
fund payments of principal to Securityholders.
The result of such retention and temporary
investment by the Trustee of such principal
would be to slow the amortization rate of the
related Securities relative to the amortization
rate of the related Mortgage Loans, or to
attempt to match the amortization rate of the
related Securities to an amortization schedule
established at the time such Securities are
issued. Any such feature applicable to any
Securities may terminate upon the occurrence of
events to be described in the related Prospectus
Supplement, resulting in the current
distribution of principal payments to the
specified Securityholders and an acceleration of
the amortization of such Securities.
Unless otherwise specified in the related
Prospectus Supplement, neither the Securities
nor the underlying Mortgage Loans will be
guaranteed or insured by any governmental agency
or instrumentality or the Sponsor, the Master
Servicer, any Sub-Servicer, any Originator or
any of their affiliates.
No Investment
Companies......... Neither the Sponsor nor any Trust will register as
an 'investment company' under the Investment
Company Act of 1940, as amended (the 'Investment
Company Act').
Cross-
Collateralization... Unless otherwise provided in the related Pooling
and Servicing Agreement and described in the
related Prospectus Supplement, the source of
payment for Securities of each series will be
the assets of the related Trust Estate only.
However, as may be described in the related
Prospectus Supplement, a Trust Estate may
include the right to receive moneys from a
common pool of Credit Enhancement which may be
available for more than one series of
Securities, such as a master reserve account or
a master insurance policy. Notwithstanding the
foregoing, unless specifically described
otherwise in the related Prospectus Supplement,
no collections on any Mortgage Loans held by any
Trust may be applied to the payment of
Securities issued by any other Trust (except to
the limited extent that certain collections in
excess of amounts needed to pay the related
Securities may be deposited in a common, master
reserve account that provides Credit Enhance-
ment for more than one series of Securities).
The Mortgage
Pools............. Unless otherwise specified in the related
Prospectus Supplement, each Trust Estate will
consist primarily of Mortgage Loans secured by
liens on one- to four-family residential or
multi-family properties ('Mortgages'), located
in any one of the fifty states,
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the District of Columbia, Puerto Rico or any
other Territories of the United States. All
Mortgage Loans will have been acquired by the
related Trust from the Sponsor. All Mortgage
Loans will have been originated either by (x)
one or more institutions affiliated with the
Sponsor (such affiliated institutions, the
'Affiliated Originators') or (y) one or more
institutions not affiliated with the Sponsor
(such unaffiliated institutions, the
'Unaffiliated Originators'). The Mortgage Loans
originated by the Affiliated Originators
generally will have been originated pursuant to
the standard underwriting guidelines (the
'Sponsor's Guidelines') set forth in the
Sponsor's guide for originators (the 'Sponsor's
Originator Guide'), as modified from time to
time. The Mortgage Loans originated by the
Unaffiliated Originators may be originated
either (i) generally pursuant to the Sponsor's
Guidelines; (ii) generally pursuant to such
Unaffiliated Originators' underwriting
guidelines as approved by the Sponsor ('Approved
Guidelines'); or (iii) generally pursuant to
such Originators' underwriting guidelines and
purchased by the Sponsor in a bulk acquisition
('Bulk Acquisition'). See 'Mortgage Loan Pro-
gram.' For a description of the types of
Mortgage Loans that may be included in the
Mortgage Pools, see 'The Mortgage Pools--The
Mortgage Loans.'
A Current Report on Form 8-K will be available to
purchasers or underwriters of the related series
of Securities and will generally be filed,
together with the related Pooling and Servicing
Agreement, with the Securities and Exchange
Commission within fifteen days after the initial
issuance of such series.
Forward Commitments;
Pre-Funding....... A Trust may enter into an agreement (each, a
'Forward Purchase Agreement') with the Sponsor
whereby the Sponsor will agree to transfer
additional Mortgage Loans (the 'Subsequent
Mortgage Loans') to such Trust following the
date on which such Trust is established and the
related Securities are issued. Any Forward
Purchase Agreement will require that any
Mortgage Loans so transferred to a Trust conform
to the requirements specified in such Forward
Purchase Agreement. In addition, the Forward
Purchase Agreement states that the Depositor
shall only transfer the Subsequent Mortgage
Loans upon the satisfaction of certain
conditions including that the Depositor shall
have delivered to the Certificate Insurer, the
Rating Agencies and the Trustee opinions of
counsel (including bankruptcy, corporate and tax
opinions) with respect to the transfer of the
Subsequent Mortgage Loans. If a Forward Purchase
Agreement is to be utilized, and unless other-
wise specified in the related Prospectus
Supplement, the related Trustee will be required
to deposit in a segregated account (each, a
'Pre-Funding Account') all or a portion of the
proceeds received by the Trustee in connection
with the sale of one or more classes of
Securities of the related series; subsequently,
the additional Mortgage Loans will be
transferred to the related Trust in exchange for
money released to the Sponsor from the related
Pre-Funding Account in one or more transfers.
Each Forward Purchase Agreement will set a
specified period during which any such transfers
must occur. The Forward Purchase Agreement or
the related Pooling and Servicing Agreement will
require that, if
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all moneys originally deposited to such
Pre-Funding Account are not so used by the end
of such specified period, then any remaining
moneys will be applied as a mandatory prepayment
of the related class or classes of Securities as
specified in the related Prospectus Supplement.
Credit
Enhancement....... If so specified in the Prospectus Supplement, the
Trust Estate with respect to any series of
Securities may include any one or any
combination of a letter of credit, mortgage pool
insurance policy, special hazard insurance
policy, bankruptcy bond, financial guaranty
insurance policy, reserve fund or other type of
Credit Enhancement to provide full or partial
coverage for certain defaults and losses
relating to the Mortgage Loans. Credit support
also may be provided in the form of the related
class of Equity Securities, and/or by
subordination of one or more classes of
Fixed-Income Securities in a series under which
losses in excess of those absorbed by any
related class of Equity Securities are first
allocated to any Subordinate Securities up to a
specified limit, cross-support among groups of
Mortgage Assets or overcollateralization. Unless
otherwise specified in the related Prospectus
Supplement, any mortgage pool insurance policy
will have certain exclusions from coverage
thereunder, which will be described in the
related Prospectus Supplement, which may be
accompanied by one or more separate Credit
Enhancements that may be obtained to cover
certain of such exclusions. To the extent not
set forth herein, the amount and types of
coverage, the identification of any entity
providing the coverage, the terms of any
subordination and related information will be
set forth in the Prospectus Supplement relating
to a series of Securities. See 'Description of
Credit Enhancement' and 'Subordination.'
Advances............ As to be described in the related Prospectus
Supplement, the Master Servicer may be obligated
to make certain advances with respect to
payments of delinquent scheduled interest and/or
principal on the Mortgage Loans, but only to the
extent that the Master Servicer believes that
such amounts will be recoverable by it. Any such
advance made by the Master Servicer with respect
to a Mortgage Loan is recoverable by it as
provided herein under 'Description of the
Securities--Advances' either from recoveries on
the specific Mortgage Loan or, with respect to
any such advance subsequently determined to be
nonrecoverable, out of funds otherwise
distributable to the holders of the related
series of Securities, which may include the
holders of any Senior Securities of such series.
As to be described in the related Prospectus
Supplement, the Master Servicer may be required
to advance Compensating Interest as defined
hereafter under 'Description of the Securities--
Advances.'
In addition, unless otherwise specified in the
related Prospectus Supplement, the Master
Servicer will be required to pay all 'out of
pocket' costs and expenses incurred in the
performance of its servicing obligations, but
only to the extent that the Master Servicer
reasonably believes that such amounts will
increase Net Liquidation Proceeds on the related
Mortgage Loan. See 'Description of the
Securities--Advances.'
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Optional
Termination....... The Master Servicer, the Sponsor, or, if specified
in the related Prospectus Supplement, the holders
of the related class of Equity Securities or the
Credit Enhancer may at their respective option
effect early retirement of a series of
Securities through the purchase of the Mortgage
Loans and other assets in the related Trust
Estate under the circumstances and in the manner
set forth herein under 'The Pooling and
Servicing Agreement--Termination; Retirement of
Securities' and in the related Prospectus
Supplement.
Mandatory
Termination....... The Trustee, the Master Servicer or certain other
entities specified in the related Prospectus
Supplement may be required to effect early
retirement of a series of Securities by
soliciting competitive bids for the purchase of
the related Trust Estate or otherwise, under
other circumstances and in the manner specified
in 'The Pooling and Servicing
Agreement--Termination; Retirement of Securi-
ties' and in the related Prospectus Supplement.
Legal Investment.... Not all of the Mortgage Loans in a particular
Mortgage Pool may represent first liens.
Accordingly, as disclosed in the related Pro-
spectus Supplement, certain classes of
Securities offered hereby and by the related
Prospectus Supplement may not constitute
'mortgage related securities' for purposes of
the Secondary Mortgage Market Enhancement Act of
1984 ('SMMEA') and, if so, will not be legal
investments for certain types of institutional
investors under SMMEA.
Institutions whose investment activities are
subject to legal investment laws and regulations
or to review by certain regulatory authorities
may be subject to additional restrictions on
investment in certain classes of Securities. Any
such institution should consult its own legal
advisors in determining whether and to what
extent a class of Securities constitutes legal
investments for such investors. See 'Legal
Investment' herein.
ERISA
Considerations.... A fiduciary of an employee benefit plan and
certain other retirement plans and arrangements,
including individual retirement accounts and
annuities, Keogh plans, and collective
investment funds and separate accounts in which
such plans, accounts, annuities or arrangements
are invested, that is subject to the Employee
Retirement Income Security Act of 1974, as
amended ('ERISA'), or Section 4975 of the Code
(each such entity, a 'Plan') should carefully
review with its legal advisors whether the
purchase or holding of Securities could give
rise to a transaction that is prohibited or is
not otherwise permissible either under ERISA or
Section 4975 of the Code. Investors are advised
to consult their counsel and to review 'ERISA
Considerations' herein.
Certain Federal
Income Tax
Consequences...... Securities of each series offered hereby will, for
federal income tax purposes, constitute either (i)
interests ('Grantor Trust Securities') in a
Trust treated as a grantor trust under
applicable provisions of the Code, (ii) 'regular
interests' ('REMIC Regular Securities') or
'residual interests' ('REMIC Residual Securi-
ties') in a Trust treated as a REMIC (or, in
certain instances, containing one or more
REMIC's) under Sections 860A through 860G of the
Code, (iii) debt issued by a Trust ('Debt
Securities')
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or (iv) interests in a Trust which is treated as
a partnership ('Partnership Interests').
Investors are advised to consult their tax
advisors and to review 'Certain Federal Income
Tax Consequences' herein and in the related
Prospectus Supplement.
Registration of
Securities........ Securities may be represented by global securities
registered in the name of Cede & Co. ('Cede'), as
nominee of The Depository Trust Company ('DTC'),
or another nominee. In such case,
Securityholders will not be entitled to receive
definitive securities representing such Holders'
interests, except in certain circumstances
described in the related Prospectus Supplement.
See 'Description of the Securities--Form of
Securities' herein.
Ratings............. Each class of Fixed-Income Securities offered
pursuant to the related Prospectus Supplement will
be rated in one of the four highest rating
categories by one or more 'national statistical
rating organizations,' as defined in the
Securities Exchange Act of 1934, as amended (the
'Exchange Act'), and commonly referred to as
'Rating Agencies.' Such ratings will address, in
the opinion of such Rating Agencies, the
likelihood that the related Trust will be able
to make timely payment of all amounts due on the
related Fixed-Income Securities in accordance
with the terms thereof. Such ratings will
neither address any prepayment or yield
considerations applicable to any Securities nor
constitute a recommendation to buy, sell or hold
any Securities.
Equity Securities will not be rated.
The ratings expected to be received with respect
to any Securities will be set forth in the
related Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity. There can be no assurance that a secondary market for
the Securities of any series or class will develop or, if it does develop, that
it will provide Securityholders with liquidity of investment or that it will
continue for the life of the Securities of any series. The Prospectus Supplement
for any series of Securities may indicate that an underwriter specified therein
intends to establish a secondary market in such Securities; however, no
underwriter will be obligated to do so. Unless otherwise specified in the
related Prospectus Supplement, the Securities will not be listed on any
securities exchange.
Limited Obligations. The Securities will not represent an interest in or
obligation, either recourse or non-recourse (except for certain non-recourse
debt described under 'Certain Federal Income Tax Consequences'), of the Sponsor,
the Master Servicer, any Originator (as defined herein) or any person other than
the related Trust. The only obligations of the foregoing entities with respect
to the Securities or the Mortgage Loans will be the obligations (if any) of the
Sponsor, the related Originators and the Master Servicer pursuant to certain
limited representations and warranties made with respect to the Mortgage Loans,
the Master Servicer's servicing obligations under the related Pooling and
Servicing Agreement (including its limited obligation, if any, to make certain
advances in the event of delinquencies on the Mortgage Loans, but only to the
extent deemed recoverable) and, if and to the extent expressly described in the
related Prospectus Supplement, certain limited obligations of the Sponsor,
Master Servicer, applicable Sub-Servicer, or another party in connection with a
purchase obligation ('Purchase Obligation') or an agreement to purchase or act
as remarketing agent with respect to a Convertible Mortgage Loan upon conversion
to a fixed rate. Notwithstanding the foregoing, and as to be described in the
related Prospectus Supplement, certain types of Credit Enhancement, such as a
financial guaranty insurance policy or a letter of credit, may constitute a full
recourse obligation of the issuer of such Credit Enhancement. Except as
described in the related Prospectus Supplement, neither the Securities nor the
underlying Mortgage Loans will be guaranteed or insured by any governmental
agency or instrumentality, or by the Sponsor, the Master Servicer, any
Sub-Servicer or any of their affiliates. Proceeds of the assets included in the
related Trust Estate for each series of Securities (including the Mortgage Loans
and any form of Credit Enhancement) will be the sole source of payments on the
Securities, and there will be no recourse to the Sponsor or any other entity in
the event that such proceeds are insufficient or otherwise unavailable to make
all payments provided for under the Securities.
Limitations, Reduction and Substitution of Credit Enhancement. With
respect to each series of Securities, Credit Enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit Enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: a letter of credit; a Purchase
Obligation; a mortgage pool insurance policy; a special hazard insurance policy;
a bankruptcy bond; a reserve fund; a financial guaranty insurance policy or
other type of Credit Enhancement to provide partial coverage for certain
defaults and losses relating to the Mortgage Loans. Credit Enhancement also may
be provided in the form of the related class of Equity Securities, subordination
of one or more classes of Fixed-Income Securities in a series under which losses
in excess of those absorbed by any related class of Equity Securities are first
allocated to any Subordinate Securities up to a specified limit, cross-support
among Mortgage Assets and/or overcollateralization. See 'Subordination' and
'Description of Credit Enhancement' herein. Regardless of the form of Credit
Enhancement provided, the coverage will be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancements may provide only very limited coverage as
to certain types of losses, and may provide no coverage as to certain other
types of losses. Generally, Credit Enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. The Master
Servicer will generally be permitted to reduce, terminate or substitute all or a
portion of the Credit Enhancement for any series of Securities, if the
applicable Rating Agency indicates that the then-current rating thereof will not
be adversely affected. To the extent not set forth herein, the amount and types
of coverage, the identification of any entity providing the coverage, the terms
of any subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Securities. See 'Description of Credit
Enhancement' and 'Subordination.'
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RISKS OF THE MORTGAGE LOANS
Risk of the Losses Associated with Junior Liens. Certain of the Mortgage
Loans will be secured by junior liens subordinate to the rights of the mortgagee
or beneficiary under each related senior mortgage or deed of trust. As a result,
the proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the principal balance of a mortgage loan only to the extent
that the claims, if any, of each such senior mortgagee or beneficiary are
satisfied in full, including any related foreclosure costs. In addition, a
mortgagee secured by a junior lien may not foreclose on the related mortgaged
property unless it forecloses subject to the related senior mortgage or
mortgages, in which case it must either pay the entire amount of each senior
mortgage to the applicable mortgagee at or prior to the foreclosure sale or
undertake the obligation to make payments on each senior mortgage in the event
of default thereunder. In servicing junior lien loans in its portfolio, it has
been the practice of the Master Servicer to satisfy each such senior mortgage at
or prior to the foreclosure sale only to the extent that it determines any
amounts so paid will be recoverable from future payments and collections on such
junior lien loans or otherwise. The Trusts will not have any source of funds to
satisfy any such senior mortgage or make payments due to any senior mortgagee.
See 'Certain Legal Aspects of Mortgage Loans and Related Matters--Foreclosure.'
Risk of Losses Associated with Declining Real Estate Values. An investment
in securities such as the Securities that generally represent beneficial
ownership interests in the Mortgage Loans or debt secured by such Mortgage Loans
may be affected by, among other things, a decline in real estate values and
changes in the borrowers' financial condition. No assurance can be given that
values of the Mortgaged Properties have remained or will remain at their levels
on the dates of origination of the related Mortgage Loans. If the residential
real estate market should experience an overall decline in property values such
that the outstanding balances of any senior liens, the Mortgage Loans and any
secondary financing on the Mortgaged Properties in a particular Mortgage Pool
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the nonconforming credit mortgage lending
industry. Such a decline could extinguish the interest of the related Trust in
the Mortgaged Properties before having any effect on the interest of the related
senior mortgagee. In addition, in the case of Mortgage Loans that are subject to
negative amortization, due to the addition to principal balance of deferred
interest ('Deferred Interest'), the principal balances of such Mortgage Loans
could be increased to an amount equal to or in excess of the value of the
underlying Mortgaged Properties, thereby increasing the likelihood of default.
To the extent that such losses are not covered by the applicable Credit
Enhancement, holders of Securities of the series evidencing interests in the
related Mortgage Pool will bear all risk of loss resulting from default by
Mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming Credit and
Non-Traditional Loans. The Sponsor's underwriting standards consider, among
other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the value of the property; however, the
Sponsor's Mortgage Loan program generally provides for the origination of
Mortgage Loans relating to non-conforming credits. For purposes hereof,
'non-conforming credit' means a mortgage loan which, based upon standard
underwriting guidelines, is ineligible for purchase by the Federal National
Mortgage Association ('FNMA') or the Federal Home Loan Mortgage Corporation
('FHLMC') due to credit characteristics that do not meet FNMA or FHLMC
guidelines, respectively. Certain of the types of loans that may be included in
the Mortgage Pools may involve additional uncertainties not present in
traditional types of loans. For example, certain of the Mortgage Loans may
provide for escalating or variable payments by the borrower under the Mortgage
Loan (the 'Mortgagor'), as to which the Mortgagor is generally qualified on the
basis of the initial payment amount. In some instances the Mortgagors' income
may not be sufficient to enable them to continue to make their loan payments as
such payments increase and thus the likelihood of default will increase. For a
more detailed discussion, see 'Mortgage Loan Program.'
Risk of Losses Associated with Balloon Loans. Certain of the Mortgage
Loans may constitute 'Balloon Loans.' Balloon Loans are originated with a stated
maturity of less than the period of time of the corresponding amortization
schedule. Consequently, upon the maturity of a Balloon Loan, the Mortgagor will
be required to make a 'balloon' payment that will be significantly larger than
such Mortgagor's previous monthly payments. The ability of such a Mortgagor to
repay a Balloon Loan at maturity frequently will depend on such borrower's
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ability to refinance the Mortgage Loan. The ability of a Mortgagor to refinance
such a Mortgage Loan will be affected by a number of factors, including the
level of available mortgage rates at the time, the value of the related
Mortgaged Property, the Mortgagor's equity in the related Mortgaged Property,
the financial condition of the Mortgagor, the tax laws and general economic
conditions at the time.
Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by Securityholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Sponsor,
the Originators, the Master Servicer, any Sub-Servicer or the Trustee will be
obligated to provide funds to refinance any Mortgage Loan, including Balloon
Loans.
Risk of Losses Associated with ARM Loans. ARM Loans may be underwritten on
the basis of an assessment that Mortgagors will have the ability to make
payments in higher amounts after relatively short periods of time. In some
instances, Mortgagors' income may not be sufficient to enable them to continue
to make their loan payments as such payments increase and thus the likelihood of
default will increase.
Risk of Losses Associated with Bankruptcy of Mortgagors. General economic
conditions have an impact on the ability of borrowers to repay Mortgage Loans.
Loss of earnings, illness and other similar factors also may lead to an increase
in delinquencies and bankruptcy filings by borrowers. In the event of personal
bankruptcy of a Mortgagor, it is possible that a Trust could experience a loss
with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan thereby either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Risk of Losses Associated with Mortgaged Properties. Even assuming that
the Mortgaged Properties provide adequate security for the Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans and corresponding delays in the receipt of related
proceeds by the Securityholders could occur. An action to foreclose on a
Mortgaged Property securing a Mortgage Loan is regulated by state statutes,
rules and judicial decisions 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
Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds
(net of expenses) ('Liquidation Proceeds') sufficient to repay all amounts due
on the related Mortgage Loan. The Master Servicer will be entitled to deduct
from Liquidation Proceeds all expenses reasonably incurred in attempting to
recover amounts due on the related liquidated Mortgage Loan ('Liquidated
Mortgage Loan') and not yet repaid, including payments to prior lienholders,
accrued Servicing Fees, legal fees and costs of legal action, real estate taxes,
and maintenance and preservation expenses. In the event that any Mortgaged
Properties fail to provide adequate security for the related Mortgage Loans and
insufficient funds are available from any applicable Credit Enhancement,
Securityholders could experience a loss on their investment.
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 takes 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 less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property that, prior to foreclosure,
has been involved in decisions or actions which may lead to contamination of a
property, may be liable for the costs of cleaning up the purportedly
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Pooling
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and Servicing Agreement, is not required to take an active role in operating the
Mortgaged Properties. See 'Certain Legal Aspects of Mortgage Loans and Related
Matters--Environmental Legislation.'
Certain of the Mortgaged Properties relating to Mortgage Loans may not be
owner occupied. It is possible that the rate of delinquencies, foreclosures and
losses on Mortgage Loans secured by nonowner occupied properties could be higher
than for loans secured by the primary residence of the borrower.
Litigation. Any material litigation relating to the Sponsor or the Master
Servicer will be specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans underlying certain series of Securities may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Information with respect to geographic
concentration of Mortgaged Properties will be specified in the related
Prospectus Supplement or related Current Report on Form 8-K.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing of
the Originators and the Master Servicer and Sub-Servicers. In addition, most
states have other laws, public policy and general principles of equity relating
to the protection of consumers, unfair and deceptive practices and practices
that may apply to the origination, servicing and collection of the Mortgage
Loans. Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the Master Servicer to collect all or part of the
principal of or interest on the Mortgage Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the Master
Servicer to damages and administrative sanctions. See 'Certain Legal Aspects of
Mortgage Loans and Related Matters.'
The Mortgage Loans may also be subject to federal laws, including: (i) the
Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity may limit the ability of the Master Servicer to collect all
or part of the principal of or interest on the Mortgage Loans, may entitle the
borrower to rescind the loan or to a refund of amounts previously paid and, in
addition, could subject the Master Servicer to damages and administrative
sanctions. If the Master Servicer is unable to collect all or part of the
principal or interest on the Mortgage Loans because of a violation of the
aforementioned laws, public policies or general principles of equity then the
Trust may be delayed or unable to repay all amounts owed to Investors.
Furthermore, depending upon whether damages and sanctions are assessed against
the Master Servicer or an Originator, such violations may materially impact the
financial ability of the Sponsor to continue to act as Master Servicer or the
ability of an Originator to repurchase or replace Mortgage Loans if such
violation breaches a representation or warranty contained in a Pooling and
Servicing Agreement.
Yield and Prepayment Considerations. The yield to maturity of the
Securities of each series will depend on the rate of payment of principal
(including prepayments, liquidations due to defaults, and repurchases due to
conversion of adjustable-rate mortgage loans ('ARM Loans') to fixed-rate loans
or breaches of representations and warranties) on the Mortgage Loans and the
price paid by Securityholders. Such yield may be adversely affected by a higher
or lower than anticipated rate of prepayments on the related Mortgage Loans. The
yield to maturity on Strip Securities or Securities purchased at premiums or
discounted to par will be extremely sensitive to the rate of prepayments on the
related Mortgage Loans. In addition, the yield to maturity on certain other
types of classes of Securities, including Accrual Securities or certain other
classes in a series including more than one class of Securities, may be
relatively more sensitive to the rate of prepayment on the related Mortgage
Loans than other classes of Securities.
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Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may be imposed in connection therewith. Unless so
specified in the related Prospectus Supplement, such penalties will not be
property of the related Trust. The rate of prepayments of the Mortgage Loans
cannot be predicted and is influenced by a wide variety of economic, social, and
other factors, including prevailing mortgage market in terest rates, the
availability of alternative financing, local and regional economic conditions
and homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that a Trust will experience.
Prepayments may result from mandatory prepayments relating to unused moneys
held in Pre-Funding Accounts, if any, voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
Mortgage Loan or Loans), sales of Mortgaged Properties subject to 'due-on-sale'
provisions and liquidations due to default, as well as the receipt of proceeds
from physical damage, credit life and disability insurance policies. In
addition, repurchases or purchases from a Trust of Mortgage Loans or
substitution adjustments required to be made under the Pooling and Servicing
Agreement will have the same effect on the Securityholders as a prepayment of
such Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, all of the Mortgage Loans contain 'due-on-sale' provisions, and the
Master Servicer will be required to enforce such provisions unless (i) the
'due-on-sale' clause, in the reasonable belief of the Master Servicer, is not
enforceable under applicable law or (ii) the Master Servicer reasonably believes
that to permit an assumption of the Mortgage Loan would not materially and
adversely affect the interests of the Securityholders or of the related Credit
Enhancer, if any. See 'The Pooling and Servicing Agreement' in the related
Prospectus Supplement.
Collections on the Mortgage Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of borrowers.
Book-Entry Registration. Issuance of the Securities in book-entry form may
reduce the liquidity of such Securities in the secondary trading market since
investors may be unwilling to purchase Securities for which they cannot obtain
definitive physical securities representing such Securityholders' interests,
except in certain circumstances described in the related Prospectus Supplement.
Since transactions in Securities will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ('Direct or Indirect Participants') and certain banks, the ability of a
Securityholder to pledge a 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 representing the
Securities.
Securityholders may experience some delay in their receipt of distributions
of interest on and principal of the Securities since distributions may be
required to be forwarded by the Trustee to DTC and, in such a case, DTC will be
required to credit such distributions to the accounts of its Participants which
thereafter will be required to credit them to the accounts of the applicable
class of Securityholders either directly or indirectly through Indirect
Participants. See 'Description of the Securities--Form of Securities.'
The Status of the Mortgage Loans in the Event of Bankruptcy of the Sponsor
or an Originator. In the event of the bankruptcy of the Sponsor or an
Originator at a time when it or any affiliate thereof holds an Equity Security,
a trustee in bankruptcy of the Sponsor, an Originator, or its creditors could
attempt to recharacterize the sale of the Mortgage Loans to the related Trust as
a borrowing by the Sponsor, the Originator or such affiliate with the result, if
such recharacterization is upheld, that the Securityholders would be deemed
creditors of the Sponsor, the Originator or such affiliate, secured by a pledge
of the Mortgage Loans. If such an attempt were successful, it could prevent
timely payments of amounts due to the Trust.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
'Relief Act'), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the
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lender. It is possible that such action 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 Mortgage Loans. In addition, the
Relief Act imposes limitations that would impair the ability of the Master
Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's period
of active duty status. Thus, in the event that such a Mortgage Loan goes into
default, there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property in a timely fashion.
Security Rating. The rating of Securities credit enhanced through external
Credit Enhancement such as a letter of credit, financial guaranty insurance
policy or mortgage pool insurance will depend primarily on the creditworthiness
of the issuer of such external Credit Enhancement device (a 'Credit Enhancer').
Any reduction in the rating assigned to the claims-paying ability of the related
Credit Enhancer below the rating initially given to the Securities would likely
result in a reduction in the rating of the Securities. See 'Ratings' in the
Prospectus Supplement.
THE TRUSTS
A Trust for any series of Securities will include the primary mortgage
assets ('Mortgage Assets') consisting of (A) a Mortgage Pool comprised of (i)
Single Family Loans, (ii) Multi-family Loans, (iii) Cooperative Loans, (iv)
Contracts, (v) Home Improvement Loans, or (vi) other loans or (B) certificates
of interest or participation in the items described in clause (A) or in pools of
such items, in each case, as specified in the related Prospectus Supplement,
together with payments in respect of such primary Mortgage Assets and certain
other accounts, obligations or agreements, in each case as specified in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
(i.e., the related Trust Estate) and will not be entitled to payments in respect
of the assets of any other related Trust Estate established by the Sponsor, the
Originators or any of their affiliates. If specified in the related Prospectus
Supplement, certain Securities will evidence the entire fractional undivided
ownership interest in the related Mortgage Loans held by the related Trust or
may represent debt secured by the related Mortgage Loans.
The following is a brief description of the Mortgage Assets expected to be
included in the related Trusts. If specific information respecting the primary
Mortgage Assets is not known at the time the related series of Securities
initially is offered, 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 Commission within fifteen days after the
initial issuance of such Securities (the 'Detailed Description'). A copy of the
Pooling and Servicing Agreement with respect to each Series of Securities will
be attached to the Form 8-K and will be available for inspection at the
corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Mortgage Assets relating to such Series (the
'Mortgage Asset Schedule') will be attached to the Pooling and Servicing
Agreement delivered to the Trustee upon delivery of the Securities.
The Mortgage Loans--General. The real properties and Manufactured Homes,
as the case may be, that secure repayment of the Mortgage Loans and Contracts
(the 'Mortgaged Properties') may be located in any one of the fifty states, the
District of Columbia, Puerto Rico or any other Territories of the United States.
Unless otherwise specified in the related Prospectus Supplement, the Mortgage
Loans or Contracts will be 'Conventional Loans' (i.e., loans that are not
insured or guaranteed by any governmental agency). If specified in the related
Prospectus Supplement, Mortgage Loans with certain loan-to-value ratios and/or
certain principal balances may be covered wholly or partially by primary
mortgage insurance policies. Unless otherwise specified in the related
Prospectus Supplement, all of the Mortgage Loans will be covered by standard
hazard insurance policies (which may be in the form of a blanket or forced
placed hazard insurance policy). The existence, extent and duration of any such
coverage will be described in the applicable Prospectus Supplement. Unless
otherwise described in the related Prospectus Supplement, the Mortgage Loans
will not be guaranteed or insured by any government agency or other insurer.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans in a Mortgage Pool will provide for payments to be made monthly
('monthly pay') or bi-weekly. The payment terms of the Mortgage Loans to be
included in a Trust will be described in the related Prospectus Supplement and
may
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include any of the following features or combination thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable Rate
(i.e., a rate that is adjustable from time to time in relation to an index,
a rate that is fixed for a period of time and under certain circumstances
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). The specified rate of interest on a Mortgage Loan is its 'Mortgage
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 Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. If provided for in the
Prospectus Supplement, certain Mortgage Loans may be subject to temporary
buydown plans ('Buydown Mortgage Loans') pursuant to which the monthly
payments made by the Mortgagor during the early years of the Mortgage Loan
(the 'Buydown Period') will be less than the scheduled monthly payments on
the Mortgage Loan, and the amount of any difference may be contributed from
(i) an amount (such amount, exclusive of investment earnings thereon, being
hereinafter referred to as 'Buydown Funds') funded by the originator of the
Mortgage Loan or another source (including the Master Servicer or the
related Originator and the builder of the Mortgaged Property) and placed in
a custodial account (the 'Buydown Account') and (ii) if the Buydown Funds
are contributed on a present value basis, investment earnings on such
Buydown Funds.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage 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
Mortgage Rate, or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity ('balloon payments'). Principal may include interest
that has been deferred and added to the principal balance of the Mortgage
Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time
('graduated payments') or may change from period to period. Mortgage 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. Mortgage Loans having graduated payment provisions may provide
for deferred payment of a portion of the interest due monthly during a
specified period, and recoup the deferred interest through negative
amortization during such period whereby the difference between the interest
paid during such period and interest accrued during such period is added
monthly to the outstanding principal balance. Other Mortgage Loans
sometimes referred to as 'growing equity' mortgage loans may provide for
periodic scheduled payment increases for a specified period with the full
amount of such increases being applied to principal.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Mortgage Loan or may decline over time,
and may be prohibited for the life of the Mortgage Loan or for certain
periods ('lockout periods'). Certain Mortgage Loans may permit prepayments
after expiration of the applicable lockout period and may require the
payment of a prepayment fee in connection therewith. Other Mortgage Loans
may permit prepayments without payment of a fee unless the prepayment
occurs during specified time periods. The Mortgage Loans may include
due-on-sale clauses which permit the mortgagee to demand payment of the
entire Mortgage Loan in connection with the sale or certain transfers of
the related Mortgaged Property. Other Mortgage Loans may be assumable by
persons meeting the then applicable underwriting standards of the related
Originator.
(e) As more fully described in the related Prospectus Supplement, the
Mortgage Loans may consist, in whole or in part, of revolving home equity
loans or certain balances thereof ('Revolving Credit Line Loans'). Interest
on each Revolving Credit Line Loan, excluding introductory rates offered
from time to time during promotional periods, may be computed and payable
monthly on the average daily outstanding principal balance of such loan.
From time to time prior to the expiration of the related draw period
specified in a Revolving Credit Line Loan, principal amounts on such
Revolving Credit Line Loan may be drawn down (up to a maximum amount as set
forth in the related Prospectus Supplement) or repaid. If specified in the
related Prospectus Supplement, new draws by borrowers under the Revolving
Credit Line Loans will
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automatically become part of the Trust Estate described in such Prospectus
Supplement. As a result, the aggregate balance of the Revolving Credit Line
Loans will fluctuate from day to day as new draws by borrowers are added to
the Trust Estate and principal payments are applied to such balances and
such amounts will usually differ each day, as more specifically described
in the related Prospectus Supplement. Under certain circumstances, under a
Revolving Credit Line Loan, a borrower may, during the related draw period,
choose an interest only payment option, during which the borrower is
obligated to pay only the amount of interest which accrues on the loan
during the billing cycle, and may also elect to pay all or a portion of the
principal. An interest only payment option may terminate at the end of the
related draw period, after which the borrower must begin paying at least a
minimum monthly portion of the average outstanding principal balance of the
loan.
Except as otherwise described in the related Prospectus Supplement or in
the related Current Report on Form 8-K, interest will be calculated on each
Mortgage Loan pursuant to one of three methods:
Date of Payment Loans. Date of Payment Loans provide that interest is
charged to the Mortgagor at the applicable Mortgage Rate on the outstanding
principal balance of such Note and calculated based on the number of days
elapsed between receipt of the Mortgagor's last payment through receipt of
the Mortgagor's most current payment. Such interest is deducted from the
Mortgagor's payment amount and the remainder, if any, of the payment is
applied as a reduction to the outstanding principal balance of such Note.
Although the Mortgagor is required to remit equal monthly payments on a
specified monthly payment date that would reduce the outstanding principal
balance of such Note to zero at such Note's maturity date, payments that
are made by the Mortgagor after the due date therefor would cause the
outstanding principal balance of such Note not to be reduced to zero. In
such a case, the Mortgagor would be required to make an additional
principal payment at the maturity date for such Note. On the other hand, if
a Mortgagor makes a payment (other than a prepayment) before the due date
therefor, the reduction in the outstanding principal balance of such Note
would occur over a shorter period of time than it would have occurred had
it been based on the original amortization schedule of such Note.
Actuarial Loans. Actuarial Loans provide that interest is charged to
the Mortgagor thereunder, and payments are due from such Mortgagor, as of a
scheduled day of each month which is fixed at the time of origination.
Scheduled monthly payments made by the Mortgagors on the Actuarial Loans
either earlier or later than the scheduled due dates thereof will not
affect the amortization schedule or the relative application of such
payments to principal and interest.
Rule of 78's Loans. A Rule of 78's Loan provides for the payment by
the related Mortgagor of a specified total amount of payments, payable in
equal monthly installments on each due date, which total represents the
principal amount financed and add-on interest in an amount calculated on
the basis of the stated Mortgage Rate for the term of the Loan. The rate at
which such amount of add-on interest is earned and, correspondingly, the
amount of each fixed monthly payment allocated to reduction of the
outstanding principal are calculated in accordance with the 'Rule of 78's.'
Under a Rule of 78's Loan, the amount of a payment allocable to interest is
determined by multiplying the total amount of add-on interest payable over
the term of the loan by a fraction derived as described below.
The fraction used in the calculation of add-on interest earned each month
under a Rule of 78's Loan has as its denominator a number equal to the sum of a
series of numbers. The series of numbers begins with one and ends with the
number of monthly payments due under the loan. For example, with a loan
providing for 12 payments, the denominator of each month's fraction will be 78,
the sum of the series of numbers from 1 to 12. The numerator of the fraction for
a given month is the number of original payments to stated maturity less the
number of payments made up to but not including the current month. Accordingly,
in the example of a twelve-month loan, the fraction for the first payment is,
for the second payment, for the third party, and so on through the final
payment, for which the fraction is. The applicable fraction is then multiplied
by the total add-on interest payable over the entire term of the loan, and the
resulting amount is the amount of add-on interest 'earned' that month. The
difference between the amount of the monthly payment by the obligor and the
amount of earned add-on interest calculated for the month is applied to
principal reduction. Rule of 78's Loans are non-level yield instruments. The
yield in the initial months of a Rule of 78's Loans is somewhat higher than the
stated Mortgage
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Rate (computed on an actuarial basis) and the yield in the later months of the
loan is somewhat less than such stated Mortgage Rate.
The Prospectus Supplement for each series of Securities or the Current
Report on Form 8-K will contain certain information with respect to the Mortgage
Loans (or a sample thereof) contained in the related Mortgage Pool; such
information, insofar as it may relate to statistical information relating to
such Mortgage Loans will be presented as of a date certain (the 'Statistic
Calculation Date') which may also be the related cut-off date (the 'Cut-Off
Date'). Such information will include to the extent applicable to the particular
Mortgage Pool (in all cases as of the Statistic Calculation Date) (i) the
aggregate outstanding principal balance and the average outstanding principal
balance of the Mortgage Loans, (ii) the largest principal balance and the
smallest principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Property securing the Mortgage Loans (e.g., one- to four-family
houses, vacation and second homes, Manufactured Homes, multifamily apartments or
other real property), (iv) the original terms to stated maturity of the Mortgage
Loans, (v) the weighted average remaining term to maturity of the Mortgage Loans
and the range of the remaining terms to maturity; (vi) the earliest origination
date and latest maturity date of any of the Mortgage Loans, (vii) the weighted
average CLTV and the range of CLTV's of the Mortgage Loans at origination,
(viii) the weighted average Mortgage Rate or annual percentage rate (as
determined under Regulation Z) (the 'APR') and ranges of Mortgage Rates or APRs
borne by the Mortgage Loans, (ix) in the case of Mortgage Loans having
adjustable rates, the weighted average of the adjustable rates and indices, if
any; (x) the aggregate outstanding principal balance, if any, of Buy-Down Loans
and Mortgage Loans having graduated payment provisions; (xi) the amount of any
mortgage pool insurance policy, special hazard insurance policy or bankruptcy
bond to be maintained with respect to such Mortgage Pool; (xii) a description of
any standard hazard insurance required to be maintained with respect to each
Mortgage Loan; (xiii) a description of any Credit Enhancement to be provided
with respect to all or any Mortgage Loans or the Mortgage Pool; and (xiv) the
geographical distribution of the Mortgage Loans on a state-by-state basis. In
addition, preliminary or more general information of the nature described above
may be provided in the Prospectus Supplement, and specific or final information
may be set forth in a Current Report on Form 8-K, together with the related
Pooling and Servicing Agreement, which will be filed with the Securities and
Exchange Commission and will be made available to holders of the related series
of Securities within fifteen days after the initial issuance of such Securities.
The loan-to-value ratio (the 'LTV') of a Mortgage Loan is equal to the
ratio (expressed as a percentage) of the original principal balance of such
Mortgage Loan to appraised value of the related Mortgaged Property (unless
otherwise disclosed in the related Prospectus Supplement or in the related
Current Report on Form 8-K, less the amount, if any, of the premium for any
credit life insurance) at the time of origination of the Mortgage Loan or, in
the case where the Mortgage represents a purchase money instrument, the lesser
of (a) the appraised value or (b) the purchase price. The combined loan-to-value
ratio (the 'CLTV') of a Mortgage Loan at any given time is the ratio, expressed
as a percentage, determined by dividing (x) the sum of the original principal
balance of such Mortgage Loan (unless otherwise disclosed in the related
Prospectus Supplement or in the related Current Report on Form 8-K, less the
amount, if any, of the premium for any credit life insurance) plus the then-
current principal balance of all mortgage loans (each, a 'Senior Lien') secured
by liens on the related Mortgaged Property having priorities senior to that of
the lien which secures such Mortgage Loan, by (y) the value of the related
Mortgaged Property, based upon the appraisal or valuation (which may in certain
instances include estimated increases in value as a result of certain home
improvements to be financed with the proceeds of such Mortgage Loan) made at the
time of origination of the Mortgage Loan. If the related Mortgagor will use the
proceeds of the Mortgage Loan to refinance an existing Mortgage Loan which is
being serviced directly or indirectly by the Master Servicer, the requirement of
an appraisal or other valuation at the time the new Mortgage Loan is made may be
waived. Unless otherwise specified in the related Prospectus Supplement, for
purposes of calculating the CLTV of a Contract relating to a new Manufactured
Home, the value of such Manufactured Home will be no greater than the sum of a
fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
'accessories' identified in the invoice (the 'Manufacturer's Invoice Price'),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit, and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. Unless otherwise specified herein or in the related Prospectus
Supplement, the value of a used Manufactured Home will be either (x) the
appraised value, and National Automobile Dealer's Association book value plus
prepaid taxes and hazard insurance premiums or
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(y) the sum of (i) the appraised value of the land to which the Manufactured
Home is attached and (ii) the appraised value of the Manufactured Home. The
appraised value of a Manufactured Home will be based upon the age and condition
of the manufactured housing unit and the quality and condition of the mobile
home park in which it is situated, if applicable.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans (plus any additional financing by other lenders
on the same Mortgaged Properties) in a particular Pool become equal to or
greater than the value of such Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the non-conforming credit mortgage lending industry. An overall
decline in the market value of residential real estate, the general condition of
a Mortgaged Property, or other factors, could adversely affect the values of the
Mortgaged Properties such that the outstanding balances of the Mortgage Loans,
together with any additional liens on the Mortgaged Properties, equal or exceed
the value of the Mortgaged Properties. Under such circumstances, the actual
rates of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the non-conforming credit mortgage lending industry.
Certain Mortgage Loans may be secured by junior liens ('Junior Lien Loans')
subordinate to the rights of the mortgagee under any related senior mortgage(s).
The proceeds from any liquidation, insurance or condemnation of Mortgaged
Properties relating to Junior Lien Loans in a Mortgage Pool will be available to
satisfy the principal balance of such Junior Lien Loans only to the extent that
the claims, if any, of all related senior mortgagees, including any related
foreclosure costs, are satisfied in full. In addition, the Master Servicer may
not foreclose on a Mortgaged Property relating to a Junior Lien Loan unless it
forecloses subject to the related senior mortgage or mortgages, in which case it
must either pay the entire amount of each senior mortgage to the applicable
mortgagee at or prior to the foreclosure sale or undertake the obligation to
make payments on each senior mortgage in the event of default thereunder.
Generally, in servicing Junior Lien Loans in its loan portfolios, it has been
the Master Servicer's practice to satisfy each senior mortgage at or prior to a
foreclosure sale only to the extent that it determines any amounts so paid will
be recoverable from future payments and collections on the Mortgage Loans or
otherwise. The Trusts will not have any source of funds to satisfy any such
senior mortgage or make payments due to any senior mortgagee. See 'Certain Legal
Aspects of Mortgage Loans and Related Matters--Foreclosure.'
Other factors affecting mortgagors' ability to repay Mortgage Loans include
excessive building resulting in an oversupply of housing stock or a decrease in
employment reducing the demand for units in an area; federal, state or local
regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness of the Mortgaged Properties. To the extent that losses
on the Mortgage Loans are not covered by Credit Enhancements, such losses will
be borne, at least in part, by the Securityholders of the related series.
The Sponsor will cause the Mortgage Loans comprising each Mortgage Pool to
be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Securities of the related series. The Master
Servicer will service the Mortgage Loans, either directly or through
Sub-Servicers, pursuant to the Pooling and Servicing Agreement and will receive
a fee for such services. See 'Mortgage Loan Program' and 'The Pooling and
Servicing Agreement.' With respect to Mortgage Loans serviced through a
Sub-Servicer, the Master Servicer will remain liable for its servicing
obligations under the related Pooling and Servicing Agreement as if the Master
Servicer alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Sponsor and the Originators with respect to a series of
Securities will be to provide (or, where the Sponsor or an Originator acquired a
Mortgage Loan from another originator, obtain from such originator) certain
representations and warranties concerning the Mortgage Loans and to assign to
the Trustee for such series of Securities the Sponsor's or Originator's rights
with respect to such representations and warranties. See 'The Pooling and
Servicing Agreement.' The obligations of the Master Servicer with respect to the
Mortgage Loans will consist principally of its contractual servicing obligations
under the related Pooling and Servicing Agreement (including its obligation to
enforce the obligations of the Sub-Servicers or Originators as more fully
described herein under 'Mortgage Loan Program--Qualifications of Originators'
and 'The Pooling and Servicing Agreement') and
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its obligation, as described in the related Prospectus Supplement, to make
certain cash advances in the event of delinquencies in payments on, or
prepayments received with respect to, the Mortgage Loans in the amounts
described herein under 'Description of the Securities--Advances.' The
obligations of a Master Servicer to make advances may be subject to limitations,
to the extent provided herein and in the related Prospectus Supplement.
Single Family and Cooperative Loans. Unless otherwise specified in the
Prospectus Supplement, single family loans will consist of mortgage loans, deeds
of trust or participation or other beneficial interests therein, secured by
first or junior liens on one- to four-family residential properties ('Single
Family Loans'). The Mortgaged Properties relating to Single Family Loans will
consist of detached or semi-detached one-family dwelling units, two- to
four-family dwelling units, townhouses, rowhouses, individual condominium units
in condominium developments, individual units in planned unit developments, and
certain mixed use and other dwelling units. Such Mortgaged Properties may
include owner-occupied (which includes vacation and second homes) and non-owner
occupied investment properties.
If so specified, the Single Family Loans may include loans or
participations therein secured by mortgages or deeds of trust on condominium
units in low- or high-rise condominium developments together with such
condominium units' appurtenant interests in the common elements of such
condominium developments. Unless otherwise specified, the Cooperative Loans will
be secured by security interests in or similar liens on stock, shares or
membership certificates issued by cooperatives and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in such cooperatives' buildings.
Multi-family Loans. Multi-family loans will consist of mortgage loans,
deeds of trust or participation or other beneficial interests therein, secured
by first or junior liens on rental apartment buildings or projects containing
five or more residential units ('Multi-family Loans').
Mortgaged Properties that secure Multi-family Loans may include high-rise,
mid-rise and garden apartments. Certain of the Multi-family Loans may be
secured by apartment buildings owned by Cooperatives. In such cases, the
Cooperative owns all the apartment units in the building and all common areas.
The Cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements that confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a Cooperative must make
a monthly payment to the Cooperative representing such tenant-stockholder's pro
rata share of the Cooperative's payments for its mortgage loan, real property
taxes, maintenance expenses and other capital or ordinary expenses. Those
payments are in addition to any payments of principal and interest the
tenant-stockholder must make on any loans to the tenant-stockholder secured by
its shares in the Cooperative. The Cooperative will be directly responsible for
building management and, in most cases, payment of real estate taxes and hazard
and liability insurance. A Cooperative's ability to meet debt service
obligations on a Multi-family Loan, as well as all other operating expenses,
will be dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the Cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
Home Improvement Loans. Unless otherwise specified in the Prospectus
Supplement, loans to make home improvements may be secured by first or junior
liens on conventional one- to four-family residential properties and
multi-family residential properties ('Home Improvement Loans'). Home Improvement
Loans may be conventional, or may be partially insured by the Federal Housing
Administration ('FHA') or another federal or state agency, as specified in the
related Prospectus Supplement. The loan proceeds from such Home Improvement
Loans are typically disbursed to an escrow agent which, according to guidelines
established by the Originators, releases such proceeds to the contractor upon
completion of the improvements or in draws as the work on the improvements
progresses. Costs incurred by the Mortgagor for loan origination including
origination points and appraisal, legal and title fees, are often included in
the amount financed. In addition, Home Improvement Loans generally provide
additional security to a first or junior mortgage loan because home improvements
typically retain or increase the value of a property.
Contracts. Contracts will consist of manufactured housing conditional
sales contracts and installment sales or loan agreements each secured by a
Manufactured Home ('Contracts'). Contracts may be conventional, insured
partially by the FHA or partially guaranteed by the Veterans Administration, as
specified in the related
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Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, each Contract will be fully amortizing and will bear interest at its
APR.
Unless otherwise specified in the related Prospectus Supplement, the
'Manufactured Homes' securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
'manufactured home' as 'a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter.'
The related Prospectus Supplement will specify for the Contracts contained
in the related Trust, among other things, the date of origination of the
Contracts; the Mortgage Rates or the APRs on the Contracts; the Contract
Loan-to-Value Ratios; the minimum and maximum outstanding principal balances as
of the Statistic Calculation Date and the average outstanding principal balance;
the outstanding principal balances of the Contracts included in the related
Trust; and the original maturities of the Contracts and the last maturity date
of any Contract.
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THE MORTGAGE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist primarily of (i) conventional Mortgage Loans, minus
any stripped portion of the interest payments due under the related Mortgage
Note that may have been retained by any Originator or broker ('Originator's
Retained Yield'), or any other interest retained by the Sponsor or any affiliate
of the Sponsor, evidenced by promissory notes (the 'Mortgage Notes') secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on single-family (i.e., one- to four-family) residential, multi-family
properties or mixed use properties, or (ii) certificates of interest or
participations in such Mortgage Notes. The Mortgaged Properties will consist
primarily of attached or detached one-family dwelling units, two- to four-family
dwelling units, condominiums, townhouses, row houses, individual units in
planned-unit developments and certain other dwelling units, mixed use properties
and the fee, leasehold or other interests in the underlying real property. The
Mortgaged Properties may be owner-occupied (which includes second and vacation
homes) and non-owner occupied investment properties. If specified in the related
Prospectus Supplement relating to a series of Securities, a Mortgage Pool may
contain cooperative apartment loans ('Cooperative Loans') evidenced by
promissory notes ('Cooperative Notes') secured by security interests in shares
issued by cooperatives and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
related buildings. As used herein, unless the context indicates otherwise,
'Mortgage Loans' include Cooperative Loans, 'Mortgaged Properties' include
shares in the related cooperative and the related proprietary leases or
occupancy agreements securing Cooperative Notes, 'Mortgage Notes' include
Cooperative Notes and 'Mortgages' include security agreements with respect to
Cooperative Notes.
Each Mortgage Loan will be selected by the Sponsor for inclusion in a
Mortgage Pool from among mortgage loans originated by one or more institutions
affiliated with the Sponsor (such affiliated institutions, the 'Affiliated
Originators'), or from banks, savings and loan associations, mortgage bankers,
mortgage brokers, investment banking firms, the RTC, the FDIC and other mortgage
loan originators or purchasers not affiliated with the Sponsor (such
unaffiliated institutions, the 'Unaffiliated Originators' and, collectively with
the Affiliated Originators, the 'Originators'), all as described below under
'Mortgage Loan Program.' The characteristics of the Mortgage Loans will be
described in the related Prospectus Supplement. Other mortgage loans available
for acquisition by a Trust may have characteristics that would make them
eligible for inclusion in a Mortgage Pool but may not be selected by the Sponsor
for inclusion in such Mortgage Pool.
Each Security will evidence an interest in only the related Mortgage Pool
and corresponding Trust Estate, and not in any other Mortgage Pool or any other
Trust Estate (except in those limited situations whereby certain collections on
any Mortgage Loans in a related Mortgage Pool in excess of amounts needed to pay
the related securities may be deposited in a common, master reserve account that
provides Credit Enhancement for more than one series of Securities).
THE MORTGAGE POOLS
Unless otherwise specified below or in the related Prospectus Supplement,
all of the Mortgage Loans in a Mortgage Pool will (i) have payments that are due
monthly or bi-weekly, (ii) be secured by Mortgaged Properties located in any of
the fifty states, the District of Columbia, Puerto Rico or any other Territories
of the United States and (iii) consist of one or more of the following types of
mortgage loans:
(1) Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans or otherwise
modified) providing for level monthly payments of principal and interest
and terms at origination or modification of generally not more than 30
years;
(2) ARM Loans having original or modified terms to maturity of
generally not more than 30 years with a related Mortgage Rate that adjusts
periodically, at the intervals described in the related Prospectus
Supplement (which may have adjustments in the amount of monthly payments at
periodic intervals) over the term of the mortgage loan to equal the sum of
a fixed percentage set forth in the related Mortgage Note (the
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'Note Margin') and an index (the 'Index') to be specified in the related
Prospectus Supplement, such as, by way of example: (i) U.S. Treasury
securities of a specified constant maturity, (ii) weekly auction average
investment yield of U.S. Treasury bills of specified maturities, (iii) the
daily Bank Prime Loan rate made available by the Federal Reserve Board or
as quoted by one or more specified lending institutions, (iv) the cost of
funds of member institutions for the Federal Home Loan Bank of San
Francisco, or (v) the interbank offered rates for U.S. dollar deposits in
the London Markets, each calculated as of a date prior to each scheduled
interest rate adjustment date that will be specified in the related
Prospectus Supplement. The related Prospectus Supplement will set forth the
relevant Index, and the related Prospectus Supplement or the related
Current Report on Form 8-K will indicate the highest, lowest and
weighted-average Note Margin with respect to the ARM Loans in the related
Mortgage Pool. If specified in the related Prospectus Supplement, an ARM
Loan may include a provision that allows the Mortgagor to convert the
adjustable Mortgage Rate to a fixed rate at some point during the term of
such ARM Loan subsequent to the initial payment date;
(3) Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of generally not more than 30 years with monthly
payments during the first year calculated on the basis of an assumed
interest rate that will be lower than the Mortgage Rate applicable to such
mortgage loan in subsequent years. Deferred Interest, if any, will be added
to the principal balance of such mortgage loans;
(4) Balloon mortgage loans ('Balloon Loans'), which are mortgage loans
having original or modified terms to maturity of generally 5 to 15 years as
described in the related Prospectus Supplement, which may have level
monthly payments of principal and interest based generally on a 10- to
30-year amortization schedule. The amount of the monthly payment may remain
constant until the maturity date, upon which date the full outstanding
principal balance on such Balloon Loan will be due and payable (such
amount, the 'Balloon Amount');
(5) Modified mortgage loans ('Modified Loans'), which are fixed or
adjustable-rate mortgage loans providing for terms at the time of
modification of generally not more than 30 years. Modified Loans may be
mortgage loans which have been consolidated and/or have had various terms
changed, mortgage loans which have been converted from adjustable rate
mortgage loans to fixed rate mortgage loans, or construction loans which
have been converted to permanent mortgage loans;
(6) Another type of mortgage loan described in the related Prospectus
Supplement; or
(7) As more fully described in the related Prospectus Supplement, the
Mortgage Loans may consist, in whole or in part, of Revolving Credit Line
Loans. Interest on each Revolving Credit Line Loan, excluding introductory
rates offered from time to time during promotional periods, may be computed
and payable monthly on the average daily outstanding principal balance of
such loan. From time to time prior to the expiration of the related draw
period specified in a Revolving Credit Line Loan, principal amounts on such
Revolving Credit Line Loan may be drawn down (up to a maximum amount as set
forth in the related Prospectus Supplement) or repaid. If specified in the
related Prospectus Supplement, new draws by borrowers under the Revolving
Credit Line Loans will automatically become part of the Trust Estate
described in such Prospectus Supplement. As a result, the aggregate balance
of the Revolving Credit Line Loans will fluctuate from day to day as new
draws by borrowers are added to the Trust Estate and principal payments are
applied to such balances and such amounts will usually differ each day, as
more specifically described in the related Prospectus Supplement. Under
certain circumstances, under a Revolving Credit Line Loan, a borrower may,
during the related draw period, choose an interest only payment option,
during which the borrower is obligated to pay only the amount of interest
which accrues on the loan during the billing cycle, and may also elect to
pay all or a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the borrower
must begin paying at least a minimum monthly portion of the average
outstanding principal balance of the loan.
If provided for in the related Prospectus Supplement, a Mortgage Pool may
contain either or both of the following types of mortgage loans (i) ARM Loans
which allow the Mortgagors to convert the adjustable rates on such Mortgage
Loans to a fixed rate at some point during the life of such Mortgage Loans and
(ii) fixed rate mortgage loans which allow the Mortgagors to convert the fixed
rates on such Mortgage Loans to an adjustable
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rate at some point during the life of such Mortgage Loans (each such Mortgage
Loan described in (i) and (ii) above, a 'Convertible Mortgage Loan').
If provided for in the related Prospectus Supplement, certain of the
Mortgage Loans may be Buydown Mortgage Loans pursuant to which the monthly
payments made by the Mortgagor during the Buydown Period will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) Buydown Funds funded by the Originator of the Mortgaged
Property or another source (including the Master Servicer or the related
Originator) and placed in the Buydown Account and (ii) if the Buydown Funds are
contributed on a present value basis, investment earnings on such Buydown Funds.
See 'Description of the Securities--Payments on Mortgage Loans; Deposits to
Distribution Account.' The terms of the Buydown Mortgage Loans, if such loans
are included in a Trust, will be as set forth in the related Prospectus
Supplement.
The Sponsor will cause the Mortgage Loans constituting each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement, for
the benefit of the holders of all of the Securities of a series. The Master
Servicer named in the related Prospectus Supplement will service the Mortgage
Loans, either directly or through other mortgage servicing institutions
(Sub-Servicers), pursuant to a Pooling and Servicing Agreement and will receive
a fee for such services. See 'Mortgage Loan Program' and 'Description of the
Securities.' With respect to those Mortgage Loans serviced by the Master
Servicer through a Sub-Servicer, the Master Servicer will remain liable for its
servicing obligations under the related Pooling and Servicing Agreement as if
the Master Servicer alone were servicing such Mortgage Loans, unless otherwise
described in the related Prospectus Supplement.
The Sponsor and/or certain Originators may make certain representations and
warranties regarding the Mortgage Loans, but its assignment of the Mortgage
Loans to the Trustee will be without recourse. See 'Description of the
Securities--Assignment of Mortgage Loans.' The Master Servicer's obligations
with respect to the Mortgage Loans will consist principally of its contractual
servicing obligations under the related Pooling and Servicing Agreement
(including its obligation to enforce certain purchase and other obligations of
Sub-Servicers and of Originators, as more fully described herein under 'Mortgage
Loan Program--Representations by Originators,' '--Sub-Servicing by Originators'
and 'Description of the Securities--Assignment of Mortgage Loans,' and its
obligation, if any, to make certain cash advances in the event of delinquencies
in payments on or with respect to the Mortgage Loans and interest shortfalls due
to prepayment of Mortgage Loans, in amounts described herein under 'Description
of the Securities--Advances'). The obligation of the Master Servicer to make
delinquency advances will be limited to amounts which the Master Servicer
believes ultimately would be reimbursable out of the proceeds of liquidation of
the Mortgage Loans. See 'Description of the Securities--Advances.'
MORTGAGE LOAN PROGRAM
As a general matter, the Sponsor's Mortgage Loan program will consist of
the origination and packaging of Mortgage Loans relating to non-conforming
credits. For purposes hereof, 'non-conforming credit' means a mortgage loan
which, based upon standard underwriting guidelines, is ineligible for purchase
by FNMA or FHLMC due to credit characteristics that do not meet FNMA or FHLMC
guidelines, respectively. However, certain of the Mortgage Loans will relate to
FNMA or FHLMC conforming credits.
The Mortgagors generally will have taken out the related Mortgage Loans for
one or more of four reasons: (i) to purchase the related Mortgaged Property,
(ii) to refinance an existing mortgage loan on more favorable terms, (iii) to
consolidate debt, or (iv) to obtain cash proceeds by borrowing against the
Mortgagor's equity in the related Mortgaged Property; the Mortgage Loans
described in (i) are commonly referred to as purchase money loans and the
Mortgage Loans described in (ii), (iii) and (iv) on the whole are commonly
referred to as home equity loans.
It is the Sponsor's practice to solicit existing Mortgagors with respect to
the possible refinancing of their existing Mortgages.
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UNDERWRITING GUIDELINES
As more fully described below under 'Qualifications of Originators' and as
may also be described in greater detail in the related Prospectus Supplement,
there are various types of Originators that may participate in the Sponsor's
Mortgage Loan Program. Under the Sponsor's Mortgage Loan Program, the Sponsor
purchases and originates Mortgage Loans pursuant to three types of underwriting
guidelines: (1) standard underwriting guidelines according to the Sponsor's
Originator Guide, as modified from time to time, used by Affiliated Originators
and Unaffiliated Originators ('Sponsor's Guidelines'), (2) underwriting
guidelines utilized by certain Unaffiliated Originators and approved by the
Sponsor ('Approved Guidelines'), and (3) underwriting guidelines ('Bulk
Guidelines') used by Unaffiliated Originators of portfolios of Mortgage Loans
subsequently purchased in whole or part by the Sponsor as bulk acquisitions
('Bulk Acquisitions'). The respective underwriting guidelines are described
below.
Sponsor's Guidelines. The Sponsor's Guidelines are set forth in the
Sponsor's Originator Guide. The Sponsor's Guidelines are revised continuously
based on opportunities and prevailing conditions in the nonconforming credit
residential mortgage market, as well as the expected market for the resulting
Securities.
Mortgage Loans originated by Affiliated Originators generally will, and
Mortgage Loans originated by Unaffiliated Originators may have been, originated
in accordance with the Sponsor's Guidelines as set forth in the Sponsor's
Originator Guide. However, certain of the Mortgage Loans may be employee or
preferred customer loans with respect to which, in accordance with such
Affiliate's mortgage loan programs, no income or asset verifications were
required. In addition, certain Originators may originate Mortgage Loans in
satisfaction of specified requirements of federal or state law applicable to
certain Originators, such as, by way of illustration, the federal Community
Reinvestment Act of 1977, which is applicable to banks; such Mortgage Loans
generally will not have been originated pursuant to the Sponsor's standard
underwriting guidelines applicable to nonconforming loans but may have been
originated pursuant to alternative guidelines applicable to such loans. The
Sponsor will not review any Affiliated Originator mortgage loans for conformity
with the Sponsor's Guidelines set forth in the Sponsor's Originator Guide. The
Sponsor generally will review or cause to be reviewed only a limited portion of
the Mortgage Loans in any delivery of Mortgage Loans from Unaffiliated
Originators for conformity with the Sponsor's Originator Guide.
The following is a brief description of the Sponsor's Guidelines set forth
in the Sponsor's Originator Guide customarily and currently employed by the
Sponsor. The Sponsor believes that these standards are consistent with those
generally used by lenders in the business of making mortgage loans based on
non-conforming credits. The underwriting process is intended to assess both the
prospective borrower's ability to repay and the adequacy of the real property as
collateral for the loan granted. The general appreciation in value of real
estate experienced in the past has been a factor in limiting the Master
Servicer's loss experience on its portfolio of one- to four-family residential
mortgage loans. However, the past pattern of appreciation in value of the real
property securing such loans has not continued, and a depreciation in value has
occurred and may continue to occur in some market areas, and may occur in
others.
The Sponsor's Guidelines permit the origination and purchase of mortgage
loans with multi-tiered credit characteristics tailored to individual credit
profiles. In general, the Sponsor's Guidelines require an analysis of the equity
in the collateral, the payment history of the borrower, the borrower's ability
to repay debt, the property type, and the characteristics of the underlying
first mortgage, if any. A lower maximum CLTV is required for lower gradations of
credit quality and higher property values.
The Sponsor's Guidelines permit the origination or purchase of fixed or
adjustable rate loans that either fully amortize over a period generally not to
exceed 30 years or, in the case of a balloon mortgage, generally amortize based
on a 30-year or less amortization schedule with a due date and a 'balloon'
payment due prior to the 30 year period.
The homes used for collateral to secure the loans may be either owner
occupied (which includes second and vacation homes) or non-owner occupied
investor properties which, in either case are single-family residences (which
may be detached, part of a two- to four-family dwelling, a condominium unit or a
unit in a planned unit development). The Sponsor's Guidelines require that the
CLTV of a Mortgage Loan generally not exceed 85%, after taking into account the
amount of any primary mortgage insurance applicable to such Mortgage Loan.
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If a senior mortgage exists, the lender may first review the senior
mortgage documentation. If it contains open end advance or negative amortization
provisions, the maximum potential senior mortgage balance may be used, although
for certain of the Sponsor's products the current balance may be used in
calculating the CLTV which determines the maximum loan amount. The Sponsor's
Guidelines do not permit the origination or purchase of loans where the senior
mortgage contains a provision pursuant to which the senior mortgagee may share
in any appreciation of the Mortgaged Property.
In most cases, the value of each property proposed as security for a
mortgage loan is required to be determined by a full appraisal. A limited
appraisal of a property, conducted on a drive-by basis, may be utilized. Two
full appraisals are generally required for properties valued over $500,000.
Appraisals are required to be completed by qualified professional
appraisers. The Sponsor evaluates the performance of appraisers and maintains a
current disapproved appraiser list.
The Sponsor's Guidelines have provided for the origination of loans under
three general loan programs: (i) a full verification program for salaried or
self-employed borrowers, (ii) a 'lite' documentation program for borrowers who
may have income which cannot be verified by traditional methods and (iii) a
non-income verification program for self-employed borrowers only. However, the
Sponsor's Guidelines allow for certain borrowers with existing loans to
refinance such loans with either limited, or no, verification of income. The
Sponsor may also purchase pools of loans which may include some loans originated
under a non-income verification program. For the Sponsor's full verification
process, each mortgage applicant is required to provide, and the Sponsor or its
designee is required to verify, personal financial information. The applicant's
total monthly obligations (including principal and interest on each mortgage,
tax assessments, other loans, charge accounts and all other scheduled
indebtedness) generally (in the absence of countervailing considerations, such
as a lower Combined Loan-to-Value Ratio or a price adjustment) should not exceed
the applicant's ability to pay. Applicants who are salaried employees must
provide current employment information in addition to recent employment history.
The Sponsor or its designee verify this information for salaried borrowers based
on written confirmation from employers or a combination of the most recent pay
stub, the most recent W-2 tax form and telephone confirmation from the employer.
Self-employed applicants are generally required to be self-employed in the same
field for a minimum of two years. The self-employed applicant is generally
required to provide personal and business financial statements and signed copies
of complete federal income tax returns (including schedules) filed for the most
recent two years. For the Sponsor's 'lite' documentation program the borrower
must establish proof of cash flow trends to support the borrower's income. Such
proof can include business bank statements or personal bank statements. For the
Sponsor's non-income verifier program, proof of two year's history of
self-employment plus proof of current self-employed status is required. The
applicant's debt-to-income ratio is calculated based on income as certified by
the borrower on the application and must be reasonable.
A credit report by an independent, nationally recognized credit reporting
agency is required reflecting the applicant's complete credit history. The
credit report should reflect all delinquencies of 30 days or more,
repossessions, judgments, foreclosures, garnishments, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records. Verification is required to be obtained of the senior mortgage balance,
if any, the status and whether local taxes, interest, insurance and assessments
are included in the applicant's monthly payment. All taxes and assessments not
included in the payment are required to be verified as current.
In connection with purchase-money loans, the Sponsor's Guidelines require
(x) (i) an acceptable source of downpayment funds, (ii) verification of the
source of the downpayment funds and (iii) adequate cash reserves or (y) adequate
equity in the collateral property.
Certain laws protect loan applicants by offering them a time frame after
loan documents are signed, termed the rescission period, during which the
applicant has the right to cancel the loan. The rescission period must have
expired prior to funding a loan and may not be waived by the applicant except as
permitted by law.
Unless otherwise disclosed in the related Prospectus Supplement, the
Sponsor's Guidelines generally require title insurance coverage issued by an
approved ALTA or CLTA title insurance company on each Mortgage Loan it
purchases. The Sponsor, the related Originator and/or their assignees generally
are named as the insured. Title
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insurance policies indicate the lien position of the mortgage loan and protect
the insured against loss if the title or lien position is not as indicated.
The applicant is required to secure property insurance in an amount
sufficient to cover the new loan and any prior mortgage. If the sum of the
outstanding first mortgage, if any, and the related mortgage loan exceeds
replacement value (the cost of rebuilding the subject property, which generally
does not include land value), insurance equal to replacement value may be
accepted. The Sponsor or its designee is required to ensure that its name and
address is properly added to the 'Mortgagee Clause' of the insurance policy. In
the event the Sponsor or the related Originator's name is added to a 'Loss Payee
Clause' and the policy does not provide for written notice of policy changes or
cancellation, an endorsement adding such provision is required.
Approved Guidelines. The Sponsor may cause a Trust to acquire Mortgage
Loans underwritten pursuant to underwriting guidelines that may differ from the
Sponsor's Guidelines as set forth in the Sponsor's Originator Guide. Certain of
the Mortgage Loans will be acquired in negotiated transactions, and such
negotiated transactions may be governed by agreements ('Master Commitments')
relating to ongoing acquisitions of Mortgage Loans by the Sponsor, from
Originators who will represent that the Mortgage Loans have been originated in
accordance with underwriting guidelines agreed to by the Sponsor. Certain other
Mortgage Loans will be acquired from Originators that will represent that the
Mortgage Loans were originated pursuant to underwriting guidelines determined by
a mortgage insurance company acceptable to the Sponsor. The Sponsor will accept
a certification from such insurance company as to a Mortgage Loan's insurability
in a mortgage pool as of the date of certification as evidence of a Mortgage
Loan conforming to applicable underwriting standards. Such certifications likely
will have been issued before the purchase of the Mortgage Loan by the Sponsor.
The Sponsor only will perform random quality assurance reviews on Mortgage Loans
delivered with such certifications.
The underwriting standards utilized in negotiated transactions and Master
Commitments and the underwriting standards of insurance companies may vary
substantially from the Sponsor's Guidelines. All of the underwriting guidelines
will provide an underwriter with information to evaluate either the security for
the related Mortgage Loan, which security consists primarily of the borrower's
repayment ability or the adequacy of the Mortgaged Property as collateral, or a
combination of both. Due to the variety of underwriting guidelines and review
procedures that may be applicable to the Mortgage Loans included in any Mortgage
Pool, the related Prospectus Supplement will not distinguish among the various
underwriting guidelines applicable to the Mortgage Loans nor describe any review
for compliance with applicable underwriting guidelines performed by the Sponsor.
Moreover, there can be no assurance that every Mortgage Loan was originated in
conformity with the Approved Guidelines in all material respects, or that the
quality or performance of Mortgage Loans underwritten pursuant to varying
guidelines as described above will be equivalent under all circumstances.
Bulk Guidelines. Bulk portfolios of Mortgage Loans may be originated by a
variety of Originators under several different underwriting guidelines. For bulk
portfolios which are seasoned for a period of time, the Sponsor's underwriting
review of bulk portfolios of Mortgage Loans focuses primarily on payment
histories and estimated current values based on estimated property appreciation
or depreciation and loan amortization. Mortgage Loans that conform to the
related Bulk Guidelines may not conform to the requirements of either the
Sponsor's Guidelines or the Approved Guidelines. For example, the Sponsor may
purchase Mortgage Loans in bulk portfolios with Combined Loan-to-Value Ratios in
excess of that required under the Sponsor's Guidelines, without title insurance,
or with nonconforming appraisal methods such as tax assessments. Bulk
Acquisition portfolios may be purchased servicing released or retained. If
servicing is retained, the Originator must meet certain minimum requirements, as
modified from time to time, by the Sponsor. The Sponsor generally will cause the
Mortgage Loans acquired in a Bulk Acquisition to be reunderwritten on a sample
basis. Such reunderwriting may be performed by the Sponsor, the Master Servicer
or by a third party acting at the direction of the Sponsor.
Quality Control. The Master Servicer maintains a quality control
department which generally reviews loans originated by Affiliated Originators.
The quality control department randomly selects a portion of the files for
underwriting review. The Sponsor or its Affiliated Originators also cause
appraisal reviews to be performed on a random sample of loan production.
A periodic report is distributed to senior management and the production
offices describing material exceptions to underwriting and appraisal guidelines,
legal and regulatory requirements and variances based on the
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reverification process. Appraisers demonstrating chronic errors, omissions or
large valuation errors are removed from the approved appraiser list. Training
programs, additional audits and performance evaluations for underwriting
personnel and management are influenced by the results of the quality control
review.
The Sponsor generally will cause Mortgage Loans acquired from Unaffiliated
Originators to be (i) reunderwritten for the purpose of determining whether such
Mortgage Loans were originated in accordance with the applicable underwriting
guidelines, (ii) reviewed to assess the accuracy of the appraised values, and
(iii) audited to determine the accuracy of the loan computer system as compared
to the loan files. Such process may consist of a review of all such Mortgage
Loans or may be performed on a sample basis. Such reunderwriting may be
performed by the Sponsor, the Master Servicer or a third party acting at the
direction of the Sponsor.
QUALIFICATIONS OF ORIGINATORS
Each Originator from which a Mortgage Loan is acquired will have been
accepted by the Sponsor for participation in the Sponsor's mortgage loan
program. Certain Unaffiliated Originators ('Conduit Participants') may be
qualified to enter into agreements to sell mortgage loans to the Sponsor
pursuant to Master Commitments which provide for the periodic purchase and sale
of loans meeting certain specified requirements.
Loans acquired from Unaffiliated Originators other than Conduit
Participants will be acquired on a 'spot' basis, or in connection with a Bulk
Acquisition. Unless otherwise described in the related Prospectus Supplement
with respect to certain specified Unaffiliated Originators (in which case any
remedies for breach will lie only against such Unaffiliated Originator), the
Sponsor will make directly, or will guarantee compliance with, any
representations and warranties made by any Unaffiliated Originator, with respect
to the Mortgage Loans originated by it and acquired by a Trust.
All Conduit Participants must have received a satisfactory review by the
Sponsor of its operating procedures. All Unaffiliated Originators will have
delinquency and foreclosure rates monitored and maintained at levels acceptable
to the Sponsor. All Unaffiliated Originators are required to originate mortgage
loans in accordance with the applicable underwriting standards. However, with
respect to any Originator, some of the generally applicable underwriting
standards described herein and in the Sponsor's Originator Guide may be modified
or waived with respect to certain Mortgage Loans originated by such Originators.
The Resolution Trust Corporation (the 'RTC') or the Federal Deposit
Insurance Corporation (the 'FDIC') (either in their respective corporate
capacities or as receiver or conservator for a depository institution) may also
be an Originator of the Mortgage Loans. The RTC and the FDIC are together
referred to as the 'Federal Corporations'. The RTC was established pursuant to
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
('FIRREA'), which was enacted in response to the financial crisis of the thrift
industry and the Federal Savings and Loan Insurance Corporation. The purpose of
FIRREA is to restore the public's confidence in the savings and loan industry in
order to ensure a viable system of affordable housing finance as well as to
improve the supervision of savings associations and promote the independence of
the FDIC. The FDIC is an independent executive agency originally established by
the Banking Act of 1933 to insure the deposits of all banks entitled to federal
deposit insurance under the Federal Reserve Act and Federal Deposit Insurance
Act. The FDIC administers the system of nationwide deposit insurance (mutual
guaranty of deposits) for United States Banks and, together with the United
States Comptroller of the Currency, regulates in areas related to the
maintenance of reserves for certain types of deposits, the maintenance of
certain financial ratios, transactions with affiliates and a broad range of
other banking practices.
The Sponsor monitors the Originators and the Sub-Servicers under the
control of a Federal Corporation, as well as those Originators and Sub-Servicers
that are insolvent or in receivership or conservatorship or otherwise
financially distressed. Such Originators may not be able or permitted to
repurchase Mortgage Loans for which there has been a breach of representation
and warranty. Moreover, any such Originator may make no representations and
warranties with respect to Mortgage Loans sold by it. The Federal Corporations
(either in their respective corporate capacities or as receiver for a depository
institution) may also originate Mortgage Loans, in which event neither the
related Federal Corporation nor the depository institution for which such
Federal Corporation is acting as receiver may make representations and
warranties with respect to the Mortgage Loans that such Federal Corporation
sells, or such Federal Corporation may make only limited representations and
warranties (for example, that the related legal documents are enforceable). A
Federal Corporation may have
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no obligation to repurchase any Mortgage Loan for a breach of a representation
and warranty. If as a result of a breach of representation and warranty an
Originator is required to repurchase a Mortgage Loan but is not permitted or
otherwise fails to do so or if representations and warranties are not made by an
Originator, to the extent that neither the Sponsor nor any other entity has
assumed the representations and warranties or made representations and
warranties, neither the Sponsor nor that entity will be required to repurchase
such Mortgage Loan and, consequently such Mortgage Loan will remain in the
related Mortgage Pool and any related losses will be borne by the
Securityholders or by the related Credit Enhancement, if any. In addition, loans
which are purchased either directly or indirectly from a Federal Corporation may
be subject to a contract right of such Federal Corporation to repurchase such
loans under certain limited circumstances.
SUB-SERVICERS
Each Originator of a Mortgage Loan will act as Sub-Servicer for such
Mortgage Loan pursuant to an agreement between the Master Servicer and the
Sub-Servicer (a 'Sub-Servicing Agreement') unless the servicing obligations are
released to the Master Servicer or transferred to a servicer approved by the
Master Servicer. An Affiliated Originator of a Mortgage Loan may act as the
Sub-Servicer for such Mortgage Loan unless the other related servicing
obligations are released or transferred. An Unaffiliated Originator acting as a
Sub-Servicer for the Mortgage Loans will be required to meet certain additional
standards with respect to its mortgage loan servicing portfolio, GAAP tangible
net worth and other specified qualifications.
REPRESENTATIONS BY ORIGINATORS
Unless otherwise specified in the related Prospectus Supplement, each
Originator will have made representations and warranties in respect of the
Mortgage Loans sold by such Originator and evidenced by a series of Securities.
Such representations and warranties generally include, among other things, that
at the time of the sale by the Originator to the Sponsor of each Mortgage Loan:
(i) the information with respect to each Mortgage Loan set forth in the
Schedules of Mortgage Loans is true and correct as of the related Cut-Off Date;
(ii) each Mortgage Loan being transferred to the Trust which is a REMIC is a
qualified mortgage under the REMIC provisions of the Code and is a Mortgage;
(iii) each Mortgaged Property is improved by a single (one- to four-) family
residential dwelling or a multi-family structure, which may include condominiums
and townhouses; (iv) each Mortgage Loan had, at the time of origination, either
an attorney's certification of title or a title search or title policy; (v) as
of the related Cut-Off Date each Mortgage Loan is secured by a valid and
subsisting lien of record on the Mortgaged Property having the priority
indicated on the related Schedule of Mortgage Loans subject in all cases to
exceptions to title set forth in the title insurance policy, if any, with
respect to the related Mortgage Loan; (vi) each Originator held good and
indefeasible title to, and was the sole owner of, each Mortgage Loan conveyed by
such Originator; and (vii) each Mortgage Loan was originated in accordance with
law and is the valid, legal and binding obligation of the related Mortgagor.
Unless otherwise described in the related Prospectus Supplement, all of the
representations and warranties of an Originator in respect of a Mortgage Loan
will be made as of the date on which such Originator sells the Mortgage Loan to
the Sponsor; the date as of which such representations and warranties are made
thus may be a date prior to the date of the issuance of the related series of
Securities. A substantial period of time may elapse between the date as of which
the representations and warranties are made and the later date of issuance of
the related series of Securities.
The Sponsor will assign to the Trustee for the benefit of the holders of
the related series of Securities all of its right, title and interest in each
agreement by which it acquires a Mortgage Loan from an Originator insofar as
such agreement relates to the representations and warranties made by an
Originator in respect of such Mortgage Loan and any remedies provided for breach
of such representations and warranties. If an Originator cannot cure a breach of
any representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Securityholders in such
Mortgage Loan within a time period specified in the related Pooling and
Servicing Agreement, such Originator and/or the Sponsor will be obligated to
purchase from the related Trust such Mortgage Loan at a price (the 'Loan
Purchase Price') set forth in the related Pooling and Servicing Agreement which
Loan Purchase Price will be equal to the principal balance thereof as of the
date of purchase plus one month's interest at the Mortgage Rate less the amount,
expressed as a percentage per annum, payable in respect of master servicing
compensation or subservicing compensation, as applicable, and the
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Originator's Retained Yield, if any, together with, without duplication, the
aggregate amount of all delinquent interest, if any.
Unless otherwise specified in the related Prospectus Supplement, as to any
such Mortgage Loan required to be purchased by an Originator and/or the Sponsor,
as provided above, rather than repurchase the Mortgage Loan, the Master Servicer
may, at its sole option, remove such Mortgage Loan (a 'Deleted Mortgage Loan')
from the related Trust and cause the Sponsor to substitute in its place another
Mortgage Loan of like kind (a 'Qualified Replacement Mortgage' as such term is
defined in the related Pooling and Servicing Agreement). With respect to a Trust
for which a REMIC election is to be made, except as otherwise provided in the
Prospectus Supplement relating to a series of Securities, such substitution of a
defective Mortgage Loan must be effected within two years of the date of the
initial issuance of the Securities, and may not be made if such substitution
would cause the Trust to not qualify as a REMIC or result in a prohibited
transaction tax under the Code. Unless otherwise specified in the related
Prospectus Supplement or Pooling and Servicing Agreement, an Unaffiliated
Originator generally will have no option to substitute for a Mortgage Loan that
it is obligated to repurchase in connection with a breach of a representation
and warranty.
The Master Servicer will be required under the applicable Pooling and
Servicing Agreement to enforce such purchase or substitution obligations for the
benefit of the Trustee and the Securityholders, following the practices it would
employ in its good faith business judgment if it were the owner of such Mortgage
Loan; provided, however, that this purchase or substitution obligation will in
no event become an obligation of the Master Servicer in the event the Originator
fails to honor such obligation. If the Originator fails to repurchase or
substitute a loan and no breach of the Sponsor's representations has occurred,
the Originator's purchase obligation will in no event become an obligation of
the Sponsor. Unless otherwise specified in the related Prospectus Supplement,
the foregoing will constitute the sole remedy available to Securityholders or
the Trustee for a breach of representation by an Originator in its capacity as a
seller of Mortgage Loans to the Sponsor.
Unless otherwise described in the related Prospectus Supplement with
respect to certain Unaffiliated Originators (in which case any remedies for
breach will lie only against such Unaffiliated Originator), the Sponsor will
make directly, or will guarantee compliance with, any representations and
warranties made by any Unaffiliated Originator with respect to the Mortgage
Loans originated or purchased by it and acquired by a Trust.
Notwithstanding the foregoing with respect to any Originator that requests
the Master Servicer's consent to the transfer of sub-servicing rights relating
to any Mortgage Loans to a successor servicer, the Master Servicer may release
such Originator from liability, under its representations and warranties
described above, upon the assumption by such successor servicer of the
Originator's liability for such representations and warranties as of the date
they were made. In that event, the Master Servicer's rights under the instrument
by which such successor servicer assumes the Originator's liability will be
assigned to the Trustee, and such successor servicer shall be deemed to be the
'Originator' for purposes of the foregoing provisions.
SUB-SERVICING BY ORIGINATORS
Each Originator of a Mortgage Loan will act as the Sub-Servicer for such
Mortgage Loan pursuant to a Sub-Servicing Agreement unless servicing is released
to the Master Servicer or has been transferred to a servicer approved by the
Master Servicer. The Master Servicer may, in turn, assign such sub-servicing to
designated sub-servicers that will be qualified Originators and may include
affiliates of the Sponsor. While such a Sub-Servicing Agreement will be a
contract solely between the Master Servicer and the Sub-Servicer, the Pooling
and Servicing Agreement pursuant to which a series of Securities is issued will
provide that, if for any reason the Master Servicer for such series of
Securities is no longer the master servicer of the related Mortgage Loans, the
Trustee or any successor Master Servicer must recognize the Sub-Servicer's
rights and obligations under such Sub-Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, with the
approval of the Master Servicer, a Sub-Servicer may delegate its servicing
obligations to third-party servicers, but such Sub-Servicer will remain
obligated under the related Sub-Servicing Agreement. Each Sub-Servicer will be
required to perform the customary functions of a servicer, including collection
of payments from Mortgagors and remittance of such collections to the Master
Servicer; maintenance of hazard insurance and filing and settlement of claims
thereunder, subject in certain cases to the right of the Master Servicer to
approve in advance any such settlement;
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maintenance of escrow or impound accounts of Mortgagors for payment of taxes,
insurance and other items required to be paid by the Mortgagor pursuant to the
Mortgage Loan; processing of assumptions or substitutions; attempting to cure
delinquencies; supervising foreclosures; inspecting and managing Mortgaged
Properties under certain circumstances; and maintaining accounting records
relating to the Mortgage Loans. A Sub-Servicer also may be obligated to make
advances to the Master Servicer in respect of delinquent installments of
principal and/or interest (net of any sub-servicing or other compensation) on
Mortgage Loans, as described more fully under 'Description of the
Securities--Advances,' and in respect of certain taxes and insurance premiums
not paid on a timely basis by Mortgagors. A Sub-Servicer may also be obligated
to deposit amounts in respect of Compensating Interest to the related Principal
and Interest Account in connection with prepayments of principal received and
applied to reduce the outstanding principal balance of a Mortgage Loan. No
assurance can be given that the Sub-Servicers will carry out their advance or
payment obligations, if any, with respect to the Mortgage Loans. Unless
otherwise specified in the related Prospectus Supplement, a Sub-Servicer may
transfer its servicing obligations to another entity that has been approved for
participation in the Sponsor's loan purchase programs, but only with the prior
written approval of the Master Servicer.
As compensation for its servicing duties, the Sub-Servicer may be entitled
to a Base Servicing Fee. The Sub-Servicer may also be entitled to collect and
retain, as part of its servicing compensation, any late charges or prepayment
penalties provided in the Mortgage Note or related instruments. The Sub-Servicer
will be entitled to reimbursement for certain expenditures that it makes,
generally to the same extent that the Master Servicer would be reimbursed under
the applicable Pooling and Servicing Agreement. See 'The Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses;
Originator's Retained Yield.'
Each Sub-Servicer will be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer is required to maintain a fidelity bond and an
errors and omission policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan pursuant
to the terms of the Sub-Servicing Agreement for the entire term of such Mortgage
Loan, unless the Sub-Servicing Agreement is terminated earlier by the Master
Servicer or unless servicing is released to the Master Servicer. The Master
Servicer generally may terminate a Sub-Servicing Agreement immediately upon the
giving of notice upon certain stated events, including the violation of such
Sub-Servicing Agreement by the Sub-Servicer, or following a specified period
after notice to the Sub-Servicer without cause upon payment of an amount equal
to a specified termination fee calculated as a specified percentage of the
aggregate outstanding principal balance of all mortgage loans, including the
Mortgage Loans serviced by such Sub-Servicer pursuant to a Sub-Servicing
Agreement and certain transfer fees.
The Master Servicer may agree with a Sub-Servicer to amend a Sub-Servicing
Agreement. Upon termination of a Sub-Servicing Agreement, the Master Servicer
may act as servicer of the related Mortgage Loans or enter into one or more new
Sub-Servicing Agreements. If the Master Servicer acts as servicer, it will not
assume liability for the representations and warranties of the Sub-Servicer that
it replaces. If the Master Servicer enters into a new Sub-Servicing Agreement,
each new Sub-Servicer either must be an Originator, meet the standards for
becoming an Originator or have such servicing experience that is otherwise
satisfactory to the Master Servicer. The Master Servicer may make reasonable
efforts to have the new Sub-Servicer assume liability for the representations
and warranties of the terminated Sub-Servicer, but no assurance can be given
that such an assumption will occur and, in any event, if the new Sub-Servicer is
an affiliate of the Master Servicer, the liability for such representations and
warranties will not be assumed by such new Sub-Servicer. In the event of such an
assumption, the Master Servicer may in the exercise of its business judgment
release the terminated Sub-Servicer from liability in respect of such
representations and warranties. Any amendments to a Sub-Servicing Agreement or
to a new Sub-Servicing Agreement may contain provisions different from those
described above that are in effect in the original Sub-Servicing Agreements.
However, the Pooling and Servicing Agreement for each Trust Estate will provide
that any such amendment or new agreement may not be inconsistent with such
Pooling and Servicing Agreement to the extent that it would materially and
adversely affect the interests of the Securityholders.
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DESCRIPTION OF THE SECURITIES
GENERAL
The Securities will be issued in series. Each series of Securities (or, in
certain instances, two or more series of Securities) will be issued pursuant to
a Pooling and Servicing Agreement. The following summaries (together with
additional summaries under 'The Pooling and Servicing Agreement' below) describe
all material terms and provisions relating to the Securities common to each
Pooling and Servicing Agreement. The summaries do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, all of the
provisions of the Pooling and Servicing Agreement for the related Trust and the
related Prospectus Supplement.
The Securities will consist of two basic types: (i) Securities of the
fixed-income type ('Fixed-Income Securities') and (ii) Securities of the equity
participation type ('Equity Securities'). No Class of Equity Securities will be
offered pursuant to this Prospectus or any Prospectus Supplement related hereto.
Fixed-Income Securities generally will be styled as debt instruments, having a
principal balance and a specified interest rate ('Interest Rate'). Fixed-Income
Securities may be either beneficial ownership interests in the related Mortgage
Loans held by the related Trust, or may represent debt secured by such Mortgage
Loans. Each series or class of Fixed-Income Securities may have a different
Interest Rate, which may be a fixed, variable or adjustable Interest Rate. The
related Prospectus Supplement will specify the Interest Rate for each series or
class of Fixed-Income Securities, or the initial Interest Rate and the method
for determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities ('Strip
Securities') entitled to (i) principal distributions, with disproportionate,
nominal or no interest distributions, or (ii) interest distributions, with
disproportionate, nominal or no principal distributions. In addition, a series
may include two or more classes of Fixed-Income Securities that differ as to
timing, sequential order, priority of payment, Interest Rate or amount of
distributions of principal or interest or both, or as to which distributions of
principal or interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula, or on the basis of
collections from designated portions of the related Mortgage Pool, which series
may include one or more classes of Fixed-Income Securities ('Accrual
Securities'), as to which certain accrued interest will not be distributed but
rather will be added to the principal balance (or nominal principal balance in
the case of Accrual Securities which are also Strip Securities) thereof on each
Payment Date, as hereinafter defined and in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series of Securities
may include one or more classes of Fixed-Income Securities (collectively, the
'Senior Securities') that are senior to one or more classes of Fixed-Income
Securities (collectively, the 'Subordinate Securities') in respect of certain
distributions of principal and interest and allocations of losses on Mortgage
Loans. In addition, certain classes of Senior (or Subordinate) Securities may be
senior to other classes of Senior (or Subordinate) Securities in respect of such
distributions or losses.
Equity Securities will represent the right to receive the proceeds of the
related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior Securities
and Subordinate Securities), and following any required deposits to any reserve
account that may be established for the benefit of the Fixed-Income Securities.
Equity Securities may constitute what are commonly referred to as the 'residual
interest,' 'seller's interest' or the 'general partnership interest,' depending
upon the treatment of the related Trust for federal income tax purposes. As
distinguished from the Fixed-Income Securities, the Equity Securities will not
be styled as having principal and interest components. Any losses suffered by
the related Trust first will be absorbed by the related class of Equity
Securities, as described herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered pursuant to this Prospectus
or any Prospectus Supplement related hereto. Equity Securities may be offered on
a private placement basis or pursuant to a separate Registration Statement to be
filed by the Sponsor. In addition, the Sponsor and its affiliates may initially
or permanently hold any Equity Securities issued by any Trust.
General Payment Terms of Securities. As provided in the related Pooling
and Servicing Agreement and as described in the related Prospectus Supplement,
Securityholders will be entitled to receive payments on their
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Securities on specified dates ('Payment Dates'). Payment Dates with respect to
Fixed-Income Securities will occur monthly, quarterly or semi-annually, as
described in the related Prospectus Supplement; Payment Dates with respect to
Equity Securities will occur as described in the related Prospectus Supplement.
The related Prospectus Supplement will describe a date (the 'Record Date')
preceding such Payment Date, as of which the Trustee or its paying agent will
fix the identity of the Securityholders for the purpose of receiving payments on
the next succeeding Payment Date. Unless otherwise described in the related
Prospectus Supplement, the Payment Date will be the twenty-fifth day of each
month (or, in the case of quarterly-pay Securities, the twenty-fifth day of
every third month; and, in the case of semi-annually-pay Securities, the twenty-
fifth day of every sixth month) and the Record Date will be the close of
business as of the last day of the calendar month which precedes such Payment
Date.
The related Prospectus Supplement and the Pooling and Servicing Agreement
will describe a period (a 'Remittance Period') antecedent to each Payment Date
(for example, in the case of monthly-pay Securities, the calendar month
preceding the month in which a Payment Date occurs or such other specified
period). Unless otherwise provided in the related Prospectus Supplement,
collections received on or with respect to the related Mortgage Loans during a
Remittance Period will be required to be remitted by the Master Servicer to the
related Trustee prior to the related Payment Date and will be used to distribute
payments to Securityholders on such Payment Date. As may be described in the
related Prospectus Supplement, the related Pooling and Servicing Agreement may
provide that all or a portion of the principal collected on or with respect to
the related Mortgage Loans may be applied by the related Trustee to the
acquisition of additional Mortgage Loans during a specified period (rather than
used to distribute payments of principal to Securityholders during such period)
with the result that the related securities possess an interest-only period,
also commonly referred to as a revolving period, which will be followed by an
amortization period. Any such interest-only or revolving period may, upon the
occurrence of certain events to be described in the related Prospectus
Supplement, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to distribute payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Unless otherwise specified in the related Prospectus Supplement, neither
the Securities nor the underlying Mortgage Loans will be guaranteed or insured
by any governmental agency or instrumentality or the Sponsor, the Master
Servicer, any Sub-Servicer, any Originator or any of their affiliates.
Unless otherwise specified in the Prospectus Supplement with respect to a
series, Securities of each series covered by a particular Pooling and Servicing
Agreement will evidence specified beneficial ownership interest in a separate
Trust Estate created pursuant to such Pooling and Servicing Agreement. A Trust
Estate will consist of, to the extent provided in the Pooling and Servicing
Agreement: (i) a pool of Mortgage Loans (and the related mortgage documents) or
certificates of interest or participations therein underlying a particular
series of Securities as from time to time are subject to the Pooling and
Servicing Agreement, exclusive of, if specified in the related Prospectus
Supplement, any Originator's Retained Yield or other interest retained by the
related Originator, the Sponsor or any of its affiliates with respect to each
such Mortgage Loan; (ii) certain other assets including, without limitation,
payments and collections in respect of the Mortgage Loans due, accrued or
received, as described in the related Prospectus Supplement, on and after the
related Cut-Off Date, as from time to time are identified as deposited in
respect thereof in the Principal and Interest Account and in the related
Distribution Account; (iii) property acquired by foreclosure of the Mortgage
Loans or deed in lieu of foreclosure; (iv) hazard insurance policies and primary
insurance policies, if any, and certain proceeds thereof; and (v) any
combination, as specified in the related Prospectus Supplement, of a letter of
credit, financial guaranty insurance
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policy, purchase obligation, mortgage pool insurance policy, special hazard
insurance policy, bankruptcy bond, reserve fund or other type of Credit
Enhancement as described under 'Description of Credit Enhancement.' To the
extent that any Trust Estate includes certificates of interest or participations
in Mortgage Loans, the related Prospectus Supplement will describe the material
terms and conditions of such certificates or participations.
FORM OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the
Securities of each series will be issued as physical certificates ('Physical
Certificates') in fully registered form only in the denominations specified in
the related Prospectus Supplement, and will be transferable and exchangeable at
the corporate trust office of the registrar of the Securities (the 'Security
Registrar') named in the related Prospectus Supplement. No service charge will
be made for any registration of exchange or transfer of Securities, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
If so specified in the related Prospectus Supplement, specified classes of
a series of Securities will be issued in uncertificated book-entry form
('Book-Entry Securities'), and will be registered in the name of Cede, the
nominee of DTC. DTC is a limited purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a 'clearing
corporation' within the meaning of the Uniform Commercial Code ('UCC') and a
'clearing agency' registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ('Participants') and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is available
to others such as brokers, dealers, banks and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ('Indirect Participant').
Under a book-entry format, Securityholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Securities registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Securityholders will receive all distributions of principal of and interest on
the Securities from the Trustee through DTC and its Participants. Under a
book-entry format, Securityholders will receive payments after the related
Payment Date because, while payments are required to be forwarded to Cede, as
nominee for DTC, on each such date, DTC will forward such payments to its
Participants, which thereafter will be required to forward such payments to
Indirect Participants or Securityholders. Unless and until Physical Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Pooling and Servicing
Agreement. The beneficial holders of such Securities will only be permitted to
exercise the rights of Securityholders under the Pooling and Servicing Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Securities and is required to
receive and transmit payments of principal of and interest on the Securities.
Participants and Indirect Participants with which Securityholders have accounts
with respect to their Securities similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Securityholders. Accordingly, although Securityholders will not possess
Securities, the rules provide a mechanism by which Securityholders will receive
distributions and will be able to transfer their interests.
Unless and until Physical Certificates are issued, Securityholders who are
not Participants may transfer ownership of Securities only through Participants
by instructing such Participants to transfer Securities, by book-entry transfer,
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Securities
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the respective Participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Securityholders.
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Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a Physical Certificate for such
Securities.
DTC in general advises that it will take any action permitted to be taken
by a Securityholder under a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account with DTC the related
Securities are credited. Additionally, DTC in general advises that it will take
such actions with respect to specified percentages of the Securityholders only
at the direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Securities that satisfy such specified
percentages. DTC may take conflicting actions with respect to other current
principal amounts of outstanding Securities to the extent that such actions are
taken on behalf of Participants whose holdings include such current principal
amounts of outstanding Securities.
Any Securities initially registered in the name of Cede, as nominee of DTC,
will be issued in fully registered, certificated form to Securityholders or
their nominees ('Physical Certificates'), rather than to DTC or its nominee only
under the events specified in the related Pooling and Servicing Agreement and
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related Pooling and Servicing Agreement and the
Prospectus Supplement, DTC will be required to notify all Participants of the
availability through DTC of Physical Certificates. Upon surrender by DTC of the
securities representing the Securities and instruction for reregistration, the
Trustee will issue the Securities in the form of Physical Certificates, and
thereafter the Trustee will recognize the holders of such Physical Certificates
as Securityholders. Thereafter, payments of principal of and interest on the
Securities will be made by the Trustee directly to Securityholders in accordance
with the procedures set forth herein and in the Pooling and Servicing Agreement.
The final distribution of any Security (whether Physical Certificates or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Payment Date at such
office or agency as is specified in the notice of final payment to
Securityholders.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of Securities, the Sponsor will cause
the Mortgage Loans being included in the related Trust Estate to be assigned to
the Trustee together with, unless otherwise specified in the related Prospectus
Supplement, all payments and collections in respect of the Mortgage Loans due,
accrued or received, as described in the related Prospectus Supplement on or
after the related Cut-Off Date. If specified in the related Prospectus
Supplement, the Sponsor or any of its affiliates may retain the Originator's
Retained Yield, if any, for itself or transfer the same to others. The Trustee
will, concurrently with such assignment, deliver a series of Securities to the
Sponsor in exchange for the Mortgage Loans. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the related Pooling and
Servicing Agreement. Such schedule will include, among other things, information
as to the principal balance of each Mortgage Loan as of the Cut-Off Date, as
well as information regarding the Mortgage Rate, the currently scheduled monthly
payment of principal and interest and the maturity of the Mortgage Note.
In connection with the establishment of certain Trusts the Sponsor may
first transfer the related Trust Estate to the Transferor and the Transferor
will then transfer such Trust Estate to the related Trust. The use of the
Transferor will not affect the obligations of the Sponsor with respect to the
related Trust or the related Securities. If the Transferor is to be involved in
a particular offering the related Prospectus Supplement will describe its role
in such offering; for purposes of this Prospectus the role of the Transferor is
subsumed in the role of the Sponsor.
The related Prospectus Supplement will describe any applicable requirements
relating to the delivery of documents, such as the related Notes, and the
preparation and/or filing of transfer documentation, such as assignments of
Mortgage, in connection with the establishment of the related Trust. To the
extent that the ratings, if any, then assigned to the unsecured debt of the
Sponsor or of the Sponsor's ultimate corporate parent are satisfactory to the
Rating Agencies, all or any portion of such document delivery requirements
and/or transfer document preparation and filing requirements may be waived, all
as to be described in the related Prospectus Supplement.
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A typical provision relating to document delivery requirements would
provide that the Sponsor deliver to the Trustee a file consisting of (i) the
original Notes or certified copies thereof, endorsed by the Originator thereof
in blank or to the order of the holder, (ii) originals of all intervening
assignments, showing a complete chain of title from origination to the
applicable Originators, if any, including warehousing assignments, with evidence
of recording thereon, (iii) originals of all assumption and modification
agreements, if any, and, unless such Mortgage Loan is covered by a counsel's
opinion as described in the next paragraph, (iv) either: (a) the original
Mortgage, with evidence of recording thereon, (b) a true and accurate copy of
the Mortgage where the original has been transmitted for recording, until such
time as the original is returned by the public recording office or (c) a copy of
the Mortgage certified by the public recording office in those instances where
the original recorded Mortgage has been lost. To the extent that such a file
containing all or a portion of such items has been delivered to the Trustee, the
Trustee will generally be required, for the benefit of the Securityholders, to
review each such file within a specified period, generally not exceeding 90
days, to ascertain that all required documents (or certified copies of
documents) have been executed and received.
A typical provision relating to the preparation and filing of transfer
documentation would require the Originators to cause to be prepared and
recorded, within a specified period, generally not exceeding 75 business days of
the execution and delivery of the applicable Pooling and Servicing Agreement
(or, if original recording information is unavailable, within such later period
as is permitted by the Pooling and Servicing Agreement) assignments of the
Mortgages from the Originators to the Trustee, in the appropriate jurisdictions
in which such recordation is necessary to perfect the lien thereof as against
creditors of or purchasers from the Originators, to the Trustee; provided,
however, that if the Originators furnish to the Trustee and to the Certificate
Insurer an opinion of counsel to the effect that no such recording is necessary
to perfect the Trustee's interests in the Mortgages with respect to any of the
jurisdictions in which the related Mortgaged Properties are located, then such
recording will not be required with respect to such jurisdictions or at the
election of the Certificate Insurer, any jurisdiction.
Unless otherwise specified in the related Prospectus Supplement, if any
such document is found to be missing or defective in any material respect, the
Trustee (or such custodian) shall promptly so notify the Sponsor, which shall
notify the related Sub-Servicer or Originator, as the case may be. If the
Sub-Servicer or Originator does not cure the omission or defect within a
specified period, generally not exceeding 60 days after notice is given to the
Sponsor, the Sub-Servicer or Originator, as the case may be, will be obligated
to purchase on the next succeeding Remittance Date the related Mortgage Loan
from the Trustee at its Loan Purchase Price (or, if specified in the related
Prospectus Supplement, will be permitted to substitute for such Mortgage Loan
under the conditions specified in the related Prospectus Supplement). The Master
Servicer will be obligated to enforce this obligation of the Sub-Servicer or
Originator, as the case may be, to the extent described above under 'Mortgage
Loan Program--Representations by Originators.' Unless otherwise specified in the
related Prospectus Supplement, neither the Master Servicer nor the Sponsor will,
however, be obligated to purchase or substitute for such Mortgage Loan if the
Sub-Servicer or Originator, as the case may be, defaults on its obligation to do
so, and there can be no assurance that a Sub-Servicer or Originator, as the case
may be, will carry out any such obligation. Unless otherwise specified in the
related Prospectus Supplement, such purchase obligation 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 at any time to appoint a custodian pursuant
to a custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the Mortgage Loans as the agent of the Trustee. The
identity of any such custodian to be appointed on the date of initial issuance
of the Securities will be set forth in the related Prospectus Supplement.
Pursuant to each Pooling and Servicing Agreement, the Master Servicer,
either directly or through Sub-Servicers, will service and administer the
Mortgage Loans assigned to the Trustee as more fully set forth below.
FORWARD COMMITMENTS; PRE-FUNDING
A Trust may enter into an agreement (each, a 'Forward Purchase Agreement')
with the Sponsor whereby the Sponsor will agree to transfer additional Mortgage
Loans to such Trust following the date on which such Trust is established and
the related Securities are issued. The Trust may enter into Forward Purchase
Agreements to permit the acquisition of additional Mortgage Loans (the
'Subsequent Mortgage Loans') that could not be
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delivered by the Sponsor or have not formally completed the origination process,
in each case prior to the date on which the Securities are delivered to the
Securityholders (the 'Closing Date'). Any Forward Purchase Agreement will
require that any Mortgage Loans so transferred to a Trust conform to the
requirements specified in such Forward Purchase Agreement. In addition, the
Forward Purchase Agreement states that the Depositor shall only transfer the
Subsequent Mortgage Loans upon the satisfaction of certain conditions including
that the Depositor shall have delivered to the Certificate Insurer, the Rating
Agencies and the Trustee opinions of counsel (including bankruptcy, corporate
and tax opinions) with respect to the transfer of the Subsequent Mortgage Loans.
If a Forward Purchase Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the related Trustee will be
required to deposit in a segregated account (each, a 'Pre-Funding Account') up
to 100% of the net proceeds received by the Trustee in connection with the sale
of one or more classes of Securities of the related series; the additional
Mortgage Loans will be transferred to the related Trust in exchange for money
released to the Sponsor from the related Pre-Funding Account. Each Forward
Purchase Agreement will set a specified period (the 'Funding Period') during
which any such transfers must occur; for a Trust which elects federal income
treatment as a REMIC or as a grantor trust, the related Funding Period will be
limited to three months from the date such Trust is established; for a Trust
which is treated as a mere security device for federal income tax purposes, the
related Funding Period will be limited to nine months from the date such Trust
is established. The Forward Purchase Agreement or the related Pooling and
Servicing Agreement will require that, if all moneys originally deposited to
such Pre-Funding Account are not so used by the end of the related Funding
Period, then any remaining moneys will be applied as a mandatory prepayment of
the related class or classes of Securities as specified in the related
Prospectus Supplement.
During the Funding Period, the moneys deposited to the Pre-Funding Account
will either (i) be held uninvested or (ii) will be invested in cash-equivalent
investments that are rated in one of the four highest rating categories by at
least one nationally recognized statistical rating organization and that will
either mature prior to the end of the Funding Period, or will be drawable on
demand and in any event, will not constitute the type of investment that would
require registration of the related Trust as an 'investment company' under the
Investment Company Act of 1940, as amended. On payment dates that occur during
the Funding Period, the Trustee will transfer any earnings on the moneys in the
Pre-Funding Account to the Certificate Account for distribution to the
Certificateholders.
The Pre-Funding Account will be maintained by the Trustee, which must be a
bank having combined capital and surplus, generally, of a least $100,000,000,
long-term, unsecured debt rated at least investment grade and a long-term
deposit rating of at least investment grade.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO DISTRIBUTION ACCOUNT
Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing
Agreement will establish and maintain an account (the 'Sub-Servicing Account')
which generally meets the requirements set forth in the Sponsor's Originator
Guide from time to time, and is otherwise acceptable to the Master Servicer. A
Sub-Servicing Account must be established with a Federal Home Loan Bank or with
a depository institution (including the Sub-Servicer itself) whose accounts are
insured by the National Credit Union Share Insurance Fund or the FDIC, provided
that any such depository institution must meet certain minimum rating criteria
set forth in the Sponsor's Originator Guide. Except as otherwise permitted by
the applicable Rating Agencies, a Sub-Servicing Account must be segregated and
may not be established as a general ledger account.
A Sub-Servicer is required to deposit into its Sub-Servicing Account on a
daily basis all amounts described above under 'Mortgage Loan Program--Sub-
Servicing by Originators' that are received by it in respect of the Mortgage
Loans, less its servicing or other compensation. On or before the date specified
in the Sub-Servicing Agreement (which date may be no later than the business day
prior to the Determination Date referred to below or, if such day is not a
business day, the preceding business day), the Sub-Servicer must remit or cause
to be remitted to the Master Servicer all funds held in the Sub-Servicing
Account with respect to Mortgage Loans that are required to be so remitted. A
Sub-Servicer may also be required to make such Servicing Advances and
Delinquency Advances and to pay Compensating Interest as set forth in the
related Sub-Servicing Agreement.
The Master Servicer will deposit or will cause to be deposited into the
Principal and Interest Account on a daily basis certain payments and collections
due, accrued or received, as described in the related Prospectus
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Supplement on or after to the Cut-Off Date, as specifically set forth in the
related Pooling and Servicing Agreement, such as the following except as
otherwise provided therein:
(i) all payments on account of principal, including principal payments
received in advance of the date on which the related monthly payment is due
(the 'Due Date') ('Principal Prepayments'), on the Mortgage Loans
comprising a Trust Estate;
(ii) all payments on account of interest on the Mortgage Loans
comprising such Trust Estate, net of the portion of each payment thereof
retained by the Sub-Servicer, if any, as its servicing or other
compensation;
(iii) all amounts (net of unreimbursed liquidation expenses and
insured expenses incurred, and unreimbursed advances made, by the related
Sub-Servicer) received and retained, if any, in connection with the
liquidation of any defaulted Mortgage Loan, by foreclosure, deed in lieu of
foreclosure or otherwise ('Liquidation Proceeds'), including all proceeds
of any special hazard insurance policy, bankruptcy bond, mortgage pool
insurance policy, financial guaranty insurance policy and any title, hazard
or other insurance policy covering any Mortgage Loan in such Mortgage Pool
(together with any payments under any letter of credit, 'Insurance
Proceeds') or proceeds from any alternative arrangements established in
lieu of any such insurance and described in the applicable Prospectus
Supplement, other than proceeds to be applied to the restoration of the
related property or released to the Mortgagor in accordance with the Master
Servicer's normal servicing procedures (such amounts, net of related
unreimbursed expenses and advances of the Master Servicer, 'Net Liquidation
Proceeds');
(iv) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be paid to Securityholders, as described below;
(v) all proceeds of any Mortgage Loan in such Trust Estate purchased
(or, in the case of a substitution, certain amounts representing a
principal adjustment) by the Master Servicer, the Sponsor, any Sub-Servicer
or Originator or any other person pursuant to the terms of the Pooling and
Servicing Agreement. See 'Mortgage Loan Program--Representations by
Originators,' '--Assignment of Mortgage Loans' above;
(vi) any amounts required to be deposited by the Master Servicer in
connection with losses realized on investments of funds held in the
Principal and Interest Account, as described below;
(vii) any amounts required to be deposited in connection with the
liquidation of the related Trust; and
(viii) any amounts required to be transferred from the Distribution
Account to the Principal and Interest Account.
In addition to the Principal and Interest Account, the Sponsor shall cause
to be established and the Trustee will maintain, at the corporate trust office
of the Trustee, in the name of the Trust for the benefit of the holders of each
series of Securities, an account for the disbursement of payments on the
Mortgage Loans evidenced by each series of Securities (the 'Distribution
Account'). The Principal and Interest Account and the Distribution Account each
must be maintained with a Designated Depository Institution. A 'Designated
Depository Institution' is an institution whose deposits are insured by the Bank
Insurance Fund or the Savings Association Insurance Fund of the FDIC, the
long-term deposits of which have a rating satisfactory to the Rating Agencies
and the related Credit Enhancer, if any, and which is any of the following: (i)
a federal savings and loan association duly organized, validly existing and in
good standing under the federal banking laws, (ii) an institution duly
organized, validly existing and in good standing under the applicable banking
laws of any state, (iii) a national banking association duly organized, validly
existing and in good standing under the federal banking laws, (iv) a principal
subsidiary of a bank holding company, or (v) approved in writing by the related
Credit Enhancer, if any, each Rating Agency and, in each case acting or
designated by the Master Servicer as the depository institution for the
Principal and Interest Account; provided, however, that any such institution or
association will generally be required to have combined capital, surplus and
undivided profits of at least $100,000,000. Notwithstanding the foregoing, the
Principal and Interest Account may be held by an institution otherwise meeting
the preceding requirements except that the only applicable rating requirement
shall be that the unsecured and uncollateralized debt obligations thereof shall
be rated at a level satisfactory to one or more Rating Agencies if such
institution has trust powers and the Principal and Interest Account is held by
such institution in its trust capacity and not in its commercial capacity. The
Distribution Account, the Principal and Interest Account and other accounts
described in the related Prospectus Supplement are collectively referred to as
'Accounts.' All funds in the Distribution Account shall be invested and
reinvested by the Trustee for the benefit of the
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Securityholders and the related Credit Enhancer, if any, as directed by the
Master Servicer, in certain defined obligations set forth in the related Pooling
and Servicing Agreement ('Eligible Investments'). The Principal and Interest
Account may contain funds relating to more than one series of Securities as well
as payments received on other mortgage loans serviced or master serviced by it
that have been deposited into the Principal and Interest Account. All funds in
the Principal and Interest Account will be required to be held (i) uninvested,
up to limits insured by the FDIC or (ii) invested in Eligible Investments. The
Master Servicer will be entitled to any interest or other income or gain
realized with respect to the funds on deposit in the Principal and Interest
Account.
To the extent that the ratings, if any, then assigned to the unsecured debt
of the Master Servicer or of the Master Servicer's corporate parent and
satisfactory to the Rating Agencies, the Master Servicer may be permitted to
co-mingle Mortgage Loan payments and collections with the Master Servicer's
general funds rather than required to deposit such amounts into a segregated
Principal and Interest Account.
Unless otherwise specified in the related Prospectus Supplement, on the day
seven days preceding each Payment Date (the 'Remittance Date'), the Master
Servicer will withdraw from the Principal and Interest Account and remit to the
Trustee for deposit in the applicable Distribution Account, in immediately
available funds, the amount to be distributed therefrom to Securityholders on
such Payment Date. The Master Servicer will remit to the Trustee for deposit
into the Distribution Account the amount of any advances made by the Master
Servicer as described herein under '--Advances,' any amounts required to be
transferred to the Distribution Account from a Reserve Fund, as described under
'Credit Enhancement' below, any amounts required to be paid by the Master
Servicer out of its own funds due to the operation of a deductible clause in any
blanket policy maintained by the Master Servicer to cover hazard losses on the
Mortgage Loans as described under 'Hazard Insurance; Claims Thereunder--Hazard
Insurance Policies' below and any other amounts as specifically set forth in the
related Pooling and Servicing Agreement. The Trustee will cause all payments
received by it from any Credit Enhancer to be deposited in the Distribution
Account not later than the related Payment Date.
Unless otherwise specified in the related Prospectus Supplement, the
portion of any payment received by the Master Servicer in respect of a Mortgage
Loan that is allocable to the Originator's Retained Yield generally will not be
deposited into the Principal and Interest Account, but will not be paid over to
the parties entitled thereto as provided in the related Pooling and Servicing
Agreement.
Funds on deposit in the Principal and Interest Account attributable to
Mortgage Loans underlying a series of Securities may be invested in Eligible
Investments maturing in general not later than the business day preceding the
next Payment Date. Unless otherwise specified in the related Prospectus
Supplement, all income and gain realized from any such investment will be for
the account of the Master Servicer. Funds on deposit in the related Distribution
Account may be invested in Eligible Investments maturing, in general, no later
than the business day preceding the next Payment Date.
With respect to each Buydown Mortgage Loan, the Sub-Servicer will deposit
the related Buydown Funds provided to it in a Buydown Account that will comply
with the requirements set forth herein with respect to a Sub-Servicing Account.
Unless otherwise specified in the related Prospectus Supplement, the terms of
all Buydown Mortgage Loans provide for the contribution of Buydown Funds in an
amount equal to or exceeding either (i) the total payments to be made from such
funds pursuant to the related buydown plan or (ii) if such Buydown Funds are to
be deposited on a discounted basis, that amount of Buydown Funds which, together
with investment earnings thereon at a rate as set forth in the Sponsor's
Originator Guide from time to time, will support the scheduled level of payments
due under the Buydown Mortgage Loan. Neither the Master Servicer nor the Sponsor
will be obligated to add to any such discounted Buydown Funds any of its own
funds should investment earnings prove insufficient to maintain the scheduled
level of payments. To the extent that any such insufficiency is not recoverable
from the Mortgagor or, in an appropriate case, from the related Originator or
the related Sub-Servicer, distributions to Securityholders may be affected. With
respect to each Buydown Mortgage Loan, the Sub-Servicer will withdraw from the
Buydown Account and remit to the Master Servicer on or before the date specified
in the Sub-Servicing Agreement described above the amount, if any, of the
Buydown Funds (and, if applicable, investment earnings thereon) for each Buydown
Mortgage Loan that, when added to the amount due from the Mortgagor on such
Buydown Mortgage Loan, equals the full monthly payment which would be due on the
Buydown Mortgage Loan if it were not subject to the buydown plan.
If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan in
its entirety during the Buydown Period, the Sub-Servicer will withdraw from the
Buydown Account and remit to the Mortgagor or such
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other designated party in accordance with the related buydown plan any Buydown
Funds remaining in the Buydown Account. If a prepayment by a Mortgagor during
the Buydown Period together with Buydown Funds will result in full prepayment of
a Buydown Mortgage Loan, the Sub-Servicer will generally be required to withdraw
from the Buydown Account and remit to the Master Servicer the Buydown Funds and
investment earnings thereon, if any, which together with such prepayment will
result in a prepayment in full; provided that Buydown Funds may not be available
to cover a prepayment under certain Mortgage Loan programs. Any Buydown Funds so
remitted to the Master Servicer in connection with a prepayment described in the
preceding sentence will be deemed to reduce the amount that would be required to
be paid by the Mortgagor to repay fully the related Mortgage Loan if the
Mortgage Loan were not subject to the buydown plan. Any investment earnings
remaining in the Buydown Account after prepayment or after termination of the
Buydown Period will be remitted to the related Mortgagor or such other
designated party pursuant to the agreement relating to each Buydown Mortgage
Loan (the 'Buydown Agreement'). If the Mortgagor defaults during the Buydown
Period with respect to a Buydown Mortgage Loan and the property securing such
Buydown Mortgage Loan is sold in liquidation (either by the Master Servicer, the
Primary Insurer, the insurer under the mortgage pool insurance policy (the 'Pool
Insurer') or any other insurer), the Sub-Servicer will be required to withdraw
from the Buydown Account the Buydown Funds and all investment earnings thereon,
if any, and remit the same to the Master Servicer or, if instructed by the
Master Servicer, pay the same to the primary insurer or the Pool Insurer, as the
case may be, if the Mortgaged Property is transferred to such insurer and such
insurer pays all of the loss incurred in respect of such default.
WITHDRAWALS FROM THE PRINCIPAL AND INTEREST ACCOUNT
The Master Servicer may, from time to time, make withdrawals from the
Principal and Interest Account for certain purposes, as specifically set forth
in the related Pooling and Servicing Agreement, which generally will include the
following except as otherwise provided therein:
(i) to effect the timely remittance to the Trustee for deposit to the
Distribution Account in the amounts and in the manner provided in the
Pooling and Servicing Agreement and described in '--Payments on Mortgage
Loans; Deposits to Distribution Account' above;
(ii) to reimburse itself or any Sub-Servicer for Delinquency Advances
and Servicing Advances as to any Mortgaged Property, out of late payments
or collections on the related Mortgage Loan with respect to which such
Delinquency Advances or Servicing Advances were made;
(iii) to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
(iv) to pay the Sponsor or its assignee all amounts allocable to the
Originator's Retained Yield out of collections or payments which represent
interest on each Mortgage Loan (including any Mortgage Loan as to which
title to the underlying Mortgaged Property was acquired);
(v) to withdraw amounts that have been deposited in the Principal and
Interest Account in error;
(vi) to clear and terminate the Principal and Interest Account in
connection with the termination of the Trust Estate pursuant to the Pooling
and Servicing Agreement, as described in 'The Pooling and Servicing
Agreement--Termination, Retirement of Securities'; and
(vii) to invest in Eligible Investments.
DISTRIBUTIONS
Beginning on the Payment Date in the month following the month (or, in the
case of quarterly-pay Securities, the third month following such month and each
third month thereafter or, in the case of semi-annually-pay Securities, the
sixth month following such month and each sixth month thereafter) in which the
Cut-Off Date occurs (or such other date as may be set forth in the related
Prospectus Supplement) for a series of Securities, distributions of principal
and interest (or, where applicable, of principal only or interest only) on each
class of Securities entitled thereto will be made either by the Trustee or a
paying agent appointed by the Trustee (the 'Paying Agent'), to the persons who
are registered as Securityholders at the close of business on the Record Date in
proportion to their respective Percentage Interests. Unless otherwise specified
in the related Prospectus Supplement, interest that accrues and is not payable
on a class of Securities will be added to the principal balance of each Security
of such class in proportion to its Percentage Interest. The undivided percentage
interest (the 'Percentage Interest') represented by a Security of a particular
class will be equal to the percentage obtained by
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dividing the initial principal balance or notional amount of such Security by
the aggregate initial amount or notional balance of all the Securities of such
class. Distributions will be made in immediately available funds (by wire
transfer or otherwise) to the account of a Securityholder at a bank or other
entity having appropriate facilities therefor, if such Securityholder has so
notified the Trustee or the Paying Agent, as the case may be, and the applicable
Pooling and Servicing Agreement provides for such form of payment, or by check
mailed to the address of the person entitled thereto as it appears on the
Security Register; provided, however, that the final distribution in retirement
of the Securities (other than any Book-Entry Securities) will be made only upon
presentation and surrender of the Securities at the office or agency of the
Trustee specified in the notice to Securityholders of such final distribution.
PRINCIPAL AND INTEREST ON THE SECURITIES
The method of determining, and the amount of, distributions of principal
and interest (or, where applicable, of principal only or interest only) on a
particular series of Securities will be described in the related Prospectus
Supplement. Each class of Securities (other than certain classes of Strip
Securities) may bear interest at a different interest rate (the 'Pass-Through
Rate'), which may be a fixed or adjustable Pass-Through Rate. The related
Prospectus Supplement will specify the Pass-Through Rate for each class, or in
the case of an adjustable Pass-Through Rate, the initial Pass-Through Rate and
the method for determining the Pass-Through Rate. Unless otherwise specified in
the related Prospectus Supplement, interest on the Securities will be calculated
on the basis of a 360-day year consisting of twelve 30-day months.
On each Payment Date for a series of Securities, the Trustee will
distribute or cause the Paying Agent to distribute, as the case may be, to each
holder of record on the Record Date of a class of Securities, an amount equal to
the Percentage Interest represented by the Security held by such holder
multiplied by such class' Distribution Amount. The Distribution Amount for a
class of Securities for any Payment Date will be the portion, if any, of the
principal distribution amount (as defined in the related Prospectus Supplement)
allocable to such class for such Payment Date, as described in the related
Prospectus Supplement, plus, if such class is entitled to payments of interest
on such Payment Date, the interest accrued at the applicable Pass-Through Rate
on the principal balance or notional amount of such class, as specified in the
applicable Prospectus Supplement, less (unless otherwise specified in the
Prospectus Supplement) the amount of any Deferred Interest added to the
principal balance of the Mortgage Loans and/or the outstanding balance of one or
more classes of Securities on the related Due Date and any other interest
shortfalls allocable to Securityholders which are not covered by advances or the
applicable Credit Enhancement, in each case in such amount that is allocated to
such class on the basis set forth in the Prospectus Supplement.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
will possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to fund payments of principal to Securityholders.
In the case of a series of Securities that includes two or more classes of
Securities, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Securities or Subordinate Securities) of each
such class shall be as provided in the related Prospectus Supplement.
Distributions in respect of principal of any class of Securities will be made on
a pro rata basis among all of the Securities of such class.
Except as otherwise provided in the related Pooling and Servicing
Agreement, on or prior to the third business day next preceding the Payment Date
(or such earlier day as shall be agreed by the related Credit
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Enhancer, if any, and the Trustee) of the month of distribution (the
'Determination Date'), the Trustee will determine the amounts of principal and
interest which will be passed through to Securityholders on the immediately
succeeding Payment Date. If the amount in the Distribution Account is
insufficient to cover the amount to be passed through to Securityholders, the
Trustee will be required to notify the related Credit Enhancer, if any, pursuant
to the related Pooling and Servicing Agreement for the purpose of funding such
deficiency.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, each
Servicer will be required, not later than each Remittance Date, to deposit into
the Principal and Interest Account an amount equal to the sum of the interest
portions (net of the Servicing Fees and the Originators' Retained Yield) due,
but not collected, with respect to delinquent Mortgage Loans directly serviced
by such Servicer during the prior Remittance Period, but only if, in its good
faith business judgment, such Servicer believes that such amount will ultimately
be recovered from the related Mortgage Loan. As may be described in the related
Prospectus Supplement, such Servicer may also be required so to advance
delinquent payments of principal. Any such amounts so advanced are 'Delinquency
Advances'. The Master Servicer will be permitted to fund its payment of
Delinquency Advances on any Remittance Date from collections on any Mortgage
Loan deposited to the Principal and Interest Account subsequent to the related
Remittance Period, and will be required to deposit into the Principal and
Interest Account with respect thereto (i) collections from the Mortgagor whose
delinquency gave rise to the shortfall which resulted in such Delinquency
Advance and (ii) Net Liquidation Proceeds recovered on account of the related
Mortgage Loan to the extent of the amount of aggregate Delinquency Advances
related thereto. A Sub-Servicer will be permitted to fund its payment of
Delinquency Advances as set forth in the related Sub-Servicing Agreement.
A Mortgage Loan is 'delinquent' if any payment due thereon is not made by
the close of business on the day such payment is scheduled to be due.
Unless otherwise specified in the related Prospectus Supplement, on or
prior to each Remittance Date, each Servicer will be required to deposit in the
Principal and Interest Account with respect to any full prepayment received on a
Mortgage Loan directly serviced by such Servicer during the related Remittance
Period out of its own funds without any right of reimbursement therefor, an
amount equal to the difference between (x) 30 days' interest at the Mortgage
Loan's Mortgage Rate (less the related Base Servicing Fees and the Originators'
Retained Yield, if any) on the principal balance of such Mortgage Loan as of the
first day of the related Remittance Period and (y) to the extent not previously
advanced, the interest (less the Servicing Fee and the Originators' Retained
Yield, if any) paid by the Mortgagor with respect to the Mortgage Loan during
such Remittance Period (any such amount paid by such Servicer, 'Compensating
Interest'). No Servicer shall be required to pay Compensating Interest with
respect to any Remittance Period in an amount in excess of the aggregate related
Base Servicing Fees received by such Servicer with respect to all Mortgage Loans
directly serviced by such Servicer for such Remittance Period.
Each Servicer will be required to pay all 'out of pocket' costs and
expenses incurred in the performance of its servicing obligations, but only to
the extent that such Servicer reasonably believes that such amounts will
increase Net Liquidation Proceeds on the related Mortgage Loan. Each such amount
so paid will constitute a 'Servicing Advance'. Such Servicer may recover
Servicing Advances to the extent permitted by the Mortgage Loans or, if not
theretofore recovered from the Mortgagor on whose behalf such Servicing Advance
was made, from Liquidation Proceeds realized upon the liquidation of the related
Mortgage Loan or, in certain cases, from excess cash flow otherwise payable to
the holders of the related Equity Securities.
Notwithstanding the foregoing, if the Master Servicer exercises its option,
if any, to purchase the assets of a Trust Estate as described under 'The Pooling
and Servicing Agreement--Termination; Retirement of Securities' below, the
Master Servicer will be deemed to have been reimbursed for all related advances
previously made by it and not theretofore reimbursed to it. The Master
Servicer's obligation to make advances may be supported by Credit Enhancement as
described in the related Pooling and Servicing Agreement. In the event that the
provider of such support is downgraded by a Rating Agency rating the related
Securities or if the collateral supporting such obligation is not performing or
is removed pursuant to the terms of any agreement described in the related
Prospectus Supplement, the Securities may also be downgraded.
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REPORTS TO SECURITYHOLDERS
With each distribution to Securityholders of a particular class the Trustee
will forward or cause to be forwarded to each holder of record of such class of
Securities a statement or statements with respect to the related Trust setting
forth the information specifically described in the related Pooling and
Servicing Agreement, which generally will include the following as applicable
except as otherwise provided therein:
(i) the amount of the distribution with respect to each class of
Securities;
(ii) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any prepayments or other
recoveries of principal included therein;
(iii) the amount of such distribution allocable to interest;
(iv) the aggregate unpaid Principal Balance of the Mortgage Loans
after giving effect to the distribution of principal on such Payment Date;
(v) with respect to a series consisting of two or more classes, the
outstanding principal balance or notional amount of each class after giving
effect to the distribution of principal on such Payment Date;
(vi) the amount of coverage under any letter of credit, mortgage pool
insurance policy or other form of Credit Enhancement covering default risk
as of the close of business on the applicable Determination Date and a
description of any Credit Enhancement substituted therefor;
(vii) information furnished by the Sponsor pursuant to section
6049(d)(7)(C) of the Code and the regulations promulgated thereunder to
assist Securityholders in computing their market discount;
(viii) the total of any Substitution Amounts and any Loan Purchase
Price amounts included in such distribution; and
(ix) a number with respect to each class (the 'Pool Factor') computed
by dividing the principal balance of all Securities in such class (after
giving effect to any distribution of principal to be made on such Payment
Date) by the original principal balance of the Securities of such class on
the Closing Date.
Items (i) through (iii) above shall, with respect to each class of
Securities, be presented on the basis of a certificate having a $1,000
denomination. In addition, by January 31 of each calendar year during which
Securities are outstanding, the Trustee shall furnish a report to each
Securityholder at any time during each calendar year as to the aggregate amounts
reported pursuant to (i), (ii) and (iii) with respect to the Securities for such
calendar year. If a class of Securities are in book-entry form, DTC will supply
such reports to the Securityholders in accordance with its procedures.
In addition, on each Payment Date the Trustee will forward or cause to be
forwarded additional information, as of the close of business on the last day of
the prior calendar month, as more specifically described in the related Pooling
and Servicing Agreement, which generally will include the following as
applicable except as otherwise provided therein:
(i) the total number of Mortgage Loans and the aggregate principal
balances thereof, together with the number, percentage (based on the
then-outstanding principal balances) and aggregate principal balances of
Mortgage Loans (a) 30-59 days delinquent, (b) 60-89 days delinquent and (c)
90 or more days delinquent;
(ii) the number, percentage (based on the then-outstanding principal
balances), aggregate Mortgage Loan balances and status of all Mortgage
Loans in foreclosure proceedings (and whether any such Mortgage Loans are
also included in any of the statistics described in the foregoing clause
(i));
(iii) the number, percentage (based on the then-outstanding principal
balances) and aggregate Mortgage Loan balances of all Mortgage Loans
relating to Mortgagors in bankruptcy proceedings (and whether any such
Mortgage Loans are also included in any of the statistics described in the
foregoing clause (i));
(iv) the number, percentage (based on the then-outstanding principal
balances) and aggregate Mortgage Loan balances of all Mortgage Loans
relating to the status of any Mortgaged Properties as to which title has
been taken in the name of, or on behalf of the Trustee (and whether any
such Mortgage Loans are also included in any of the statistics described in
the foregoing clause (i)); and
(v) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure.
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COLLECTION AND OTHER SERVICING PROCEDURES
Acting directly or through one or more Sub-Servicers as provided in the
related Pooling and Servicing Agreement, the Master Servicer, is required to
service and administer the Mortgage Loans in accordance with the Pooling and
Servicing Agreement and with reasonable care, and using that degree of skill and
attention that the Master Servicer exercises with respect to comparable mortgage
loans that it services for itself or others.
The duties of the Master Servicer include collecting and posting of all
payments, responding to inquiries of Mortgagors or by federal, state or local
government authorities with respect to the Mortgage Loans, investigating
delinquencies, reporting tax information to Mortgagors in accordance with its
customary practices and accounting for collections and furnishing monthly and
annual statements to the Trustee with respect to distributions and making
Delinquency Advances and Servicing Advances to the extent described in the
related Prospectus Supplement. The Master Servicer is required to follow its
customary standards, policies and procedures in performing its duties as Master
Servicer.
The Master Servicer (i) is authorized and empowered to execute and deliver,
on behalf of itself, the Securityholders and the Trustee or any of them, any and
all instruments of satisfaction or cancellation, or of partial or full release
or discharge and all other comparable instruments, with respect to the Mortgage
Loans and with respect to the related Mortgaged Properties; (ii) may consent to
any modification of the terms of any Note not expressly prohibited by the
Pooling and Servicing Agreement if the ef fect of any such modification (x) will
not materially and adversely affect the security afforded by the related
Mortgaged Property or the timing of receipt of any payments required thereunder
(in each case other than as permitted by the related Pooling and Servicing
Agreement); and (y) will not cause a Trust which is a REMIC to fail to qualify
as a REMIC.
The related Pooling and Servicing Agreement will require the Master
Servicer to follow such collection procedures as it follows from time to time
with respect to mortgage loans in its servicing portfolio that are comparable to
the Mortgage Loans; provided that the Master Servicer is required always at
least to follow collection procedures that are consistent with or better than
standard industry practices. The Master Servicer may in its discretion (i) waive
any assumption fees, late payment charges, charges for checks returned for
insufficient funds, prepayment fees, if any, or the fees which may be collected
in the ordinary course of servicing the Mortgage Loans, (ii) if a Mortgagor is
in default or about to be in default because of a Mortgagor's financial
condition, arrange with the Mortgagor a schedule for the payment of delinquent
payments due on the related Mortgage Loan; provided, however, the Master
Servicer shall generally not be permitted to reschedule the payment of
delinquent payments more than one time in any twelve consecutive months with
respect to any Mortgagor or (iii) modify payments of monthly principal and
interest on any Mortgage Loan becoming subject to the terms of the Relief Act in
accordance with the Master Servicer's general policies of the comparable
mortgage loans subject to such Relief Act.
When a Mortgaged Property (other than Mortgaged Property subject to an ARM
Loan) has been or is about to be conveyed by the Mortgagor, the Master Servicer
will be required, to the extent it has knowledge of such conveyance or
prospective conveyance, to exercise its rights to accelerate the maturity of the
related Mortgage Loan under any 'due-on-sale' clause contained in the related
Mortgage or Note; provided, however, that the Master Servicer will not be
required to exercise any such right if (i) the 'due-on-sale' clause, in the
reasonable belief of the Master Servicer, is not enforceable under applicable
law or (ii) the Master Servicer reasonably believes that to permit an assumption
of the Mortgage Loan would not materially and adversely affect the interests of
Securityholders or the related Credit Enhancer or jeopardize coverage under any
primary insurance policy or applicable Credit Enhancement arrangements. In such
event, the Master Servicer will be required to enter into an assumption and
modification agreement with the person to whom such Mortgaged Property has been
or is about to be conveyed, pursuant to which such person becomes liable under
the Mortgage Note and, unless prohibited by applicable law or the related
documents, the Mortgagor remains liable thereon. If the foregoing is not
permitted under applicable law, the Master Servicer will be authorized to enter
into a substitution of liability agreement with such person, pursuant to which
the original Mortgagor is released from liability and such person is substituted
as Mortgagor and becomes liable under the Mortgage Note. The assumed loan must
conform in all respects to the requirements, representations and warranties of
the Pooling and Servicing Agreement.
An ARM Loan may be assumed if such ARM Loan is by its terms assumable and
if, in the reasonable judgment of the Master Servicer or the Sub-Servicer, the
proposed transferee of the related Mortgaged Property establishes its ability to
repay the loan and the security for such ARM Loan would not be impaired by the
assumption. If a Mortgagor transfers the Mortgaged Property subject to an ARM
Loan without consent, such ARM Loan may be
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declared due and payable. Any fee collected by the Master Servicer or
Sub-Servicer for entering into an assumption or substitution of liability
agreement will be retained by the Master Servicer or Sub-Servicer as additional
servicing compensation unless otherwise set forth in the related Prospectus
Supplement. See 'Certain Legal Aspects of Mortgage Loans and Related
Matters--Enforceability of Certain Provisions' herein.
The Master Servicer will have the right under the Pooling and Servicing
Agreement to approve applications of Mortgagors seeking consent for (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Mortgaged Properties. No application for consent may be approved by
the Master Servicer unless: (i) the provisions of the related Mortgage Note and
Mortgage have been complied with; (ii) the credit profile of the related
Mortgage Loan after any release is consistent with the Sponsor's Originator
Guide then applicable to such Mortgage Loan; and (iii) the lien priority of the
related Mortgage is not reduced.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer shall foreclose upon or otherwise comparably effect the
ownership of Mortgaged Properties relating to defaulted Mortgage Loans as to
which no satisfactory arrangements can be made for collection of delinquent
payments and which the Master Servicer has not purchased pursuant to the related
Pooling and Servicing Agreement (such Mortgage Loans, 'REO Property'). In
connection with such foreclosure or other conversion, the Master Servicer shall
exercise such of the rights and powers vested in it, and use the same degree of
care and skill in their exercise or use, as prudent mortgage lenders would
exercise or use under the circumstances in the conduct of their own affairs,
including, but not limited to, making Servicing Advances for the payment of
taxes, amounts due with respect to Senior Liens, and insurance premiums. Unless
otherwise provided in the related Prospectus Supplement, the Master Servicer
shall sell any REO Property within 23 months of its acquisition by the Trust.
The Pooling and Servicing Agreements generally will permit the Master Servicer
to cease further collection and foreclosure activity if the Master Servicer
reasonably determines that such further activity would not increase collections
or recoveries to be received by the related Trust with respect to the related
Mortgage Loan. In addition, any required advancing may be permitted to cease at
this point.
Notwithstanding the generality of the foregoing provisions, the Master
Servicer will be required to manage, conserve, protect and operate each REO
Property for the Securityholders solely for the purpose of its prompt
disposition and sale as 'foreclosure property' within the meaning of Section
860G(a)(8) of the Code or result in the receipt by the Trust of any 'income from
non-permitted assets' within the meaning of Section 860F(a)(2)(B) of the Code or
any 'net income from foreclosure property' which is subject to taxation under
the REMIC Provisions. Pursuant to its efforts to sell such REO Property, the
Master Servicer shall either itself or through an agent selected by the Master
Servicer protect and conserve such REO Property in the same manner and to such
extent as is customary in the locality where such REO Property is located and
may, incident to its conservation and protection of the interests of the
Securityholders, rent the same, or any part thereof, as the Master Servicer
deems to be in the best interest of the Securityholders for the period prior to
the sale of such REO Property. The Master Servicer shall take into account the
existence of any hazardous substances, hazardous wastes or solid wastes, as such
terms are defined in the Comprehensive Environmental Response Compensation and
Liability Act, the Resource Conservation and Recovery Act of 1976, or other
federal, state or local environmental legislation, on a Mortgaged Property in
determining whether to foreclose upon or otherwise comparably convert the
ownership of such Mortgaged Property.
The Master Servicer shall determine, with respect to each defaulted
Mortgage Loan, when it has recovered, whether through trustee's sale,
foreclosure sale or otherwise, all amounts it expects to recover from or on
account of such defaulted Mortgage Loan, whereupon such Mortgage Loan shall
become a Liquidated Mortgage Loan. A Mortgage Loan which is 'charged-off', i.e.,
as to which the Master Servicer ceases further collection and/or foreclosure
activity as a result of a determination that such further actions will not
increase collections or recoveries to be received by the related Trust is also a
'Liquidated Mortgage Loan.'
If a loss is realized on a defaulted Mortgage Loan or REO Property upon the
final liquidation thereof that is not covered by any applicable form of Credit
Enhancement or other insurance, the Securityholders will bear such loss.
However, if a gain results from the final liquidation of an REO Property that is
not required by law to be remitted to the related Mortgagor, the Master Servicer
will be entitled to retain such gain as additional servicing compensation unless
the related Prospectus Supplement provides otherwise. For a description of the
Master Servicer's obligations to maintain and make claims under applicable forms
of Credit Enhancement and insurance relating to the Mortgage Loans, see
'Description of Credit Enhancement' and 'Hazard Insurance; Claims Thereunder;
Hazard Insurance Policies.'
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SUBORDINATION
A Senior/Subordinate Series of Securities will consist of one or more
classes of Senior Securities and one or more classes of Subordinate Securities,
as specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, only the Senior Securities will be offered
hereby. Subordination of the Subordinate Securities of any Senior/Subordinate
Series of Securities will be effected by the following method, unless an
alternative method is specified in the related Prospectus Supplement. In
addition, certain classes of Senior (or Subordinate) Securities may be senior to
other classes of Senior (or Subordinate) Securities, as specified in the related
Prospectus Supplement, in which case the following discussion is qualified in
its entirety by reference to the related Prospectus Supplement with respect to
the various priorities and other rights as among the various classes of Senior
Securities or Subordinate Securities, as the case may be.
With respect to any Senior/Subordinate Series of Securities, the total
amount available for distribution on each Payment Date, as well as the method
for allocating such amount among the various classes of Securities included in
such series, will be as set forth in the related Prospectus Supplement.
Generally, the amount available for contribution will be allocated first to
interest on the Senior Securities of such series, and then to principal of the
Senior Securities up to the amounts determined as specified in the related
Prospectus Supplement, prior to allocation to the Subordinate Securities of such
series.
In the event of any Realized Losses (as defined below) on Mortgage Loans
not in excess of the limitations described below, other than Extraordinary
Losses, the rights of the Subordinate Securityholders to receive distributions
with respect to the Mortgage Loans will be subordinate to the rights of the
Senior Securityholders. With respect to any defaulted Mortgage Loan that becomes
a Liquidated Mortgage Loan, through foreclosure sale, disposition of the related
Mortgaged Property if acquired by deed in lieu of foreclosure, 'charged-off' or
otherwise, the amount of loss realized, if any (as more fully described in the
related Pooling and Servicing Agreement, a 'Realized Loss'), will equal the
portion of the stated principal balance remaining, after application of all
amounts recovered (net of amounts reimbursable to the Master Servicer for
related advances and expenses) towards interest and principal owing on the
Mortgage Loan. With respect to a Mortgage Loan the principal balance of which
has been reduced in connection with bankruptcy proceedings, the amount of such
reduction will be treated as a Realized Loss.
Except as noted below, all Realized Losses will be allocated to the
Subordinate Securities of the related series, until the Principal Balance (as
defined in the related Prospectus Supplement) of such Subordinate Securities
thereof has been reduced to zero. Any additional Realized Losses will be
allocated to the Senior Securities (or, if such series includes more than one
class of Senior Securities, either on a pro-rata basis among all of the Senior
Securities in proportion to their respective outstanding Principal Balances or
as otherwise provided in the related Prospectus Supplement).
With respect to certain Realized Losses resulting from physical damage to
Mortgaged Properties that are generally of the same type as are covered under a
special hazard insurance policy, the amount thereof that may be allocated to the
Subordinate Securities of the related series may be limited to an amount (the
'Special Hazard Amount') specified in the related Prospectus Supplement. See
'Description of Credit Enhancement--Special Hazard Insurance Policies.' If so,
any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of Securities of the related series,
either on a pro-rata basis in proportion to their outstanding Security Principal
Balances, regardless of whether any Subordinate Securities remain outstanding,
or as otherwise provided in the related Prospectus Supplement. The respective
amounts of other specified types of losses (including Fraud Losses and
Bankruptcy Losses) that may be borne solely by the Subordinate Securities may be
similarly limited to an amount (with respect to Fraud Losses, the 'Fraud Loss
Amount' and with respect to Bankruptcy Losses, the 'Bankruptcy Loss Amount'),
and the Subordinate Securities may provide no coverage with respect to certain
other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro-rata basis
among all outstanding classes of Securities.
Any allocation of a Realized Loss (including a Special Hazard Loss) to a
Security in a Senior/Subordinate Series will be made by reducing the Security
Principal Balance thereof as of the Payment Date following the calendar month in
which such Realized Loss was incurred.
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In lieu of the foregoing provisions, subordination may be effected in the
following manner, or in any other manner described in the related Prospectus
Supplement. The rights of the holders of Subordinate Securities to receive any
or a specified portion of distributions with respect to the Mortgage Loans may
be subordinated to the extent of the amount set forth in the related Prospectus
Supplement (the 'Subordinate Amount'). As specified in the related Prospectus
Supplement, the Subordinate Amount may be subject to reduction based upon the
amount of losses borne by the holders of the Subordinate Securities as a result
of such subordination, a specified schedule or such other method of reduction as
such Prospectus Supplement may specify. If so specified in the related
Prospectus Supplement, additional credit support for this form of subordination
may be provided by the establishment of a reserve fund for the benefit of the
holders of the Senior Securities (which may, if such Prospectus Supplement so
provides, initially be funded by a cash deposit by the Originator) into which
certain distributions otherwise allocable to the holders of the Subordinate
Securities may be placed; such funds would thereafter be available to cure
shortfalls in distributions to holders of the Senior Securities.
DESCRIPTION OF CREDIT ENHANCEMENT
Unless otherwise expressly provided and described in the applicable
Prospectus Supplement, each series of Securities shall have credit support
(referred to herein as 'Credit Enhancement') comprised of one or more of the
following components. Each component will have a monetary limit and will provide
coverage with respect to Realized Losses that are (i) attributable to the
Mortgagor's failure to make any payment of principal or interest as required
under the Mortgage Note, but not including Special Hazard Losses, Extraordinary
Losses or other losses resulting from damage to a Mortgaged Property, Bankruptcy
Losses or Fraud Losses (any such loss, a 'Defaulted Mortgage Loss'); (ii) of a
type generally covered by a special hazard insurance policy (as defined below)
(any such loss, a 'Special Hazard Loss'); (iii) attributable to certain actions
which may be taken by a bankruptcy court in connection with a Mortgage Loan,
including a reduction by a bankruptcy court of the principal balance of or the
Mortgage Rate on a Mortgage Loan or an extension of its maturity (any such loss,
a 'Bankruptcy Loss'); and (iv) incurred on defaulted Mortgage Loans as to which
there was fraud in the origination of such Mortgage Loans (any such loss, a
'Fraud Loss'). Losses occasioned by war, civil insurrection, certain
governmental actions, nuclear reaction and certain other risks ('Extraordinary
Losses') will not be covered unless otherwise specified. To the extent that the
Credit Enhancement for any series of Securities is exhausted, the
Securityholders will bear all further risks of loss not otherwise insured
against.
As set forth below and in the applicable Prospectus Supplement, Credit
Enhancement may be provided with respect to one or more classes of a series of
Securities or with respect to the Mortgage Assets in the related Trust. Credit
Enhancement may be in the form of (i) the subordination of one or more classes
of Subordinate Securities to provide credit support to one or more classes of
Senior Securities as described under 'Subordination,' (ii) the use of a mortgage
pool insurance policy, special hazard insurance policy, bankruptcy bond, reserve
fund, letter of credit, financial guaranty insurance policy, other third party
guarantees, another method of Credit Enhancement described in the related
Prospectus Supplement, or the use of a cross-support feature or
overcollateralization, or (iii) any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any 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 that exceed the amount covered by Credit Enhancement or
are not covered by the Credit Enhancement, holders of one or more classes of
Securities will bear their allocable share of deficiencies. If a form of Credit
Enhancement applies to several classes of Securities, and if principal payments
equal to the aggregate principal balances of certain classes will be distributed
prior to such distributions to the classes, the classes that receive such
distributions at a later time are more likely to bear any losses that exceed the
amount covered by Credit Enhancement.
The amounts and type of Credit Enhancement arrangement as well as the
provider thereof, if applicable, with respect to each series of Securities will
be set forth in the related Prospectus Supplement. To the extent provided in the
applicable Prospectus Supplement and the Pooling and Servicing Agreement, the
Credit Enhancement arrangements may be periodically modified, reduced and
substituted for based on the aggregate outstanding principal balance of the
Mortgage Loans covered thereby. See 'Description of Credit
Enhancement--Reduction or Substitution of Credit Enhancement.' If specified in
the applicable Prospectus Supplement, Credit Enhancement for a series of
Securities may cover one or more other series of Securities.
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The descriptions of any insurance policies or bonds described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of such policies, copies of which are available upon request.
Letter of Credit. If any component of Credit Enhancement as to any series
of Securities is to be provided by a letter of credit (the 'Letter of Credit'),
a bank (the 'Letter of Credit Bank') will deliver to the Trustee an irrevocable
Letter of Credit. The Letter of Credit may provide direct coverage with respect
to the related Securities or, if specified in the related Prospectus Supplement,
support the Sponsor's or any other person's obligation pursuant to a Purchase
Obligation to make certain payments to the Trustee with respect to one or more
components of Credit Enhancement. The Letter of Credit Bank, as well as the
amount available under the Letter of Credit with respect to each component of
Credit Enhancement, will be specified in the applicable Prospectus Supplement.
The Letter of Credit will expire on the expiration date set forth in the related
Prospectus Supplement, unless earlier terminated or extended in accordance with
its terms. On or before each Payment Date, either the Letter of Credit Bank or
the Trustee (or other obligor under a Purchase Obligation) will be required to
make the payments specified in the related Prospectus Supplement after
notification from the Trustee, to be deposited in the related Distribution
Account, if and to the extent covered, under the applicable Letter of Credit.
Mortgage Pool Insurance Policies. Any mortgage pool insurance policy
('Mortgage Pool Insurance Policy') obtained by the Sponsor for each related
Trust Estate will be issued by the Pool Insurer named in the related Prospectus
Supplement. Each Mortgage Pool Insurance Policy will, subject to limitations
specified in the related Prospectus Supplement described below, cover Defaulted
Mortgage Losses in an amount equal to a percentage specified in the related
Prospectus Supplement (or in a Current Report on Form 8-K) of the aggregate
principal balance of the Mortgage Loans on the Cut-Off Date. As set forth under
'Maintenance of Credit Enhancement,' the Master Servicer will use reasonable
efforts to maintain the Mortgage Pool Insurance Policy and to present claims
thereunder to the Pool Insurer on behalf of itself, the Trustee and the
Securityholders. The Mortgage Pool Insurance Policies, however, are not blanket
policies against loss (typically, such policies do not cover Special Hazard
Losses, Fraud Losses and Bankruptcy Losses), since claims thereunder may only be
made respecting particular defaulted Mortgage Loans and only upon satisfaction
of certain conditions precedent described below due to a failure to pay
irrespective of the reason therefor.
Special Hazard Insurance Policies. Any insurance policy covering Special
Hazard Losses (a 'Special Hazard Insurance Policy') obtained by the Sponsor for
a Trust Estate will be issued by the insurer named in the related Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described in the related Prospectus Supplement, protect holders of the related
series of Securities from (i) losses due to direct physical damage to a
Mortgaged Property other than any loss of a type covered by a hazard insurance
policy or a flood insurance policy, if applicable, and (ii) losses from partial
damage caused by reason of the application of the co-insurance clauses contained
in hazard insurance policies. See 'Hazard Insurance; Claims Thereunder.' A
Special Hazard Insurance Policy will not cover Extraordinary Losses. Aggregate
claims under a Special Hazard Insurance Policy will be limited to a maximum
amount of coverage, as set forth in the related Prospectus Supplement or in a
Current Report on Form 8-K. A Special Hazard Insurance Policy will provide that
no claim may be paid unless hazard and, if applicable, flood insurance on the
Mortgaged Property securing the Mortgage Loan has been kept in force and other
protection and preservation expenses have been paid by the Master Servicer.
Subject to the foregoing limitations, in general a Special Hazard Insurance
Policy will provide that, where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer or
the Sub-Servicer, the insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) up on transfer of the property to the
insurer, the unpaid principal balance of such Mortgage Loan at the time of
acquisition of such property by foreclosure or deed in lieu of foreclosure, plus
accrued interest at the Mortgage Rate to the date of claim settlement and
certain expenses incurred by the Master Servicer or the Sub-Servicer with
respect to such property. If the property is transferred to a third party in a
sale approved by the issuer of the Special Hazard Insurance Policy (the 'Special
Hazard Insurer'), the amount that the Special Hazard Insurer will pay will be
the amount under (ii) above reduced by the net proceeds of the sale of the
property.
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As indicated under 'Description of the Securities--Assignment of Mortgage
Loans' above and to the extent set forth in the related Prospectus Supplement,
coverage in respect of Special Hazard Losses for a series of Securities may be
provided, in whole or in part by a type of special hazard instrument other than
a Special Hazard Insurance Policy or by means of the special hazard
representation of the Sponsor.
Bankruptcy Bonds. In the event of a personal bankruptcy of a Mortgagor, it
is possible that the bankruptcy court may establish the value of the Mortgaged
Property of such Mortgagor at an amount less than the then-outstanding,
principal balance of the Mortgage Loan secured by such Mortgaged Property (a
'Deficient Valuation'). The amount of the secured debt then could be reduced to
such value, and, thus, the holder of such Mortgage Loan would become an
unsecured creditor to the extent the outstanding principal balance of such
Mortgage Loan exceeds the value assigned to the Mortgaged Property by the
bankruptcy court. In addition, certain other modifications of the terms of a
Mortgage Loan can result from a bankruptcy proceeding, including a reduction in
the amount of the monthly payment on the related Mortgage Loan or a reduction in
the mortgage interest rate (a 'Debt Service Reduction'; Debt Service Reductions
and Deficient Valuations, collectively referred to herein as 'Bankruptcy
Losses'). See 'Certain Legal Aspects of Mortgage Loans and Related
Matters--Anti-Deficiency Legislation and Other Limitations on Lenders.' Any
bankruptcy bond ('Bankruptcy Bond') to provide coverage for Bankruptcy Losses
for proceedings under the federal Bankruptcy Code obtained by the Sponsor for a
Trust Estate will be issued by an insurer named in the related Prospectus
Supplement. The level of coverage under each Bankruptcy Bond will be set forth
in the applicable Prospectus Supplement or in a Current Report on Form 8-K.
Reserve Funds. If so provided in the related Prospectus Supplement, the
Sponsor will deposit or cause to be deposited in an account (a 'Reserve Fund')
any combination of cash, one or more irrevocable letters of credit or one or
more Eligible Investments in specified amounts, amounts otherwise distributable
to Subordinate Securityholders or the owners of any Originator's Retained Yield,
or any other instrument satisfactory to the Rating Agency or Agencies, which
will be applied and maintained in the manner and under the conditions specified
in such Prospectus Supplement. In the alternate or in addition to such deposit
to the extent described in the related Prospectus Supplement, a Reserve Fund may
be funded through application of all or a portion of amounts otherwise payable
on any related Subordinate Securities from the Originator's Retained Yield or
otherwise. In addition, with respect to any series of Securities as to which
Credit Enhancement includes a Letter of Credit, if so specified in the related
Prospectus Supplement, under certain circumstances the remaining amount of the
Letter of Credit may be drawn by the Trustee and deposited in a Reserve Fund.
Amounts in a Reserve Fund may be distributed to Securityholders, or applied to
reimburse the Master Servicer for outstanding advances or may be used for other
purposes, in the manner and to the extent specified in the related Prospectus
Supplement. A Trust Estate may contain more than one Reserve Fund, each of which
may apply only to a specified class of Securities or to specified Mortgage
Assets.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
('Financial Guaranty Insurance Policy') may be obtained and maintained for each
class or series of Securities. The issuer of any Financial Guaranty Insurance
Policy (a 'Financial Guaranty Insurer') will be described in the related
Prospectus Supplement. A copy of any such Financial Guaranty Insurance Policy
will be attached as an exhibit to the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Securityholders that an amount equal to each full and complete
insured payment will be received by an agent of the Trustee (an 'Insurance
Paying Agent') on behalf of Securityholders, for distribution by the Trustee to
each Securityholder. The 'insured payment' will be defined in the related
Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Securityholders are entitled
under the related Pooling and Servicing Agreement plus any other amounts
specified therein or in the related Prospectus Supplement (the 'Insured
Payment').
Financial Guaranty Insurance Policies may apply only to certain specified
classes, or may apply at the Mortgage Asset level and only to specified Mortgage
Assets.
The specific terms of any Financial Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Originators to
repurchase or substitute for any
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Mortgage Loans, Financial Guaranty Insurance Policies will not guarantee any
specified rate of prepayments and/or to provide funds to redeem Securities on
any specified date.
Subject to the terms of the related Pooling and Servicing Agreement, the
Financial Guaranty Insurer may be subrogated to the rights of each
Securityholder to receive payments under the Securities to the extent of any
payment by such Financial Guaranty Insurer under the related Financial Guaranty
Insurance Policy.
Other Insurance, Guarantees and Similar Instruments or Agreements. If
specified in the related Prospectus Supplement, a Trust may include in lieu of
some or all of the foregoing or in addition thereto third party guarantees, and
other arrangements for maintaining timely payments or providing additional
protection against losses on all or any specified portion of the assets included
in such Trust, paying administrative expenses, or accomplishing such other
purpose as may be described in the Prospectus Supplement. The Trust may include
a guaranteed investment contract or reinvestment agreement pursuant to which
funds held in one or more accounts will be invested at a specified rate. If any
class of Securities has a floating interest rate, or if any of the Mortgage
Assets has a floating interest rate, the Trust may include an interest rate swap
contract, an interest rate cap agreement or similar contract providing limited
protection against interest rate risks.
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 with respect to one class of Securities may be made from
excess amounts available from other asset groups within the same Trust which
support other classes of Securities. The Prospectus Supplement for a series that
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one or
more forms of credit support may apply concurrently to two or more separate
Trusts. If applicable, the Prospectus Supplement will identify the Trusts to
which such credit support relates and the manner of determining the amount of
the coverage provided thereby and of the application of such coverage to the
identified Trusts.
Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Securities relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Securities. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof, over
collateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or a group thereof, over the principal
balance of the related class of Securities. Such acceleration may continue for
the life of the related Security, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related Prospectus Supplement,
such limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
Maintenance of Credit Enhancement. To the extent that the applicable
Prospectus Supplement does not expressly provide for Credit Enhancement
arrangements in lieu of some or all of the arrangements mentioned below, the
following paragraphs shall apply.
If a form of Credit Enhancement has been obtained for a series of
Securities, the Sponsor will be obligated to exercise its best reasonable
efforts to keep or cause to be kept such form of credit support in full force
and effect throughout the term of the applicable Pooling and Servicing
Agreement, unless coverage thereunder has been exhausted through payment of
claims or otherwise, or substitution therefor is made as described below under
'Reduction or Substitution of Credit Enhancement.'
In lieu of the Sponsor's obligation to maintain a particular form of Credit
Enhancement, the Sponsor may obtain a substitute or alternate form of Credit
Enhancement. If the Master Servicer obtains such a substitute form of Credit
Enhancement, it will maintain and keep such form of Credit Enhancement in full
force and effect as provided herein. Prior to its obtaining any substitute or
alternate form of Credit Enhancement, the Sponsor will obtain written
confirmation from the Rating Agency or Agencies that rated the related series of
Securities that the substitution or alternate form of Credit Enhancement for the
existing Credit Enhancement will not adversely affect the then-current ratings
assigned to such Securities by such Rating Agency or Agencies.
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The Master Servicer, on behalf of itself, the Trustee and Securityholders,
will provide the Trustee information required for the Trustee to draw under a
Letter of Credit or Financial Guaranty Insurance Policy, will present claims to
each Pool Insurer, to the issuer of each Special Hazard Insurance Policy or
other special hazard instrument, to the issuer of each Bankruptcy Bond and will
take such reasonable steps as are necessary to permit recovery under such Letter
of Credit, Financial Guaranty Insurance Policy, Purchase Obligation, insurance
policies or comparable coverage respecting defaulted Mortgage Loans or Mortgage
Loans which are the subject of a bankruptcy proceeding. Additionally, the Master
Servicer will present such claims and take such steps as are reasonably
necessary to provide for the performance by another party of its Purchase
Obligation. As set forth above, all collections by the Master Servicer under any
Purchase Obligation, any Mortgage Pool Insurance Policy, or any Bankruptcy Bond
and, where the related property has not been restored, any Special Hazard
Insurance Policy, are to be deposited initially in the Principal and Interest
Account and ultimately in the Distribution Account, subject to withdrawal as
described above. All draws under any Letter of Credit or Financial Guaranty
Insurance Policy will be deposited directly in the Distribution Account.
If any property securing a defaulted Mortgage Loan is damaged and proceeds,
if any, from the related hazard insurance policy or any applicable Special
Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any applicable form of Credit
Enhancement, the Master Servicer is not required to expend its own funds to
restore the damaged property unless it determines (i) that such restoration will
increase the proceeds to one or more classes of Securityholders on liquidation
of the Mortgage Loan after reimbursement of the Master Servicer for its expenses
and (ii) that such expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds. If recovery under any applicable form of Credit
Enhancement is not available because the Master Servicer has been unable to make
the above determinations, has made such determinations incorrectly or recovery
is not available for any other reason, the Master Servicer is nevertheless
obligated to follow such normal practices and procedures (subject to the
preceding sentence) as it deems necessary or advisable to realize upon the
defaulted Mortgage Loan and in the event such determination has been incorrectly
made, is entitled to reimbursement of its expenses in connection with such
restoration.
Reduction or Substitution of Credit Enhancement. Unless otherwise
specified in the related Prospectus Supplement, the amount of credit support
provided pursuant to any of the Credit Enhancements (including, without
limitation, a Mortgage Pool Insurance Policy, Financial Guaranty Insurance
Policy, Special Hazard Insurance Policy, Bankruptcy Bond, Letter of Credit, or
any alternative form of Credit Enhancement) may be reduced under certain
specified circumstances. In addition, if so described in the related Prospectus
Supplement, any formula used in calculating the amount or degree of Credit
Enhancement may be changed without the consent of the Securityholders upon
written confirmation from each Rating Agency then rating the Securities that
such change will not adversely affect the then-current rating or ratings
assigned to the Securities. In most cases, the amount available pursuant to any
Credit Enhancement will be subject to periodic reduction in accordance with a
schedule or formula on a nondiscretionary basis pursuant to the terms of the
related Pooling and Servicing Agreement as the aggregate outstanding principal
balance of the Mortgage Loans declines. Additionally, in certain cases, such
credit support (and any replacements therefor) may be replaced, reduced or
terminated upon the written assurance from each applicable Rating Agency that
the then-current rating of the related series of Securities will not be
adversely affected. Furthermore, in the event that the credit rating of any
obligor under any applicable Credit Enhancement is downgraded, the credit rating
of the related Securities may be downgraded to a corresponding level, and,
unless otherwise specified in the related Prospectus Supplement, the Sponsor
thereafter will not be obligated to obtain replacement credit support in order
to restore the rating of the Securities, and also will be permitted to replace
such credit support with other Credit Enhancement instruments issued by obligors
whose credit ratings are equivalent to such downgraded level and in lower
amounts which would satisfy such downgraded level, provided that the
then-current, albeit downgraded, rating of the related series of Securities is
maintained. Where the credit support is in the form of a Reserve Fund, a
permitted reduction in the amount of Credit Enhancement will result in a release
of all or a portion of the assets in the Reserve Fund to the Sponsor, the Master
Servicer, one or more Originators or such other person that is entitled thereto.
Any assets so released will not be available to fund distribution obligations in
future periods.
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HAZARD INSURANCE; CLAIMS THEREUNDER
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below). The following is only a brief description of
certain insurance policies and does not purport to summarize or describe all of
the provisions of these policies. Such insurance is subject to underwriting and
approval of individual Mortgage Loans by the respective insurers. The
descriptions of any insurance policies described in this Prospectus or any
Prospectus Supplement and the coverage thereunder do not purport to be complete
and are qualified in their entirety by reference to such forms of policies,
sample copies of which are available from the Trustee upon request.
HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a hazard
insurance policy for the Mortgage Loan. Additionally, the Pooling and Servicing
Agreement will require the Master Servicer to cause to be maintained with
respect to each Mortgage Loan a hazard insurance policy with a generally
acceptable carrier that provides for fire and extended coverage relating to such
Mortgage Loan in an amount not less than the least of (i) the outstanding
principal balance of the Mortgage Loan, (ii) the minimum amount required to
compensate for damage or loss on a replacement cost basis or (iii) the full
insurable value of the premises.
If a Mortgage Loan at the time of origination relates to a Mortgaged
Property in an area identified in the Federal Register by the Federal Emergency
Management Agency as having special flood hazards, the Master Servicer will be
required to maintain with respect thereto a flood insurance policy in a form
meeting the requirements of the then-current guidelines of the Federal Insurance
Administration with a generally acceptable carrier in an amount representing
coverage, and which provides for recovery by the Master Servicer on behalf of
the Trust of insurance proceeds relating to such Mortgage Loan of not less than
the least of (i) the outstanding principal balance of the Mortgage Loan, (ii)
the minimum amount required to compensate for damage or loss on a replacement
cost basis, (iii) the maximum amount of insurance that is available under the
Flood Disaster Protection Act of 1973. Pursuant to the related Pooling and
Servicing Agreement, the Master Servicer will be required to indemnify the Trust
out of the Master Servicer's own funds for any loss to the Trust resulting from
the Master Servicer's failure to maintain such flood insurance.
In the event that the Master Servicer obtains and maintains a blanket
policy insuring against fire with extended coverage and against flood hazards on
all of the Mortgage Loans, then, to the extent such policy names the Master
Servicer as loss payee and provides coverage in an amount equal to the aggregate
unpaid principal balance on the Mortgage Loans without co-insurance, and
otherwise complies with the requirements of the Pooling and Servicing Agreement,
the Master Servicer shall be deemed conclusively to have satisfied its
obligations with respect to fire and hazard insurance coverage under the Pooling
and Servicing Agreement. Such blanket policy may contain a deductible clause, in
which case the Master Servicer will be required, in the event that there shall
not have been maintained on the related Mortgaged Property a policy complying
with the Pooling and Servicing Agreement, and there shall have been a loss that
would have been covered by such policy, to deposit in the Principal and Interest
Account from the Master Servicer's own funds the difference, if any, between the
amount that would have been payable under a policy complying with the Pooling
and Servicing Agreement and the amount paid under such blanket policy.
THE SPONSOR AND THE TRANSFEROR
The Sponsor, ADVANTA Mortgage Conduit Services, Inc., was incorporated in
the State of Delaware in April, 1993. It is a direct subsidiary of the Master
Servicer, Advanta Mortgage Corp. USA, in addition to ADVANTA Mortgage Corp.
Midatlantic, ADVANTA Mortgage Corp., Midatlantic II, ADVANTA Mortgage Corp.
Midwest, ADVANTA Mortgage Corp. of New Jersey and ADVANTA Mortgage Corp.
Northeast. The Sponsor was organized for the purpose of the purchase and
securitization of first and junior mortgage loans.
The Sponsor maintains its principal office at 16875 West Bernardo Drive,
San Diego, California 92127. Its telephone number is (619) 674-1800.
The Transferor, ADVANTA Mortgage Receivables Inc., was incorporated in the
State of Delaware in February, 1994. It is a direct subsidiary of the Sponsor,
and was formed as a special purpose finance subsidiary to
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facilitate certain issuances of Securities. The use of the Transferor will not
affect the obligations of the Sponsor with respect to the related Trust or the
related Securities. If the Transferor is to be involved in a particular offering
the related Prospectus Supplement will describe its role in such offering; for
purposes of this Prospectus the role of the Transferor is subsumed in the role
of the Sponsor.
The Transferor maintains its principal office at Brandywine Corporate
Center, 650 Naamans Road, Claymont, Delaware 19703. Its telephone number is
(302) 791-4400.
THE MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement, ADVANTA
Mortgage Corp. USA will act as the Master Servicer for a series of Securities.
ADVANTA Mortgage Corp. USA was acquired by ADVANTA Corp., a Delaware
corporation ('ADVANTA Parent') in September, 1986 and is an indirect subsidiary
of ADVANTA Parent. The Master Servicer is an affiliate of Colonial National Bank
USA ('Colonial'), a national banking association domiciled in Delaware, and the
parent of ADVANTA Mortgage Corp. Midatlantic, ADVANTA Mortgage Corp. Midatlantic
II, ADVANTA Mortgage Corp. Midwest, ADVANTA Mortgage Corp. of New Jersey and
ADVANTA Mortgage Corp. Northeast. ADVANTA Mortgage Corp. USA is a Delaware
corporation incorporated in 1983. It is a nationwide servicer of first and
junior mortgage loans. ADVANTA Mortgage Corp. USA has centralized servicing
functions located in San Diego, California. This provides for economies of scale
and a depth of appraisal, attorney and realtor contacts throughout the country.
THE POOLING AND SERVICING AGREEMENT
As described above under 'Description of the Securities--General,' each
series of Securities will be issued pursuant to a Pooling and Servicing
Agreement as described in that section. The following summaries describe certain
additional provisions common to each Pooling and Servicing Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; ORIGINATOR'S RETAINED
YIELD
Each servicer, whether the Master Servicer or any Sub-Servicer (either the
Master Servicer or any Sub-Servicer being a 'Servicer'), will retain a fee in
connection with its servicing activities for each series of Securities equal to
the percentage per annum specified in the related Prospectus Supplement or
Current Report on Form 8-K (the 'Base Servicing Fee'), generally payable monthly
with respect to each Mortgage Loan directly serviced by such Servicer at
one-twelfth the annual rate, of the then-outstanding principal amount of each
such Mortgage Loan as of the first day of each calendar month. The Master
Servicer acting as master servicer with respect to Mortgage Loans being serviced
directly by a Sub-Servicer will retain a fee equal to the percentage per annum
specified in the related Prospectus Supplement or Current Report on Form 8-K
('Master Servicing Fee'), generally payable monthly on one-twelfth the annual
rate, of the then-outstanding principal amount of each such Mortgage Loan as of
the first day of each calendar month. The Base Servicing Fees and the Master
Servicing Fee are collectively referred to as the 'Servicing Fee.'
In addition to the Base Servicing Fee, each Servicer will generally be
entitled under the Pooling and Servicing Agreement to retain additional
servicing compensation in the form of prepayment charges, release fees, bad
check charges, assumption fees, late payment charges, or any other
servicing-related fees, Net Liquidation Proceeds not required to be deposited in
the Principal and Interest Account pursuant to the Pooling and Servicing
Agreement, and similar items.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will pay or cause to be paid certain ongoing expenses associated with
each Trust Estate and incurred by it in connection with its responsibilities
under the Pooling and Servicing Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any alternative Credit
Enhancement arrangements, payment of the fees and disbursements of the Trustee
or accountant, any custodian appointed by the Trustee, the Security Registrar
and any Paying Agent, and payment of expenses incurred in enforcing the
obligations of Sub-Servicers and Originators. The Master Servicer may be
entitled to reimbursement of expenses incurred in enforcing the
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obligations of Sub-Servicers and Originators under certain limited
circumstances. In addition, as indicated in the preceding section, the Master
Servicer will be entitled to reimbursements for certain expenses incurred by it
in connection with Liquidated Mortgage Loans and in connection with the
restoration of Mortgaged Properties, such right of reimbursement being prior to
the rights of Securityholders to receive any related Liquidation Proceeds
(including Insurance Proceeds).
The Prospectus Supplement for a series of Securities will specify if there
will be any Originator's Retained Yield retained. Any such Originator's Retained
Yield will be a specified portion of the interest payable on each Mortgage Loan
in a Mortgage Pool. Any such Originator's Retained Yield will be established on
a loan-by-loan basis and the amount thereof with respect to each Mortgage Loan
in a Mortgage Pool will be specified on an exhibit to the related Pooling and
Servicing Agreement. Any Originator's Retained Yield in respect of a Mortgage
Loan will represent a specified portion of the interest payable thereon and will
not be part of the related Trust Estate. Any partial recovery of interest in
respect of a Mortgage Loan will be allocated between the owners of any
Originator's Retained Yield and the holders of classes of Securities entitled to
payments of interest as provided in the Prospectus Supplement and the applicable
Pooling and Servicing Agreement.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement will require the Master Servicer to
deliver annually to the Trustee and any Credit Enhancer, an officers'
certificate stating, as to each signer thereof, that (i) a review of the
activities of the Master Servicer during such preceding year and of performance
under the related Pooling and Servicing Agreement has been made under such
officers' supervision, and (ii) to the best of such officers' knowledge, based
on such review, the Master Servicer has fulfilled all its obligations under the
related Pooling and Servicing Agreement for such year, or, if there has been a
default in the fulfillment of any such obligations, specifying each such default
known to such officers and the nature and status thereof including the steps
being taken by the Master Servicer to remedy such defaults.
Each Pooling and Servicing Agreement will require the Master Servicer to
cause to be delivered to the Trustee and any Credit Enhancer a letter or letters
of a firm of independent, nationally recognized certified public accountants
reasonably acceptable to the Credit Enhancer, if applicable, stating that such
firm has, with respect to the Master Servicer's overall servicing operations (i)
performed applicable tests in accordance with the compliance testing procedures
as set forth in Appendix 3 of the Audit Guide for Audits of HUD Approved
Nonsupervised Mortgagees or (ii) examined such operations in accordance with the
requirements of the Uniform Single Audit Program for Mortgage Bankers, and in
either case stating such firm's conclusions relating thereto.
Copies of the annual accountants' statement and the annual statement of
officers of the Master Servicer may be obtained by Securityholders without
charge upon written request to the Master Servicer.
REMOVAL AND RESIGNATION OF THE MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that the Master Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, 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. No such resignation will become effective until the Trustee has
assumed the Master Servicer's obligations and duties under the Pooling and
Servicing Agreement. The Trustee, the Securityholders or a Credit Enhancer, if
applicable, will have the right, pursuant to the related Pooling and Servicing
Agreement, to remove the Master Servicer upon the occurrence of any of (a)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Master Servicer and certain
actions by the Master Servicer indicating its insolvency or inability to pay its
obligations; (b) the failure of the Master Servicer to perform any one or more
of its material obligations under the Pooling and Servicing Agreement as to
which the Master Servicer shall continue in default with respect thereto for a
specified period, generally of sixty (60) days, after notice by the Trustee or
any Credit Enhancer (if required by the Pooling and Servicing Agreement) of said
failure; or (c) the failure of the Master Servicer to cure any breach of any of
its representations and warranties set forth in the Pooling and Servicing
Agreement which materially and adversely
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affects the interests of the Securityholders or any Credit Enhancer, for a
specified period, generally of thirty (30) days after the Master Servicer's
discovery or receipt of notice thereof.
The Pooling and Servicing Agreement may also provide that the related
Credit Enhancer may remove the Master Servicer upon the occurrence of any of
certain events including:
(i) with respect to any Payment Date, if the total available funds
with respect to the Mortgage Loans Group will be less than the related
distribution amount on the class of credit-enhanced securities in respect
of such Payment Date; provided, however, that the Credit Enhancer generally
will have no right to remove the Master Servicer pursuant to the provision
described in this clause (i) if the Master Servicer can demonstrate to the
reasonable satisfaction of the Credit Enhancer that such event was due to
circumstances beyond the control of the Master Servicer;
(ii) the failure by the Master Servicer to make any required Servicing
Advance;
(iii) the failure of the Master Servicer to perform one or more of its
material obligations under the Pooling and Servicing Agreement; or
(iv) the failure by the Master Servicer to make any required
Delinquency Advance or to pay any Compensating Interest;
provided, however, that prior to any removal of the Master Servicer by the
related Credit Enhancer pursuant to clauses (i), (ii) or (iii) above the Master
Servicer shall first have been given by the related Credit Enhancer notice of
the occurrence of one or more of the events set forth in clauses (i) or (ii)
above and the Master Servicer shall not have remedied, or shall not have taken
action satisfactory to such Credit Enhancer to remedy, such event or events
within a specified period, generally 30 days (60 days with respect to clause
(iii)) after the Master Servicer's receipt of such notice; and provided, further
that in the event of the refusal or inability of the Master Servicer to make any
required Delinquency Advance or to pay any Compensating Interest as described in
clause (iv) above, such removal shall be effective (without the requirement of
any action on the part of such Credit Enhancer or of the Trustee) not later than
a shorter specified period, generally not in excess of five business days,
following the day on which the Trustee notifies an authorized officer of the
Master Servicer that a required Delinquency Advance or to pay any Compensating
Interest has not been received by the Trustee.
AMENDMENTS
The Trustee, the Sponsor and the Master Servicer may at any time and from
time to time, with the prior approval of the related Credit Enhancer, if
required, but without the giving of notice to or the receipt of the consent of
the Securityholders, amend a Pooling and Servicing Agreement, and the Trustee
will be required to consent to such amendment, for the purposes of (x) (i)
curing any ambiguity, or correcting or supplementing any provision of such
Pooling and Servicing Agreement which may be inconsistent with any other
provision of the Pooling and Servicing Agreement, (ii) in connection with a
Trust making REMIC elections, if accompanied by an approving opinion of counsel
experienced in federal income tax matters, removing the restriction against the
transfer of a REMIC residual security to a Disqualified Organization (as such
term is defined in the Code) or (iii) complying with the requirements of the
Code and the regulations proposed or promulgated thereunder; provided, however,
that such action shall not, as evidenced by an opinion of counsel delivered to
the Trustee, materially and adversely affect the interests of any Securityholder
(without its written consent) or (y) such other purposes set forth in the
related Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement may also be amended by the Trustee, the Sponsor
and the Master Servicer at any time and from time to time, with the prior
written approval of the related Credit Enhancer, if required, and not less than
a majority of the Percentage Interest represented by each related class of
Securities then outstanding, for the purpose of adding any provisions or
changing in any manner or eliminating any of the provisions of such Pooling and
Servicing Agreement or of modifying in any manner the rights of the
Securityholders thereunder; provided, however, that no such amendment shall (a)
change in any manner the amount of, or delay the timing of, payments which are
required to be distributed to any Securityholders without the consent of the
holder of such Security or (b) change the aforesaid percentages of Percentage
Interest which are required to consent to any such amendments, without the
consent of the holders of all Securities of the class or classes affected then
outstanding.
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TERMINATION; RETIREMENT OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that a Trust will terminate upon
the earlier of (i) the payment to the Securityholders of all Securities issued
by the Trust from amounts other than those available under, if applicable, the
related Credit Enhancement of all amounts required to be paid to such
Securityholders upon the later to occur of (a) the final payment or other
liquidation (or any advance made with respect thereto) of the last Mortgage Loan
in the Trust Estate or (b) the disposition of all property acquired in respect
of any Mortgage Loan remaining in the Trust Estate, (ii) any time when a
Qualified Liquidation (as defined in the Code) of the Trust Estate (if the
related Trust is a REMIC) is effected. In no event, however, will the trust
created by the Pooling and Servicing Agreement continue beyond the expiration of
21 years from the death of the survivor of certain persons named in such Pooling
and Servicing Agreement. Written notice of termination of the Pooling and
Servicing Agreement will be given to each Securityholder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency appointed by the Trustee that will be specified in the
notice of termination. If the Securityholders are permitted to terminate the
trust under the applicable Pooling and Servicing Agreement, a penalty may be
imposed upon the Securityholders based upon the fee that would be foregone by
the Master Servicer because of such termination.
Any purchase of Mortgage Loans and property acquired in respect of Mortgage
Loans evidenced by a series of Securities shall be made at the option of the
Master Servicer, the Sponsor or, if applicable, the holder of the REMIC Residual
Securities at the price specified in the related Prospectus Supplement. The
exercise of such right will effect earlier than expected retirement of the
Securities of that series, but the right of the Master Servicer, the Sponsor or,
if applicable, such holder to so purchase is, unless otherwise specified in the
applicable Prospectus Supplement, subject to the aggregate principal balance of
the Mortgage Loans for that series as of any Remittance Date being less than the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans at the Cut-Off Date for that series. The
Prospectus Supplement for each series of Securities will set forth the amounts
that the holders of such Securities will be entitled to receive upon such
earlier than expected retirement. If a REMIC election has been made, the
termination of the related Trust Estate will be effected in a manner consistent
with applicable federal income tax regulations and its status as a REMIC.
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement will be named in the
related Prospectus Supplement. Each Pooling and Servicing Agreement will provide
that the Trustee shall be under no obligation to exercise any of the rights or
powers vested in it by the Pooling and Servicing Agreement at the request or
direction of any of the Securityholders, unless such Securityholders shall have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction.
The Trustee may execute any of the trusts or powers granted by each Pooling
and Servicing Agreement or perform any duties thereunder either directly or by
or through agents or attorneys, and the Trustee will not be responsible for any
misconduct or negligence on the part of any agent or attorney appointed and
supervised with due care by it thereunder.
Pursuant to each Pooling and Servicing Agreement, the Trustee will not be
liable for any action it takes or omits to take in good faith which it
reasonably believes to be authorized by an authorized officer of any person or
within its rights or powers under the Pooling and Servicing Agreement.
Unless otherwise described in the related Prospectus Supplement, each
Pooling and Servicing Agreement will permit the removal of the Trustee upon the
occurrence and continuance of one of the following events:
(1) the Trustee shall fail to distribute to the Securityholders
entitled thereto on any Payment Date amounts available for distribution in
accordance with the terms of the Pooling and Servicing Agreement; or
(2) the Trustee shall default in the performance of, or breach, any
covenant or agreement of the Trustee in the Pooling and Servicing
Agreement, or if any representation or warranty of the Trustee made in the
Pooling and Servicing Agreement or in any certificate or other writing
delivered pursuant thereto or in
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connection therewith shall prove to be incorrect in any material respect as
of the time when the same shall have been made, and such default or breach
shall continue or not be cured for the period then specified in the related
Pooling and Servicing Agreement after the Trustee shall have received
notice specifying such default or breach and requiring it to be remedied;
or
(3) a decree or order of a court or agency or supervisory authority
having jurisdiction for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Trustee,
and such decree or order shall have remained in force undischarged or
unstayed for the period then specified in the related Pooling and Servicing
Agreement; or
(4) a conservator or receiver or liquidator or sequestrator or
custodian of the property of the Trustee is appointed in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings of or relating to the Trustee or relating to all or
substantially all of its property; or
(5) the Trustee shall become insolvent (however insolvency is
evidenced), generally fail to pay its debts as they come due, file or
consent to the filing of a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the benefit of
its creditors, voluntarily suspend payment of its obligations, or take
corporate action for the purpose of any of the foregoing.
If an event described above occurs and is continuing, then, and in every
such case (i) the Sponsor, (ii) the Securityholders (on the terms set forth in
the related Pooling and Servicing Agreement), or (iii) if there is a Credit
Enhancer, such Credit Enhancer may, whether or not the Trustee has resigned,
immediately, concurrently with the giving of notice to the Trustee, and without
delay, appoint a successor Trustee pursuant to the terms of the Pooling and
Servicing Agreement.
No Securityholder will have any right to institute any proceeding, judicial
or otherwise, with respect to a Pooling and Servicing Agreement or any Credit
Enhancement, if applicable, or for the appointment of a receiver or trustee, or
for any other remedy under the Pooling and Servicing Agreement, unless:
(1) such Securityholder has previously given written notice to the
Sponsor and the Trustee of such Securityholder's intention to institute
such proceeding;
(2) the Securityholders of not less than 25% of the Percentage
Interests represented by certain specified classes of Securities then
outstanding shall have made written request to the Trustee to institute
such proceeding;
(3) such Securityholder or Securityholders have offered to the Trustee
reasonable indemnity, against the costs, expenses and liabilities to be
incurred in compliance with such request;
(4) the Trustee for the period specified in the related Pooling and
Servicing Agreement, generally not in excess of 60 days after receipt of
such notice, request and offer of indemnity, has failed to institute such
proceeding;
(5) as long as such action affects any credit-enhanced class of
Securities outstanding, the related Credit Enhancer has consented in
writing thereto; and
(6) no direction inconsistent with such written request has been given
to the Trustee during such specified period by the Securityholders of a
majority of the Percentage Interests represented by certain specified
classes of Securities.
No one or more Securityholders will have any right in any manner whatever
by virtue of, or by availing themselves of, any provision of the Pooling and
Servicing Agreement to affect, disturb or prejudice the rights of any other
Securityholder of the same class or to obtain or to seek to obtain priority or
preference over any other Securityholder of the same class or to enforce any
right under the Pooling and Servicing Agreement, except in the manner provided
in the Pooling and Servicing Agreement and for the equal and ratable benefit of
all of the Securityholders of the same class.
In the event the Trustee receives conflicting or inconsistent requests and
indemnity from two or more groups of Securityholders, each representing less
than a majority of the applicable class of Securities, the Trustee in its
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sole discretion may determine what action, if any, shall be taken,
notwithstanding any other provision of the Pooling and Servicing Agreement.
Notwithstanding any other provision in the Pooling and Servicing Agreement,
the Securityholder of any Security has the right, which is absolute and
unconditional, to receive distributions to the extent provided in the Pooling
and Servicing Agreement with respect to such Security or to institute suit for
the enforcement of any such distribution, and such right shall not be impaired
without the consent of such Security.
Either (i) the Securityholders of a majority of the Percentage Interests
represented by certain specified classes of Securities then outstanding or (ii)
if there is a Credit Enhancer, such Credit Enhancer may direct the time, method
and place of conducting any proceeding for any remedy available to the Sponsor
with respect to the Certificates or exercising any trust or power conferred on
the Trustee with respect to such Certificates; provided that:
(1) such direction shall not be in conflict with any rule of law or
with a Pooling and Servicing Agreement;
(2) the Sponsor or the Trustee, as the case may be, shall have been
provided with indemnity satisfactory to them; and
(3) the Sponsor or the Trustee, as the case may be, may take any other
action deemed proper by the Trustee which is not inconsistent with such
direction; provided, however, that the Sponsor or the Trustee, as the case
may be, need not take any action which they determine might involve them in
liability or may be unjustly prejudicial to the Securityholders not so
directing.
The Trustee will be liable under the Pooling and Servicing Agreement only
to the extent of the obligations specifically imposed upon and undertaken by the
Trustee therein. Neither the Trustee nor any of the directors, officers,
employees or agents of the Trustee will be under any liability on any Security
or otherwise to any Account, the Sponsor, the Master Servicer or any
Securityholder for any action taken or for refraining from the taking of any
action in good faith under a Pooling and Servicing Agreement, or for errors in
judgment; provided, however, that such provision shall not protect the Trustee
or any such person against any liability which would otherwise be imposed by
reason of negligent action, negligent failure to act or willful misconduct in
the performance of duties or by reason of reckless disregard of obligations and
duties thereunder.
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YIELD CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by the
holder for such Security, the Pass-Through Rate on any such Security entitled to
payments of interest (which Pass-Through Rate may vary if so specified in the
related Prospectus Supplement) and the rate of payment of principal on such
Security (or the rate at which the notional amount thereof is reduced if such
Security is not entitled to payments of principal) and other factors.
Each month the interest payable on an actuarial type of Mortgage Loan will
be calculated as one-twelfth of the applicable Mortgage Rate multiplied by the
principal balance of such Mortgage Loan outstanding as of a specified day,
usually the first day of the month prior to the month in which the Payment Date
for the related series of Securities occurs, after giving effect to the payment
of principal due on such day, subject to any Deferred Interest. With respect to
date of payment Mortgage Loans, interest is charged to the Mortgagor at the
Mortgage Rate on the outstanding principal balance of such Note and calculated
based on the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payments. The amount of
such payments with respect to each Mortgage Loan distributed (or accrued in the
case of Deferred Interest or Accrual Securities) either monthly, quarterly or
semi-annually to holders of a class of Securities entitled to payments of
interest will be similarly calculated on the basis of such class' specified
percentage of each such payment of interest (or accrual in the case of Accrual
Securities) and will be expressed as a fixed, adjustable or variable
Pass-Through Rate payable on the outstanding principal balance or notional
amount of such Security, calculated as described herein and in the related
Prospectus Supplement. Holders of Strip Securities or a class of Securities
having a fixed Pass-Through Rate that varies based on the weighted average
Mortgage Rate of the underlying Mortgage Loans will be affected by
disproportionate prepayments and repurchases of Mortgage Loans having higher Net
Mortgage Rates or rates applicable to the Strip Securities, as applicable.
The effective yield to maturity to each holder of fixed-rate Securities
entitled to payments of interest will be below that otherwise produced by the
applicable Pass-Through Rate and purchase price of such Security because, while
interest will accrue on each Mortgage Loan from the first day of each month, the
distribution of such interest will be made on the 25th day (or, if such day is
not a business day, the next succeeding business day) of the month (or, in the
case of quarterly-pay Securities, the twenty-fifth day of every third month, or,
in the case of semi-annual-pay Securities, the twenty-fifth day of every sixth
month) following the month of accrual.
A class of Securities may be entitled to payments of interest at a fixed
Pass-Through Rate specified in the related Prospectus Supplement, a variable
Pass-Through Rate or adjustable Pass-Through Rate calculated based on the
weighted average of the Mortgage Rates (net of Servicing Fees and any
Originator's Retained Yield (each, a 'Net Mortgage Rate')) of the related
Mortgage Loans for the designated periods preceding the Payment Date if so
specified in the related Prospectus Supplement, or at such other variable rate
as may be specified in the related Prospectus Supplement.
As will be described in the related Prospectus Supplement, the aggregate
payments of interest on a class of Securities, and the yield to maturity
thereon, will be effected by the rate of payment of principal on the Securities
(or the rate of reduction in the notional balance of Securities entitled only to
payments of interest) and, in the case of Securities evidencing interests in ARM
Loans, by changes in the Net Mortgage Rates on the ARM Loans. See 'Maturity and
Prepayment Considerations' below. The yield on the Securities also will be
effected by liquidations of Mortgage Loans following Mortgagor defaults and by
purchases of Mortgage Loans required by the Pooling and Servicing Agreement in
the event of breaches of representations made in respect of such Mortgage Loans
by the Sponsor, the Originators, the Master Servicer and others, or repurchases
due to conversions of ARM Loans to a fixed interest rate. See 'Mortgage Loan
Program--Representations by Originators' and 'Descriptions of the
Securities--Assignment of Mortgage Loans' above. In general, if a class of
Securities is purchased at initial issuance at a premium and payments of
principal on the related Mortgage Loans occur at a rate faster than anticipated
at the time of purchase, the purchaser's actual yield to maturity will be lower
than that assumed at the time of purchase. Conversely, if a class of Securities
is purchased at initial issuance at a discount and payments of principal on the
related Mortgage Loans occur at a rate slower than that assumed at the time of
purchase, the purchaser's actual yield to maturity will be lower than that
originally anticipated. The effect of principal prepayments, liquidations and
purchases on yield will be particularly
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significant in the case of a series of Securities having a class entitled to
payments of interest only or to payments of interest that are disproportionately
high relative to the principal payments to which such class is entitled. Such a
class likely will be sold at a substantial premium to its principal balance, if
any, and any faster than anticipated rate of prepayments will adversely affect
the yield to holders thereof. In certain circumstances, rapid prepayments may
result in the failure of such holders to recoup their original investment. In
addition, the yield to maturity on certain other types of classes of Securities,
including Accrual Securities or certain other classes in a series including more
than one class of Securities, may be relatively more sensitive to the rate of
prepayment on the related Mortgage Loans than other classes of Securities.
The timing of changes in the rate of principal payments on or repurchases
of the Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. In general, the earlier a
prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of Securities
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
The Mortgage Rates on certain ARM Loans subject to negative amortization
adjust monthly and their amortization schedules adjust less frequently. During a
period of rising interest rates as well as immediately after origination
(initial Mortgage Rates are generally lower than the sum of the Indices
applicable at origination and the related Note Margins) the amount of interest
accruing on the principal balance of such Mortgage Loans may exceed the amount
of the minimum scheduled monthly payment thereon. As a result, a portion of the
accrued interest on negatively amortizing Mortgage Loans may become Deferred
Interest that will be added to the principal balance thereof and will bear
interest at the applicable Mortgage Rate. The addition of any such Deferred
Interest to the principal balance will lengthen the weighted average life of the
Securities evidencing interests in such Mortgage Loans and may adversely affect
yield to holders thereof depending upon the price at which such Securities were
purchased. In addition, with respect to certain ARM Loans subject to negative
amortization, during a period of declining interest rates, it might be expected
that each minimum scheduled monthly payment on such a Mortgage Loan would exceed
the amount of scheduled principal and accrued interest on the principal balance
thereof, and since such excess will be applied to reduce such principal balance,
the weighted average life of such Securities will be reduced and may adversely
affect yield to holders thereof depending upon the price at which such
Securities were purchased.
For each Mortgage Pool, if all necessary advances are made and if there is
no unrecoverable loss on any Mortgage Loan and if the related Credit Enhancer is
not in default under its obligations or other Credit Enhancement has not been
exhausted, the net effect of each distribution respecting interest will be to
pass-through to each holder of a class of Securities entitled to payments of
interest an amount which is equal to one month's interest (or, in the case of
quarterly-pay Securities, three month's interest or, in the case of semi-
annually-pay Securities, six months' interest) at the applicable Pass-Through
Rate on such class' principal balance or notional balance, as adjusted downward
to reflect any decrease in interest caused by any principal prepayments and the
addition of any Deferred Interest to the principal balance of any Mortgage Loan.
'Description of the Securities--Principal and Interest on the Securities.'
With respect to certain of the ARM Loans, the Mortgage Rate at origination
may be below the rate that would result if the index and margin relating thereto
were applied at origination. Under the Sponsor's underwriting standards, the
Mortgagor under each Mortgage Loan will be qualified on the basis of the
Mortgage Rate in effect at origination. The repayment of any such Mortgage Loan
may thus be dependent on the ability of the Mortgagor to make larger level
monthly payments following the adjustment of the Mortgage Rate.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under 'The Mortgage Pools,' the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Securities will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool.
Unless otherwise specified in the related Prospectus
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Supplement, all of the Mortgage Loans may be prepaid without penalty in full or
in part at any time. The prepayment experience with respect to the Mortgage
Loans in a Mortgage Pool will affect the maturity, average life and yield of the
related series of Securities.
With respect to Balloon Loans, payment of the Balloon Amount (which, based
on the amortization schedule of such Mortgage Loans, may be a substantial
amount) will generally depend on the Mortgagor's ability to obtain refinancing
of such Mortgage Loan or to sell the Mortgaged Property prior to the maturity of
the Balloon Loan. The ability to obtain refinancing will depend on a number of
factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the Mortgagor's financial situation,
prevailing mortgage loan interest rates, the Mortgagor's equity in the related
Mortgaged Property, tax laws and prevailing general economic conditions. Unless
otherwise specified in the related Prospectus Supplement, neither the Sponsor,
the Master Servicer, nor any of their affiliates will be obligated to refinance
or repurchase any Mortgage Loan or to sell the Mortgaged Property.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds, affect prepayment experience. Unless otherwise
specified in the related Prospectus Supplement, the Mortgage Loans will
generally contain due-on-sale provisions permitting the mortgagee to accelerate
the maturity of the Mortgage Loan upon sale or certain transfers by the
Mortgagor of the underlying Mortgaged Property. Unless the related Prospectus
Supplement indicates otherwise, the Master Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. Certain ARM Loans may be assumable under certain conditions if the
proposed transferee of the related Mortgaged Property establishes its ability to
repay the Mortgage Loan and, in the reasonable judgment of the Master Servicer
or the related Sub-Servicer, the security for the ARM Loan would not be impaired
or might be improved by the assumption. The extent to which ARM Loans are
assumed by purchasers of the Mortgaged Properties rather than prepaid by the
related Mortgagors in connection with the sales of the Mortgaged Properties will
affect the weighted average life of the related series of Securities. See
'Description of the Securities--Collection and Other Servicing Procedures' and
'Certain Legal Aspects of the Mortgage Loans and Related Matters--Enforceability
of Certain Provisions' for a description of certain provisions of the Pooling
and Servicing Agreement and certain legal developments that may affect the
prepayment experience on the Mortgage Loans.
There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Sponsor is not aware of any reliable, publicly available statistics
relating to the principal prepayment experience of diverse portfolios of
mortgage loans such as the Mortgage Loans over an extended period of time. All
statistics known to the Sponsor that have been compiled with respect to
prepayment experience on mortgage loans indicates that while some mortgage loans
may remain outstanding until their stated maturities, a substantial number will
be paid prior to their respective stated maturities.
Although the Mortgage Rates on ARM Loans will be subject to periodic
adjustments, such adjustments will, unless otherwise specified in the related
Prospectus Supplement, (i) not increase or decrease such Mortgage Rates by more
than a fixed percentage amount on each adjustment date, (ii) not increase such
Mortgage Rates over a fixed percentage amount during the life of any ARM Loan
and (iii) be based on an index (which may not rise and fall consistently with
mortgage interest rates) plus the related Note Margin (which may be different
from margins being used at the time for newly originated adjustable rate
mortgage loans). As a result, the Mortgage Rates on the ARM Loans in a Mortgage
Pool at any time may not equal the prevailing rates for similar, newly
originated adjustable rate mortgage loans. In certain rate environments, the
prevailing rates on fixed-rate mortgage loans may be sufficiently low in
relation to the then-current Mortgage Rates on ARM Loans that the rate of
prepayment may increase as a result of refinancings. There can be no certainty
as to the rate of prepayments on the Mortgage Loans during any period or over
the life of any series of Securities.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather
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than used to fund payments of principal to Securityholders during such period)
with the result that the related securities possess an interest-only period,
also commonly referred to as a revolving period, which will be followed by an
amortization period. Any such interest-only or revolving period may, upon the
occurrence of certain events to be described in the related Prospectus
Supplement, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Under certain circumstances, the Master Servicer, the Sponsor or, if
specified in the related Prospectus Supplement, the holders of the REMIC
Residual Securities or the Credit Enhancer may have the option to purchase the
Mortgage Loans in a Trust Estate. See 'The Pooling and Servicing
Agreement--Termination; Retirement of Securities.'
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state law (which laws may differ substantially),
the summaries do not purport to be complete nor to reflect the laws of any
particular state nor to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
GENERAL
The Mortgage Loans will be secured by either deeds of trust or mortgages,
depending upon the prevailing practice in the state in which the Mortgaged
Property subject to a Mortgage Loan is located. In some states, a mortgage
creates a lien upon the real property encumbered by the mortgage. In other
states, the mortgage conveys legal title to the property to the mortgagee
subject to a condition subsequent (i.e., the payment of the indebtedness secured
thereby). The mortgage is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers. Priority
between mortgages depends on their terms in some cases or on the terms of
separate subordination or intercreditor agreements, and generally on the order
of recordation of the mortgage in the appropriate recording office. There are
two parties to a mortgage, the mortgagor, who is the borrower and homeowner, and
the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower is the beneficiary;
at origination of a mortgage loan, the borrower executes a separate undertaking
to make payments on the mortgage note. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties; the borrower-homeowner 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. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by law, the express provisions of the
deed of trust or mortgage, and, in some cases, the directions of the
beneficiary.
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COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Securities, the Mortgage Loans also may consist of Cooperative Loans evidenced
by Cooperative Notes secured by security interests in shares issued by
cooperatives, which are private corporations that are entitled to be treated as
housing cooperatives under federal tax law, and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, also is
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or the
obtaining of capital by the cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that cooperative is the
landlord generally is subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease. If the cooperative
is unable to meet the payment obligations (i) arising under a blanket mortgage,
the mortgagee holding a blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements or (ii)
arising under its land lease, the holder of the landlord's interest under the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity. The
inability of the cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee.
Similarly, a land lease has an expiration date and the inability of the
cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of the Mortgage Loans,
the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary leases or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See 'Foreclosure on Shares of
Cooperatives' below.
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FORECLOSURE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale (private sale) under a specific provision in the deed of trust
and state laws which authorize the trustee to sell the property upon any default
by the borrower under the terms of the note or deed of trust. Beside the
nonjudicial remedy, a deed of trust may be judicially foreclosed. In addition to
any notice requirements contained in a deed of trust, in some states, the
trustee must record a notice of default and within a certain period of time send
a copy to the borrower trustor and to any person who has recorded a request for
a copy of notice of default and notice of sale. In addition, the trustee must
provide notice in some states to any other individual having an interest of
record in the real property, including any junior lienholders. If the deed of
trust is not reinstated within a specified period, a notice of sale must be
posted in a public place and, in most states, published for a specific period of
time in one or more local 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.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record 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 applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
in such states, the borrower, or any other person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at a foreclosure sale unless
there is a great deal of economic incentive for the new purchaser to purchase
the subject property at the sale. Rather, it is common for the lender to
purchase the property from the trustee or referee for a credit bid less than or
equal to the unpaid principal amount of the mortgage or deed of trust, accrued
and unpaid interest and the expense of foreclosure. Generally, state law
controls the amount of foreclosure costs and expenses, including attorneys'
fees, which may be recovered by a lender. Thereafter, subject to the right of
the borrower in some states to remain in possession during the redemption
period, the lender will assume the burdens of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property and, in some states, the lender may be entitled to a deficiency
judgment. Any loss may be reduced by the receipt of any mortgage insurance
proceeds.
FORECLOSURE ON SHARES OF COOPERATIVES
The cooperative shares and proprietary lease or occupancy agreement owned
by the tenant-stockholder and pledged to the lender are, in almost all cases,
subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled by the cooperative for failure by the tenant
stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
that are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate such
lease or agreement in the event the borrower defaults in the performance of
covenants thereunder. Typically, the lender and the cooperative enter into a
recognition agreement that, together with any lender protection provisions
contained in the proprietary lease, establishes the rights and obligations of
both parties in the event of a default by
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the tenant-stockholder on its obligations under the proprietary lease or
occupancy agreement. A default by the tenant-stockholder under the proprietary
lease or occupancy agreement usually will constitute a default under the
security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the cooperative will
recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement or sums that have become liens on the
shares relating to the proprietary lease or occupancy agreement. The total
amount owed to the cooperative by the tenant-stockholder, which the lender
generally cannot restrict and does not monitor, could reduce the amount realized
upon a sale of the collateral below the outstanding principal balance of the
Cooperative Loan and accrued and unpaid interest thereon.
Recognition agreements generally also provide that in the event of a
foreclosure on a Cooperative Loan, the lender must obtain the approval or
consent of the cooperative as required by the proprietary lease before
transferring the cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholder.
In New York, foreclosure on the cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a 'commercially reasonable' manner. Whether a sale has
been conducted in a 'commercially reasonable' manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
sale and the sale price. Generally, a sale conducted according to the usual
practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See 'Anti-Deficiency Legislation and
Other Limitations on Lenders' below.
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 or other parties are given
a statutory period in which to redeem the property from the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. 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 rights of
redemption would defeat the title of any purchaser subsequent to foreclosure or
sale under a deed of trust. Consequently, the practical effect of the redemption
right is to force the lender to maintain the property and pay the expenses of
ownership until the redemption period has expired. In some states, there is no
right to redeem property after a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the public sale of the real property. In
the case of a Mortgage Loan secured by a property owned by a trust where the
Mortgage Note is executed on behalf of the trust, a deficiency judgment against
the trust following foreclosure or sale under a deed of trust, even if
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obtainable under applicable law, may be of little value to the mortgagee or
beneficiary if there are no trust assets against which such deficiency judgment
may be executed. Other statutes require the beneficiary or mortgagee to exhaust
the security af forded 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, in those states permitting
such election, is that lenders will usually proceed against the security first
rather than bringing a personal action against the borrower. Finally, in certain
other states, statutory provisions limit any deficiency judgment against the
former borrower following a foreclosure to the excess of the outstanding debt
over the fair value of the property at the time of the public sale. The purpose
of these statutes is generally to prevent a beneficiary or mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
Certain states have imposed general equitable principles upon judicial
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of the borrower's default under the related loan
documents. Examples of judicial remedies that have been fashioned include
judicial requirements that the lender undertake affirmative and expensive
actions to determine the causes for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, lenders
have been required to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disabilities.
In other cases, such courts have limited the right of the lender to foreclose if
the default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include, by example, the federal Truth-in-Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act and related statutes and the California Fair Debt
Collection Practices Act. These laws and regulations impose specific statutory
liabilities upon lenders who originate mortgage loans and fail to comply with
the provisions of the law. In some cases, this liability may affect assignees of
the mortgage loans.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien generally will have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In some states, however, such a lien
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will not have priority over prior recorded liens of a deed of trust. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an 'owner' or
'operator' of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a lender (such as a Trust Estate) secured by
residential real property. In the event that title to a Mortgaged Property
securing a Mortgage Loan in a Trust Estate was acquired by the Trust and cleanup
costs were incurred in respect of the Mortgaged Property, the holders of the
related series of Securities might realize a loss if such costs were required to
be paid by the Trust.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, generally all of the
Mortgage Loans contain due-on-sale clauses. These clauses permit the lender to
accelerate the maturity of the loan if the borrower sells, transfers or conveys
the property. The enforceability of these clauses has been the subject of
legislation or litigation in many states including California, and in some cases
the enforceability of these clauses was limited or denied. However, the Garn-St.
Germain Depository Institutions Act of 1982 (the 'Garn-St. Germain Act')
preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. 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.
The Garn-St. Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St. Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, that may have an impact upon the average
life of the Mortgage Loans and the number of Mortgage Loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles generally are designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. 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, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
CERTAIN PROVISIONS OF CALIFORNIA DEEDS OF TRUST
Most institutional lenders in California use a form of deed of trust that
confers on the beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the deed of trust, in such order as the beneficiary may
determine, provided, however, that California law prohibits the beneficiary from
applying insurance and condemnation proceeds to the indebtedness secured by the
deed of trust unless the beneficiary's security has been impaired by the
casualty or condemnation, and, if such security has
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been impaired, permits such proceeds to be so applied only to the extent of such
impairment. 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, and, as a result thereof, the beneficiary's security is impaired,
the beneficiary under the underlying first deed of trust 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 first deed of trust. Proceeds in excess
of the amount of indebtedness secured by a first deed of trust will, in most
cases, be applied to the indebtedness of a junior deed of trust.
Another provision typically found in the forms of deed of trust used by
most institutional lenders in California obligates the trustor 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 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 beneficiary under the deed of trust. Upon a failure of the
trustor to perform any of these obligations, the beneficiary is given the right
under the deed of trust to perform the obligation itself, at its election, with
the trustor agreeing to reimburse the beneficiary for any sums expended by the
beneficiary on behalf of the trustor. All sums so expended by the beneficiary
become part of the indebtedness secured by the deed of trust.
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. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision which expressly rejects
application of the federal law. In addition, even where Title V is 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 or to limit discount
points or other charges.
As indicated above under 'Mortgage Loan Program--Representations by
Originators,' each Originator of a Mortgage Loan will have represented that such
Mortgage Loan was originated in compliance with then applicable state laws,
including usury laws, in all material respects. However, the Mortgage Rates on
the Mortgage Loans will be subject to applicable usury laws as in effect from
time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including ARM Loans and early ownership
mortgage loans, originated by non-federally chartered lenders have historically
been subjected to a variety of restrictions. Such restrictions differed from
state to state, resulting in difficulties in determining whether a particular
alternative mortgage instrument originated by a state-chartered lender was in
compliance with applicable law. These difficulties were alleviated substantially
as a result of the enactment of Title VIII of the Garn-St. Germain Act ('Title
VIII'). Title VIII provides that: notwithstanding any state law to the contrary,
state-chartered banks may originate alternative mortgage instruments in
accordance with regulations promulgated by the Comptroller of the Currency with
respect to origination of alternative mortgage instruments by national banks;
state-chartered credit unions may originate alternative mortgage instruments in
accordance with regulations promulgated by the National Credit Union
Administration with respect to origination of alternative mortgage instruments
by federal credit unions; and all other non-federally chartered housing
creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
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SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the 'Relief Act'), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
Mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on certain of
the Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Mortgage Loans, would result in a reduction
of the amounts distributable to the holders of the related Securities, and would
not be covered by advances, any Letter of Credit or any other form of Credit
Enhancement provided in connection with the related series of Securities. In
addition, the Relief Act imposes limitations that would impair the ability of
the Master Servicer to foreclose on an affected Mortgage Loan during the
Mortgagor's period of active duty status, and, under certain circumstances,
during an additional three month period thereafter. Thus, in the event that the
Relief Act or similar legislation or regulations apply to any Mortgage Loan
which goes into default, there may be delays in payment and losses on the
related Securities in connection therewith. Any other interest shortfalls,
deferrals or forgiveness of payments on the Mortgage Loans resulting from
similar legislation or regulations may result in delays in payments or losses to
Securityholders of the related series.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material anticipated federal
income tax consequences 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
consequences 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 Securities.
The following discussion addresses securities of three general types: (i)
securities ('Grantor Trust Securities') representing interests in a Trust Estate
(a 'Grantor Trust Estate') which the Sponsor will covenant not to elect to have
treated as a real estate mortgage investment conduit (REMIC); (ii) securities
('REMIC Securities') representing interests in a Trust Estate, or a portion
thereof, which the Sponsor will covenant to elect to have treated as a REMIC
under sections 860A through 860G of the Internal Revenue Code of 1986, as
amended (the 'Code'); and (iii) securities ('Debt Securities') that are intended
to be treated for federal income tax purposes as indebtedness secured by the
underlying Mortgage Loans. This Prospectus does not address the tax treatment of
partnership interests. Such a discussion will be set forth in the related
Prospectus Supplement for any Trust issuing Securities characterized as
partnership interests. The Prospectus Supplement for each series of Securities
will indicate whether a REMIC election (or elections) will be made for the
related Trust Estate and, if a REMIC election is to be made, will identify all
'regular interests' and 'residual interests' in the REMIC. For purposes of this
discussion, references to a 'Securityholder' or a 'Holder' are to the beneficial
owner of a Security.
GRANTOR TRUST SECURITIES
With respect to each series of Grantor Trust Securities, Dewey Ballantine,
special tax counsel to the Sponsor, will deliver its opinion to the Sponsor that
(unless otherwise limited in the related Prospectus Supplement) the related
Grantor Trust Estate will be classified as a grantor trust and not as a
partnership or an association taxable as a corporation. Accordingly, each Holder
of a Grantor Trust Security will generally be treated as the owner of an
interest in the Mortgage Loans included in the Grant or Trust Estate.
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For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Estate, together with
interest thereon at a pass-through rate, will be referred to as a 'Grantor Trust
Fractional Interest Security.' A Grantor Trust Security representing ownership
of all or a portion of the difference between interest paid on the Mortgage
Loans constituting the related Grantor Trust Estate and interest paid to the
Holders of Grantor Trust Fractional Interest Securities issued with respect to
such Grantor Trust Estate will be referred to as a 'Grantor Trust Strip
Security.'
Special Tax Attributes
Unless otherwise disclosed in a related Prospectus Supplement, Dewey
Ballantine, special tax counsel to the Sponsor, will deliver its opinion to the
Sponsor that (a) Grantor Trust Fractional Interest Securities will represent
interests in (i) 'qualifying real property loans' within the meaning of section
593(d) of the Code; (ii) 'loans . . . secured by an interest in real property'
within the meaning of section 7701(a)(19)(C)(v) of the Code; and (iii)
'obligations (including any participation or certificate of beneficial ownership
therein) which . . . are principally secured by an interest in real property'
within the meaning of section 860G(a)(3)(A) of the Code; and (b) interest on
Grantor Trust Fractional Interest Securities will be considered '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. In addition,
the Grantor Trust Strip Securities will be 'obligations (including any
participation or certificate of beneficial ownership therein) . . . principally
secured by an interest in real property' within the meaning of section
860G(a)(3)(A) of the Code.
Taxation of Holders of Grantor Trust Securities
Holders of Grantor Trust Fractional Interest Securities generally will be
required to report on their federal income tax returns their respective shares
of the income from the Mortgage Loans (including amounts used to pay reasonable
servicing fees and other expenses but excluding amounts payable to Holders of
any corresponding Grantor Trust Strip Securities) and, subject to the
limitations described below, will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. If a Holder acquires a Grantor
Trust Fractional Interest Security for an amount that differs from its
outstanding principal amount, the amount includible in income on a Grantor Trust
Fractional Interest Security may differ from the amount of interest
distributable thereon. See 'Discount and Premium,' below. Individuals holding a
Grantor Trust Fractional Interest Security directly or through certain
pass-through entities will be allowed a deduction for such reasonable servicing
fees and expenses only to the extent that the aggregate of such Holder's
miscellaneous itemized deductions exceeds 2% of such Holder's adjusted gross
income. Further, Holders (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining
alternative minimum taxable income.
Holders of Grantor Trust Strip Securities generally will be required to
treat such Securities as 'stripped coupons' under section 1286 of the Code.
Accordingly, such a Holder will be required to treat the excess of the total
amount of payments on such a Security over the amount paid for such Security as
original issue discount and to include such discount in income as it accrues
over the life of such Security. See '--Discount and Premium,' below.
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the Holder's income as
it accrues (regardless of the Holder's method of accounting), as described below
under '--Discount and Premium.' The coupon stripping rules will not apply,
however, if (i) the pass-through rate is no more than 100 basis points lower
than the gross rate of interest payable on the underlying Mortgage Loans and
(ii) the difference between the outstanding principal balance on the Security
and the amount paid for such Security is less than 0.25% of such principal
balance times the weighted average remaining maturity of the Security.
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Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust Security (equal
to the difference between the amount realized on the sale and the adjusted basis
of such Grantor Trust Security) will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and in the case of banks and other financial institutions
except as provided under section 582(c) of the Code. The adjusted basis of a
Grantor Trust Security will generally equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions of principal.
Grantor Trust Reporting
The Trustee will furnish to each Holder of a Grantor Trust Fractional
Interest Security with each distribution a statement setting forth the amount of
such distribution allocable to principal on the underlying Mortgage Loans and to
interest thereon at the related Pass-Through Rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Servicer, the Trustee will furnish to each Holder during such
year such customary factual information as the Servic er deems necessary or
desirable to enable Holders of Grantor Trust Securities to prepare their tax
returns and will furnish comparable information to the Internal Revenue Service
(the 'IRS') as and when required to do so by law.
REMIC SECURITIES
If provided in a related Prospectus Supplement, an election will be made to
treat a Trust Estate as a REMIC under the Code. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each series
of Securities for which such an election is made, Dewey Ballantine, special tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the related Prospectus Supplement), assuming compliance
with the Pooling and Servicing Agreement, the Trust Estate will be treated as a
REMIC for federal income tax purposes. A Trust Estate for which a REMIC election
is made will be referred to herein as a 'REMIC Trust.' The Securities of each
class will be designated as 'regular interests' in the REMIC Trust except that a
separate class will be designated as the 'residual interest' in the REMIC Trust.
The Prospectus Supplement for each series of Securities will state whether
Securities of each class will constitute a regular interest (a REMIC Regular
Security) or a residual interest (a REMIC Residual Security).
A REMIC Trust will not be subject to federal income tax except with respect
to income from prohibited transactions and in certain other instances described
below. See '--Taxes on a REMIC Trust.' Generally, the total income from the
Mortgage Loans in a REMIC Trust will be taxable to the Holders of the Securities
of that series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (the
'REMIC Regulations') provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
Securities. While certain material provisions of the REMIC Regulations are
discussed below, investors should consult their own tax advisors regarding the
possible application of the REMIC Regulations in their specific circumstances.
SPECIAL TAX ATTRIBUTES
REMIC Regular Securities and REMIC Residual Securities will be 'regular or
residual interests in a REMIC' within the meaning of section 7701(a)(19)(C)(xi)
of the Code, 'qualifying real property loans' within the meaning of section
593(d) of the Code and 'real estate assets' within the meaning of section
856(c)(5)(A) of the Code. If at any time during a calendar year less than 95% of
the assets of a REMIC Trust consist of 'qualified mortgages' (within the meaning
of section 860G(a)(3) of the Code) then the portion of the REMIC Regular
Securities and REMIC Residual Securities that are qualifying assets under those
sections during such calendar year may be limited to the portion of the assets
of such REMIC Trust that are qualified mortgages. Similarly, income on the REMIC
Regular Securities and REMIC Residual Securities will be treated as 'interest on
obligations secured by mortgages on real property' within the meaning of section
856(c)(3)(B) of the Code, subject to the same limitation as set forth in the
preceding sentence. For purposes of applying this limitation, a REMIC Trust
should be treated as owning the assets represented by the qualified mortgages.
The assets of the
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Trust Estate will include, in addition to the Mortgage Loans, payments on the
Mortgage Loans held pending distribution on the REMIC Regular Securities and
REMIC Residual Securities and any reinvestment income thereon. REMIC Regular
Securities and REMIC Residual Securities held by a financial institution to
which section 585, 586 or 593 of the Code applies will be treated as evidences
of indebtedness for purposes of section 582(c)(1) of the Code. REMIC Regular
Securities will also be qualified mortgages with respect to other REMICs.
Taxation of Holders of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the REMIC
Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the 'Settlement Date') and not as ownership interests in the
REMIC Trust or its assets. Holders of REMIC Regular Securities that otherwise
report income under a cash method of accounting will be required to report
income with respect to such Securities under an ac crual method. For additional
tax consequences relating to REMIC Regular Securities purchased at a discount or
with premium, see '--Discount and Premium,' below.
Taxation of Holders of REMIC Residual Securities
Daily Portions. Except as indicated below, a Holder of a REMIC Residual
Security for a REMIC Trust generally will be required to report its daily
portion of the taxable income or net loss of the REMIC Trust for each day during
a calendar quarter that the Holder owned such REMIC Residual Security. For this
purpose, the daily portion shall be determined by allocating to each day in the
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC Trust for such quarter and by allocating the amount so allocated among the
Residual Holders (on such day) in accordance with their percentage interests on
such day. Any amount included in the gross income or allowed as a loss of any
Residual Holder by virtue of this paragraph will be treated as ordinary income
or loss.
The requirement that each Holder of a REMIC Residual Security report its
daily portion of the taxable income or net loss of the REMIC Trust will continue
until there are no Securities of any class outstanding, even though the Holder
of the REMIC Residual Security may have received full payment of the stated
interest and principal on its REMIC Residual Security.
The Trustee will provide to Holders of REMIC Residual Securities of each
series of Securities (i) such information as is necessary to enable them to
prepare their federal income tax returns and (ii) any reports regarding the
Securities of such series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net
loss of a REMIC Trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with certain modifications. The
first modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d) of the Code) on the REMIC Regular
Securities (but not the REMIC Residual Securities), even though REMIC Regular
Securities are for non-tax purposes evidences of beneficial ownership rather
than indebtedness of a REMIC Trust. Second, market discount or premium equal to
the difference between the total stated principal balances of the qualified
mortgages and the basis to the REMIC Trust therein generally will be included in
income (in the case of discount) or deductible (in the case of premium) by the
REMIC Trust as it accrues under a constant yield method, taking into account the
'Prepayment Assumption' (as defined in the Related Prospectus Supplement, see
'--Discount and Premium--Original Issue Discount,' below). The basis to a REMIC
Trust in the qualified mortgages is the aggregate of the issue prices of all the
REMIC Regular Securities and REMIC Residual Securities in the REMIC Trust on the
Settlement Date. If, however, a substantial amount of a class of REMIC Regular
Securities or REMIC Residual Securities has not been sold to the public, then
the fair market value of all the REMIC Regular Securities or REMIC Residual
Securities in that class as of the date of the Prospectus Supplement should be
substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a prohibited
transaction (see '--Taxes on a REMIC Trust--Prohibited Transactions' below) will
be taken into account. Fourth, a REMIC Trust generally
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may not deduct any item that would not be allowed in calculating the taxable
income of a partnership by virtue of section 703(a)(2) of the Code. Finally, the
limitation on miscellaneous itemized deductions imposed on individuals by
section 67 of the Code will not be applied at the REMIC Trust level to any
servicing and guaranty fees. (See, however, '--Pass-Through of Servicing and
Guaranty Fees to Individuals' below.) In addition, under the REMIC Regulations,
any expenses that are incurred in connection with the formation of a REMIC Trust
and the issuance of the REMIC Regular Securities and REMIC Residual Securities
are not treated as expenses of the REMIC Trust for which a deduction is allowed.
If the deductions allowed to a REMIC Trust exceed its gross income for a
calendar quarter, such excess will be a net loss for the REMIC Trust for that
calendar quarter. The REMIC Regulations also provide that any gain or loss to a
REMIC Trust from the disposition of any asset, including a qualified mortgage or
'permitted investment' (as defined in section 860G(a)(5) of the Code) will be
treated as ordinary gain or loss.
A Holder of a REMIC Residual Security may be required to recognize taxable
income without being entitled to receive a corresponding amount of cash. This
could occur, for example, if the qualified mortgages are considered to be
purchased by the REMIC Trust at a discount, some or all of the REMIC Regular
Securities are issued at a discount, and the discount included as a result of a
prepayment on a Mortgage Loan that is used to pay principal on the REMIC Regular
Securities exceeds the REMIC Trust's deduction for unaccrued original issue
discount relating to such REMIC Regular Securities. Taxable income may also be
greater in earlier years because interest expense deductions, expressed as a
percentage of the outstanding principal amount of the REMIC Regular Securities,
may increase over time as the earlier classes of REMIC Regular Securities are
paid, whereas interest income with respect to any given Mortgage Loan expressed
as a percentage of the outstanding principal amount of that Mortgage Loan, will
remain constant over time.
Basis Rules and Distributions. A Holder of a REMIC Residual Security has
an initial basis in its Security equal to the amount paid for such REMIC
Residual Security. Such basis is increased by amounts included in the income of
the Holder and decreased by distributions and by any net loss taken into account
with respect to such REMIC Residual Security. A distribution on a REMIC Residual
Security to a Holder is not included in gross income to the extent it does not
exceed such Holder's basis in the REMIC Residual Security (adjusted as described
above) and, to the extent it exceeds the adjusted basis of the REMIC Residual
Security, shall be treated as gain from the sale of the REMIC Residual Security.
A Holder of a REMIC Residual Security is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
Holder's adjusted basis in its REMIC Residual Security as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC Residual Security.
Excess Inclusions. Any excess inclusions with respect to a REMIC Residual
Security are subject to certain special tax rules. With respect to a Holder of a
REMIC Residual Security, the excess inclusion for any calendar quarter is
defined as the excess (if any) of the daily portions of taxable income over the
sum of the 'daily accruals' for each day during such quarter that such REMIC
Residual Security was held by such Holder. The daily accruals are determined by
allocating to each day during a calendar quarter its ratable portion of the
product of the 'adjusted issue price' of the REMIC Residual Security at the
beginning of the calendar quarter and 120% of the 'federal long-term rate' in
effect on the Settlement Date, based on quarterly compounding, and properly
adjusted for the length of such quarter. For this purpose, the adjusted issue
price of a REMIC Residual Security as of the beginning of any calendar quarter
is equal to the issue price of the REMIC Residual Security, increased by the
amount of daily accruals for all prior quarters and decreased by any
distributions made with respect to such REMIC Residual Security before the
beginning of such quarter. The issue price of a REMIC Residual Security is the
initial offering price to the public (excluding bond houses and brokers) at
which a substantial number of the REMIC Residual Securities was sold. The
federal long-term rate is a blend of current yields on Treasury securities
having a maturity of more than nine years, computed and published monthly by the
IRS.
For Holders of REMIC Residual Securities that are thrift institutions
described in section 593 of the Code, income from a REMIC Residual Security
generally may be offset by losses from other activities. Under the REMIC
Regulations, such an organization is treated as having applied its allowable
deductions for the year first to offset income that is not an excess inclusion
and then to offset that portion of its income that is an excess
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inclusion. For other Holders of REMIC Residual Securities, any excess inclusions
cannot be offset by losses from other activities. For Holders that are subject
to tax only on unrelated business taxable income (as defined in section 511 of
the Code), an excess inclusion of such Holder is treated as unrelated business
taxable income. With respect to variable contracts (within the meaning of
section 817 of the Code), a life insurance company cannot adjust its reserve to
the extent of any excess inclusion, except as provided in regulations. The REMIC
Regulations indicate that if a Holder of a REMIC Residual Security is a member
of an affiliated group filing a consolidated income tax return, the taxable
income of the affiliated group cannot be less than the sum of the excess
inclusions attributable to all residual interests in REMICS held by members of
the affiliated group. For a discussion of the effect of excess inclusions on
certain foreign investors that own REMIC Residual Securities, see '--Foreign
Investors' below.
The REMIC Regulations provide that an organization to which section 593 of
the Code applies and which is the Holder of a REMIC Residual Security may not
use its allowable deductions to offset any excess inclusions with respect to
such Security if such Security does not have 'significant value.' For this
purpose, a REMIC Residual Security has significant value under the REMIC
Regulations if (i) its issue price is at least 2% of the aggregate of the issue
prices of all the REMIC Regular Securities and REMIC Residual Securities in that
REMIC Trust and (ii) its 'anticipated weighted average life' is at least 20% of
the 'anticipated weighted average life' of such REMIC Trust.
In determining whether a REMIC Residual Security has significant value, the
anticipated weighted average life of such Security is based in part on the
Prepayment Assumption, except that all anticipated payments on such Security are
taken into account, regardless of their designation as principal or interest.
The anticipated weighted average life of a REMIC Trust is the weighted average
of the anticipated weighted average lives of the Securities.
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have 'significant value.' Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
whether the test for significant value that is contained in the REMIC
Regulations and discussed in the two preceding paragraphs would be applicable.
If no such rule is applicable, excess inclusions should be calculated as
discussed above.
In the case of any REMIC Residual Securities that are held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Securities reduced (but not below zero) by the real estate investment
trust taxable income (within the meaning of section 857(b)(2) of the Code,
excluding any net capital gain) will be allocated among the shareholders of such
trust in proportion to the dividends received by such shareholders from such
trust, and any amount so allocated will be treated as an excess inclusion with
respect to a REMIC Residual Security as if held directly by such shareholder.
Similar rules will apply in the case of regulated investment companies, common
trust funds and certain cooperatives that hold a REMIC Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of a
REMIC Residual Security who is an individual will be required to include in
income a share of any servicing and guaranty fees. A deduction for such fees
will be allowed to such Holder only to the extent that such fees, along with
certain of such Holder's other miscellaneous itemized deductions exceed 2% of
such Holder's adjusted gross income. In addition, a Holder of a REMIC Residual
Security may not be able to deduct any portion of such fees in computing such
Holder's alternative minimum tax liability. A Holder's share of such fees will
generally be determined by (i) allocating the amount of such expenses for each
calendar quarter on a pro rata basis to each day in the calendar quarter, and
(ii) allocating the daily amount among the Holders in proportion to their
respective holdings on such day.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC equal to 100%
of the net income derived from 'prohibited transactions.' In general, a
prohibited transaction means the disposition of a qualified mortgage other than
pursuant to certain specified exceptions, the receipt of investment income from
a source other than a Mortgage Loan or certain other permitted investments, the
receipt of compensation for services, or the disposition of an asset purchased
with the payments on the qualified mortgages for temporary investment pending
distribution on the regular and residual interests.
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Contributions to a REMIC after the Startup Day. The Code imposes a tax on
a REMIC equal to 100% of the value of any property contributed to the REMIC
after the 'startup day' (generally the same as the Settlement Date). Exceptions
are provided for cash contributions to a REMIC (i) during the three month period
beginning on the startup day, (ii) made to a qualified reserve fund by a Holder
of a residual interest, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted by Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on 'net income from foreclosure property.'
The terms 'foreclosure property' (which includes property acquired by deed in
lieu of foreclosure) and 'net income from foreclosure property' are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of two years, with
possible extensions. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
Sales of REMIC Securities
General. Except as provided below, if a Regular or REMIC Residual Security
is sold, the seller will recognize gain or loss equal to the difference between
the amount realized in the sale and its adjusted basis in the Security. The
adjusted basis of a REMIC Regular Security generally will equal the cost of such
Security to the seller, increased by any original issue discount or market
discount included in the seller's gross income with respect to such Security and
reduced by distributions on such Security previously received by the seller of
amounts included in the stated redemption price at maturity and by any premium
that has reduced the seller's interest income with respect to such Security. See
'--Discount and Premium.' The adjusted basis of a REMIC Residual Security is
determined as described above under '--Taxation of Holders of REMIC Residual
Securities--Basis Rules and Distributions.' Except as provided in the following
paragraph or under section 582(c) of the Code, any such gain or loss will be
capital gain or loss, provided such Security is held as a 'capital asset'
(generally, property held for investment) within the meaning of section 1221 of
the Code.
Gain from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the Holder of a REMIC Regular Security had income
accrued at a rate equal to 110% of the 'applicable federal rate' (generally, an
average of current yields on Treasury securities) as of the date of purchase
over (ii) the amount actually includible in such Holder's income. In addition,
gain recognized on such a sale by a Holder of a REMIC Regular Security who
purchased such a Security at a market discount would also be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period such Security was held by such Holder, reduced by any market
discount includible in income under the rules described below under '--Discount
and Premium.'
If a Holder of a REMIC Residual Security sells its REMIC Residual Security
at a loss, the loss will not be recognized if, within six months before or after
the sale of the REMIC Residual Security, such Holder purchases another residual
interest in any REMIC or any interest in a taxable mortgage pool (as defined in
section 7701(i) of the Code) comparable to a residual interest in a REMIC. Such
disallowed loss would be allowed upon the sale of the other residual interest
(or comparable interest) if the rule referred to in the preceding sentence does
not apply to that sale. While this rule may be modified by Treasury regulations,
no such regulations have yet been published.
Transfers of REMIC Residual Securities. Section 860E(e) of the Code
imposes a substantial tax, payable by the transferor (or, if a transfer is
through a broker, nominee, or other middleman as the transferee's agent, payable
by that agent) upon any transfer of a REMIC Residual Security to a disqualified
organization and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, certain cooperatives, and nominees) that owns a REMIC Residual
Security if such pass-through entity has a disqualified organization as a
record-holder. For purposes of the preceding sentence, a transfer includes any
transfer of record or beneficial ownership, whether pursuant to a purchase, a
default under a secured lending agreement or otherwise.
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The term 'disqualified organization' includes the United States, any state
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of the foregoing (other than
certain taxable instrumentalities), any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax, unless such organization is subject to the tax on unrelated business
income. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of a REMIC Residual Security and certain other
provisions that are intended to meet this requirement are described in the
Pooling and Servicing Agreement, and will be discussed more fully in the related
Prospectus Supplement relating to the offering of any REMIC Residual Security.
In addition, a pass-through entity (including a nominee) that holds a REMIC
Residual Security may be subject to additional taxes if a disqualified
organization is a record-holder therein. A transferor of a REMIC Residual
Security (or an agent of a transferee of a REMIC Residual Security, as the case
may be) will be relieved of such tax liability if (i) the transferee furnishes
to the transferor (or the transferee's agent) an affidavit that the transferee
is not a disqualified organization, and (ii) the transferor (or the transferee's
agent) does not have actual knowledge that the affidavit is false at the time of
the transfer. Similarly, no such tax will be imposed on a pass-through entity
for a period with respect to an interest therein owned by a disqualified
organization if (i) the record-holder of such interest furnishes to the
pass-through entity an affidavit that it is not a disqualified organization, and
(ii) during such period, the pass-through entity has no actual knowledge that
the affidavit is false.
Under the REMIC Regulations, a transfer of a 'noneconomic residual
interest' to a U.S. Person (as defined below in '--Foreign Investors--Grantor
Trust Securities and REMIC Regular Securities') will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. A REMIC Residual Security would be treated
as constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
REMIC Residual Security is no less than the product of the present value of the
'anticipated excess inclusions' with respect to such Security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC Trust in an amount sufficient to satisfy the liability
for income tax on any 'excess inclusions' at or after the time when such
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a REMIC Residual Security, determined as of the date
such Security is transferred and based on events that have occurred as of that
date and on the Prepayment Assumption. See '--Discount and Premium' and
'--Taxation of Holders of REMIC Residual Securities--Excess Inclusions.'
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has 'improper knowledge' (i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC Trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (ii) the
transferee makes certain representations to the transferor in the affidavit
relating to disqualified organizations discussed above. Transferors of a REMIC
Residual Security should consu lt with their own tax advisors for further
information regarding such transfers.
Reporting and Other Administrative Matters. For purposes of the
administrative provisions of the Code, each REMIC Trust will be treated as a
partnership and the Holders of REMIC Residual Securities will be treated as
partners. The Trustee will prepare, sign and file federal income tax returns for
each REMIC Trust, which returns are subject to audit by the IRS. Moreover,
within a reasonable time after the end of each calendar year, the Trustee will
furnish to each Holder that received a distribution during such year a statement
setting forth the portions of any such distributions that constitute interest
distributions, original issue discount, and such other information as is
required by Treasury regulations and, with respect to Holders of REMIC Residual
Securities in a REMIC Trust, information necessary to compute the daily portions
of the taxable income (or net loss) of such
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REMIC Trust for each day during such year. The Trustee will also act as the tax
matters partner for each REMIC Trust, either in its capacity as a Holder of a
REMIC Residual Security or in a fiduciary capacity. Each Holder of a REMIC
Residual Security, by the acceptance of its REMIC Residual Security, agrees that
the Trustee will act as its fiduciary in the performance of any duties required
of it in the event that it is the tax matters partner.
Each Holder of a REMIC Residual Security is required to treat items on its
return consistently with the treatment on the return of the REMIC Trust, unless
the Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Trust. The IRS may assert a deficiency resulting from a failure to comply
with the consistency requirement without instituting an administrative
proceeding at the REMIC Trust level. Unless otherwise specified in the related
Prospectus Supplement, the Trustee does not intend to register any REMIC Trust
as a tax shelter pursuant to section 6111 of the Code.
Termination
In general, no special tax consequences will apply to a Holder of a REMIC
Regular Security upon the termination of a REMIC Trust by virtue of the final
payment or liquidation of the last Mortgage Loan remaining in the Trust Estate.
If a Holder of a REMIC Residual Security's adjusted basis in its REMIC Residual
Security at the time such termination occurs exceeds the amount of cash
distributed to such Holder in liquidation of its interest, although the matter
is not entirely free from doubt, it would appear that the Holder of the REMIC
Residual Security is entitled to a loss equal to the amount of such excess.
DEBT SECURITIES
General
With respect to each series of Debt Securities, Dewey Ballantine, special
tax counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the related Prospectus Supplement) the Securities will be
classified as debt of the Sponsor secured by the related Mortgage Loans.
Consequently, the Debt Securities will not be treated as ownership interests in
the Mortgage Loans or the Trust. Holders will be required to report income
received with respect to the Debt Securities in accordance with their normal
method of accounting. For additional tax consequences relating to Debt
Securities purchased at a discount or with premium, see '--Discount and
Premium,' below.
Special Tax Attributes
As described above, Grantor Trust Securities will possess certain special
tax attributes by virtue of their being ownership interests in the underlying
Mortgage Loans. Similarly, REMIC Securities will possess similar attributes by
virtue of the REMIC provisions of the Code. In general, Debt Securities will not
possess such special tax attributes. Investors to whom such attributes are
important should consult their own tax advisors regarding investment in Debt
Securities.
Sale or Exchange
If a Holder of a Debt Security sells or exchanges such Security, the Holder
will recognize gain or loss equal to the difference, if any, between the amount
received and the Holder's adjusted basis in the Security. The adjusted basis in
the Security generally will equal its initial cost, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the Security and reduced by the payments previously
received on the Security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described in '--Discount and Premium--Market
Discount,' below), except for certain financial institutions subject to section
582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security
recognized by an investor who holds the Security as a capital asset (within the
meaning of section 1221 of the Code), will be capital gain or loss and will be
long-term or short-term depending on whether the Security has been held for more
than one year.
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DISCOUNT AND PREMIUM
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286 of the
Code. In very general terms, (i) original issue discount is treated as a form of
interest and must be included in a Holder's income as it accrues (regardless of
the Holder's regular method of accounting) using a constant yield method; (ii)
market discount is treated as ordinary income and must be included in a Holder's
income as principal payments are made on the Security (or upon a sale of a
Security); and (iii) if a Holder so elects, premium may be amortized over the
life of the Security and offset against inclusions of interest income. These tax
consequences are discussed in greater detail below.
Original Issue Discount
In general, a Security will be considered to be issued with original issue
discount equal to the excess, if any, of its 'stated redemption price at
maturity' over its 'issue price.' The issue price of a Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial number of the Securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
Remittance Period and the Settlement Date. The stated redemption price at
maturity of a Security that has a notional principal amount or receives
principal only or that is or may be an Accrual Security is equal to the sum of
all distributions to be made under such Security. The stated redemption price at
maturity of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first Payment Date
over the interest that accrues for the period from the Settlement Date to the
first Payment Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25% of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a Security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the amounts
determined by multiplying (i) the number of complete years (rounding down for
partial years) from the Settlement Date until the date on which each such
distribution is expected to be made under the assumption that the Mortgage Loans
prepay at the rate specified in the related Prospectus Supplement (the
'Prepayment Assumption') by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the Security's
stated redemption price at maturity. If original issue discount is treated as
zero under this rule, the actual amount of original issue discount must be
allocated to the principal distributions on the Security and, when each such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities and applicable
by analogy to Grantor Trust Securities. Investors in Grantor Trust Securities
should be aware that there can be no assurance that the rules described below
will be applied to such Securities. Under these rules (described in greater
detail below), (i) the amount and rate of accrual of original issue discount on
each series of Securities will be based on (x) the Prepayment Assumption, and
(y) in the case of a Security calling for a variable rate of interest, an
assumption that the value of the index upon which such variable rate is based
remains equal to the value of that rate on the Settlement Date, and (ii)
adjustments will be made in the amount of discount accruing in each taxable year
in which the actual prepayment rate differs from the Prepayment Assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Sponsor anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The Sponsor
makes no representation, however, that the Mortgage Loans for a given series
will prepay at the rate reflected in the Prepayment Assumption for that series
or at any other rate. Each investor must make its own decision as to the
appropriate prepayment assumption to be used in deciding whether or not to
purchase any of the Securities.
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Each Securityholder must include in gross income the sum of the 'daily
portions' of original issue discount on its Security for each day during its
taxable year on which it held such Security. For this purpose, in the case of an
original Holder, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each 'accrual period.' The Trustee
will supply, at the time and in the manner required by the IRS, to
Securityholders, brokers and middlemen information with respect to the original
issue discount accruing on the Securities. Unless otherwise disclosed in the
related Prospectus Supplement, the Trustee will report original issue discount
based on accrual periods of one month, each beginning on a payment date (or, in
the case of the first such period, the Settlement Date) and ending on the day
before the next payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security during the accrual period of amounts
included in the stated redemption price at maturity, over (ii) the adjusted
issue price of such Security at the beginning of the accrual period. The present
value of the remaining distributions referred to in the preceding sentence will
be calculated based on (i) the yield to maturity of the Security, calculated as
of the Settlement Date, giving effect to the Prepayment Assumption, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, (iii) the Prepayment Assumption, and (iv) in the case of a
Security calling for a variable rate of interest, an assumption that the value
of the index upon which such variable rate is based remains the same as its
value on the Settlement Date over the entire life of such Security. The adjusted
issue price of a Security at any time will equal the issue price of such
Security, increased by the aggregate amount of previously accrued original issue
discount with respect to such Security, and reduced by the amount of any
distributions made on such Security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing during
any accrual period will then be allocated ratably to each day during the period
to determine the daily portion of original issue discount.
In the case of Grantor Trust Strip Securities and certain REMIC Securities,
the calculation described in the preceding paragraph may produce a negative
amount of original issue discount for one or more accrual periods. No definitive
guidance has been issued regarding the treatment of such negative amounts. The
legislative history to section 1272(a)(6) indicates that such negative amounts
may be used to offset subsequent positive accruals but may not offset prior
accruals and may not be allowed as a deduction item in a taxable year in which
negative accruals exceed positive accruals. Holders of such Securities should
consult their own tax advisors concerning the treatment of such negative
accruals.
A subsequent purchaser of a Security that purchases such Security at a cost
less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
Market Discount
A Holder that purchases a Security at a market discount, that is, at a
purchase price less than the remaining stated redemption price at maturity of
such Security (or, in the case of a Security with original issue discount, its
adjusted issue price), will be required to allocate each principal distribution
first to accrued market discount on the Security, and recognize ordinary income
to the extent such distribution does not exceed the aggregate amount of accrued
market discount on such Security not previously included in income. With respect
to Securities that have unaccrued original issue discount, such market discount
must be included in income in addition to any original issue discount. A Holder
that incurs or continues indebtedness to acquire a Security at a market discount
may also 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. In general terms, market discount on a Security may be
treated as accruing either (i) under a constant yield method or (ii) in
proportion to remaining accruals of original issue discount, if any, or if none,
in proportion to remaining distributions of interest on the Security, in
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any case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to Holders of Securities information
necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such Security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased such Security (a 'Premium Security') at a premium. Such a
purchaser need not include in income any remaining original issue discount and
may elect, under section 171(c)(2) of the Code, to treat such premium as
'amortizable bond premium.' If a Holder makes such an election, the amount of
any interest payment that must be included in such Holder's income for each
period ending on a Payment Date will be reduced by the portion of the premium
allocable to such period based on the Premium Security's yield to maturity. The
legislative history of the Tax Reform Act of 1986 states that such premium
amortization should be made under principles analogous to those governing the
accrual of market discount (as discussed above under '--Market Discount'). If
such election is made by the Holder, the election will also apply to all bonds
the interest on which is not excludible from gross income ('fully taxable
bonds') held by the Holder at the beginning of the first taxable year to which
the election applies and to all such fully taxable bonds thereafter acquired by
it, and is irrevocable without the consent of the IRS. If such an election is
not made, (i) such a Holder must include the full amount of each interest
payment in income as it accrues, and (ii) the premium must be allocated to the
principal distributions on the Premium Security and, when each such distribution
is received, a loss equal to the premium allocated to such distribution will be
recognized. Any tax benefit from the premium not previously recognized will be
taken into account in computing gain or loss upon the sale or disposition of the
Premium Security.
Some Securities may provide for only nominal distributions of principal in
comparison to the distributions of interest thereon. It is possible that the IRS
or the Treasury Department may issue guidance excluding such Securities from the
rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total payments to be received
thereon over its issue price. In such event, section 1272(a)(6) of the Code
would govern the accrual of such original issue discount, but a Holder would
recognize substantially the same income in any given period as would be
recognized if an election were made under section 171(c)(2) of the Code. Unless
and until the Treasury Department or the IRS publishes specific guidance
relating to the tax treatment of such Securities, the Trustee intends to furnish
tax information to Holders of such Securities in accordance with the rules
described in the preceding paragraph.
Special Election
For any Security acquired on or after April 4, 1994, a Holder may elect to
include in gross income all 'interest' that accrues on the Security by using a
constant yield method. For purposes of the election, the term 'interest'
includes stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimis market discount and
unstated interest as adjusted by any amortizable bond premium or acquisition
premium. A Holder should consult its own tax advisor regarding the time and
manner of making and the scope of the election and the implementation of the
constant yield method.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the 'backup withholding
tax' under section 3406 of the Code at a rate of 31% if recipients of such
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or
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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 that does not do so in the proper manner.
FOREIGN INVESTORS
Grantor Trust Securities and REMIC Regular Securities
Distributions made on a Grantor Trust Security or a REMIC Regular Security
to, or on behalf of, a Holder that is not a U.S. Person generally will be exempt
from U.S. federal income and withholding taxes. The term 'U.S. Person' means a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, or an estate or trust that is subject to U.S.
federal income tax regardless of the source of its income. This exemption is
applicable provided (a) the Holder is not subject to U.S. tax as a result of a
connection to the United States other than ownership of the Security, (b) the
Holder signs a statement under penalties of perjury that certifies that such
Holder is not a U.S. Person, and provides the name and address of such Holder,
and (c) the last U.S. Person in the chain of payment to the Holder receives such
statement from such Holder or a financial institution holding on its behalf and
does not have actual knowledge that such statement is false. Holders should be
aware that the IRS might take the position that this exemption does not apply to
a Holder that also owns 10% or more of the REMIC Residual Securities of any
REMIC trust, or to a Holder that is a 'controlled foreign corporation' described
in section 881(c)(3)(C) of the Code.
REMIC Residual Securities
Amounts distributed to a Holder of a REMIC Residual Security that is a not
a U.S. Person generally will be treated as interest for purposes of applying the
30% (or lower treaty rate) withholding tax on income that is not effectively
connected with a U.S. trade or business. Temporary Treasury Regulations clarify
that amounts not constituting excess inclusions that are distributed on a REMIC
Residual Security to a Holder that is not a U.S. Person generally will be exempt
from U.S. federal income and withholding tax, subject to the same conditions
applicable to distributions on Grantor Trust Securities and REMIC Regular
Securities, as described above, but only to the extent that the obligations
directly underlying the REMIC Trust that issued the REMIC Residual Security
(e.g., Mortgage Loans or regular interests in another REMIC) were issued after
July 18, 1984. In no case will any portion of REMIC income that constitutes an
excess inclusion be entitled to any exemption from the withholding tax or a
reduced treaty rate for withholding. See '--REMIC Securities--Taxation of
Holders of REMIC Residual Securities--Excess Inclusions.'
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ('ERISA'),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ('ERISA Plans'). Section 4975
of the Code imposes essentially the same prohibited transaction restrictions on
tax-qualified retirement plans described in section 401(a) of the Code
('Qualified Retirement Plans') and on Individual Retirement Accounts ('IRAs')
described in section 408 of the Code (collectively, 'Tax-Favored Plans').
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Securities without
regard to the ERISA considerations described below, subject to the provisions of
applicable federal and state law. Any such plan that is a Qualified Retirement
Plan and exempt from taxation under sections 401(a) and 501(a) of the Code,
however, is subject to the prohibited tran saction rules set forth in section
503 of the Code.
Section 404 of ERISA imposes general fiduciary requirements, including
those of investment prudence and diversification and the requirement that a
Plan's investment be made in accordance with the documents governing the Plan.
In addition, Section 406 of ERISA and section 4975 of the Code prohibit a broad
range of transactions involving assets of ERISA Plans and Tax-Favored Plans
(collectively, 'Plans') and persons
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('Parties in Interest' under ERISA or 'Disqualified Persons' under the Code) who
have certain specified relationships to the Plans, unless a statutory or
administrative exemption is available. Certain Parties in Interest (or
Disqualified Persons) that participate in a prohibited transaction may be
subject to a penalty (or an excise tax) imposed pursuant to Section 502(i) of
ERISA or section 4975 of the Code, unless a statutory or administrative
exemption is available.
PLAN ASSET REGULATIONS
A Plan's investment in Securities may cause the Mortgage Loans included in
a Mortgage Pool to be deemed Plan assets. The U.S. Department of Labor (the
'DOL') has promulgated regulations (the 'DOL Regulations') concerning whether or
not a Plan's assets would be deemed to include an interest in the underlying
assets of an entity (such as a Trust Estate), for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an 'equity
interest' (such as a Security) in such entity. Because of the factual nature of
certain of the rules set forth in the DOL Regulations, an investing Plan's
assets either may be deemed to include an interest in the assets of a Trust
Estate or may be deemed merely to include its interest in the Securities.
Therefore, Plans should not acquire or hold Securities in reliance upon the
availability of any exception under the DOL Regulations.
The prohibited transaction provisions of Section 406 of ERISA and section
4975 of the Code may apply to a Trust Estate and cause the Sponsor, the Master
Servicer, any Sub-Servicer, the Trustee, the obligor under any Credit
Enhancement mechanism or certain affiliates thereof, to be considered or become
Parties in Interest or Disqualified Persons with respect to an investing Plan.
If so, the acquisition or holding of Securities by or on behalf of the investing
Plan could also give rise to a prohibited trans action under ERISA and the Code,
unless some statutory or administrative exemption is available. Securities
acquired by a Plan would be assets of that Plan. Under the DOL Regulations, the
Trust Estate, including the Mortgage Loans and the other assets held in the
Trust Estate, may also be deemed to be assets of each Plan that acquires
Securities. Special caution should be exercised before the assets of a Plan are
used to acquire a Security in such circumstances, especially if, with respect to
such assets, the Sponsor, the Master Servicer, any Sub-Servicer, the Trustee,
the obligor under any Credit Enhancement mechanism or an affiliate thereof
either (i) has investment discretion with respect to the investment of Plan
assets; or (ii) has authority or responsibility to give (or regularly gives)
investment advice with respect to Plan assets for a fee pursuant to an agreement
or understanding that such advice will serve as a primary basis for investment
decisions with respect to such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee (in the manner described above), is
a fiduciary of the investing Plan. If the Mortgage Loans were to constitute Plan
assets, then any party exercising management or discretionary control regarding
those assets may be deemed to be a Plan 'fiduciary,' and thus subject to the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and section 4975 of the Code with respect to the investing Plan. In
addition, if the Mortgage Loans were to constitute Plan assets, then the
acquisition or holding of Securities by a Plan, as well as the operation of the
Trust Estate, may constitute or involve a prohibited transaction under ERISA and
the Code.
PROHIBITED TRANSACTION CLASS EXEMPTION
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ('PTCE 83-1'), which generally exempts from the prohibited
transaction provisions of section 406(a) of ERISA, and from the excise taxes
imposed by sections 4975(a) and (b) of the Code by reason of section
4975(c)(1)(A) through (D) of the Code, certain transactions involving
residential mortgage pool investment trusts relating to the purchase, sale and
holding of securities in the initial issuance of Securities and the servicing
and operation of 'mortgage pools' (as defined below). PTCE 83-1 permits, subject
to certain general and specific conditions, transactions which might otherwise
be prohibited between Plans and Parties in Interest (or Disqualified Persons)
with respect to those Plans, related to the origination, maintenance and
termination of mortgage pools and the acquisition and holding of certain
mortgage pool pass-through Securities representing interests in such mortgage
pools by Plans, whether or not the Plan's assets would be deemed to include an
ownership interest in the mortgage loans in the mortgage pool. PTCE 83-1 is not
available for mortgage pools that include Cooperative Loans and does not provide
an exemption for Subordinate Securities.
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PTCE 83-1 defines the term 'mortgage pool' as 'an investment pool the
corpus of which (1) is held in trust; and (2) consists solely of (a) interest
bearing obligations secured by either first or second mortgages or deeds of
trust on one- to four-family residential property; (b) property which had
secured obligations and which has been acquired by foreclosure; and (c)
undistributed cash.' The Sponsor expects that each pool of Mortgage Loans (other
than pools including Junior Lien Loans which are not in the second lien
position, Cooperative Loans or Multi-Family Loans) will be a 'mortgage pool'
within the meaning of PTCE 83-1.
PTCE 83-1 defines the term 'mortgage pool pass-through certificate' as a
'certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor.' The Sponsor has been advised that, for purposes
of applying PTCE 83-1, the term 'mortgage pool pass-through certificate' would
include (i) Securities representing interests in a Trust Estate consisting of
Mortgage Loans issued in a series consisting of only a single class of
Securities; and (ii) Senior Securities representing interests in a Trust Estate
consisting of Mortgage Loans issued in a series in which there is only one class
of Senior Securities; provided that the Securities described in clauses (i) and
(ii) evidence the beneficial ownership of a specified portion of both future
interest payments and future principal payments with respect to the Mortgage
Loans.
It is not clear whether all types of Securities that may be offered
hereunder would be 'mortgage pass-through certificates' for purposes of applying
PTCE 83-1, including, but not limited to, (a) a class of Securities that
evidences the beneficial ownership of interest payments only or principal
payments only, disproportionate interest and principal payments, or nominal
principal or interest payments, such as the Strip Securities; or (b) Securities
in a series including classes of Securities which differ as to timing,
sequential order, rate or amount of distributions of principal or interest or
both, or as to which distributions of principal or interest or both on any class
may be made upon the occurrence of specified events, in accordance with a
schedule or formula, or on the basis of collections from designated portions of
the Mortgage Pool; or (c) Securities evidencing an interest in a Trust Estate as
to which two or more REMIC elections have been made; or (d) a series including
other types of multiple classes. Accordingly, until further clarification by the
DOL, Plans should not acquire or hold Securities representing interests
described in this paragraph in reliance upon the availability of PTCE 83-1
without first consulting with their counsel regarding the application of PTCE
83-1 to the proposed acquisition and holding of such Securities.
PTCE 83-1 sets forth three general conditions that must be satisfied for
any transaction involving the purchase, sale and holding of 'mortgage pool
pass-through certificates' and the servicing and operation of the 'mortgage
pool' to be eligible for exemption: (1) the pool trustee must not be an
affiliate of the pool sponsor; (2) a system of insurance or other protection for
the pooled mortgage loans and property securing such loans, and for indemnifying
securityholders against reductions in pass-through payments due to property
damage or defaults in loan payments in an amount not less than the greater of 1%
of the aggregate principal balance of all covered pooled mortgages, or the
principal balance of the largest covered mortgage, must be maintained; and (3)
the amount of the payment retained by the pool sponsor together with other funds
inuring to its benefit must be limited to not more than adequate consideration
for forming the mortgage pools plus reasonable compensation for services
provided by the pool sponsor to the mortgage pool. PTCE 83-1 also imposes
additional specific conditions for certain types of transactions involving an
investing Plan and for situations in which the Parties in Interest or
Disqualified Persons are fiduciaries.
The Prospectus Supplement for a series will set forth whether the Trustee
in respect of that series is affiliated with the Sponsor. If the Credit
Enhancement mechanism for a series of Securities constitutes a system of
insurance or other protection within the meaning of PTCE 83-1 and is maintained
in an amount not less than the greater of 1% of the aggregate principal balance
of the Mortgage Loans or the principal balance of the largest Mortgage Loan,
then the Sponsor has been advised that the second general condition referred to
above will be satisfied. The Sponsor will not receive total compensation for
forming and providing services to the Mortgage Pools which will be more than
adequate consideration. Each Plan fiduciary responsible for making the
investment decision whether to acquire or hold Securities must make its own
determination as to whether (i) the Securities constitute 'mortgage pool pass
through certificates' for purposes of applying PTCE 83-1, (ii) the second and
third general conditions will be satisfied, and (iii) the specific conditions,
not discussed herein, of PTCE 83-1 have been satisfied.
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It should be noted that in promulgating PTCE 83-1 and its predecessor, the
DOL did not have under its consideration interests in pools of the exact nature
described herein. There are other class and individual prohibited transaction
exemptions issued by the DOL that could apply to a Plan's acquisition or holding
of Securities. There can be no assurance that any of those exemptions will apply
with respect to any particular Plan that acquires or holds Securities or, even
if all of the conditions specified therein were satisfied, that the exemption
would apply to all transactions involving the Trust Estate. The related
Prospectus Supplement under 'ERISA Considerations' may contain additional
information regarding the application of PTCE 83-1, or other prohibited
transaction exemptions that may be available, with respect to the series offered
thereby.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a 'Tax Exempt Investor') nonetheless will be subject to federal
income taxation to the extent that its income is unrelated business taxable
income within the meaning of Section 512 of the Code. All 'excess inclusions' of
a REMIC allocated to a REMIC Residual Security held by a Tax Exempt Investor
will be considered unrelated business taxable income and thus will be subject to
federal income tax. See 'Certain Federal Income Tax Consequences--REMIC
Securities--Taxation of Holders of REMIC Residual Securities--Excess
Inclusions.'
CONSULTATION WITH COUNSEL
Any Plan fiduciary that proposes to cause a Plan to acquire or hold
Securities should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and the Code to the proposed
investment and the availability of PTCE 83-1 or any other prohibited transaction
exemption.
LEGAL INVESTMENT MATTERS
Certain classes of Securities offered hereby and by the related Prospectus
Supplement will constitute 'mortgage related securities' for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA') so long as they are
rated in at least the second highest rating category by any Rating Agency, and
as such may 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
whose authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, if a State enacted
legislation on or prior to October 3, 1991 specifically limiting the legal
investment authority of any such entities with respect to 'mortgage related
securities,' such securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Certain States
have enacted legislation which overrides the preemption provisions of SMMEA.
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 'mortgage related securities,' or require the sale or other
disposition of such securities, so long as such contractual commitment was made
or such securities 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 with 'mortgage
related securities' without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such 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 regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has adopted a
supervisory policy statement (the 'Policy Statement'), applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in 'high-risk mortgage securities.' The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the Office of Thrift Supervision with
an effective date of February 10, 1992. The Policy Statement generally indicates
that a
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mortgage derivative product will be deemed to be high risk if it exhibits
greater price volatility than a standard fixed rate thirty-year mortgage
security. According to the Policy Statement, prior to purchase, a depository
institution will be required to determine whether a mortgage derivative product
that it is considering acquiring is high-risk, and if so, that the proposed
acquisition would reduce the institution's overall interest rate risk. Reliance
on analysis and documentation obtained from a securities dealer or other outside
party without internal analysis by the institution would be unacceptable. There
can be no assurance as to which classes of Securities will be treated as
high-risk under the Policy Statement. In addition, the National Credit Union
Administration has issued regulations governing federal credit union investments
which prohibit investment in certain specified types of securities, which may
include certain classes of Securities. Similar policy statements have been
issued by regulators having jurisdiction over other types of depository
institutions.
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Securities or to purchase any class of Securities
representing more than a specified percentage of the investors' assets. The
Sponsor will make no representations as to the proper characterization of any
class of Securities for legal investment or other purposes, or as to the ability
of particular investors to purchase any class of Securities under applicable
legal investment restrictions. These uncertainties may adversely affect the
liquidity of any class of Securities. Accordingly, all investors whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements or review by regulatory authorities should
consult with their own legal advisors in determining whether and to what extent
the Securities of any class constitute legal investments under SMMEA or are
subject to investment, capital or other restrictions, and whether SMMEA has been
overridden in any jurisdiction applicable to such investor.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of Securities
will be applied by the Sponsor to finance the purchase of, or to repay short-
term loans incurred to finance the purchase of, the Mortgage Loans underlying
the Securities or will be used by the Sponsor for general corporate purposes.
The Sponsor expects that it will make additional sales of securities similar to
the Securities from time to time, but the timing and amount of any such
additional offerings will be dependent upon a number of factors, including the
volume of mortgage loans purchased by the Sponsor, prevailing interest rates,
availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the public offering or
purchase price of such series and the net proceeds to the Sponsor from such
sale.
The Sponsor intends that Securities will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular series of
Securities may be made through a combination of two or more of these methods.
Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. By placements by the Sponsor with institutional investors through
dealers; and
3. By direct placements by the Sponsor with institutional investors.
In addition, if specified in the related Prospectus Supplement, a series of
Securities may be offered in whole or in part in exchange for the Mortgage Loans
(and other assets, if applicable) that would comprise the Mortgage Pool in
respect of such Securities.
If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at
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varying prices to be determined at the time of sale or at the time of commitment
therefor. Such underwriters may be broker-dealers affiliated with the Sponsor
whose identities and relationships to the Sponsor will be as set forth in the
related Prospectus Supplement. The managing underwriter or underwriters with
respect to the offer and sale of a particular series of Securities will be set
forth on the cover of the Prospectus Supplement relating to such series and the
members of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Sponsor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Sponsor and any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended. The Prospectus Supplement will describe any such compensation
paid by the Sponsor.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Securities will provide that the obligations of the underwriters
will be subject to certain conditions precedent, that the underwriters will be
obligated to purchase all such Securities if any are purchased (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the Sponsor will indemnify the several underwriters and the
underwriters will indemnify the Sponsor against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers 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.
The Sponsor anticipates that the Securities offered hereby will be sold
primarily to institutional investors. Purchasers of Securities, including
dealers, may, depending on the facts and circumstances of such purchases, be
deemed to be 'underwriters' within the meaning of the Securities Act of 1933, as
amended, in connection with reoffers and sales by them of Securities. Holders of
Securities should consult with their legal advisors in this regard prior to any
such reoffer or sale.
LEGAL MATTERS
Certain legal matters will be passed upon for the Sponsor by Dewey
Ballantine, New York, New York and by the office of the general counsel of the
Sponsor.
FINANCIAL INFORMATION
The Sponsor has determined that its financial statements are not material
to the offering made hereby. However, any prospective purchaser who desires to
review financial information concerning the Sponsor will be provided by the
Sponsor upon request with a copy of the most recent financial statements of the
Sponsor.
A Prospectus Supplement may contain the financial statements of the related
Credit Enhancer, if any.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each series of
Securities, contains a summary of the material terms of the applicable exhibits
to the Registration Statement and the documents referred to herein and therein.
Copies of such exhibits are on file at the offices of the Securities and
Exchange Commission in Washington, D.C., and may be obtained at rates prescribed
by the Commission upon request to the Commission and may be inspected, without
charge, at the Commission's offices.
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No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Sponsor
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so to anyone to whom it
is unlawful to make any such offer or solicitation. Neither the delivery of this
Prospectus Supplement nor any sale made hereunder shall, under any
circumstances, create an implication that information herein or therein is
correct as of any time since the date of this Prospectus Supplement or the
Prospectus.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Prospectus Supplement
<S> <C>
Available Information.................................................................................................. S-
Reports to the Certificateholders...................................................................................... S-
Summary................................................................................................................ S-
Risk Factors............................................................................................................ S-
The Portfolio of Mortgage Loans......................................................................................... S-
The Mortgage Loan Pool...................................................................................................S-
Prepayment and Yield Considerations..................................................................................... S-
Use of Proceeds......................................................................................................... S-
The Sponsor and the Master Servicer..................................................................................... S-
Description of the Certificates......................................................................................... S-
The Certificate Insurance Policy........................................................................................ S-
The Certificate Insurer................................................................................................. S-
The Pooling and Servicing Agreement..................................................................................... S-
Certain Federal Income Tax Consequences................................................................................. S-
ERISA Considerations.....................................................................................................S-
Ratings................................................................................................................. S-
Legal Investment Considerations......................................................................................... S-
Underwriting............................................................................................................ S-
Experts................................................................................................................. S-
Certain Legal Matters................................................................................................... S-
Index of Principal Defined Terms........................................................................................ S-
Global Clearance, Settlement and Tax
Documentation Procedures......................................................................................... Annex I
Appendix A - Audited Financial Statements of
Certificate Insurer................................................................................................... S-
Appendix B - Unaudited Financial Statements of
Certificate Insurer................................................................................................... S-
Prospectus
Summary of Prospectus.....................................................................................................4
Special Considerations...................................................................................................13
The Trusts...............................................................................................................18
The Mortgage Pools.......................................................................................................25
Mortgage Loan Program....................................................................................................27
Description of the Securities............................................................................................35
Subordination............................................................................................................49
Description of Credit Enhancement........................................................................................50
Hazard Insurance; Claims Thereunder......................................................................................55
The Sponsor and the Transferor...........................................................................................55
The Master Servicer......................................................................................................56
The Pooling and Servicing Agreement......................................................................................56
Yield Considerations.....................................................................................................62
Maturity and Prepayment Considerations...................................................................................63
Certain Legal Aspects of Mortgage Loans and Related
Matters................................................................................................................65
Certain Federal Income Tax Consequences..................................................................................72
ERISA Considerations.....................................................................................................84
Legal Investment Matters.................................................................................................87
Use of Proceeds..........................................................................................................88
Methods of Distribution..................................................................................................88
Financial Information....................................................................................................89
Index of Principal Definitions...........................................................................................90
</TABLE>
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Advanta Mortgage Loan
Trust 1996-4
$210,000,000 Class A-1
Group I Certificates
$120,000,000 class A-2
Group II Certificates
Mortgage Loan
Asset-Backed Certificates
Series 1996-4
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PROSPECTUS SUPPLEMENT
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PRUDENTIAL SECURITIES
INCORPORATED
MORGAN STANLEY & CO.
Incorporated
SALOMON BROTHERS INC
December 6, 1996
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