<PAGE>
Filed pursuant to
Rule 424(6)(2)
Reg. Number 333-19779.
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 5, 1997)
$104,845,000 (APPROXIMATE)
MORGAN STANLEY ABS CAPITAL I INC.
DEPOSITOR
OCWEN FEDERAL BANK FSB
LMAC, INC.
[LOGO]
SELLERS
OCWEN FEDERAL BANK FSB
MASTER SERVICER
OCWEN MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 1997-1
-----------------
THE OCWEN MORTGAGE LOAN ASSET-BACKED CERTIFICATES, SERIES 1997-1 (THE
"CERTIFICATES") WILL CONSIST OF (I) THE CLASS A-1 CERTIFICATES (THE "FIXED RATE
CERTIFICATES"), (II) THE CLASS A-2 CERTIFICATES (THE "ADJUSTABLE RATE
CERTIFICATES" AND, COLLECTIVELY WITH THE FIXED RATE CERTIFICATES, THE "CLASS
A CERTIFICATES"), (III) THE CLASS X-1 AND THE CLASS X-2 CERTIFICATES
(COLLECTIVELY, THE "CLASS X CERTIFICATES") AND (IV) THE RESIDUAL
CERTIFICATES (THE "CLASS R CERTIFICATES"). ONLY THE CLASS A CERTIFICATES
ARE OFFERED HEREBY.
ON OR BEFORE THE ISSUANCE OF THE CERTIFICATES, THE MASTER SERVICER WILL OBTAIN
FROM FINANCIAL SECURITY ASSURANCE INC. (THE "CERTIFICATE INSURER") A
CERTIFICATE GUARANTY INSURANCE POLICY RELATING TO THE CLASS A CERTIFICATES
(THE "POLICY") IN FAVOR OF THE TRUSTEE. THE POLICY WILL PROVIDE COVERAGE OF
THE ULTIMATE PRINCIPAL AMOUNT OF, AND INTEREST DUE ON, THE CLASS A
CERTIFICATES PURSUANT TO THE TERMS OF THE POLICY.
[LOGO]
-------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION
SET FORTH UNDER "RISK FACTORS" ON PAGE S-22 HEREIN
AND ON PAGE 18 IN THE ACCOMPANYING PROSPECTUS.
-----------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE POLICY ARE THE
SOLE SOURCE OF PAYMENTS ON THE CLASS A CERTIFICATES. THE CLASS A
CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE SELLERS, THE MASTER SERVICER, THE CERTIFICATE INSURER,
THE TRUSTEE OR ANY OF THEIR AFFILIATES. NEITHER THE CLASS A
CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR
BY THE DEPOSITOR, THE SELLERS, THE MASTER SERVICER, THE
TRUSTEE OR ANY OF THEIR AFFILIATES.
-------------------
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 OR
THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------
<TABLE>
<CAPTION>
INITIAL
CERTIFICATE PASS-THROUGH PRICE TO UNDERWRITING PROCEEDS TO
CLASS BALANCE(1) RATE PUBLIC DISCOUNT DEPOSITOR(4)
- ----------------------------------- ---------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
CLASS A-1 CERTIFICATE.............. $ 17,727,000 7.05%(2) 99.890625%(3) 0.30% $ 17,744,690
CLASS A-2 CERTIFICATE.............. $ 87,118,000 (5) 100.000000% 0.30% $ 86,856,646
</TABLE>
- -------------
(1) THE INITIAL AGGREGATE CERTIFICATE BALANCE OF THE CLASS A CERTIFICATES IS
SUBJECT TO A PERMITTED VARIANCE OF 5%.
(2) ON EACH DISTRIBUTION DATE AFTER THE OPTIONAL TERMINATION DATE, THE
PASS-THROUGH RATE ON THE CLASS A-1 CERTIFICATES WILL BE THE LESSER OF (A)
7.80% PER ANNUM AND (B) THE WEIGHTED AVERAGE OF THE MORTGAGE RATES ON THE
MORTGAGE LOANS IN THE FIXED RATE GROUP AS OF THE FIRST DAY OF THE RELATED
DUE PERIOD.
(3) NOT INCLUDING ACCRUED INTEREST FROM JUNE 1, 1997 TOTALING $90,259.98.
(4) BEFORE DEDUCTING EXPENSES PAYABLE BY THE DEPOSITOR, ESTIMATED TO BE
$250,000.
(5) THE PASS-THROUGH RATE OF THE CLASS A-2 CERTIFICATES IS ADJUSTABLE BASED ON
ONE-MONTH LIBOR, AS DESCRIBED HEREIN.
THE CLASS A CERTIFICATES ARE OFFERED BY MORGAN STANLEY & CO. INCORPORATED
(THE "UNDERWRITER") SUBJECT TO PRIOR SALE, WHEN, AS AND IF ISSUED AND ACCEPTED
BY THE UNDERWRITER AND SUBJECT TO THE UNDERWRITER'S RIGHT TO REJECT ORDERS IN
WHOLE OR IN PART AND TO APPROVAL OF CERTAIN LEGAL MATTERS BY ITS COUNSEL. IT IS
EXPECTED THAT THE CLASS A CERTIFICATES WILL BE DELIVERED IN BOOK-ENTRY FORM
THROUGH THE FACILITIES OF THE DEPOSITORY TRUST COMPANY AGAINST PAYMENT THEREFOR
IN IMMEDIATELY AVAILABLE FUNDS ON OR ABOUT JUNE 27, 1997.
---------------------
MORGAN STANLEY DEAN WITTER
JUNE 19, 1997.
<PAGE>
(CONTINUED FROM COVER PAGE)
The Certificates represent in the aggregate the entire beneficial ownership
interest in a Trust Fund (the "Trust Fund") consisting primarily of a segregated
pool (the "Mortgage Pool") of conventional, one to four-family, first lien
mortgage loans having original terms to maturity ranging from 15 years to 30
years (the "Mortgage Loans"). The Mortgage Pool will be divided into two
separate groups of Mortgage Loans (each, a "Loan Group") based on whether the
interest rate for the related Mortgage Loans is fixed or adjustable. The Fixed
Rate Certificates will represent an undivided ownership interest in a Loan Group
of fixed-rate Mortgage Loans (the "Fixed Rate Group"). The Adjustable Rate
Certificates will represent an undivided ownership interest in a Loan Group of
adjustable-rate Mortgage Loans (the "Adjustable Rate Group"). Each Mortgage Loan
in the Adjustable Rate Group provides for semi-annual adjustment to the mortgage
rate thereon, provided that in the case of 2.33% of the Mortgage Loans, the
first adjustment for such Mortgage Loan will occur after an initial period of
one year, in the case of 69.30% of the Mortgage Loans, two years, in the case of
1.61% of the Mortgage Loans, three years, and in the case of 0.05% of the
Mortgage Loans, five years, each by aggregate principal balance of the Mortgage
Loans in the Adjustable Rate Group as of the Cut-off Date, from the origination
thereof based on the six-month London interbank offered rate for United States
dollar deposits (the "Index") and for corresponding adjustments to the monthly
payment amount due thereon, in each case subject to the limitations described
herein. The Class A Certificates will also represent undivided ownership
interests in (i) all scheduled payments of principal and interest due on the
Mortgage Loans after the Cut-off Date (as defined herein), (ii) amounts on
deposit in the Distribution Account and the Collection Account and (iii) certain
other property. Ocwen Federal Bank FSB and LMAC, Inc. (each, a "Seller" and,
together, the "Sellers") intend to sell the Mortgage Loans to the Depositor on
the date of the issuance of the Certificates and the Mortgage Loans will be
master serviced by Ocwen Federal Bank FSB (in its capacity as master servicer,
the "Master Servicer"). LMAC, Inc. intends to acquire the Mortgage Loans
originated or acquired by Ocwen Financial Services, Inc. contemporaneously with
the transfer of the Mortgage Loans by LMAC, Inc. to the Depositor.
Distributions on the Class A Certificates will be made, to the extent of
funds available therefor, on the 25th day of each month, or, if such day is not
a Business Day, then on the next Business Day, commencing in July 1997 (each, a
"Distribution Date"). Interest will be passed through on each Distribution Date
to the holders of the Class A Certificates (the "Class A Certificateholders")
based on the related Class Certificate Balance (as defined herein) at the rate
applicable to each Class of the Class A Certificates (each, a "Pass-Through
Rate"). The Pass-Through Rate for the Fixed Rate Certificates is set forth on
the cover hereof. The Pass-Through Rate for the Adjustable Rate Certificates
adjusts monthly based, subject to certain limitations described herein, upon
One-Month LIBOR (as defined herein) or as otherwise described herein.
Distributions of principal in reduction of the Class Certificate Balance of the
Class A Certificates will be made on each Distribution Date in the manner and
the amounts described herein.
It is a condition of the issuance of the Class A Certificates that they be
rated "AAA" by Standard & Poor's Ratings Services ("Standard & Poor's") and
"Aaa" by Moody's Investors Service, Inc. ("Moody's").
THE YIELD TO MATURITY ON THE CLASS A CERTIFICATES WILL BE SENSITIVE TO THE
RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND
REPURCHASES) AND, IN THE CASE OF THE CLASS A-2 CERTIFICATES, TO ADJUSTMENTS TO
THE MORTGAGE RATES ON THE MORTGAGE LOANS IN THE ADJUSTABLE RATE GROUP. THE
MORTGAGE LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY TIME; HOWEVER,
WITH RESPECT TO A MAJORITY OF THE MORTGAGE LOANS IN EACH LOAN GROUP, A
PREPAYMENT MAY SUBJECT THE RELATED MORTGAGOR TO A PREPAYMENT CHARGE. THE YIELD
TO INVESTORS IN THE CLASS A CERTIFICATES MAY BE ADVERSELY AFFECTED BY ANY
SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO PREPAYMENTS,
LIQUIDATIONS OR OTHERWISE. SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE
LOANS DUE TO
S-2
<PAGE>
PREPAYMENTS WILL BE OFFSET BY THE MASTER SERVICER TO THE EXTENT DESCRIBED
HEREIN. SEE "SUMMARY--SPECIAL PREPAYMENT CONSIDERATIONS" AND "--SPECIAL YIELD
CONSIDERATIONS" AND "YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN.
There is currently no secondary market for the Class A Certificates. The
Underwriter currently expects to make a secondary market in the Class A
Certificates, but has no obligation to do so. There can be no assurance that
such a market will develop or, if it does develop, that it will continue.
As described herein, the Trust Fund will include two segregated asset pools,
with respect to which elections will be made to treat each as a separate "real
estate mortgage investment conduit" (a "REMIC") for federal income tax purposes.
The segregated pool comprised of the Mortgage Loans, all monies received on the
Mortgage Loans after the Cut-off Date, the Policy and any amounts on deposit in
the Collection Account and Distribution Account from time to time shall be
designated as a REMIC (the "Subsidiary REMIC"), and the segregated pool of
assets consisting of the regular interests in the Subsidiary REMIC shall be
designated as a separate REMIC (the "Master REMIC"). The Class A Certificates
and the Class X Certificates will constitute "regular interests" in the Master
REMIC as described herein. For a description of certain tax consequences of
owning the Class A Certificates, including, without limitation, original issue
discount, see "Federal Income Tax Consequences" herein and in the Prospectus.
-------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A
CERTIFICATES. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING."
THE UNDERWRITER AND THE DEPOSITOR HAVE AGREED THAT THE CLOSING OF THE SALE
OF THE CLASS A CERTIFICATES TO THE UNDERWRITER WILL OCCUR SIX BUSINESS DAYS
AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT OR AT SUCH LATER DATE AS THEY MAY
MUTUALLY AGREE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THIS PROSPECTUS SUPPLEMENT IS NOT INTENDED TO FURNISH LEGAL, REGULATORY, TAX
OR ACCOUNTING ADVICE TO ANY PROSPECTIVE PURCHASER OF THE CLASS A CERTIFICATES.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS SHOULD BE REVIEWED BY EACH
PROSPECTIVE PURCHASER AND ITS LEGAL, REGULATORY, TAX AND ACCOUNTING ADVISORS.
EACH PROSPECTIVE PURCHASER MUST RELY ON ITS OWN EXAMINATION OF THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
INVESTORS WHOSE INVESTMENT AUTHORITY IS SUBJECT TO LEGAL RESTRICTIONS SHOULD
CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT THE
OFFERED CERTIFICATES CONSTITUTE LEGAL INVESTMENTS FOR THEM.
-------------------
THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE
PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED JUNE 5, 1997, OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND
THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE CLASS A CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
S-3
<PAGE>
UNTIL SEPTEMBER 25, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND A PROSPECTUS. THIS 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.
TO THE EXTENT THAT ANY STATEMENTS IN THIS PROSPECTUS SUPPLEMENT MODIFY
STATEMENTS CONTAINED IN THE PROSPECTUS, THE STATEMENTS IN THIS PROSPECTUS
SUPPLEMENT SHALL CONTROL.
-------------------
No dealer, salesman 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 Depositor, the Sellers, the Master Servicer, the Trustee, the
Certificate Insurer or 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 or to anyone
to whom it is unlawful to make any such offer or solicitation. Neither the
delivery of this Prospectus Supplement and the Prospectus 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.
-------------------
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Offered Certificates. This Prospectus Supplement
and the related Prospectus, which form a part of the Registration Statement,
omit certain information contained in such Registration Statement pursuant to
the Rules and Regulations of the Commission. The Registration Statement can be
inspected and copied at the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and the Commission's regional offices at
Seven World Trade Center, 13th Floor, New York, New York 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Such material may also be accessed electronically by means of the
Commission home page on the Internet at http://www.sec.gov.
-------------------
REPORTS TO CERTIFICATEHOLDERS
The Trustee will mail monthly reports concerning the Certificates to all
Certificateholders of record.
S-4
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary.................................................................................................... S-6
Risk Factors............................................................................................... S-22
The Mortgage Pool.......................................................................................... S-25
Description of the Certificates............................................................................ S-45
Credit Enhancement......................................................................................... S-53
The Pooling and Servicing Agreement........................................................................ S-59
The Trustee................................................................................................ S-68
Yield and Prepayment Considerations........................................................................ S-69
Federal Income Tax Consequences............................................................................ S-75
Underwriting............................................................................................... S-78
Use of Proceeds............................................................................................ S-78
Report of Experts.......................................................................................... S-78
Legal Investment........................................................................................... S-79
ERISA Considerations....................................................................................... S-79
Legal Matters.............................................................................................. S-82
Ratings.................................................................................................... S-82
Index of Defined Terms..................................................................................... S-84
PROSPECTUS
Summary of Terms........................................................................................... 5
Risk Factors............................................................................................... 18
The Trust Fund............................................................................................. 28
Use of Proceeds............................................................................................ 44
The Depositor.............................................................................................. 44
Description of the Securities.............................................................................. 44
Credit Enhancement......................................................................................... 60
Yield and Prepayment Considerations........................................................................ 65
The Agreements............................................................................................. 68
Certain Legal Aspects of the Loans......................................................................... 82
Federal Income Tax Consequences............................................................................ 97
State Tax Considerations................................................................................... 119
ERISA Considerations....................................................................................... 119
Legal Investment........................................................................................... 123
Method of Distribution..................................................................................... 125
Legal Matters.............................................................................................. 125
Financial Information...................................................................................... 125
Rating..................................................................................................... 126
Index of Defined Terms..................................................................................... 127
</TABLE>
S-5
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND IN
THE PROSPECTUS. CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED WILL HAVE THE
MEANINGS ASSIGNED TO SUCH TERMS IN THE PROSPECTUS.
<TABLE>
<S> <C>
Title of Certificates............. Ocwen Mortgage Loan Asset-Backed Certificates, Series
1997-1 (the "Certificates").
Certificates Offered.............. $104,845,000 (approximate) Ocwen Mortgage Loan Asset-
Backed Certificates, Series 1997-1, to be issued in the
following Classes (each, a "Class"):
</TABLE>
<TABLE>
<CAPTION>
INITIAL
CLASS
CERTIFICATE PASS THROUGH
CLASS BALANCE(1) RATE
--------- ------------- -------------
<S> <C> <C> <C>
A-1 $ 17,727,000 7.05%(2)
A-2 $ 87,118,000 (3)
</TABLE>
<TABLE>
<S> <C>
(1) The aggregate Initial Class Certificate Balances of
the Class A Certificates will be subject to a permitted
variance in the aggregate plus or minus 5%.
(2) On each Distribution Date that occurs after the
Optional Termination Date, the Pass-Through Rate on the
Class A-1 Certificates will be the lesser of (a) 7.80%
per annum and (b) the weighted average of the Mortgage
Rates on the Mortgage Loans in the Fixed Rate Group as
of the first day of the related Due Period.
(3) On each Distribution Date, the Pass-Through Rate on
the Class A-2 Certificates will be equal to the lesser
of (i) the rate equal to the London interbank offered
rate for one-month United States dollar deposits
("One-Month LIBOR") (calculated as described under
"Description of the Certificates--Calculation of
One-Month LIBOR" herein) plus (a) 0.23% per annum prior
to and including the Optional Termination Date, or (b)
0.46% per annum after the Optional Termination Date
(such percentage, the "Adjustable Rate Margin"), and
(ii) the weighted average of the Mortgage Rates on the
Mortgage Loans in the Adjustable Rate Group as of the
first day of the related Due Period, less the sum of (a)
the Servicing Fee Rate, (b) the Trustee Fee Rate, (c)
the Insurance Premium Rate and (d) commencing on the
sixth Distribution Date, 0.50% per annum (the "Available
Funds Cap").
With respect to either Loan Group, the sum of the
Servicing Fee Rate, the Trustee Fee Rate and the
Insurance Premium Rate will be approximately 0.73% per
annum.
The Class A-1 Certificates are referred to herein as the
"Fixed Rate Certificates." The Class A-2 Certificates
are referred to herein as the "Adjustable Rate
Certificates." The Fixed Rate Certificates and
Adjustable Rate Certificates are collectively referred
to herein as the "Class A Certificates." Only the Class
A Certificates are offered hereby.
On any date after the Closing Date, the "Class
Certificate Balance" of a specific Class is the Initial
Class Certificate
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
Balance for such Class as set forth above, less all
amounts previously distributed to such Class of Class A
Certificates on account of principal.
Private Certificates.............. The Class X Certificates and the Class R Certificates
are not offered hereby. Such Certificates initially will
be held by the Sellers.
Depositor......................... Morgan Stanley ABS Capital I Inc. (the "Depositor"). See
"The Depositor" in the Prospectus.
Sellers........................... Ocwen Federal Bank FSB and LMAC, Inc. (each, a "Seller"
and together, the "Sellers"). LMAC, Inc. is a newly
formed, wholly-owned, limited purpose finance subsidiary
of Ocwen Financial Services, Inc. Ocwen Financial
Services, Inc. is a subsidiary of Ocwen Financial
Corporation. Ocwen Financial Services, Inc. was
organized under the laws of the State of Florida,
commenced operations in May 1997 and engages principally
in the acquisition and origination of sub-prime Mortgage
Loans.
Originators....................... Ocwen Federal Bank FSB and Ocwen Financial Services,
Inc. (each, an 'Originator' and together, the
"Originators").
Master Servicer................... Ocwen Federal Bank FSB (in its capacity as master
servicer, the "Master Servicer").
Trustee........................... Texas Commerce Bank National Association, a national
banking association organized and existing under the
laws of the United States (the "Trustee").
Certificate Insurer............... Financial Security Assurance Inc. (the "Certificate
Insurer"). See "Credit Enhancement--The Certificate
Insurer" herein.
Cut-off Date...................... June 1, 1997 (the "Cut-off Date").
Closing Date...................... On or about June 27, 1997 (the "Closing Date").
Distribution Date................. The 25th calendar day of each month or, if such day is
not a Business Day, the first Business Day following
such 25th calendar day, commencing in July 1997 (each, a
"Distribution Date").
Denominations..................... The Class A Certificates will be issued, maintained and
transferred on the book-entry records of The Depository
Trust Company ("DTC") and its Participants. The Class A
Certificates are issuable in original principal amounts
of $1,000 and integral multiples thereof, except that
one Certificate for each Class of Certificates may be
issued in a lesser amount.
Registration of the Class A The Class A Certificates will initially be issued in
Certificates.................... book-entry form. Persons acquiring beneficial ownership
interests in the Class A Certificates ("Certificates
Owners") may elect to hold their Class A Certificate
interests through DTC, in the United States, or Cedel
Bank Societe anonyme ("Cedel") or the Euroclear System
("Euroclear" and, collectively with Cedel, the "European
Depositaries"), 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
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
system. So long as the Class A Certificates are
Book-Entry Certificates (as defined herein), each Class
of such Certificates will be evidenced by one or more
Certificates registered in the name of Cede & Co.
("Cede"), as the nominee of DTC or one of the European
Depositaries. Cross-market transfers between persons
holding directly or indirectly through DTC, on the one
hand, and counterparties holding directly or indirectly
through Cedel or Euroclear, on the other, will be
effected in DTC through Citibank N.A. ("Citibank") or
The Chase Manhattan Bank ("Chase"), the relevant
depositaries of Cedel or Euroclear, respectively, and
each a participating member of DTC. The Class A
Certificates will initially be registered in the name of
Cede. The interests of the Class A Certificate Owners
will be represented by book entries on the records of
DTC and participating members thereof. No Certificate
Owner will be entitled to receive a definitive
certificate representing such person's interest, except
in the event that Definitive Certificates (as defined
herein) are issued under the limited circumstances
described under "Description of the
Certificates--Book-Entry Certificates" herein. All
references in this Prospectus Supplement to any Class A
Certificates reflect the rights of Certificate Owners
only as such rights may be exercised through DTC and its
participating organizations for so long as such Class A
Certificates are held by DTC.
The Mortgage Pool General......... The Mortgage Pool will consist of approximately 896
conventional, one- to four-family, fixed-rate and
adjustable-rate Mortgage Loans secured by first liens on
residential real properties consisting of detached or
semi-detached one to four family dwellings, townhouses,
individual condominium units and individual units in
planned unit developments (the "Mortgaged Properties").
The Mortgage Loans have original terms to maturity
ranging from 15 years to 30 years. The Mortgage Pool
will be divided in two separate groups of Mortgage Loans
(each a "Loan Group") based on whether the interest rate
for the related Mortgage Loans is fixed or adjustable.
The Loan Group of fixed-rate Mortgage Loans is referred
to herein as the "Fixed Rate Group" and the Loan Group
of adjustable-rate Mortgage Loans is referred to herein
as the "Adjustable Rate Group", each as described below.
The Fixed Rate Group.............. The Fixed Rate Group consists of approximately 211
fixed-rate Mortgage Loans having an aggregate principal
balance as of the Cut-off Date, after application of
scheduled payments due on or prior to the Cut-off Date
whether or not received, of approximately $17,727,255,
subject to a permitted variance of plus or minus 5%. The
Mortgage Loans in the Fixed Rate Group have annual rates
at which such Mortgage Loans bear interest ("Mortgage
Rates") that are fixed and range from 8.25% per annum to
14.99% per annum, with a weighted average Mortgage Rate
as of the Cut-off Date of approximately 10.69% per
annum. As of the Cut-off Date, the Mortgage Loans in the
Fixed Rate Group will have a weighted average remaining
term to maturity of approximately 336 months.
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
Approximately 3.91% of the Mortgage Loans in the Fixed
Rate Group are Buydown Mortgage Loans. Approximately
0.51% of the Mortgage Loans in the Fixed Rate Group are
balloon payment mortgage loans (each, a "Balloon
Mortgage Loan"). See "The Mortgage Pool" herein.
The Adjustable Rate Group......... The Adjustable Rate Group consists of approximately 685
adjustable-rate Mortgage Loans having an aggregate
principal balance as of the Cut-off Date, after
application of scheduled payments due on or prior to the
Cut-off Date whether or not received, of approximately
$87,118,227, subject to a permitted variance of plus or
minus 5%. Each Mortgage Loan in the Adjustable Rate
Group provides for semi-annual adjustment to the
Mortgage Rate thereon and for corresponding adjustments
to the monthly payment amount due thereon, in each case
on each adjustment date applicable thereto (each such
date, an "Adjustment Date"); provided, however, that the
first Adjustment Date for 2.33% of the Mortgage Loans
will occur after an initial period of one year, in the
case of 69.30% of the Mortgage Loans two years, in the
case of 1.61% of the Mortgage Loans three years, and in
the case of 0.05% of the Mortgage Loans five years, each
by aggregate principal balance of the Mortgage Loans in
the Adjustable Rate Group as of the Cut-off Date, from
the origination thereof. On each Adjustment Date for
each Mortgage Loan in the Adjustable Rate Group, the
Mortgage Rate thereon will be adjusted to equal the sum,
rounded to the nearest multiple of 0.125%, of the Index
(as described below) and a fixed percentage amount (the
"Gross Margin"), subject to periodic and lifetime
limitations as described herein. See "The Mortgage Pool"
herein. None of the Mortgage Loans in the Adjustable
Rate Group permits the related mortgagor to convert the
adjustable Mortgage Rate thereon to a fixed Mortgage
Rate.
As of the Cut-off Date, the Mortgage Loans in the
Adjustable Rate Group have Mortgage Rates ranging from
6.13% per annum to 14.50% per annum, a weighted average
Mortgage Rate of approximately 9.94% per annum, a
weighted average months to next rate adjustment of 17
months, Gross Margins ranging from 3.45% to 8.50% and a
weighted average Gross Margin of approximately 6.02%. As
of the Cut-off Date, the Mortgage Loans in the
Adjustable Rate Group will have a weighted average
remaining term to maturity of approximately 358 months.
Approximately 0.47% of the Mortgage Loans in the
Adjustable Rate Group are Introductory Rate Loans. See
"The Mortgage Pool" herein.
The Index......................... As of any Adjustment Date, the Index applicable to the
determination of the Mortgage Rate on each Mortgage Loan
in the Adjustable Rate Group will be the average of the
interbank offered rates for six-month United States
dollar deposits in the London market as published in THE
WALL STREET JOURNAL and as most recently available
either (i) as of the
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first business day 45 days prior to such Adjustment Date
or (ii) as of the first business day of the month
preceding the month of such Adjustment Date, as
specified in the related Mortgage Note. See "The
Mortgage Pool--The Index" herein.
The Certificates The Certificates will be issued pursuant to a Pooling
A. General...................... and Servicing Agreement to be dated as of the Cut-off
Date among the Master Servicer, the Depositor, the
Sellers and the Trustee (the "Pooling and Servicing
Agreement").
The Certificates will consist of (i) the Class A-1
Certificates (the "Fixed Rate Certificates"), (ii) the
Class A-2 Certificates (the "Adjustable Rate
Certificates," and together with the Fixed Rate
Certificates, the "Class A Certificates"), (iii) the
Class X-1 and Class X-2 Certificates (the "Class X
Certificates") and (iv) the Class R Certificates (the
"Class R Certificates"). Distributions on the Class X
and Class R Certificates (collectively, the "Subordinate
Certificates") will be subordinate to distributions on
the Class A Certificates to the extent described herein
and in the Pooling and Servicing Agreement. Only the
Class A Certificates are offered hereby. Interest due on
the Class X Certificates on any Distribution Date shall
be calculated based on a notional principal amount. The
notional principal amount of the Class X-1 Certificates
on any Distribution Date shall be the aggregate Loan
Balance of the Mortgage Loans in the Fixed Rate Group as
of the prior Distribution Date. The notional principal
amount of the Class X-2 Certificates on any Distribution
Date shall be the aggregate Loan Balance of the Mortgage
Loans in the Adjustable Rate Group as of the prior
Distribution Date. The Class R Certificates will
represent an investment unit consisting of (i) the sole
class of "residual interests" in the Subsidiary REMIC
and (ii) the sole class of "residual interests," in the
Master REMIC, as hereinafter described. The Class R
Certificates shall not have a principal amount or
pass-through rate.
B. Distributions--General......... On the 25th day of each month, or, if such day is not a
Business Day, then the next succeeding Business Day,
commencing in July 1997 (each such day being a
"Distribution Date"), the Trustee will be required to
distribute to the holders of the Class A Certificates of
record as of the last day of the calendar month
immediately preceding the calendar month in which such
Distribution Date occurs (each such date, the "Record
Date"), to the extent of funds available, the "Class A
Distribution Amount" which shall be the sum of (x)
Current Interest and (y) the Principal Distribution
Amount (each as defined below).
For each Distribution Date, interest due with respect to
the Fixed Rate Certificates will be interest which has
accrued at the Class A-1 Pass-Through Rate on the
related Class Certificate Balance during the calendar
month immediately preceding the month in which such
Distribution Date occurs. The interest due with respect
to the Adjustable Rate Certificates will be the interest
which has accrued at the Class A-2 Pass-Through Rate on
the related Class Certificate Balance from the preceding
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Distribution Date (or from the Closing Date in the case
of the first Distribution Date) to and including the day
prior to the current Distribution Date. Each such period
relating to the accrual of interest is an "Accrual
Period" for the related Class of Class A Certificates.
All calculations of interest on the Fixed Rate
Certificates will be made on the basis of a 360-day year
assumed to consist of twelve 30-day months. Calculations
of interest on the Adjustable Rate Certificates will be
made on the basis of the actual number of days elapsed
in the related Accrual Period and a year of 360 days.
A "Business Day" is any day other than a Saturday,
Sunday or a day on which banking institutions in New
York City, in the city in which the corporate trust
office of the Trustee is located, in the city in which
the home office of the Master Servicer is located, or in
the city in which the principal office of the
Certificate Insurer is located are authorized or
obligated by law or executive order to close.
C. Allocations of Interest The Class A Distribution Amount relating to each of the
and Principal................... Fixed Rate Certificates and the Adjustable Rate
Certificates (each, a "Certificate Group") for each
Distribution Date (to the extent funds are available
therefor) shall be allocated among the Class A
Certificates in the following amounts and in the
following order of priority:
(i) First, with respect to each Certificate Group, to
the holders of the Class A Certificates of such
Certificate Group, the related Current Interest for such
Class of Certificates on a pro rata basis without any
priority among such Class A Certificateholders;
(ii) Second, with respect to each Certificate Group, to
the holders of the Class A Certificates of such
Certificate Group, the Principal Distribution Amount (as
defined under the sub-heading "D. Principal" below). The
Principal Distribution Amount (A) applicable to the
Fixed Rate Group shall be distributed to the holders of
the Class A-1 Certificates until the Class Certificate
Balance thereof is reduced to zero; and (B) applicable
to the Adjustable Rate Group shall be distributed to the
holders of the Class A-2 Certificates until the Class
Certificate Balance thereof is reduced to zero; and
(iii) Third, with respect to the Adjustable Rate Group,
to the holders of the Adjustable Rate Certificates, the
Basis Risk Carryover Amount (as defined below), if any.
"Current Interest" with respect to each Class of Class A
Certificates means, with respect to any Distribution
Date (i) the aggregate amount of interest accrued at the
related Pass-Through Rate during the preceding Accrual
Period on the Class Certificate Balance of the related
Class A Certificates immediately prior to such
Distribution Date (net of Net Prepayment Interest
Shortfalls and the interest portion of reductions due to
the Relief Act) plus (ii) the portion of the Carry
Forward Amount relating to interest, if any, with
respect to such Class of Class A Certificates (net of
Net Prepayment
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Interest Shortfalls and the interest portion of
reductions due to the Relief Act).
The "Carry Forward Amount" with respect to any Class of
the Class A Certificates for any Distribution Date is
the sum of (x) the amount, if any, by which (i) the
Class A Distribution Amount allocable to such Class as
of the immediately preceding Distribution Date exceeded
(ii) the amount of the actual distribution made to the
holders of such Class of Class A Certificates on such
immediately preceding Distribution Date plus (y) 30
days' interest on such amount, calculated at the related
Pass-Through Rate in effect with respect to such Class
of Class A Certificates.
If on any Distribution Date, the Pass-Through Rate for
the Adjustable Rate Certificates is based on the
Available Funds Cap, the excess (the "Basis Risk
Excess") of (i) the amount of interest the Adjustable
Rate Certificates would be entitled to receive on such
Distribution Date at the lesser of (a) the Net Lifetime
Cap for such Distribution Date and (b) the then-
applicable Pass-Through Rate on the Adjustable Rate
Certificates without reference to the Available Funds
Cap, over (ii) the amount of interest such Adjustable
Rate Certificates receive on such Distribution Date at
the Available Funds Cap. The Basis Risk Excess for such
Distribution Date, together with any Basis Risk Excess
from prior Distribution Dates, is referred to herein as
the "Basis Risk Carryover Amount". If, on any
Distribution Date, the Available Funds Cap equals the
Net Lifetime Cap, the Basis Risk Excess for such
Distribution Date will equal zero. Any Basis Risk
Carryover Amount will be paid, to the extent of funds,
if any, available to make such payment, on any
Distribution Date, as set forth under "Description of
the Certificates--Distributions" herein. No interest
will accrue on the Basis Risk Carryover Amount and no
Basis Risk Carryover Amount will be paid to the holders
of the Adjustable Rate Certificates after the Class
Certificate Balance thereof has been reduced to zero.
The Policy will not cover the payment of, and the
ratings assigned to the Adjustable Rate Certificates do
not address the likelihood of the payment of, any Basis
Risk Carryover Amount. The "Net Lifetime Cap" on any
Distribution Date is equal to the weighted average of
the Maximum Mortgage Rates on the Mortgage Loans in the
Adjustable Rate Group as of the first day of the related
Due Period less the sum of (a) the Servicing Fee Rate,
(b) the Trustee Fee Rate, (c) the Insurance Premium Rate
and (d) commencing on the sixth Distribution Date, 0.50%
per annum. The "Insurance Premium Rate" is the rate used
to calculate the amount payable to the Certificate
Insurer pursuant to the Pooling and Servicing Agreement
as a premium for the Policy (the "Insurance Premium
Amount").
The credit enhancement provisions of the Trust Fund
result in a limited acceleration of principal payments
to the Class A Certificateholders; such provisions are
more fully described under "Credit
Enhancement--Overcollateralization Provisions"
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and "Credit Enhancement--Crosscollateralization
Provisions" herein. Such credit enhancement provisions
also have an effect on the weighted average lives of the
Class A Certificates; see "Yield and Prepayment
Considerations" herein. In addition, the following
discussion makes use of a number of defined terms which
are defined under "Credit Enhancement---
Overcollateralization Provisions" and "Credit
Enhancement-- Crosscollateralization Provisions" herein.
D. Principal...................... On each Distribution Date, distributions in reduction of
the Class Certificate Balance of the Class A
Certificates will be made in the amounts described
herein. The "Principal Distribution Amount" for each of
the Fixed Rate Certificates and the Adjustable Rate
Certificates on each Distribution Date shall be the
lesser of:
(a) the Total Available Funds (as defined below) for the
related Certificate Group plus any related Insured
Payments minus the related Current Interest with respect
to the related Certificate Group; and
(b) the excess, if any, of (i) the sum of (without
duplication):
(A) the principal collected (other than the principal
portion of Prepayments) by the Master Servicer for the
related Due Period on or prior to the related
Determination Date or advanced by the Master Servicer
for such Distribution Date;
(B) the principal portion of all Prepayments received by
the Master Servicer during the Prepayment Period and
remitted to the Trustee as of the Monthly Remittance
Date;
(C) the principal portion of any Loan Purchase Price for
each Mortgage Loan in the related Loan Group that was
repurchased by the Sellers or purchased by the Master
Servicer on or prior to the related Monthly Remittance
Date, to the extent such Loan Purchase Price is actually
received by the Trustee on or prior to the related
Monthly Remittance Date;
(D) the principal portion of any Substitution
Adjustments (i.e. the excess, if any, of the Loan
Balance of a Mortgage Loan being replaced over the
outstanding Loan Balance of a replacement Mortgage Loan)
delivered by the Sellers on or prior to the related
Monthly Remittance Date in connection with a
substitution of a Mortgage Loan in the related Loan
Group, to the extent such Substitution Adjustments are
actually received by the Trustee on or prior to the
related Monthly Remittance Date;
(E) all Net Liquidation Proceeds and Curtailments
actually collected by the Master Servicer in the related
Loan Group during the related Due Period (to the extent
such Net Liquidation Proceeds or Curtailment are related
to principal) to the extent such Net Liquidation
Proceeds or Curtailments are actually received by the
Trustee on or prior to the related Monthly Remittance
Date;
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(F) the amount of any Subordination Deficit with respect
to the related Loan Group for such Distribution Date;
(G) the portion of the proceeds received with respect to
the related Loan Group by the Trustee upon termination
of the Trust Fund (to the extent such proceeds relate to
principal);
(H) the amount of any Subordination Increase Amount with
respect to the related Loan Group for such Distribution
Date to the extent of any Net Monthly Excess Cash Flow
available for such purpose; and
(I) the portion of any Carry Forward Amount relating to
the principal with respect to the related Loan Group for
such Distribution Date;
over
(ii) the amount of any Subordination Reduction Amount
with respect to the related Loan Group for such
Distribution Date.
The "Due Period" with respect to any Monthly Remittance
Date is the calendar month immediately preceding the
calendar month in which the Monthly Remittance Date
occurs. A "Monthly Remittance Date" is the date on which
funds on deposit in the Collection Account (less amounts
that the Master Servicer is authorized to withdraw from
the Collection Account in accordance with the Pooling
and Servicing Agreement) are remitted by the Master
Servicer to the Trustee for deposit into the
Distribution Account, which is the Business Day immedi-
ately prior to the related Distribution Date commencing
in July 1997.
With respect to any Distribution Date, the
"Determination Date" is the 15th day of the month of
such Distribution Date, or if such day is not a Business
Day, the Business Day immediately preceding such 15th
day of the month, commencing in July 1997. With respect
to any Distribution Date, the "Prepayment Period" is the
period commencing on the calendar day following the
prior Determination Date to and including the
Determination Date relating to the Distribution Date;
provided, however, that the first "Prepayment Period"
shall be the period commencing on June 16 through and
including July 15.
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).
The Class A Certificateholders are entitled to receive
ultimate recovery of Realized Losses which occur in the
related Loan Group to the extent such Realized Losses
create a Subordination Deficit in the related Loan
Group, and payment in recovery of such losses will be in
the form of an Insured Payment payable in accordance
with the terms of the Policy on the next following
Distribution Date if not covered through Net Monthly
Excess Cashflow from the related Loan Group or
crosscollateralization from the other Loan Group.
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A "Subordination Deficit" with respect to a Loan Group
and a Distribution Date is the amount, if any, by which
(x) the aggregate of the Class Certificate Balances
relating to such Loan Group, after taking into account
all distributions to be made on such Distribution Date,
exceeds (y) the aggregate Loan Balances of the Mortgage
Loans in the related Loan Group as of the close of
business on the last day of the related Due Period
(taking into account all payments of principal, other
than Prepayments, collected for the related Due Period
on or prior to the related Determination Date, or, in
connection with Curtailments and Net Liquidation
Proceeds, collected during the related Due Period,
together with all Prepayments received on such Mortgage
Loans in such Loan Group during the related Prepayment
Period.)
A "Subordination Increase Amount" with respect to a Loan
Group and Distribution Date is the amount, if any, of
Net Monthly Excess Cashflow (as defined herein) actually
applied as an accelerated payment of principal on the
Class A Certificates relating to the applicable Loan
Group. A "Subordination Reduction Amount" with respect
to a Loan Group and Distribution Date is the amount, if
any, distributed to the Subordinate Certificates in an
amount equal to the lesser of (x) the Excess
Subordinated Amount (as defined herein) and (y) the
amount available for distribution on account of
principal with respect to the Class A Certificates
relating to the applicable Loan Group on such
Distribution Date. See "Credit Enhancement--Overcol-
lateralization Provisions" herein.
Credit Enhancement................ The credit enhancement provided for the benefit of the
Class A Certificateholders consists of (x) the
overcollateralization and crosscollateralization
mechanics, which utilize the internal cash flows of the
Trust Fund, and (y) the Policy.
OVERCOLLATERALIZATION. The credit enhancement provisions
of the Trust Fund result in a limited acceleration of
the Classes of Class A Certificates then entitled to
receive distributions of principal relative to the
amortization of the related Mortgage Loans in the
related Loan Group in the early months of the
transaction. The accelerated amortization is achieved by
the application of certain excess interest to the
payment of principal on the Fixed Rate Certificates and
Adjustable Rate Certificates. This acceleration feature
creates, with respect to each Loan Group, overcol-
lateralization (I.E., the excess of the aggregate Loan
Balance of the Mortgage Loans in the related Loan Group
over the aggregate Class Certificate Balance of the
Class A Certificates in the related Certificate Group).
Once the required level of overcollateralization is
reached, and subject to the provisions described in the
next paragraph, the acceleration feature will cease,
until necessary to maintain the required level of
overcollateralization.
The Pooling and Servicing Agreement provides that,
subject to certain floors, caps and triggers, the
required level of overcollateralization with respect to
a Loan Group may increase or decrease over time. An
increase would result in a temporary
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period of accelerated amortization of the Classes of
Class A Certificates then entitled to receive
distributions of principal to increase the actual level
of overcollateralization to its required level; a
decrease would result in a temporary period of deceler-
ated amortization to reduce the actual level of
overcollateralization to its required level.
CROSSCOLLATERALIZATION. In addition to the foregoing,
the Pooling and Servicing Agreement provides for
crosscollateralization through the application of excess
amounts generated by one Loan Group to fund shortfalls
in Available Funds and the required
overcollateralization level in the other Loan Group,
subject to certain prior debt service and credit
enhancement requirements of such Loan Group.
See "Yield and Prepayment Considerations," "Credit
Enhancement--Overcollateralization Provisions" and
"Credit Enhancement--Crosscollateralization Provisions"
herein and "Credit Enhancement" in the Prospectus.
POLICY. Financial Security Assurance Inc. (the
"Certificate Insurer"), will provide a Policy with
respect to the Class A Certificates.
Subject to the terms thereof, the Policy unconditionally
and irrevocably guarantees payments to the Trust Fund on
any Distribution Date of Current Interest (net of any
Prepayment Interest Shortfalls and the interest portion
of reductions due to the Relief Act) and any
Subordination Deficit with respect to each Certificate
Group.
The Policy is not cancelable for any reason.
"Insured Payments" means, with respect to any Loan Group
and any Distribution Date, without duplication, (A) the
excess, if any, of (i) the sum of (a) the Current
Interest with respect to the Class A Certificates
relating to such Loan Group and (b) the then existing
Subordination Deficit for such Loan Group, if any over
(ii) Total Available Funds for such Loan Group (net of
the Insurance Premium Amount for such Loan Group) after
taking into account any Principal Distribution Amount to
be actually distributed on such Distribution Date and
the crosscollateralization provisions of the Trust Fund.
Insured Payments do not cover Realized Losses except to
the extent that a Subordination Deficit exists. Insured
Payments do not cover the Master Servicer's failure to
make P&I Advances, except to the extent that a
Subordination Deficit or a failure to distribute Current
Interest would otherwise result therefrom. Nevertheless,
the effect of the Policy is to guarantee the timely
payment of Current Interest (net of Prepayment Interest
Shortfalls and the interest portion of reductions due to
the Relief Act) on all Classes of the Class A
Certificates and the ultimate payment of the principal
amount of the Class A Certificates.
The Policy does not guarantee any specified rate of
prepayments, nor does the Policy provide funds to redeem
the Class A
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Certificates on any specified date. The Certificate
Insurer's obligation under the Policy will be discharged
to the extent that funds are received by the Trustee for
distribution to the Class A Certificateholders. See
"Credit Enhancement--The Policy" herein.
Servicing......................... The Master Servicer will be responsible for servicing,
managing and making collections on the Mortgage Loans.
The Master Servicer will be permitted to service the
Mortgage Loans through subservicers. See "Pooling and
Servicing Agreement-- Servicing and Sub-Servicing"
herein. The Master Servicer will receive a monthly
servicing fee (the "Servicing Fee"), payable out of the
interest amounts collected by the Master Servicer on
each Mortgage Loan, as compensation for acting as Master
Servicer, and will be responsible for all fees payable
to any subservicers. The Servicing Fee for each Mortgage
Loan will be paid on each Distribution Date for the
related Due Period, and will be equal to 0.50% per annum
(the "Servicing Fee Rate") of the then outstanding Loan
Balance of each such Mortgage Loan as of the first day
of the related Due Period. As part of its servicing
responsibilities, the Master Servicer will be required
to cause to be deposited, in the manner and at the times
described herein, into an account or accounts (the
"Collection Account"), which must be an Eligible
Account, all payments received with respect to the
Mortgage Loans after the Cut-off-Date, except any late
fees, penalty charges, prepayment premiums, bad check
fees, extension, modification or assumption fees and
other administrative or similar charges allowed by
applicable law which will be retained by the Master
Servicer as additional servicing compensation. The
Master Servicer is entitled to receive investment
earnings on amounts in the Collection Account and shall
be responsible for investment losses thereon without the
right to reimbursement thereof. See "Description of the
Certificates--Deposits to Collection Account" and "The
Pooling and Servicing Agreement--Servicing and
Sub-Servicing" herein.
P&I Advances and
Compensating Interest........... The Master Servicer will be obligated to make P&I
Advances no later than the Monthly Remittance Date only
to the extent that such P&I Advances, in the Master
Servicer's reasonable judgment, are recoverable from the
related Mortgage Loan. P&I Advances are recoverable from
collections on the Mortgages Loans with respect to the
related Loan Group or from Net Monthly Excess Cashflow.
"P&I Advances" will equal, on any Distribution Date (A)
scheduled interest on the Mortgage Loans due and payable
during the related Due Period but uncollected as of the
related Determination Date (net of the Servicing Fee)
and (B) principal due and payable during the related Due
Period but uncollected as of the related Determination
Date, other than a Balloon Payment. The Master Servicer
will also be required to make Servicing Advances. See
"The Pooling and Servicing Agreement--Servicing and
Sub-servicing" herein.
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In addition, the Master Servicer will also be required
to pay Compensating Interest with respect to any
Prepayment received on a Mortgage Loan during the
related Prepayment Period as described herein under "The
Pooling and Servicing Agreement--Servicing and
Sub-Servicing." The Master Servicer will not be required
to pay Compensating Interest with respect to any
Prepayment Period in an amount in excess of one-half the
Servicing Fee received by the Master Servicer for such
Mortgage Loan.
Special Prepayment
Considerations.................. The rate and timing of distributions allocable to
principal on the Class A Certificates will depend, in
general, on the rate and timing of principal payments
(including prepayments and collections upon defaults,
liquidations and repurchases) on the Mortgage Loans in
the related Loan Group and the allocation thereof to pay
principal on the Class A Certificates as provided
herein. As is the case with mortgage pass-through
certificates generally, the Class A Certificates are
subject to substantial inherent cash-flow uncertainties
because the related Mortgage Loans may be prepaid at any
time; however, with respect to a majority of the
Mortgage Loans in each Loan Group, a prepayment may
subject the related mortgagor to a prepayment charge.
See "The Mortgage Pool" herein.
Generally, when prevailing interest rates are
increasing, prepayment rates on mortgage loans tend to
decrease; a decrease in the prepayment rates on the
Mortgage Loans in either Loan Group will result in a
reduced rate of return of principal to investors in the
related Class A Certificates at a time when reinvestment
at such higher prevailing rates would be desirable.
Conversely, when prevailing interest rates are
declining, prepayment rates on mortgage loans tend to
increase; an increase in the prepayment rates on the
Mortgage Loans in either Loan Group will result in a
greater rate of return of principal to investors in the
related Class A Certificates at a time when reinvestment
at comparable yields may not be possible.
Special Yield
Considerations.................. The yield to maturity on the Class A Certificates will
depend, in general, on (i) the applicable Pass-Through
Rates thereon, (ii) the applicable purchase price and
(iii) the rate and timing of principal payments
(including payments by the Certificate Insurer,
prepayments and collections upon defaults, liquidations
and repurchases) on the Mortgage Loans in the related
Loan Group and the allocation thereof to reduce the
Certificate Principal Balance of such Certificates, as
well as other factors.
The yield to investors in the Class A Certificates will
be adversely affected by any allocation thereto of any
interest shortfalls not covered by the Certificate
Insurer.
In general, if the Class A Certificates are purchased at
a premium and principal distributions thereon occur at a
rate faster than anticipated at the time of purchase,
the investor's actual yield to maturity will be lower
than that assumed at the time of
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purchase. Conversely, if the Class A Certificates are
purchased at a discount and principal distributions
thereon occur at a rate slower than that assumed at the
time of purchase, the investor's actual yield to
maturity will be lower than that originally antici-
pated.
The proceeds to the Depositor from the sale of the Class
A Certificates were determined based on a number of
assumptions, including a prepayment assumption of 100%
of the Prepayment Vector (as defined herein) in the case
of the Mortgage Loans in the Fixed Rate Group, or 25%
CPR (as defined herein) in the case of Mortgage Loans in
the Adjustable Rate Group, and weighted average lives
corresponding thereto. No representation is made that
the Mortgage Loans will prepay at either such rate or at
any other rate, or that the Mortgage Loans in each Loan
Group will prepay at the same rate. The yield
assumptions for the Class A Certificates will vary as
determined at the time of sale.
Optional Termination.............. On any Distribution Date on or after the date (the
"Optional Termination Date") on which the aggregate Loan
Balance of the Mortgage Loans in the Trust Fund has
declined to less than 10% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date
(the "Original Pool Principal Balance") a majority
holder of the Class R Certificates (the "Class R
Optionholder") (or if such holder does not exercise such
option, the Master Servicer or the Certificate Insurer)
will have the option, subject to certain conditions set
forth in the Pooling and Servicing Agreement, to
purchase all, but not less than all, of the Mortgage
Loans and other assets of the Trust Fund, at the
purchase price described herein. The payment of such
purchase price will effect retirement of the
Certificates which are outstanding on the date of
purchase and may have an effect on an investor's yield
on such Certificates. See "The Pooling and Servicing
Agreement--Termination; Retirement of the Certificates"
herein.
Final Scheduled
Distribution Dates.............. The Final Scheduled Distribution Date for each Class of
Class A Certificates is set forth below, although it is
anticipated that the actual final Distribution Date for
each Class may occur earlier than its Final Scheduled
Distribution Date. See "Certain Yield and Prepayment
Considerations" herein.
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<CAPTION>
FINAL SCHEDULED
DISTRIBUTION
DATE
----------------
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Class A-1 Certificates: July 25, 2027
Class A-2 Certificates: July 25, 2027
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Federal Income
Tax Consequences................ For federal income tax purposes, the Trust Fund will
include two segregated asset pools, with respect to
which elections will be made to treat each as a separate
"real estate mortgage investment conduit" ("REMIC"). The
Class A Certificates and Class X Certificates will
constitute "regular interests" in the
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Master REMIC. The Class R Certificates will represent
the beneficial ownership of the sole class of "residual
interest" in the Master REMIC and the sole class of
"residual interest" in the Subsidiary REMIC and will be
the class of Residual Certificates, as described in the
Prospectus.
Upon the issuance of the Certificates, Latham & Watkins,
special tax counsel to the Depositor ("Tax Counsel"),
and counsel to the Underwriter, will deliver its opinion
generally to the effect that, assuming compliance with
all provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, each of the Master
REMIC and Subsidiary REMIC will qualify as a REMIC under
Sections 860A through 860G of the Internal Revenue Code
of 1986 (the "Code") and the Class A Certificates will
be treated as debt of the Master REMIC for federal
income tax purposes.
For further information regarding the federal income tax
consequences of investing in the Class A Certificates,
see "Federal Income Tax Consequences" herein and in the
Prospectus.
ERISA Considerations.............. A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully review with its
legal advisors whether the purchase or holding of
Certificates could give rise to a transaction prohibited
or not otherwise permissible under ERISA or the Code.
Certain exemptions from the prohibited transaction rules
could be applicable to the acquisition of the
Certificates. See "ERISA Considerations." The U.S.
Department of Labor has issued an individual exemption,
Prohibited Transaction Exemption 90-24, to Morgan
Stanley & Co. Incorporated that generally exempts from
the application of certain of the prohibited transaction
provisions of ERISA and the Code, transactions relating
to the purchase, sale and holding of pass-through
certificates underwritten by such Underwriter such as
the Class A Certificates and the servicing and operation
of asset pools, provided that certain conditions are
satisfied.
Legal Investment.................. The Class A Certificates will constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") for so
long as they are rated in at least the second highest
rating category by one or more nationally recognized
statistical rating agencies. Institutions whose
investment activities are subject to legal investment
laws and regulations, regulatory capital requirements or
review by regulatory authorities may be subject to
restrictions on investment in the Class A Certificates
and should consult with their legal advisors. See "Legal
Investment" herein and "Legal Matters" in the
Prospectus.
Ratings........................... It is a condition to the issuance of the Class A
Certificates that each be rated AAA by Standard and
Poor's Ratings Services, a
</TABLE>
S-20
<PAGE>
<TABLE>
<S> <C>
division of The McGraw-Hill Companies ("S&P") and Aaa by
Moody's Investors Service, Inc. ("Moody's", and each of
S&P and Moody's, a "Rating Agency"). A security rating
is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any
time. No person is obligated to maintain any rating on
any Class of Class A Certificates and, accordingly,
there can be no assurance that the rating assigned to
any Class of Class A Certificates upon initial issuance
thereof will not be lowered or withdrawn by a Rating
Agency at any time thereafter. In the event any rating
is revised or withdrawn, the liquidity of the related
Class of Class A Certificates may be adversely affected.
In general, the ratings address credit risk and do not
represent any assessment of the likelihood or rate of
principal prepayments. In addition, the Rating Agencies
do not address the likelihood of payment of any Basis
Risk Carryover Amount. See "Risk Factors--Ratings are
not Recommendations" in the Prospectus and "Ratings"
herein and in the Prospectus.
Risk Factors...................... For a discussion of certain risks associated with an
investment in the Class A Certificates, see "Risk
Factors" on page S-22 herein and on page 18 in the
Prospectus.
</TABLE>
S-21
<PAGE>
RISK FACTORS
Investors should consider, among other things, the items discussed under
"Risk Factors" in the Prospectus and the following factors in connection with
the purchase of the Class A Certificates.
UNDERWRITING STANDARDS
The Sellers' underwriting standards are primarily intended to assess the
value of the Mortgaged Property and to evaluate the adequacy of such property as
collateral for the Mortgage Loan. The Sellers provide loans primarily to
borrowers who do not qualify for loans conforming to FNMA and FHLMC guidelines
but who have equity in their property. While the Sellers' primary consideration
in underwriting a Mortgage Loan is the value of the Mortgaged Property, the
Sellers also consider, among other things, a mortgagor's credit history,
repayment ability and debt service-to-income ratio, as well as the type and use
of the Mortgaged Property.
As a result of the Sellers' underwriting standards, the Mortgage Loans are
likely to experience rates of delinquency, foreclosure and bankruptcy that are
higher, and that may be substantially higher, than those experienced by mortgage
loans underwritten to conforming loan guidelines.
Furthermore, changes in the values of Mortgaged Properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated in a more traditional
manner. No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at the levels in effect on the dates of origination
of the related Mortgage Loans. Approximately 45.69% and 13.83% of the Mortgage
Loans in the Fixed Rate Group, each by aggregate principal balance of the
Mortgage Loans as of the Cut-off Date, are secured by Mortgaged Properties
located in the States of California and Florida, respectively. Approximately
19.01% and 10.75% of the Mortgage Loans in the Adjustable Rate Group, each by
aggregate principal balance of the Mortgage Loans as of the Cut-off Date, are
secured by Mortgaged Properties located in the States of California and
Illinois, respectively. If the residential real estate market in the States of
California, Florida or Illinois should experience an overall decline in property
values after the dates of origination of the Mortgage Loans, the rates of
delinquencies, foreclosures, bankruptcies and losses on the Mortgage Loans may
be expected to increase, and may increase substantially. See "The Mortgage
Pool--Underwriting Standards; Representations" herein.
ADDITIONAL RISKS ASSOCIATED WITH THE MORTGAGE LOANS
Approximately 14.71% of the Mortgage Loans in the Fixed Rate Group and
approximately 17.70% of the Mortgage Loans in the Adjustable Rate Group, each by
aggregate principal balance of the Mortgage Loans in such Loan Group as of the
Cut-off Date, had a Loan-to-Value Ratio at origination in excess of 80% but will
not be covered by a primary mortgage insurance policy. Mortgage Loans with
higher Loan-to-Value Ratios may present a greater risk of loss. See "The
Mortgage Pool--General" herein.
Approximately 5.12% of the Mortgage Loans in the Fixed Rate Group and
approximately 8.83% of the Mortgage Loans in the Adjustable Rate Group, each by
aggregate principal balance of the Mortgage Loans in such Loan Group as of the
Cut-off Date, have a first Due Date (as defined herein) on July 1, 1997.
LIMITED OPERATING HISTORY
Approximately 13.00% of the Mortgage Loans were originated or acquired by
Ocwen Financial Services, Inc. LMAC, Inc. intends to acquire the Mortgage Loans
from Ocwen Financial Services, Inc. on the Closing Date contemporaneously with
the transfer of the Mortgage Loans by LMAC, Inc. to the Depositor on the Closing
Date. Ocwen Financial Services, Inc. commenced operations in May 1997 and
accordingly does not have representative historical delinquency, bankruptcy,
foreclosure or default experience with respect to its portfolio of mortgage
loans.
S-22
<PAGE>
LIMITED LIQUIDITY
Prior to their issuance there has been no market for the Class A
Certificates nor can there be any assurance that one will develop or, if it does
develop, that it will provide Certificate Owners of the Class A Certificates
with liquidity or will continue for the life of the Class A Certificates. The
Underwriter intends, but is not obligated, to make a market in the Class A
Certificates.
DIFFICULTY IN PLEDGING
Since transactions in Class A Certificates can be effected only through DTC,
Cedel or Euroclear, their Participants and Indirect Participants, the ability of
a Certificate Owner to pledge a Class A Certificate to persons or entities that
do not participate in the DTC, Cedel or Euroclear systems, or otherwise to take
actions in respect of such Certificates, may be limited due to lack of a
physical certificate representing such Certificates. See "Description of the
Certificates--Book-Entry Registration" herein.
POTENTIAL DELAYS IN RECEIPT OF DISTRIBUTIONS
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Class A Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants which will thereafter credit
them to the accounts of Certificate Owners either directly or indirectly through
Indirect Participants. See "Description of the Certificates--Book-Entry
Registration" herein.
LIMITED OBLIGATIONS
The Class A Certificates will not represent an interest in or obligation of
the Depositor, the Sellers, the Master Servicer, the Trustee, the Certificate
Insurer or any of their respective affiliates. The only obligations of the
foregoing entities with respect to the Certificates or any Mortgage Loan will be
the obligations of the Depositor and of the Master Servicer (in its capacity as
Seller) pursuant to certain limited representations and warranties made with
respect to its servicing obligations under the Agreement (including the limited
obligation to make certain P&I Advances). Neither the Certificates nor the
underlying Mortgage Loans will be guaranteed or insured by any governmental
agency or instrumentality, or by the Depositor, the Master Servicer, the Trustee
or any of their respective affiliates. The Class A Certificates are covered by
the Policy, as and to the extent described under the caption "Credit
Enhancement--The Policy" herein. Proceeds of the assets included in the Trust
Fund (including the Mortgage Loans) and of the Policy will be the sole source of
payments on the Class A Certificates, and there will be no recourse to the
Depositor, the Master Servicer, the Trustee or any other entity in the event
that such proceeds are insufficient or otherwise unavailable to make all
payments provided for under the Class A Certificates.
LEGAL CONSIDERATIONS
State law generally regulates interest rates and other charges, requires
certain disclosures, and, unless an exemption is available, requires licensing
of originators of mortgage loans. In addition, other state laws, public policy
and general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Mortgage Loans.
The Mortgage Loans are also subject to federal laws, including: (i) the
federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the notes or
other documents or agreements evidencing the borrower's indebtedness in respect
of the Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination in the extension of credit
on the basis of age, race, color, sex, religion, marital status, national
origin, receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act; (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience and (iv) the Fair Debt Collection Practices Act
S-23
<PAGE>
and Federal Trade Commission rule on Credit Practices, which regulates practices
used to effect collections on consumer loans. Certain of the Mortgage Loans may
be subject to the Riegle Community Development and Regulatory Improvement Act of
1994 (the "Riegle Act"), which incorporates the Home Ownership and Equity
Protection Act of 1994. These provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
mortgage loans. In addition, any assignee of the creditor would generally be
subject to all claims and defenses that the consumer could assert against the
creditor, including, without limitation, the right to rescind the mortgage loan.
The application of state and federal consumer protection laws to particular
circumstances is not always certain and in some cases courts and regulatory
authorities have shown a willingness to adopt novel interpretations of these
laws. Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws may limit the ability of an
assignee (including the Trust Fund) to collect all or part of the principal of
or interest on the Mortgage Loans, may entitle the mortgagor to a refund of
amounts previously paid and, in addition, could subject the assignee to damages
and administrative sanctions. In some instances, particularly in actions
involving fraud or deceptive practices, damage awards have been large. If the
Trust Fund were obligated to pay any such damages, its assets would be reduced,
resulting in a possible loss to Certificate holders.
The Sellers will represent and warrant in the Pooling and Servicing
Agreement that each Mortgage Loan was originated in compliance with applicable
law in all material respects. See "Risk Factors--Legal Matters" in the
Prospectus.
RISK OF MORTGAGE LOAN RATES REDUCING THE CLASS A-2 CERTIFICATES PASS-THROUGH
RATE
The calculation of the Class A-2 Certificates Pass-Through Rate is based
upon (i) the value of One-Month LIBOR which is different from the value of the
Index applicable to the Mortgage Loans in the Adjustable Rate Group (either as a
result of the use of a different index, a different rate determination date or a
different rate adjustment date) and (ii) the weighted average of the Mortgage
Rates of the Mortgage Loans in the Adjustable Rate Group, which are subject to
periodic adjustment caps, maximum rate caps and minimum rate floors. In general,
the Mortgage Loans in the Adjustable Rate Group adjust based upon Six-Month
LIBOR whereas the Pass-Through Rate on the Class A-2 Certificates adjusts
monthly based upon One-Month LIBOR, as described under "Description of the
Certificates--Calculation of One-Month LIBOR" herein, subject to the Available
Funds Cap. Consequently, the interest which becomes due on the Mortgage Loans in
the Adjustable Rate Group (net of the Servicing Fee, the Insurance Premium
Amount, the Trustee Fee and certain reductions required by the Certificate
Insurer) during any Due Period may not equal the amount of interest that would
accrue at One-Month LIBOR plus the Adjustable Rate Margin on the Class A-2
Certificates during the related Accrual Period. In particular the Class A-2
Certificates Pass-Through Rate adjusts monthly, while the Mortgage Rates of the
Mortgage Loans in the Adjustable Rate Group adjust less frequently with the
result that the Available Funds Cap may limit increases in the Class A-2
Certificates Pass-Through Rate for extended periods in a rising interest rate
environment. The Mortgage Rate on 2.33%, 69.30%, 1.61% and 0.05% of the Mortgage
Loans in the Adjustable Rate Group, in each case based upon the aggregate
principal balance of the Mortgage Loans in the Adjustable Rate Group as of the
Cut-off Date, will not adjust for one year, two years, three years or five
years, respectively, following origination. In addition, the Mortgage Rates on
certain of the Mortgage Loans in the Adjustable Rate Group may respond to
different economic and market factors than the Class A-2 Certificates
Pass-Through Rate and there is not necessarily a correlation between them. Thus,
it is possible, for example, that the Mortgage Rates on certain of the Mortgage
Loans in the Adjustable Rate Group may fall during periods in which One-Month
LIBOR is stable or is rising or that, even if both the Mortgage Rates on the
Mortgage Loans in the Adjustable Rate Group and One-Month LIBOR fall during the
same period, the Mortgage Rates on certain of the Mortgage Loans in the
Adjustable Rate Group may fall more rapidly than One-Month LIBOR. Furthermore,
if the Available Funds Cap is used to determine
S-24
<PAGE>
the Class A-2 Pass-Through Rate for a Distribution Date, the value of the Class
A-2 Certificates may be temporarily reduced.
If, with respect to any Distribution Date, the amount of interest that would
accrue during the related Accrual Period on the Class A-2 Certificates based on
the applicable level of One-Month LIBOR plus the Adjustable Rate Margin is
greater than the weighted average (calculated as described herein) of the
Mortgage Rates on the Mortgage Loans in the Adjustable Rate Group as of the
first day of the related Due Period, less the sum of (a) the Servicing Fee Rate,
(b) the Trustee Fee Rate, (c) the Insurance Premium Rate and (d) commencing on
the sixth Distribution Date, 0.50% per annum, and the Pass-Through Rate on the
Class A-2 Certificates is therefore based on the Available Funds Cap, Basis Risk
Excess will, except as provided below, arise. However, no assurance can be given
that there will be sufficient Net Monthly Excess Cashflow generated from the
Mortgage Loans in the Adjustable Rate Group (or, with respect to any
crosscollateralization provisions, from the Mortgage Loans in the Fixed Rate
Group) to pay the Basis Risk Carryover Amount on any given Distribution Date.
Interest will not accrue on or be paid on the Basis Risk Carryover Amount and
the Policy will not cover any Basis Risk Carryover Amount. Moreover, to the
extent that the Available Funds Cap for any Distribution Date equals the Net
Lifetime Cap, the Basis Risk Excess for such Distribution Date will equal zero.
THE STATUS OF THE MORTGAGE LOANS IN THE EVENT OF INSOLVENCY OF OCWEN FEDERAL
BANK FSB
The Depositor believes that the transfer of the Mortgage Loans by Ocwen
Federal Bank FSB to it will constitute absolute and unconditional sales.
However, in the event of an insolvency and receivership of Ocwen Federal Bank
FSB at a time when it or any affiliate holds Certificates, the Federal Deposit
Insurance Corporation (the "FDIC") as its receiver, for purposes of such a
receivership, could attempt to recharacterize the sale of the Mortgage Loans by
Ocwen Federal Bank FSB as a borrowing by Ocwen Federal Bank FSB or such
affiliate from the Depositor, secured by a pledge of the Mortgage Loans. Such an
attempt, even if unsuccessful, could result in delays in payments on the
Certificates. If such an attempt were successful, the FDIC could elect to
liquidate the Mortgage Loans and accelerate payment of the Certificates with the
holders thereof entitled to the then outstanding principal amount thereof, if
any, together with interest at the applicable Pass-Through Rate to the date of
payment. Thus, the holders of Certificates could lose the right to future
payments of interest, and might suffer reinvestment loss in a lower interest
rate environment.
THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately 896 conventional one- to
four-family, fixed-rate and adjustable-rate Mortgage Loans secured by first
liens on residential real properties consisting of detached or semi-detached
one-to-four family dwellings, townhouses, individual condominium units and
individual units in planned unit developments (the "Mortgaged Properties"). The
Mortgage Loans have original terms to maturity ranging from 15 years to 30
years. The Mortgage Pool will be divided into two separate groups of Mortgage
Loans (each, a "Loan Group") based upon whether the Mortgage Loans are fixed-
rate Mortgage Loans (the "Fixed Rate Group") or adjustable rate Mortgage Loans
(the "Adjustable Rate Group"). The Fixed Rate Group will consist of
approximately 211 Mortgage Loans having an aggregate principal balance as of
June 1, 1997 (the "Cut-off Date") of approximately $17,727,255, and the
Adjustable Rate Group will consist of approximately 685 Mortgage Loans having an
aggregate principal balance as of the Cut-off Date of approximately $87,118,227,
in each case after application of scheduled payments due on or before the
Cut-off Date whether or not received, and in each case subject to a permitted
variance of plus or minus 5%. Each Mortgage Loan in the Adjustable Rate Group
provides for semi-annual adjustment to the mortgage rate thereon, provided that
in the case of 2.33% of the Mortgage Loans the first Adjustment Date for such
Mortgage Loans will occur after an initial period of one year, in the case of
69.30% of the Mortgage Loans, two years, in the case 1.61% of the Mortgage
Loans, three years, or in the case of 0.05% of the Mortgage Loans, five years,
each by aggregate principle balance of the Mortgage
S-25
<PAGE>
Loans in the Adjustable Rate Group as of the Cut-off Date, from the origination
thereof based on six-month London interbank offered rates for United States
dollar deposits (the "Index") and for corresponding adjustments to the monthly
payment amount due thereon, in each case subject to the limitations described
under "--The Adjustable Rate Group" herein.
The Mortgage Loans to be included in the Mortgage Pool will be acquired by
the Depositor from the Sellers. See "--Underwriting Standards; Representations"
herein. Ocwen Federal Bank FSB will act as the master servicer for the Mortgage
Loans pursuant to the Agreement (in such capacity, the "Master Servicer").
Approximately 14.71% of the Mortgage Loans in the Fixed Rate Group and
approximately 17.70% of the Mortgage Loans in the Adjustable Rate Group had a
Loan-to-Value Ratio at origination in excess of 80% but will not be covered by a
primary mortgage insurance policy. No Mortgage Loan will have a Loan-to-Value
Ratio at origination exceeding 90.0%. There can be no assurance that the
Loan-to-Value Ratio of any Mortgage Loan determined at any time after
origination is less than or equal to its original Loan-to-Value Ratio.
Substantially all of the Mortgage Loans generally have scheduled monthly
payments due on the first day of the month (with respect to each Mortgage Loan,
a "Due Date"). Each Mortgage Loan will contain a customary "due-on-sale" clause.
Approximately 91.52% of the Mortgage Loans in the Fixed Rate Group and
approximately, 66.75% of the Mortgage Loans in the Adjustable Rate Group provide
for payment by the mortgagor of a prepayment charge in limited circumstances on
certain prepayments. Generally, each such Mortgage Loan provides for payment of
a prepayment charge on certain partial prepayments and all prepayments in full
made within one year, two years, three years or five years from the date of
origination of such Mortgage Loan. The amount of the prepayment charge is as
provided in the related Mortgage Note but is generally equal to six month's
interest on any amounts prepaid in excess of 20% of the then outstanding
principal balance of the related Mortgage Loan in any 12 month period. The
Master Servicer will be entitled to all prepayment charges received on the
Mortgage Loans and such amounts will not be available for distribution on the
Certificates.
Approximately 3.91% of the Mortgage Loans in the Fixed Rate Group are
Buydown Mortgage Loans.
Approximately 0.51% of the Mortgage Loans in the Fixed Rate Group and none
of the Mortgage Loans in the Adjustable Rate Group are balloon payment mortgage
loans (each, a "Balloon Mortgage Loan"). Each Balloon Mortgage Loan generally
amortizes over 360 months, but the final payment (the "Balloon Payment") on each
Balloon Mortgage Loan is due and payable on the 180th month. The amount of the
Balloon Payment on each Balloon Mortgage Loan is substantially in excess of the
amount of the scheduled monthly payment on such Mortgage Loan for the period
prior to the Due Date of such Balloon Payment.
The Mortgage Loans in each Loan Group are expected to have the additional
characteristics described below under "--The Fixed Rate Group" or "--The
Adjustable Rate Group," as applicable.
THE FIXED RATE GROUP
Each Mortgage Loan in the Fixed Rate Group is a fixed-rate mortgage loan.
Each Mortgage Loan in the Fixed Rate Group had a Mortgage Rate of not less than
8.25% per annum and not more than 14.99% per annum and as of the Cut-off Date
the weighted average Mortgage Rate was approximately 10.69% per annum.
The weighted average remaining term to maturity of the Mortgage Loans in the
Fixed Rate Group will be approximately 336 months as of the Cut-off Date. None
of the Mortgage Loans in the Fixed Rate Group will have a first Due Date prior
to February 1, 1996 or after July 1, 1997, or will have a remaining term to
maturity of less than 163 months or greater than 360 months as of the Cut-off
Date. The latest maturity date of any Mortgage Loan in the Fixed Rate Group is
June 1, 2027.
S-26
<PAGE>
The average principal balance of the Mortgage Loans in the Fixed Rate Group
at origination was approximately $84,175 . No Mortgage Loan in the Fixed Rate
Group had a principal balance at origination of greater than $333,750 or less
than $20,825 . The average principal balance of the Mortgage Loans in the Fixed
Rate Group as of the Cut-off Date was approximately $84,015. No Mortgage Loan
had a principal balance as of the Cut-off Date of greater than approximately
$333,327 or less than approximately $20,711.
The Mortgage Loans in the Fixed Rate Group are expected to have the
following characteristics as of the Cut-off Date (the sum in any column may not
equal the total indicated due to rounding):
GEOGRAPHIC DISTRIBUTION
OF THE MORTGAGED PROPERTIES
FIXED RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
California..................................................... 70 $ 8,099,277.93 45.69%
Florida........................................................ 35 2,451,175.74 13.83
Indiana........................................................ 22 1,254,940.36 7.08
New York....................................................... 5 595,888.11 3.36
Oregon......................................................... 6 517,566.42 2.92
New Jersey..................................................... 5 486,642.05 2.75
Massachusetts.................................................. 4 485,813.34 2.74
Illinois....................................................... 7 470,742.27 2.66
Utah........................................................... 6 466,183.24 2.63
Ohio........................................................... 7 381,653.39 2.15
Colorado....................................................... 4 369,358.40 2.08
Arizona........................................................ 6 346,249.35 1.95
Nebraska....................................................... 4 227,510.34 1.28
Georgia........................................................ 5 222,902.78 1.26
Pennsylvania................................................... 3 219,430.72 1.24
Hawaii......................................................... 1 188,703.69 1.06
Maryland....................................................... 4 149,058.23 0.84
Missouri....................................................... 4 142,640.01 0.80
Wisconsin...................................................... 3 141,933.66 0.80
North Carolina................................................. 2 122,480.30 0.69
Connecticut.................................................... 2 90,407.03 0.51
Michigan....................................................... 2 90,350.25 0.51
Virginia....................................................... 2 81,389.20 0.46
Vermont........................................................ 1 75,000.00 0.42
Rhode Island................................................... 1 49,957.88 0.28
--- ------------------ ------
Total:..................................................... 211 $ 17,727,254.69 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
The greatest geographic concentration of Mortgage Loans in the Fixed Rate
Group by aggregate principal balance as of the Cut-off date was $371,698 in
California in the 91331 zip code.
S-27
<PAGE>
PRINCIPAL BALANCES OF THE
MORTGAGE LOANS AT ORIGINATION
FIXED RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RANGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------- ------------- ------------------ -------------------
<C> <S> <C> <C> <C>
$ 1- $ 25,000 ......................................... 2 $ 43,361.13 0.24%
25,001- 50,000 ......................................... 63 2,305,696.15 13.01
50,001- 75,000 ......................................... 51 3,252,441.52 18.35
75,001- 100,000 ......................................... 36 3,160,832.53 17.83
100,001- 125,000 ......................................... 26 2,912,220.98 16.43
125,001- 150,000 ......................................... 9 1,205,912.59 6.80
150,001- 175,000 ......................................... 8 1,267,787.17 7.15
175,001- 200,000 ......................................... 6 1,148,820.41 6.48
200,001- 225,000 ......................................... 4 877,272.06 4.95
225,001- 250,000 ......................................... 4 954,411.61 5.38
250,001- 275,000 ......................................... 1 265,172.01 1.50
325,001- 350,000 ......................................... 1 333,326.53 1.88
--- ------------------ ------
Total: ......................................... 211 $ 17,727,254.69 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
The average principal balance of the Mortgage Loans in the Fixed Rate Group
at origination was approximately $84,175. No Mortgage Loan in the Fixed Rate
Group had a principal balance at origination greater than $333,750 or less than
$20,825.
PRINCIPAL BALANCES OF THE MORTGAGE LOANS
AS OF THE CUT-OFF DATE
FIXED RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RANGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
$ 1 - $ 25,000............................................. 2 $ 43,361.13 0.24%
25,001 - 50,000............................................ 63 2,305,696.15 13.01
50,001 - 75,000............................................ 51 3,252,441.52 18.35
75,001 - 100,000............................................ 37 3,260,413.30 18.39
100,001 - 125,000............................................ 26 2,937,497.65 16.57
125,001 - 150,000............................................ 8 1,081,055.15 6.10
150,001 - 175,000............................................ 8 1,267,787.17 7.15
175,001 - 200,000............................................ 6 1,148,820.41 6.48
200,001 - 225,000............................................ 4 877,272.06 4.95
225,001 - 250,000............................................ 4 954,411.61 5.38
250,001 - 275,000............................................ 1 265,172.01 1.50
325,001 - 350,000............................................ 1 333,326.53 1.88
--- ------------------ ------
Total:..................................................... 211 $ 17,727,254.69 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
The average principal balance of the Mortgage Loans in the Fixed Rate Group
as of the Cut-off Date was approximately $84,015. No Mortgage Loan in the Fixed
Rate Group had a principal balance as of the Cut-off Date greater than $333,327
or less than $20,711.
S-28
<PAGE>
MORTGAGE RATES OF THE MORTGAGE LOANS
FIXED RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
8.001%- 8.500%............................................... 3 $ 261,907.78 1.48%
8.501 - 9.000................................................ 5 646,566.74 3.65
9.001 -_ 9.500................................................ 14 1,343,153.77 7.58
9.501 - 10.000................................................ 42 4,066,830.37 22.94
10.001 - 10.500................................................ 34 3,744,004.22 21.12
10.501 - 11.000................................................ 30 2,615,909.25 14.76
11.001 - 11.500................................................ 22 1,066,352.83 6.02
11.501 - 12.000................................................ 18 1,603,568.47 9.05
12.001 - 12.500................................................ 21 1,328,558.78 7.49
12.501 - 13.000................................................ 8 385,118.92 2.17
13.001 - 13.500................................................ 5 292,738.96 1.65
13.501 - 14.000................................................ 8 261,993.23 1.48
14.501 - 15.000................................................ 1 110,551.37 0.62
--- ------------------ ------
Total:..................................................... 211 $ 17,727,254.69 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans in the Fixed Rate Group was approximately 10.69% per annum.
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
FIXED RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
20.01% - 25.00%................................................ 1 $ 31,957.07 0.18%
25.01 - 30.00.................................................. 1 34,989.96 0.20
35.01 - 40.00.................................................. 3 204,624.90 1.15
40.01 - 45.00.................................................. 3 176,349.49 0.99
45.01 - 50.00.................................................. 5 276,355.00 1.56
50.01 - 55.00.................................................. 10 906,481.49 5.11
55.01 - 60.00.................................................. 6 395,103.98 2.23
60.01 - 65.00.................................................. 18 1,325,500.26 7.48
65.01 - 70.00.................................................. 48 3,095,631.12 17.46
70.01 - 75.00.................................................. 38 3,851,016.20 21.72
75.01 - 80.00.................................................. 53 4,821,090.95 27.20
80.01 - 85.00.................................................. 21 1,967,028.05 11.10
85.01 - 90.00.................................................. 4 641,126.22 3.62
--- ------------------ ------
Total:..................................................... 211 $ 17,727,254.69 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans in the Fixed Rate Group was approximately 73.10%. No Mortgage Loan in the
Fixed Rate Group had a Loan-to-Value Ratio at origination greater than 90.00% or
less than 24.24%.
S-29
<PAGE>
PROPERTY TYPE
FIXED RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
Single Family Residence........................................ 174 $ 14,679,546.30 82.81%
2-4 Family..................................................... 28 2,449,385.94 13.82
Condo.......................................................... 8 547,463.96 3.09
Planned Unit Development....................................... 1 50,858.49 0.29
--- ------------------ ------
Total:..................................................... 211 $ 17,727,254.69 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
OCCUPANCY STATUS
FIXED RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUSTANDING AS OF
OCCUPANCY LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
Owner Occupied................................................. 167 $ 14,614,657.89 82.44%
Non-Owner Occupied............................................. 44 3,112,596.80 17.56
--- ------------------ ------
Total:..................................................... 211 $ 17,727,254.69 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
PURPOSE OF THE MORTGAGE LOANS
FIXED RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUSTANDING AS OF
LOAN PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
Equity-out Refinance........................................... 149 $ 13,486,048.29 76.08%
Refinance...................................................... 36 3,013,149.26 17.00
Purchase....................................................... 26 1,228,057.14 6.93
--- ------------------ ------
Total:..................................................... 211 $ 17,727,254.69 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
S-30
<PAGE>
LOAN PROGRAMS
FIXED RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
Full Documentation Program..................................... 133 $ 11,154,132.70 62.92%
Lite Documentation Program..................................... 10 1,124,372.81 6.34
Stated Income Documentation Program............................ 68 5,448,749.18 30.74
--- ------------------ ------
Total...................................................... 211 $ 17,727,254.69 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
RISK CATEGORIES
FIXED RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
A.............................................................. 26 $ 2,686,783.82 15.16%
A-............................................................. 102 9,009,352.38 50.82
B.............................................................. 44 3,496,738.19 19.73
C.............................................................. 24 1,749,731.63 9.87
D.............................................................. 11 574,518.18 3.24
D-............................................................. 4 210,130.49 1.19
--- ------------------ ------
Total:..................................................... 211 $ 17,727,254.69 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY
FIXED RATE GROUP
<TABLE>
<CAPTION>
% OF FIXED
AGGREGATE RATE GROUP
PRINCIPAL BY AGGREGATE
RANGE OF MONTHS NUMBER OF BALANCE PRINCIPAL BALANCE
REMAINING TO MORTGAGE OUTSTANDING AS OF AS OF THE CUT-OFF
SCHEDULED MATURITY LOANS THE CUT-OFF DATE DATE
--------------------- ------------- ------------------ ---------------------
<S> <C> <C> <C>
157 - 168................................................... 1 $ 90,527.44 0.51%
169 - 180................................................... 22 1,887,841.37 10.65
229 - 240................................................... 4 247,216.39 1.39
349 - 360................................................... 184 15,501,669.49 87.45
--- ------------------ ------
Total:.................................................. 211 $ 17,727,254.69 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
S-31
<PAGE>
THE ADJUSTABLE RATE GROUP
Each Mortgage Loan in the Adjustable Rate Group provides for semi-annual
adjustment to the Mortgage Rate thereon and for corresponding adjustments to the
monthly payment amount due thereon, in each case on each adjustment date
applicable thereto (each such date, an "Adjustment Date"); provided, however,
that in the case of approximately 2.33%, 69.30%, 1.61% and 0.05% of the Mortgage
Loans in the Adjustable Rate Group, the first Adjustment Date for such Mortgage
Loans will occur after an initial period of one year, two years, three years or
five years, respectively, from the origination thereof. On each Adjustment Date
for each Mortgage Loan in the Adjustable Rate Group, the Mortgage Rate thereon
will be adjusted to equal the sum, rounded to the nearest multiple of 0.125%, of
the Index (as described below) and a fixed percentage amount (the "Gross
Margin"); provided, however, that the Mortgage Rate on each such Mortgage Loan
generally will not increase or decrease by more than 1.00% per annum on any
related Adjustment Date (the "Periodic Rate Cap") and will not exceed a
specified maximum Mortgage Rate over the life of such Mortgage Loan (the
"Maximum Mortgage Rate") or be less than a specified minimum Mortgage Rate over
the life of such Mortgage Loan (the "Minimum Mortgage Rate"). Notwithstanding
the foregoing, the Adjustable Rate Group has a weighted average Periodic Rate
Cap of approximately 1.00% per annum. Effective with the first monthly payment
due on each Mortgage Loan in the Adjustable Rate Group after each related
Adjustment Date, the monthly payment amount will be adjusted to an amount that
will amortize fully the outstanding principal balance of the related Mortgage
Loan over its remaining term, and pay interest at the Mortgage Rate as so
adjusted. Approximately 0.47% of the Adjustable Rate Mortgage Loans (the
"Introductory Rate Loans") were originated with Mortgage Rates lower than the
Lifetime Floor and provide for semi-annual adjustments to the Mortgage Rate,
subject to a 2.00% Periodic Rate Cap for the initial Adjustment Date and a 1.00%
Periodic Rate Cap thereafter. Approximately 0.40% of the Adjustable Rate
Mortgage Loans are Introductory Rate Loans that have not reached their
respective initial Adjustment Dates. Due to the application of the Periodic Rate
Caps and the Maximum Mortgage Rates, the Mortgage Rate on each such Mortgage
Loan, as adjusted on any related Adjustment Date, may be less than the sum of
the Index and Gross Margin, rounded as described herein. See "--The Index"
herein. None of the Mortgage Loans in the Adjustable Rate Group permits the
related mortgagor to convert the adjustable Mortgage Rate thereon to a fixed
Mortgage Rate.
The Mortgage Loans in the Adjustable Rate Group had Mortgage Rates as of the
Cut-off Date of not less than 6.13% per annum and not more than 14.50% per annum
and the weighted average Mortgage Rate was approximately 9.94% per annum. As of
the Cut-off Date, the Mortgage Loans in the Adjustable Rate Group had Gross
Margins ranging from 3.45% to 8.50%, Minimum Mortgage Rates ranging from 6.13%
per annum to 14.50% per annum and Maximum Mortgage Rates ranging from 12.63% per
annum to 21.00% per annum. As of the Cut-off Date, the weighted average Gross
Margin was approximately 6.02%, the weighted average Minimum Mortgage Rate was
approximately 9.94% per annum and the weighted average Maximum Mortgage Rate was
approximately 16.44% per annum. The latest first Adjustment Date following the
Cut-off Date on any Mortgage Loan in the Adjustable Rate Group occurs in May 1,
2002 and the weighted average months to next rate adjustment for all of the
Mortgage Loans in the Adjustable Rate Group following the Cut-off Date is 17
months.
The weighted average remaining term to maturity of the Mortgage Loans in the
Adjustable Rate Group will be approximately 358 months as of the Cut-off Date.
None of the Mortgage Loans in the Adjustable Rate Group will have a first Due
Date prior to November 1, 1995 or after July 1, 1997, or will have a remaining
term to maturity of less than 176 months or greater than 360 months as of the
Cut-off Date. The latest maturity date of any Mortgage Loan in the Adjustable
Rate Group is June 1, 2027.
The average principal balance of the Mortgage Loans in the Adjustable Rate
Group at origination was approximately $127,315. No Mortgage Loan in the
Adjustable Rate Group had a principal balance at origination of greater than
$1,200,000 or less than $15,400. The average principal balance of the Mortgage
Loans in the Adjustable Rate Group as of the Cut-off Date was approximately
$127,180. No Mortgage Loan had a principal balance as of the Cut-off Date of
greater than $1,198,633 or less than $15,391.
The Mortgage Loans in the Adjustable Rate Group are expected to have the
following characteristics as of the Cut-off Date (the sum in any column may not
equal the total indicated due to rounding):
S-32
<PAGE>
GEOGRAPHIC DISTRIBUTION OF
THE MORTGAGED PROPERTIES
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
California..................................................... 116 $ 16,564,534.41 19.01%
Illinois....................................................... 81 9,366,450.02 10.75
Massachusetts.................................................. 50 8,533,229.73 9.79
New Jersey..................................................... 42 7,888,997.93 9.06
Florida........................................................ 55 7,812,397.78 8.97
New York....................................................... 31 6,558,912.44 7.53
Utah........................................................... 42 5,179,437.38 5.95
Oregon......................................................... 31 3,992,813.92 4.58
Georgia........................................................ 16 2,321,167.88 2.66
Missouri....................................................... 23 2,044,917.34 2.35
Colorado....................................................... 21 1,913,893.66 2.20
North Carolina................................................. 19 1,738,292.70 2.00
Ohio........................................................... 17 1,519,609.35 1.74
Indiana........................................................ 23 1,511,515.92 1.74
Rhode Island................................................... 16 1,444,802.39 1.66
Pennsylvania................................................... 7 1,263,639.11 1.45
Virginia....................................................... 13 1,207,692.91 1.39
Michigan....................................................... 11 1,100,301.48 1.26
Arizona........................................................ 11 1,012,155.29 1.16
Tennessee...................................................... 5 660,921.85 0.76
Nebraska....................................................... 9 571,496.40 0.66
Iowa........................................................... 6 424,675.00 0.49
Connecticut.................................................... 3 347,789.88 0.40
Washington..................................................... 2 333,256.35 0.38
Wisconsin...................................................... 9 313,810.09 0.36
Vermont........................................................ 4 286,288.43 0.33
Idaho.......................................................... 4 226,200.37 0.26
New Hampshire.................................................. 2 201,820.51 0.23
Kentucky....................................................... 4 188,488.47 0.22
New Mexico..................................................... 4 185,299.64 0.21
Kansas......................................................... 2 139,953.63 0.16
Maryland....................................................... 3 136,033.79 0.16
Wyoming........................................................ 1 46,242.78 0.05
South Dakota................................................... 1 44,100.00 0.05
Maine.......................................................... 1 37,088.53 0.04
--- ------------------ ------
Total:..................................................... 685 $ 87,118,227.36 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
The greatest geographic concentration of Mortgage Loans in the Adjustable
Rate group by aggregate principal balance as of the Cut-off date was $713,080 in
California in the 90043 zip code.
S-33
<PAGE>
PRINCIPLE BALANCES OF MORTGAGE LOANS AT ORIGINATION
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RANGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------ ------------- ------------------ -----------------
<S> <C> <C> <C>
$ 1 - $25,000.................................. 11 $ 244,013.06 0.28%
25,001 - 50,000.................................. 93 3,767,663.81 4.32
50,001 - 75,000.................................. 136 8,509,036.10 9.77
75,001 - 100,000.................................. 121 10,638,994.00 12.21
100,001 - 125,000.................................. 112 12,475,460.60 14.32
125,001 - 150,000.................................. 61 8,363,904.69 9.60
150,001 - 175,000.................................. 34 5,503,236.78 6.32
175,001 - 200,000.................................. 27 5,085,096.46 5.84
200,001 - 225,000.................................. 21 4,460,187.32 5.12
225,001 - 250,000.................................. 9 2,138,059.02 2.45
250,001 - 275,000.................................. 13 3,438,537.79 3.95
275,001 - 300,000.................................. 4 1,152,830.46 1.32
300,001 - 325,000.................................. 3 946,554.99 1.09
325,001 - 350,000.................................. 9 3,054,343.79 3.51
350,001 - 375,000.................................. 3 1,097,726.01 1.26
375,001 - 400,000.................................. 4 1,541,373.82 1.77
400,001 - 425,000.................................. 2 837,935.06 0.96
425,001 - 450,000.................................. 2 876,189.73 1.01
450,001 - 475,000.................................. 6 2,757,583.83 3.17
475,001 - 500,000.................................. 1 479,205.98 0.55
500,001 - 1,000,000................................. 12 8,551,661.58 9.82
1,000,001>=........................................... 1 1,198,632.48 1.38
--- ------------------ ------
Total:.......................................... 685 $ 87,118,227.36 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
The average principal balance of the Mortgage Loans in the Adjustable Rate
Group at origination was approximately $127,315. No Mortgage Loan in the
Adjustable Rate Group had a principal balance at origination greater than
$1,200,000 or less than $15,400.
S-34
<PAGE>
PRINCIPLE BALANCES OF THE MORTGAGE LOANS
AS OF THE CUT-OFF DATE
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RANGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------ ------------- ------------------ -----------------
<S> <C> <C> <C>
$ 1 - $25,000................................... 11 $ 244,013.06 0.28%
25,001 - 50,000................................... 93 3,767,663.81 4.32
50,001 - 75,000................................... 136 8,509,036.10 9.77
75,001 - 100,000................................... 122 10,738,936.48 12.33
100,001 - 125,000................................... 111 12,375,518.12 14.21
125,001 - 150,000................................... 61 8,363,904.69 9.60
150,001 - 175,000................................... 34 5,503,236.78 6.32
175,001 - 200,000................................... 27 5,085,096.46 5.84
200,001 - 225,000................................... 21 4,460,187.32 5.12
225,001 - 250,000................................... 9 2,138,059.02 2.45
250,001 - 275,000................................... 13 3,438,537.79 3.95
275,001 - 300,000................................... 4 1,152,830.46 1.32
300,001 - 325,000................................... 3 946,554.99 1.09
325,001 - 350,000................................... 9 3,054,343.79 3.51
350,001 - 375,000................................... 3 1,097,726.01 1.26
375,001 - 400,000................................... 4 1,541,373.82 1.77
400,001 - 425,000................................... 2 837,935.06 0.96
425,001 - 450,000................................... 2 876,189.73 1.01
450,001 - 475,000................................... 6 2,757,583.83 3.17
475,001 - 500,000................................... 1 479,205.98 0.55
500,001 - 1,000,000.................................. 12 8,551,661.58 9.82
1,000,001 >=.......................................... 1 1,198,632.48 1.38
--- ------------------ ------
Total:.......................................... 685 $ 87,118,227.36 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
The average principal balance of the Mortgage Loans in the Adjustable Rate
Group as of the Cut-off Date was approximately $127,180. No Mortgage Loan in the
Adjustable Rate Group had a principal balance as of the Cut-off Date greater
than $1,198,632 or less than $15,392.
S-35
<PAGE>
MORTGAGE RATES OF THE MORTGAGE LOANS AT ORIGINATION
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------ ------------- ------------------ -----------------
<S> <C> <C> <C>
6.001% - 6.500%..................................... 1 $ 64,107.12 0.07%
6.501 - 7.000 ...................................... 1 223,812.36 0.26
7.001 - 7.500 ...................................... 4 452,620.15 0.52
7.501 - 8.000 ...................................... 13 1,538,231.50 1.77
8.001 - 8.500 ...................................... 43 5,342,925.63 6.13
8.501 - 9.000 ...................................... 89 11,353,829.57 13.03
9.001 - 9.500 ...................................... 117 15,465,944.92 17.75
9.501 - 10.000 ...................................... 121 16,051,395.31 18.42
10.001 - 10.500 ...................................... 118 16,898,764.39 19.40
10.501 - 11.000 ...................................... 63 8,189,437.63 9.40
11.001 - 11.500 ...................................... 44 5,668,579.32 6.51
11.501 - 12.000 ...................................... 23 1,858,376.56 2.13
12.001 - 12.500 ...................................... 16 1,522,727.65 1.75
12.501 - 13.000 ...................................... 14 1,125,656.76 1.29
13.001 - 13.500 ...................................... 6 401,921.46 0.46
13.501 - 14.000 ...................................... 8 551,903.66 0.63
14.001 - 14.500 ...................................... 4 407,993.37 0.47
--- ------------------ ------
Total:.......................................... 685 $ 87,118,227.36 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
At origination, the weighted average Mortgage Rate of the Mortgage Loans in
the Adjustable Rate Group was approximately 9.93% per annum.
MORTGAGE RATES OF THE MORTGAGE LOANS
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE LOANS THE CUT-OFF DATE CUT-OFF DATE
- ------------------------------------------------------ ------------- ------------------ -----------------
<S> <C> <C> <C>
6.001% - 6.500%..................................... 1 $ 64,107.12 0.07%
6.501 - 7.000....................................... 1 223,812.36 0.26
7.001 - 7.500....................................... 4 452,620.15 0.52
7.501 - 8.000....................................... 13 1,538,231.50 1.77
8.001 - 8.500....................................... 43 5,342,925.63 6.13
8.501 - 9.000....................................... 89 11,353,829.57 13.03
9.001 - 9.500....................................... 117 15,465,944.92 17.75
9.501 - 10.000....................................... 121 16,051,395.31 18.42
10.001 - 10.500....................................... 117 16,784,621.46 19.27
10.501 - 11.000....................................... 62 8,130,863.48 9.33
11.001 - 11.500....................................... 45 5,782,722.25 6.64
11.501 - 12.000....................................... 23 1,858,376.56 2.13
12.001 - 12.500....................................... 16 1,522,727.65 1.75
12.501 - 13.000....................................... 15 1,184,230.91 1.36
13.001 - 13.500....................................... 6 401,921.46 0.46
13.501 - 14.000....................................... 8 551,903.66 0.63
14.001 - 14.500....................................... 4 407,993.37 0.47
--- ------------------ ------
Total:............................................ 685 $ 87,118,227.36 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans in the Adjustable Rate group was approximately 9.94% per annum.
S-36
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE PRINCIPAL
PRINCIPAL BALANCE
BALANCE OUTSTANDING AS
NUMBER OF OUTSTANDING AS OF OF
LOAN-TO-VALUE RATIO LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ---------------------- ----------- ------------------ ----------------
<S> <C> <C> <C>
20.01%- 25.00%................................................. 1 $ 29,924.10 0.03%
25.01 - 30.00.................................................. 1 145,000.00 0.17
35.01 - 40.00.................................................. 3 256,849.53 0.29
40.01 - 45.00.................................................. 6 357,054.72 0.41
45.01 - 50.00.................................................. 9 795,596.75 0.91
50.01 - 55.00.................................................. 13 2,193,263.01 2.52
55.01 - 60.00.................................................. 23 2,707,434.83 3.11
60.01 - 65.00.................................................. 62 9,488,926.67 10.89
65.01 - 70.00.................................................. 119 14,258,418.91 16.37
70.01 - 75.00.................................................. 156 17,735,379.99 20.36
75.01 - 80.00.................................................. 170 23,726,275.37 27.23
80.01 - 85.00.................................................. 81 9,766,056.96 11.21
85.01 - 90.00.................................................. 41 5,658,046.52 6.49
----------- ------------------ --------
Total:..................................................... 685 $ 87,118,227.36 100.00%
----------- ------------------ --------
----------- ------------------ --------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans in the Adjustable Rate Group was approximately 74.43%. No Mortgage Loan in
the Adjustable Rate Group had a Loan-to-Value Ratio at origination greater than
90.00% or less than 22.22%.
PROPERTY TYPE
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
Single Family Residence........................................ 567 $ 72,336,087.87 83.03%
2-4 Family..................................................... 69 7,996,789.50 9.18
Condo.......................................................... 31 3,811,554.99 4.38
Planned Unit Development....................................... 17 2,873,951.75 3.30
Townhouse...................................................... 1 99,843.25 0.11
--- ------------------ ------
Total:....................................................... 685 $ 87,118,227.36 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
S-37
<PAGE>
OCCUPANCY STATUS
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
Owner Occupied................................................. 586 $ 78,268,315.39 89.84%
Non-Owner Occupied............................................. 99 8,849,911.97 10.16
--- ------------------ ------
Total:....................................................... 685 $ 87,118,227.36 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
PURPOSE OF THE MORTGAGE LOANS
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
Equity-out Refinance........................................... 397 $ 52,957,224.15 60.79%
Refinance...................................................... 105 12,075,894.86 13.86
Purchase....................................................... 183 22,085,108.35 25.35
--- ------------------ ------
Total:....................................................... 685 $ 87,118,227.36 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
LOAN PROGRAMS
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PROGRAM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
Full Documentation Program..................................... 378 $ 40,724,490.10 46.75%
Lite Documentation Program..................................... 71 9,846,311.67 11.30
Stated Income Documentation Program............................ 236 36,547,425.59 41.95
--- ------------------ ------
Total:....................................................... 685 $ 87,118,227.36 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
RISK CATEGORIES
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
A.............................................................. 37 $ 4,054,435.02 4.65%
A-............................................................. 350 49,083,907.91 56.34
B.............................................................. 164 18,962,637.64 21.77
C.............................................................. 86 10,788,140.75 12.38
D.............................................................. 35 3,020,518.03 3.47
D-............................................................. 13 1,208,588.01 1.39
--- ------------------ ------
Total:....................................................... 685 $ 87,118,227.36 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
S-38
<PAGE>
MAXIMUM MORTGAGE RATES OF THE MORTGAGE LOANS
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MAXIMUM MORTGAGE RATES LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
12.501%- 13.000%........................................................... 1 $ 64,107.12 0.07%
13.001 - 13.500............................................................ 1 223,812.36 0.26
13.501 - 14.000............................................................ 3 356,965.35 0.41
14.001 - 14.500............................................................ 13 1,538,231.50 1.77
14.501 - 15.000............................................................ 44 5,438,580.43 6.24
15.001 - 15.500............................................................ 85 10,793,076.02 12.39
15.501 - 16.000............................................................ 118 15,658,584.02 17.97
16.001 - 16.500............................................................ 124 16,366,647.27 18.79
16.501 - 17.000............................................................ 117 16,432,252.24 18.86
17.001 - 17.500............................................................ 64 8,745,373.18 10.04
17.501 - 18.000............................................................ 43 5,573,444.26 6.40
18.001 - 18.500............................................................ 24 1,916,950.71 2.20
18.501 - 19.000............................................................ 16 1,522,727.65 1.75
19.001 - 19.500............................................................ 14 1,125,656.76 1.29
19.501 - 20.000............................................................ 6 401,921.46 0.46
20.001 >=.................................................................. 12 959,897.03 1.10
--- ------------------ ------
Total: 685 $ 87,118,227.36 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
The weighted average Maximum Mortgage Rate of the Mortgage Loans in the
Adjustable Rate Group as of the Cut-off Date was approximately 16.44% per annum.
MINIMUM MORTGAGE RATES OF THE MORTGAGE LOANS
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MINIMUM MORTGAGE RATES LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
6.001%- 6.500%........................................................... 1 $ 64,107.12 0.07%
6.501 - 7.000............................................................ 1 223,812.36 0.26
7.001 - 7.500............................................................ 3 356,965.35 0.41
7.501 - 8.000............................................................ 13 1,538,231.50 1.77
8.001 - 8.500............................................................ 44 5,438,580.43 6.24
8.501 - 9.000............................................................ 88 11,238,605.29 12.90
9.001 - 9.500............................................................ 116 15,330,230.23 17.60
9.501 - 10.000............................................................ 122 16,166,619.59 18.56
10.001 - 10.500............................................................ 119 17,034,479.08 19.55
10.501 - 11.000............................................................ 62 8,130,863.48 9.33
11.001 - 11.500............................................................ 44 5,668,579.32 6.51
11.501 - 12.000............................................................ 24 1,916,950.71 2.20
12.001 - 12.500............................................................ 16 1,522,727.65 1.75
12.501 - 13.000............................................................ 14 1,125,656.76 1.29
13.001 - 13.500............................................................ 6 401,921.46 0.46
13.501 - 14.000............................................................ 8 551,903.66 0.63
14.001 - 14.500............................................................ 4 407,993.37 0.47
--- ------------------ ------
Total:................................................................. 685 $ 87,118,227.36 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
The weighted average Minimum Mortgage Rate of the Mortgage Loans as of the
Cut-off Date was approximately 9.94% per annum.
S-39
<PAGE>
GROSS MARGINS OF THE MORTGAGE LOANS
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGINS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
3.001%- 3.500%............................................................. 1 $ 64,107.12 0.07%
4.501 - 5.000.............................................................. 7 1,254,100.01 1.44
5.001 - 5.500.............................................................. 14 1,752,244.98 2.01
5.501 - 6.000.............................................................. 389 53,692,859.18 61.63
6.001 - 6.500.............................................................. 165 20,404,979.46 23.42
6.501 - 7.000.............................................................. 98 9,019,168.28 10.35
7.001 - 7.500.............................................................. 9 724,506.68 0.83
7.501 - 8.000.............................................................. 1 66,476.24 0.08
8.001 - 8.500.............................................................. 1 139,785.41 0.16
--- ------------------ ------
Total.................................................................. 685 $ 87,118,227.36 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
The weighted average Gross Margin of the Mortgage Loans in the Adjustable
Rate Group as of the Cut-off Date was approximately 6.02%.
NEXT ADJUSTMENT DATES FOR THE MORTGAGE LOANS
ADJUSTABLE RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL % OF AGGREGATE
BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MONTH OF NEXT ADJUSTMENT DATE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------------------------------------------------------- ------------- ------------------ -----------------
<S> <C> <C> <C>
1997-07.................................................................... 1 $ 748,221.79 0.86%
1997-08.................................................................... 16 2,765,978.18 3.17
1997-09.................................................................... 35 4,793,491.98 5.50
1997-10.................................................................... 38 5,926,901.99 6.80
1997-11.................................................................... 49 6,860,847.04 7.88
1997-12.................................................................... 19 2,095,744.93 2.41
1998-05.................................................................... 7 1,332,279.00 1.53
1998-06.................................................................... 5 701,800.00 0.81
1998-09.................................................................... 2 190,652.86 0.22
1998-11.................................................................... 1 390,617.80 0.45
1998-12.................................................................... 1 114,455.03 0.13
1999-01.................................................................... 4 1,359,308.99 1.56
1999-02.................................................................... 51 6,446,938.55 7.40
1999-03.................................................................... 89 11,413,938.21 13.10
1999-04.................................................................... 98 10,924,971.82 12.54
1999-05.................................................................... 200 24,205,546.16 27.78
1999-06.................................................................... 55 5,394,800.00 6.19
1999-12.................................................................... 4 183,825.93 0.21
2000-02.................................................................... 3 517,013.17 0.59
2000-03.................................................................... 1 268,573.66 0.31
2000-04.................................................................... 2 118,777.82 0.14
2000-05.................................................................... 2 189,056.52 0.22
2000-06.................................................................... 1 128,000.00 0.15
2002-05.................................................................... 1 46,485.93 0.05
--- ------------------ ------
Total.................................................................... 685 $ 87,118,227.36 100.00%
--- ------------------ ------
--- ------------------ ------
</TABLE>
S-40
<PAGE>
THE INDEX ON MORTGAGE LOANS
As of any Adjustment Date, the Index applicable to the determination of the
Mortgage Rate on each Mortgage Loan in the Adjustable Rate Group will be the
average of the interbank offered rates for six-month United States dollar
deposits in the London market ("Six-Month LIBOR") as published in THE WALL
STREET JOURNAL and as most recently available either (i) as of the first
business day 45 days prior to such Adjustment Date or (ii) as of the first
business day of the month preceding the month of such Adjustment Date, as
specified in the related Mortgage Note.
In the event that the Index becomes unavailable or otherwise unpublished,
the Master Servicer will select a comparable alternative index over which it has
no direct control and which is readily verifiable.
UNDERWRITING STANDARDS; REPRESENTATIONS
The Mortgage Loans will be acquired by the Depositor from the Sellers on the
Closing Date. All of the Mortgage Loans were originated or acquired by Ocwen
Federal Bank FSB or Ocwen Financial Services, Inc. (each, an "Originator" and
together, the "Originators"), generally in accordance with the underwriting
criteria described herein. LMAC, Inc. will acquire the Mortgage Loans originated
or acquired by Ocwen Financial Services, Inc. contemporaneously with the
transfer of the Mortgage Loans by LMAC, Inc. to the Depositor.
The Originators' underwriting standards are primarily intended to assess the
value of the mortgaged property and to evaluate the adequacy of such property as
collateral for the mortgage loan. All of the Mortgage Loans were also
underwritten with a view toward the resale thereof in the secondary mortgage
market. While the Originators' primary consideration in underwriting a mortgage
loan is the value of the mortgaged property, the Originators also consider,
among other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio ("Debt Ratio"), as well as the type and use of the
mortgaged property. Second lien financing of the mortgaged properties may be
provided by lenders at any time (including at origination), in which case the
combined loan-to-value ratios of such related mortgage loans may not exceed 95%.
The Originators, however, will not themselves provide second lien financing on a
mortgaged property. The Mortgage Loans generally bear higher rates of interest
than mortgage loans that are originated in accordance with FNMA and FHLMC
standards which is likely to result in rates of delinquencies and foreclosures
that are higher, and that may be substantially higher, than those experienced by
portfolios of mortgage loans underwritten in a more traditional manner. Unless
prohibited by state law or otherwise waived by the Originators upon payment by
the related mortgagor of higher origination fees and a higher Mortgage Rate, a
majority of the Mortgage Loans provide for the payment by the mortgagor of a
prepayment charge in limited circumstances on certain full or partial
prepayments made within one year, two years, three years or five years from the
date of origination of the related Mortgage Loan as described under "--General"
above. The amount of the prepayment charge is as provided in the related
Mortgage Note but is generally equal to six months' interest on any amounts
prepaid in excess of 20% of the then outstanding principal balance of the
related Mortgage Loan in any 12 month period.
As a result of the Originators' underwriting criteria, changes in the values
of Mortgaged Properties may have a greater effect on the Originators'
delinquency, foreclosure and loss experience than on those of lenders whose
mortgage loans are originated in a more traditional manner. No assurance can be
given that the values of the Mortgaged Properties have remained or will remain
at the levels in effect on the dates of origination of the related Mortgage
Loans. Approximately 45.69% and 13.83% of the Mortgage Loans in the Fixed Rate
Group, each by aggregate principal balance of the related Mortgage Loans as of
the Cut-off Date, are secured by Mortgaged Properties located in the State of
California and Florida. Approximately 19.01% and 10.75% of the Mortgage Loans in
the Adjustable Rate Group, each by aggregate principal balance of the Mortgage
Loans as of the Cut-off Date, are secured by Mortgaged Properties located in the
States of California and Illinois, respectively. If the California, Florida or
Illinois residential real estate markets should experience an overall decline in
property values after the dates of origination of the
S-41
<PAGE>
Mortgage Loans, the rates of delinquencies, foreclosures and losses on the
Mortgage Loans may increase over historical levels of comparable type loans, and
may increase substantially.
All originations by the Originators of one- to four-family residential
mortgage loans are based on loan application packages submitted through approved
correspondents and brokers. Such loan application packages, which generally
contain relevant credit, property and underwriting information on the loan
request, are compiled by the applicable correspondent or broker and submitted to
the Originators for approval and purchase. The correspondents and brokers
receive all or a portion of the loan origination fee charged to the borrower at
the time the loan is made. As part of their quality control procedures, the
Originators maintain a file with respect to each correspondent and broker
including a copy of such correspondent's or broker's license and reports of any
complaints received with respect to such correspondent or their brokers.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history,
employment history and personal information. The Originators require a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions, or judgments. Properties that are to
secure single-family (otherwise referred to herein as one- to four-family)
mortgage loans are appraised or reviewed by qualified independent appraisers who
are approved by the Originators' internal appraisal department. Such appraisers
inspect the interior and/or exterior and appraise the subject property and
report the property condition. Following each inspection, the appraiser prepares
a report which includes a market value analysis based on recent sales of
comparable homes in the area and, when deemed appropriate, replacement cost
analysis based on the current cost of constructing a similar home. All
appraisals are required to conform to the Uniform Standards of Professional
Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal
Foundation and must be on forms acceptable to FNMA and FHLMC. Every independent
appraisal is reviewed by either the Originators or by another independent
appraiser approved by the Originators before the mortgage loan is made and to
the extent that such review appraisal determines a market value more than five
percent less than the market value determined by the initial appraisal, such
review appraisal is used in place of the initial appraisal.
The Mortgage Loans were underwritten by the Originators' regular lending
divisions pursuant to the Originators' "Full Documentation," "Lite
Documentation," and "Stated Income Documentation" residential loan programs.
Under each of the programs, the Originators' regular lending divisions review
the loan applicant's source of income, calculate the amount of income from
sources indicated on the loan application or similar documentation, review the
credit history of the applicant, calculate the Debt Ratio to determine the
applicant's ability to repay the loan, review the type and use of the property
being financed and review the property for compliance with the Originators'
standards. In determining the ability of the applicant to repay the loan, the
Originators use the interest rate of the loan being applied for (the "Qualifying
Rate"). The Originators' underwriting standards are applied in a standardized
procedure which complies with applicable federal and state laws and regulations
and requires their underwriters and/ or the in-house appraiser to be satisfied
that the value of the property being financed, as indicated by an appraisal and
a review appraisal, currently supports the outstanding loan balance.
In general, the maximum loan amount for mortgage loans originated under the
regular lending program is $750,000; however, mortgage loans on a case by case
basis may be originated for a higher loan amount. None of the Mortgage Loans has
a principal balance at origination higher than $1,200,000. The Originators
underwrite one to four-family loans with Loan-to-Value Ratios at origination of
generally up to 90%, depending on, among other things, the purpose of the
mortgage loan, a mortgagor's credit history, repayment ability and Debt Ratio,
as well as the type and use of the property. Under each class of underwriting
criteria, the maximum combined loan-to-value ratio at origination, including any
then existing second deeds of trust subordinate to the Originators' first deed
of trust, is 95%. The Originators, however, will not themselves provide second
lien financing on a mortgaged property. Generally, none of
S-42
<PAGE>
the mortgage loans originated or acquired by the Originators will be covered by
a primary mortgage insurance policy.
The Originators verify the income of each borrower and the source of funds
under their various programs as follows: under the Full Documentation program,
borrowers are generally required to submit verification of stable income for a
two year period. Under the Lite Documentation program, borrowers are generally
required to submit verification of stable employment for the past six months.
Under the Stated Income program, the borrowers may be qualified based upon the
monthly income stated on the mortgage application, without verification. The
income stated must be reasonable and customary for the borrower's line of work
and a copy of the business license is required or other generally acceptable
evidence of business conduct. Under all of the programs, the correspondent, or
an Originator if originated by an Originator, generally performs a telephone
verification of the borrower's employment. For self-employed borrowers the
business location and telephone number must be confirmed through an independent
source, such as directory assistance or a published telephone directory.
The Originators use the following categories and characteristics as
guidelines to grade the mortgage loans:
"A" RISK. Under the "A" risk category, account ratings cannot be greater
than 30-days past due. A maximum of 0x30-day late payment in the last 12
months, and 1x30 day late payment in the last 24 months is acceptable (or
0x30 for mortgage loans originated under the Lite Documentation and
Stated Income Documentation programs). No 60-day late payments within the
last 24 months is acceptable on an existing mortgage loan. For purposes
of determining whether a prospective mortgagor has been 30-days late, the
Originators use a "rolling 30-day period," i.e. the Originators generally
will consider a continuous sequence of 30-day late payments as a single
30-day late payment. All judgments, garnishments and liens of record must
be paid in full at funding. No bankruptcies may have occurred during the
preceding 24 months and no notice of default may have occurred in the
preceding 36 months. All bankruptcies must have been discharged or
dismissed. Two years re-established excellent credit since discharge or
dismissal is required. A maximum Loan-to-Value Ratio of 85% (or 75% for
mortgage loans originated under the Lite Documentation and Stated Income
Documentation programs) is permitted for a mortgage loan on a single
family owner occupied property. A maximum of 80% Loan-to-Value Ratio is
permitted for a mortgage loan on an owner occupied condominium or
two-to-four family residential property originated under the Full
Documentation program. All nonowner occupied loans have a maximum
Loan-to-Value Ratio of 75% (or 70% and 65% for mortgage loans originated
under the Lite Documentation or Stated Income Documentation programs,
respectively.) The required Debt Ratio is 42% or less.
"A-" RISK. Under the "A-" risk category, account ratings cannot be
greater than 30-days past due. A maximum of 2x30-day late payments in the
last 12 months is acceptable on a mortgage loan. No 60-day late payments
within the last 24 months is acceptable on an existing mortgage loan. For
purposes of determining whether a prospective mortgagor has been 30-days
late, the Originators use a "rolling 30-day period," i.e. the Originators
generally will consider a continuous sequence of 30-day late payments as
a single 30-day late payment. An existing mortgage loan is not required
to be current at the time the application is submitted. All judgments,
garnishments and liens of record must be paid in full at funding. When
the Loan-to-Value Ratio is equal to 70% or less, judgments and
collections that do not appear in the public records need not be paid on
rate/term refinances (no cash to borrowers) and purchases only. No
bankruptcies may have occurred in the preceding 24 months. All
bankruptcies must have been discharged or dismissed. No notice of default
may have occurred in the preceding 24 months. Two years reestablished
credit since discharge or dismissal is required. A maximum Loan-to-Value
Ratio of 90% (or 85% for mortgage loans originated under the Lite
Documentation program or 80% under the Stated Income Documentation
program) is permitted for a mortgage loan on a single family owner
S-43
<PAGE>
occupied property. A maximum of 80% Loan-to-Value Ratio is permitted for
a mortgage loan on an owner occupied condominium or two-to-four family
residential property under the Full Documentation program only. Non-owner
occupied loans have a maximum Loan-to-Value Ratio of 80% under the Full
Documentation program or 75% under the Lite Documentation program (or 70%
for mortgage loans originated under the Stated Income program). The
maximum Debt Ratio is 50%.
"B" RISK. Under the "B" risk category, account ratings cannot be greater
than 60-days past due. A maximum of 4x30 or 2x30 and 1x60 day late
payments in the last 12 months is acceptable on a mortgage loan. For
purposes of determining whether a prospective mortgagor has been 30-days
late, the Originators use a "rolling 30-day period, i.e. the Originators
generally will consider a continuous sequence of 30-day late payments as
a single 30-day late payment. An existing mortgage loan is not required
to be current at the time the application is submitted. All judgments,
garnishments and liens of record must be paid in full at funding. When
the Loan-to-Value Ratio is equal to 70% or less, judgments and
collections that do not appear in the public records need not be paid on
rate/term refinances (no cash to borrowers) and purchases only. No
bankruptcies may have occurred in the preceding 24 months. All
bankruptcies must have been discharged or dismissed. Two years'
re-established credit since discharge of dismissal is required. No notice
of default may have occurred in the preceding 24 months. A maximum
Loan-to-Value Ratio of 85% (or 80% for mortgage loans originated under
the Lite Documentation program or 75% under the Stated Income
Documentation program) is permitted for an owner occupied mortgage loan
regardless of the property type. Non-owner occupied loans have a maximum
Loan-to-Value Ratio of 75% under the Full Documentation, 70% under the
Lite Documentation and 65% under the Stated Income Documents programs.
The maximum Debt Ratio is 55%.
"C" RISK. Under the "C" risk category, account ratings cannot be greater
than 90-days past due. The majority of the credit must not be currently
delinquent. A maximum of 6x30 or 3x30 and 1x60 or 2x30 and 1x90 day late
payments in the last 12 months is acceptable. For purposes of
determination whether a prospective mortgagor has been 30-days late, the
Originators use a "rolling 30-day period," i.e. the Originators generally
will consider a continuous sequence of 30-day late payments as a single
30-day late payment. An existing mortgage loan is not required to be
current at the time the application is submitted. When the Loan-to-Value
Ratio is equal to 70% or less, judgments and collections that do not
appear in the public records need not to be paid on rate/term refinances
(no cash to borrowers) and purchases only. No bankruptcies may have
occurred in the preceding 24 months and all bankruptcies must have been
discharged or dismissed. Two years re-established credit since discharge
or dismissal is required. No notice of default may have occurred in the
preceding 12 months. A maximum Loan-to-Value Ratio of 75% is permitted
for an owner occupied mortgage loan regardless of the property type.
Non-owner occupied loans have a maximum Loan-to-Value Ratio of 70% under
the Full Documentation, 65% under the Lite Documentation and 60% under
the Stated Income Documentation programs. The maximum Debt Ratio is 60%.
"D" RISK. Under the "D" risk category, account ratings cannot be greater
than 180-days past due in the last 12 months. A maximum 120 days past due
(or over 120 days with a Loan-to-Value ratio of 70% or less) in the last
12 months is acceptable. No notice of sale can be filed on any notice of
default. For purposes of determining whether a prospective mortgagor has
been 30-days late, the Originators use a "rolling 30-day period," i.e.
the Originators generally will consider a continuous sequence of 30-day
late payments as a single 30-day late payment. An existing mortgage loan
is not required to be current at the time the application is submitted.
Judgments and collections that do not appear in the public records need
not be paid on rate/term refinances (no cash to borrowers) and purchases
only. Mortgagor cannot be currently in bankruptcy on a purchase but a
recent discharge or dismissal is allowed. On refinances the mortgagor can
be currently in a Chapter 11 or 12 bankruptcy. The proceeds can be used
to obtain the bankruptcy
S-44
<PAGE>
discharge. A maximum Loan-to-Value Ratio of 70% is permitted for an owner
occupied mortgage loan regardless of the property type. Non-owner
occupied loans have a maximum Loan-to-Value Ratio of 60% under the Full
Documentation, 55% under the Lite Documentation and 50% under the Stated
Income Documentation programs. The maximum Debt Ratio is 60%.
"D-" RISK. Under the "D-" risk category, account ratings are not taken
into consideration. Notice of sale can be filed on any notice of default.
For purposes of determining whether a prospective mortgagor has been
30-days late, the Originators use a "rolling 30-day period," i.e. the
Originators generally will consider a continuous sequence of 30-day late
payments as a single 30-day late payment. An existing mortgage loan is
not required to be current at the time the application is submitted.
Judgments and collections that do not appear in the public records need
not be paid on rate/term refinances (no cash to borrowers) and purchases
only. The mortgagor can be currently in bankruptcy and proceeds can be
used to obtain the bankruptcy discharge. A maximum Loan-to-Value Ratio of
65% is permitted for an owner occupied mortgage loan regardless of the
property type. Non-owner occupied loans are allowed at a maximum Loan-to-
Value Ratio of 60% regardless of the documentation program. The maximum
Debt Ratio is 60%.
EXCEPTIONS. As described above the Originators use the foregoing
categories and characteristics as guidelines only. On a case by case
basis only, the Originators may determine that the prospective mortgagor
warrants a risk upgrade or an exception from certain requirements of a
particular risk category. A one level credit upgrade in "B" and "C" risk
grade loans only may be allowed if the application reflects certain
compensating factors, among others: low Loan-to-Value Ratio, stable
employment, ownership of current residence of 5 or more years and
condition of the property. An exception may also be granted if the
applicant has tendered a minimum down payment of 20% or more, the new
loan reduces the applicant's housing expense by more than 25% and if the
mortgage credit history is rated 0x30 or 1x30 in the last 12 months.
The Originators will make representations and warranties with respect to the
Mortgage Loans as of the Closing Date. The Originators will be obligated to
repurchase Mortgage Loans in respect of which a material breach of the
representations and warranties has occurred (other than those breaches which
have been cured).
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Ocwen Mortgage Loan Asset-Backed Certificates Series, 1997-1, (the
"Certificates") will consist of (i) the Class A-1 Certificates (the "Fixed Rate
Certificates"), (ii) the Class A-2 Certificates (the "Adjustable Rate
Certificates," and, collectively with the Fixed Rate Certificates, the "Class A
Certificates"), (iii) the Class X-1 and Class X-2 Certificates (the "Class X
Certificates") and (iv) the Class R Certificates (the "Class R Certificates").
The Class X and Class R Certificates are referred to collectively as the
"Subordinate Certificates".
DEPOSITS TO COLLECTION ACCOUNT
The Master Servicer will establish and maintain on behalf of the Trustee an
account (the "Collection Account") for the benefit of the holders of the
Certificates (the "Certificateholders"). The Collection Account will be an
Eligible Account. Amounts deposited in the Collection Account may be invested in
Permitted Investments maturing no later than one Business Day prior to the date
on which the amount on deposit therein is required to be deposited in the
Distribution Account on the related Monthly Remittance Date. "Permitted
Investments" are
(a) Direct general obligations of, or obligations fully and
unconditionally guaranteed as to the timely payment of principal and
interest by, the United States or any agency or instrumentality thereof,
provided such obligations are backed by the full faith and credit of the
United States, Federal Housing Administration debentures, FHLMC senior debt
obligations, and FNMA senior debt obligations, but excluding any of such
securities whose terms do not provide for payment of a fixed dollar amount
upon maturity or call for redemption;
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(b) Federal Housing Administration debentures rated by each Rating
Agency in one of its two highest long-term unsecured rating categories;
(c) Consolidated senior debt obligations of any Federal Home Loan Banks
rated by each Rating Agency in one of its two highest long-term unsecured
rating categories;
(d) Federal funds, certificates of deposit, time deposits, and bankers'
acceptances (having original maturities of not more than 365 days) of any
domestic bank, the short-term debt obligations of which have been rated A-1
or better by S&P and P-1 or better by Moody's;
(e) Deposits of any bank or savings and loan association (the long-term
deposit rating of which is Baa3 or better by Moody's and BBB or better by
S&P) which has combined capital, surplus and undivided profits of at least
$50,000,000 which deposits are insured by the FDIC and held up to the limits
insured by the FDIC;
(f) Investment agreements approved by the Certificate Insurer, subject
to the limitations set forth in the Pooling and Servicing Agreement;
(g) Repurchase agreements collateralized by securities described in (a)
above with any registered broker/dealer subject to the Securities Investors
Protection Corporation's jurisdiction and subject to applicable limits
therein promulgated by Securities Investors Protection Corporation or any
commercial bank, if such broker/dealer or bank has an uninsured, unsecured
and unguaranteed short-term or long-term obligation rated P-1 or Aa2,
respectively, or better by Moody's and A-l+ or AA, respectively, or better
by S&P, subject to the limitations set forth in the Pooling and Servicing
Agreement;
(h) Commercial paper (having original maturities of not more than 270
days) rated in the highest short-term rating categories of S&P and Moody's;
and
(i) Investments in no load money market funds rated AAAm or AAAm-g by
S&P and Aaa by Moody's;
provided that no instrument described above shall evidence either the right to
receive (a) only interest with respect to the obligations underlying such
instrument or (b) both principal and interest payments derived from obligations
underlying such instrument and the interest and principal payments with respect
to such instrument provided a yield to maturity at par greater than 120% of the
yield to maturity at par of the underlying obligations; and provided, further,
that all instruments described hereunder shall mature at par on or prior to the
next succeeding Distribution Date unless otherwise provided in the Pooling and
Servicing Agreement and that no instrument described hereunder may be purchased
at a price greater than par if such instrument may be prepaid or called at a
price less than its purchase price prior to stated maturity.
An "Eligible Account" is an account that is (i) maintained with a federal or
state chartered depository institution or trust company whose short-term
unsecured debt obligations at the time of any deposit therein have the highest
short-term rating by the Rating Agencies, (ii) one or more accounts with a
depository institution or trust company which accounts are fully insured by
either the Savings Association Insurance Fund ("SAIF") or the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation and the uninsured
deposits in which accounts are otherwise secured such that, as evidenced by an
opinion of counsel delivered to the Trustee, the Certificate Insurer and to each
Rating Agency, the holders of the Certificates have a claim with respect to the
funds in such account or a perfected first priority security interest against
any collateral (which shall be limited to Permitted Investments) securing such
funds that is superior to claims of any other depositors or creditors of the
depository institution or trust company in which such account is maintained,
(iii) a segregated trust account maintained with the Trustee or an affiliate of
the Trustee in its fiduciary capacity or (iv) otherwise acceptable to the
Certificate Insurer and each Rating Agency as evidenced by a letter from the
Certificate Insurer and each Rating Agency to the Trustee, without reduction or
withdrawal of their then current ratings of the Certificates.
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DISTRIBUTION DATES
On each Distribution Date, the holders of each Class of the Class A
Certificates will be entitled to receive, from amounts then on deposit in the
distribution account established and maintained by the Trustee in accordance
with the Pooling and Servicing Agreement (the "Distribution Account") and until
the Class Certificate Balance of such Class of Class A Certificates is reduced
to zero, the aggregate Class A Distribution Amount as of such Distribution Date,
allocated among the Classes of the Class A Certificates as described below.
Distributions will be made in immediately available funds to holders of Class A
Certificates by wire transfer or otherwise, as provided in the Pooling and
Servicing Agreement, to the account of such holders at a domestic bank or other
entity having appropriate facilities therefor, if such holders have so notified
the Trustee, or by check mailed to the address of the person entitled thereto as
it appears on the register (the "Register") maintained by the Trustee as
registrar (the "Registrar"). Beneficial Owners may experience some delay in the
receipt of their payments due to the operations of DTC. The final distribution
on each Certificate will be made in like manner, but only upon presentment and
surrender of such Certificate at the corporate trust office of the Trustee or at
such other location specified in the notice to Certificate holders of such final
distribution.
The Pooling and Servicing Agreement will provide that, in any event, any
Certificate as to which the final distribution thereon has been made shall be
deemed canceled for all purposes under or pursuant to the Pooling and Servicing
Agreement and the Policy except to the extent of a Reimbursement Amount on such
Certificate, in which case the Certificate Insurer will be subrogated to the
rights of such Certificateholder and the Certificate will not be deemed
canceled.
Each holder of record of the related Class of the Class A Certificates will
be entitled to receive such holder's Percentage Interest in the amounts due such
Class on such Distribution Date. The "Percentage Interest" of a Class A
Certificate as of any Distribution Date will be equal to the percentage obtained
by dividing the principal balance of such Certificate as of the related
Distribution Date (prior to giving effect to distribution of principal on such
date) by the Class Certificate Balance for the related Class of the Class A
Certificates as of the related Distribution Date (prior to giving effect to
distribution of principal on such date).
DISTRIBUTIONS
Upon receipt, the Trustee will be required to deposit into the Distribution
Account (i)(a) payments other than those specified in clauses (b) and (c) of
this paragraph collected or advanced on or prior to the related Determination
Date with respect to the related Due Period, (b) any Prepayments collected
during the related Prepayment Period and (c) any Curtailments and Net
Liquidation Proceeds collected during the related Due Period, in each case, as
remitted by the Master Servicer on the Monthly Remittance Date, together with
any Substitution Adjustment and any Loan Purchase Price amount (the "Monthly
Remittance"), (ii) any Insured Payment, and (iii) the proceeds of any
liquidation of the Trust Fund.
The Pooling and Servicing Agreement establishes a pass-through rate on each
Class of the Class A Certificates (each, a "Pass-Through Rate") as set forth
herein.
On each Distribution Date, the Trustee is required to make the following
disbursements and transfers from moneys then on deposit in the Distribution
Account as specified below in the following order of priority of each such
transfer and disbursement:
(i) first, the Trustee shall allocate an amount equal to the sum of (x)
the Total Monthly Excess Spread with respect to such Loan Group and
Distribution Date plus (y) any Subordination Reduction Amount with respect
to such Loan Group and Distribution Date (such sum being the "Total Monthly
Excess Cashflow" with respect to such Loan Group and Distribution Date) in
the following order of priority:
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(A) first, such Total Monthly Excess Cashflow with respect to each
Loan Group shall be allocated to the payment of the Class A Distribution
Amount pursuant to clauses (iii)(A) and (D) below on such Distribution
Date with respect to the related Loan Group in an amount equal to the
amount, if any, by which (x) the Class A Distribution Amount with respect
to the related Loan Group (determined for this purpose only by reference
to clause (b) of the definition of Principal Distribution Amount, but
without any amount calculated under clause (I) of clause (B) of such
definition and without any Subordination Increase Amount) for such
Distribution Date exceeds (y) the Available Funds with respect to such
Loan Group for such Distribution Date (the amount of such difference with
respect to a Loan Group being an "Available Funds Shortfall" for such
Loan Group);
(B) second, any portion of the Total Monthly Excess Cashflow with
respect to such Loan Group remaining after the application described in
clause (A) above shall be allocated against any Available Funds Shortfall
with respect to the other Loan Group;
(C) third, any portion of the Total Monthly Excess Cashflow with
respect to such Loan Group remaining after the allocations described in
clauses (A) and (B) above shall be paid to the Certificate Insurer in
respect of amounts owed on account of any Reimbursement Amount owed to
the Certificate Insurer with respect to the related Loan Group;
(D) fourth, any portion of the Total Monthly Excess Cashflow with
respect to such Loan Group remaining after the allocations described in
clauses (A), (B) and (C) above shall be paid to the Certificate Insurer
in respect of any Reimbursement Amount with respect to the other Loan
Group;
(E) fifth, any portion of the Total Monthly Excess Cashflow with
respect to such Loan Group remaining after the allocations described in
clauses (A), (B), (C) and (D) above shall be allocated to the payment of
the related Class A Distribution Amount pursuant to clauses (iii)(A) and
(D) below on such Distribution Date with respect to the related Loan
Group in an amount equal to the amount, if any, calculated under clause
(I) of clause (b) of the definition of Principal Distribution Amount that
was excluded from the calculation of the related Available Funds
Shortfall; and
(F) sixth, any portion of the Total Monthly Excess Cashflow with
respect to such Loan Group remaining after the allocations described in
clauses (A), (B), (C), (D) and (E) above shall be allocated to the
payment of the Class A Distribution Amount pursuant to clauses (iii)(A)
and (D) below on such Distribution Date with respect to the other Loan
Group in an amount equal to the amount, if any, calculated under clause
(I) of clause (b) of the definition of Principal Distribution Amount that
was excluded from the calculation of the Available Funds Shortfall for
the other Loan Group.
(ii) second, the Trustee shall apply the amount, if any, of the Total
Monthly Excess Cashflow with respect to such Loan Group remaining after the
allocations described in clause (i) above (the "Net Monthly Excess
Cashflow") with respect to such Loan Group for such Distribution Date in the
following order of priority:
(A) first, such Net Monthly Excess Cashflow shall be used to reduce
to zero, through the allocation of a Subordination Increase Amount to the
payment of the related Class A Distribution Amount pursuant to clause
(iii) below, any Subordination Deficiency Amount (as defined in the
Pooling and Servicing Agreement) with respect to such Loan Group as of
such Distribution Date;
(B) second, any Net Monthly Excess Cashflow remaining after the
application described in clause (A) above shall be used to reduce to
zero, through the allocation of a Subordination Increase Amount to the
payment of the related Class A Distribution Amount pursuant to clause
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(iii) below, the Subordination Deficiency Amount, if any, with respect to
the other Loan Group; and
(C) Third, any Net Monthly Excess Cashflow remaining after the
application described in clauses (A) and (B) above shall be paid to the
Master Servicer to the extent of any unreimbursed P&I Advances and
unreimbursed Servicing Advances.
(iii) third, following the making by the Trustee of all allocations,
transfers and disbursements described above from amounts then on deposit in
the Distribution Account with respect to the related Loan Group, the Trustee
shall distribute:
(A) to the holders of the Class A Certificates of the related
Certificate Group, the related Current Interest, on a pro rata basis
without any priority among such Class A Certificates, until the Class A
Certificate Balances thereof are reduced to zero;
(B) to the Certificate Insurer, for the related Loan Group, the pro
rated Insurance Premium Amount determined by the relative Class
Certificate Balance of the related Classes of Class A Certificates for
such Distribution Date;
(C) to the Trustee, the Trustee Fees (as set forth in the Pooling and
Servicing Agreement) with respect to such Loan Group then due;
(D) to the holders of the related Class of Class A Certificates, (I)
the Principal Distribution Amount applicable to the Fixed Rate Group
shall be distributed to the holders of the Class A-1 Certificates, until
the Class A-1 Certificate Balance thereof is reduced to zero; and (II)
the Principal Distribution Amount applicable to the Adjustable Rate Group
shall be distributed to the holders of the Class A-2 Certificates, until
the Class A-2 Certificate Balance thereof is reduced to zero;
(E) to the Adjustable Rate Certificates, the Basis Risk Carryover
Amount outstanding on such Distribution Date;
(F) to the holders of the related Class of Class A Certificates, any
Net Prepayment Interest Shortfalls or the interest portion of reductions
due to the Relief Act incurred by such Class of Certificates which remain
outstanding on such Distribution Date, on a pro rata basis among such
Classes of Certificates; and
(G) to the Depositor and the Master Servicer to the extent of costs,
expenses and liabilities, and to the holders of the Subordinate
Certificates, all remaining distributable amounts as specified in the
Pooling and Servicing Agreement.
"Available Funds" as to any Loan Group and Distribution Date is the amount
on deposit in the Distribution Account with respect to such Loan Group on such
Distribution Date (net of Total Monthly Excess Cashflow and disregarding the
amounts of any Insured Payments with respect to such Loan Group to be made on
such Distribution Date).
"Total Available Funds" as to any Loan Group and Distribution Date is (x)
the amount on deposit in the Distribution Account with respect to such Loan
Group (net of Total Monthly Excess Cashflow with respect to such Loan Group) on
such Distribution Date plus (y) any amounts of Total Monthly Excess Cashflow
with respect to the other Loan Group to be applied on such Distribution Date to
such Loan Group, disregarding, in either case the amount of any Insured Payment
with respect to either Loan Group to be made on such Distribution Date.
The Trustee shall (i) receive as attorney-in-fact of each holder of Class A
Certificates any Insured Payment from the Certificate Insurer and (ii) disburse
the same to each holder of Class A Certificates. The Pooling and Servicing
Agreement will provide that to the extent the Certificate Insurer makes Insured
Payments, either directly or indirectly (as by paying through the Trustee), to
the holders of such Class A
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Certificates, if any, the Certificate Insurer will be subrogated to the rights
of such holders of Class A Certificates with respect to such Insured Payments,
and shall receive reimbursement for such Insured Payments plus any amounts due
and owing the Certificate Insurer pursuant to the terms of the Pooling and
Servicing Agreement (the "Reimbursement Amount") to the extent provided in the
Pooling and Servicing Agreement, but only from the sources and in the manner
provided in the Pooling and Servicing Agreement for the payment of the Class A
Distribution Amount to holders of Class A Certificates, if any; such subrogation
and reimbursement will have no effect on the Certificate Insurer's obligations
under the Policy.
The Pooling and Servicing Agreement provides that the term "Available Funds"
does not include Insured Payments and does not include any amounts that cannot
be distributed to the holders of the Class A Certificates, if any, by the
Trustee as a result of proceedings under the United States Bankruptcy Code.
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period for the Adjustable Rate Certificates (each
such date, a "LIBOR Determination Date"), the Trustee will determine the London
interbank offered rate for one-month United States dollar deposits ("One-Month
LIBOR") for such Accrual Period for the Adjustable Rate Certificates by
reference to the quotations, as set forth on the Telerate Screen Page 3750
offered by the principal London office of each of the designated reference banks
meeting the criteria set forth herein (the "Reference Banks") for making
one-month United States dollar deposits in leading banks in the London Interbank
market, as of 11:00 a.m. (London time) on such LIBOR Determination Date. In lieu
of relying on the quotations for those Reference Banks that appear at such time
on such Telerate Screen Page, the Trustee may request each of the Reference
Banks to provide such offered quotations at such time. LIBOR will be established
by the Trustee on each LIBOR Determination Date as follows:
(a) If on any LIBOR Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the next Accrual Period shall be
the arithmetic mean of such offered quotations (rounded upwards if necessary
to the nearest whole multiple of 1/32%).
(b) If on any LIBOR Determination Date only one or none of the Reference
Banks provides such offered quotations, LIBOR for the next Accrual Period
shall be whichever is the higher of (i) LIBOR as determined on the previous
LIBOR Determination Date or (ii) the Reserve Interest Rate. The "Reserve
Interest Rate" shall be the rate per annum which the Trustee determines to
be either (i) the arithmetic mean (rounded upwards if necessary to the
nearest whole multiple of 1/32%) of the one-month United States dollar
lending rates that New York City banks selected by the Trustee are quoting,
on the relevant LIBOR Determination Date, to the principal London offices of
at least two of the Reference Banks to which such quotations are, in the
opinion of the Trustee, being so made, or (ii) in the event that the Trustee
can determine no such arithmetic mean, the lowest one-month United States
dollar lending rate which New York City banks selected by the Trustee are
quoting on such LIBOR Determination Date to leading European banks.
(c) If on any LIBOR Determination Date the Trustee is required but is
unable to determine the Reserve Interest Rate in the manner provided in
paragraph (b) above, LIBOR for the next Accrual Period shall be LIBOR as
determined on the preceding LIBOR Determination Date, or, in the case of the
first LIBOR Determination Date, LIBOR shall be a rate equal to 5.6875% per
annum.
Each Reference Bank (i) shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; (ii) shall not
control, be controlled by, or be under common control with the Trustee; and
(iii) shall have an established place of business in London. If any such
Reference Bank should be unwilling or unable to act as such or if appointment of
any such Reference Bank is terminated, another leading bank meeting the criteria
specified above will be appointed.
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The establishment of LIBOR on each LIBOR Determination Date by the Trustee
and its calculation of the rate of interest for the applicable classes for the
related Accrual Period shall (in the absence of manifest error) be final and
binding.
As used herein, "LIBOR Business Day" means any day other than (i) a Saturday
or a Sunday, or (ii) a day on which banking institutions in the City of New
York, New York, or the City of London, England are authorized or obligated by
law or executive order to be closed.
BOOK-ENTRY CERTIFICATES
The Class A Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the Class A
Certificates ("Certificate Owners") may elect to hold their Class A Certificates
through the Depository Trust Company ("DTC") in the United States, or Cedel or
Euroclear (in Europe) if they are participants of such systems, or indirectly
through organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate principal balance of each Class of Class A 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
customer's securities accounts in the depositaries' names on the books of DTC.
Citibank will act as depositary for Cedel and Chase will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations representing
Class Certificate Balances of $1,000 and integral multiples thereof, except that
one Certificate for each Class of Certificates may be issued in a lesser amount.
Except as described below, no person acquiring a Book-Entry Certificate (each, a
"beneficial owner") will be entitled to receive a physical certificate
representing such Class A Certificate (a "Definitive Certificate"). Unless and
until Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Class A Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Pooling and Servicing Agreement. Certificate Owners are only permitted to
exercise their rights indirectly through the participating organizations that
utilize the services of DTC, including securities brokers and dealers, banks and
trust companies and clearing corporations and certain other organizations
("Participants") and DTC. See "Description of the Certificates--Book-Entry
Registration of Securities" in the Prospectus.
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 Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depositary with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor at its sole
option, elects to terminate a book-entry system through DTC or (c) after the
occurrence of an Event of Default (as defined in the Pooling and Servicing
Agreement) beneficial owners having not less than 51% of the Voting Rights (as
defined in the Pooling and Servicing Agreement) evidenced by the Class A
Certificates advise the Trustee and DTC through the Participants in writing that
the continuation of a book-entry system through DTC (or a successor thereto) is
no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
holders of Class A Certificates under the Pooling and Servicing Agreement.
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Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
and those outlined in the Prospectus under "Description of the
Certificates--Book-Entry Registration of Securities," 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.
REPORTS TO CLASS A CERTIFICATEHOLDERS
On the second Business Day following the Determination Date, the Master
Servicer shall provide to the Trustee such information as the Trustee will
require, in a format as previously specified by the Trustee, in order for the
Trustee to prepare the statement referred to below and to prepare a Notice for
the Certificate Insurer, if necessary, for the related Determination Date.
On each Distribution Date, the Trustee will forward to each Class A
Certificateholder and to the Certificate Insurer a statement generally setting
forth as to each Loan Group and as to the Trust Fund, as applicable:
(i) the amount of the related distribution to Class A Certificateholders
of such Class of Certificates allocable to principal, separately identifying
the aggregate amount of any Prepayments included therein, any principal
portion of any Carry Forward Amount included in such distribution and any
remaining principal portion of any Carry Forward Amount after giving effect
to such distribution;
(ii) the amount of such distribution to Class A Certificateholders of
such Class of Certificates allocable to interest, any Compensating Interest,
any interest portion of any Carry Forward Amount included in such
distribution, any remaining interest portion of any Carry Forward Amount
after giving effect to such distribution, any amount paid on account of any
outstanding Basis Risk Carryover Amount and any remaining Basis Risk
Carryover Amount after giving effect to such distribution;
(iii) the Class Certificate Balance of each Class of Class A Certificates
after giving effect to the distribution of principal on such Distribution
Date;
(iv) the aggregate Loan Balance of the Mortgage Loans in each Loan Group
for the following Distribution Date;
(v) the related amount of the Servicing Fees, Insurance Premium Amount
and Trustee Fee paid to or retained by the Master Servicer or paid to the
Certificate Insurer or the Trustee;
(vi) the Pass-Through Rate for such Class of Class A Certificates with
respect to the current Accrual Period;
(vii) the amount of P&I Advances and Servicing Advances, stated
separately, included in the distribution on such Distribution Date and the
aggregate amount of P&I Advances and Servicing Advances, stated separately,
outstanding as of the close of business on such Distribution Date;
(viii) the number and aggregate Loan Balance of the Mortgage Loans (a)
delinquent one payment, (b) delinquent two payments, (c) delinquent three or
more payments, (d) as to which foreclosure proceedings have been commenced
and (e) with respect to which related mortgagor has filed for protection
under applicable bankruptcy laws, with respect to whom bankruptcy
proceedings are pending or with respect to whom bankruptcy protection is in
force (it being understood that for purposes of calculating the information
described in clauses (a), (b), and (c) above, a Mortgage Loan is delinquent
one payment if payment on such Mortgage Loan is one calendar month past due
on a contractual basis, a Mortgage Loan is delinquent two payments if
payment on such Mortgage Loan is two calendar months past due on a
contractual basis and a Mortgage Loan is delinquent three payments if
payment on such Mortgage Loan is three calendar months past due on a
contractual basis);
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(ix) with respect to any Mortgage Loan that became an REO Property
during the preceding calendar month, the loan number and Loan Balance of
such Mortgage Loan as of the close of business on the Determination Date
preceding such Distribution Date and the date of acquisition thereof;
(x) the total number and principal balance of any REO Properties as of
the close of business on the Determination Date preceding such Distribution
Date;
(xi) the amount of any Insured Payment included in the amounts
distributed to the holders of each Class of the Class A Certificates on such
Distribution Date;
(xii) the aggregate Loan Balance of all Mortgage Loans and the aggregate
Loan Balance of the Mortgage Loans in each Loan Group after giving effect to
any payment of principal on such Distribution Date;
(xiii) the Subordinated Amount and Subordination Deficit for each Loan
Group, if any, remaining after giving effect to all distributions and
transfers on such Distribution Date;
(xiv) information furnished by the Master Servicer as such information is
required by Section 6049(d)(7)(C) of the Code and the regulations
promulgated thereunder to assist the holders of the Class A Certificates in
computing their market discount;
(xv) the total of any Substitution Adjustment or Loan Purchase Price
amounts included in such distribution with respect to each Loan Group;
(xvi) the weighted average Mortgage Rate of the Mortgage Loans with
respect to each Loan Group;
(xvii) such other information as the Certificate Insurer may reasonably
request with respect to delinquent Mortgage Loans and which the Master
Servicer has provided to the Trustee; and
(xviii) the largest Loan Balance outstanding.
Certain obligations of the Trustee to provide information to the Class A
Certificateholders and the Certificate Insurer are conditioned upon such
information being received from the Master Servicer.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each Certificateholder of
record during the previous calendar year and the Certificate Insurer a statement
containing information necessary to enable Certificateholders to prepare their
tax returns as specified in the Pooling and Servicing Agreement. Such statements
will not have been examined and reported upon by an independent public
accountant.
CREDIT ENHANCEMENT
THE POLICY
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Policy (the "Policy"), thereby unconditionally and
irrevocably guarantees that an amount equal to each full and complete Insured
Payment will be paid to the Trustee, or its successor, as trustee for the Owners
(the "Trustee") on behalf of the Owners by the Certificate Insurer, for
distribution by the Trustee to each Owner of each Owner's proportionate share of
the Insured Payment. The Certificate Insurer's obligations under the Policy with
respect to a particular Insured Payment shall be discharged to the extent funds
equal to the applicable Insured Payment are received by the Trustee, whether or
not such funds are properly applied by the Trustee. Insured Payments shall be
made only at the time set forth in such Policy, and no accelerated Insured
Payments shall be made regardless of any acceleration of the Class A
Certificates, unless such acceleration is at the sole option of the Certificate
Insurer.
Payment of claims on the Policy made in respect of Insured Payments will be
made by the Certificate Insurer following receipt by the appropriate notice for
payment on the later to occur of (i) 12:00 noon, New York City time, on the
second Business Day following receipt of such notice for payment, and (ii) 12:00
noon, New York City time, on the date on which such payment was due on the Class
A Certificates.
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If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Policy, the Certificate Insurer shall cause such payment to be made on the
later of (a) the date when due to be paid pursuant to the Order referred to
below or (b) the first to occur of (i) the fourth Business Day following receipt
by the Certificate Insurer from the Trustee of (A) a certified copy of the order
(the "Order") of the court or other governmental body which exercised
jurisdiction to the effect that the holder of Class A Certificates is required
to return principal or interest paid on the Class A Certificates during the term
of the Policy because such payments were avoidable as preference payments under
applicable bankruptcy law, (B) a Certificate of such holder that the Order has
been entered and is not subject to any stay, and (C) an assignment duly executed
and delivered by such holder, in such form as is reasonably required by the
Certificate Insurer and provided to such holder by the Certificate Insurer,
irrevocably assigning to the Certificate Insurer all rights and claims of such
holder relating to or arising under the Class A Certificates against the Trust
Fund or otherwise with respect to such preference payment, or (ii) the date of
receipt by the Certificate Insurer from the Trustee of the items referred to in
clauses (A), (B) and (C) above if, at least four Business Days prior to such
date of receipt, the Certificate Insurer shall have received written notice from
the Trustee that such items were to be delivered on such date and such date was
specified in such notice. Such payment shall be disbursed to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
and not to the Trustee or any holder of Class A Certificates directly (unless a
holder of Class A Certificates has previously paid such amount to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order,
in which case such payment shall be disbursed to the Trustee for distribution to
such holder upon proof of such payment reasonably satisfactory to the
Certificate Insurer). In connection with the foregoing, the Certificate Insurer
shall have the rights provided in the Pooling and Servicing Agreement.
The Certificate Insurer shall be subrogated to the rights of Owners to
receive payments of principal and interest, as applicable, with respect to
distributions on the Class A Certificates to the extent of any payments by the
Certificate Insurer under the Policy. To the extent the Certificate Insurer
makes Insured Payments, either directly or indirectly, to the Owners, the
Certificate Insurer will be subrogated to the rights of the Owners, as
applicable, with respcet to such Insured Payment and shall be deemed to the
extent of the payments to be an Owner for purposes of payment. Further, unless
the Certificate Insurer is in default under the Pooling and Servicing Agreement
for failure to make any payment under the Policy, the Certificate Insurer will
be entitled to exercise certain rights of the holder of the Class A
Certificates, without the consent of such holders, and such holders may exercise
such rights only with the prior written consent of the Certificate Insurer.
The following terms shall have the following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as of June 1,
1997, among the Depositor, the Sellers, the Master Servicer, and the Trustee,
without regard to any amendment or supplement thereto unless such amendment or
supplement has been approved in writing by the Certificate Insurer.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which the Certificate Insurer and banking institutions in New York City or in
the city in which the corporate trust office of the Trustee is located are
authorized or obligated by law or executive order to close.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to the
Policy, the original of which is subsequently delivered by registered or
certified mail, from the Trustee specifying the Insured Payment which shall be
due and owing on the applicable Distribution Date.
"Owner" means each Owner (as defined in the Agreement) of any Class A
Certificate who, on the applicable Distribution Date, is entitled under the
terms of the Class A Certificates to payment thereunder.
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"Loan Group" means the Fixed Rate Group or the Adjustable Rate Group, as the
case may be.
Capitalized terms used in the Policy and not otherwise defined in the Policy
shall have the respective meanings set forth in the Agreement as of the date of
execution of the Policy, without giving effect to any subsequent amendment or
modification to the Agreement unless such amendment or modification has been
approved in writing by the Certificate Insurer.
The Policy is being issued under and pursuant to and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
The insurance provided by each Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Policy is not cancelable for any reason. The premium on each Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Class A Certificates.
THE CERTIFICATE INSURER
The following information has been supplied by Financial Security Assurance
Inc. for inclusion in this Prospectus Supplement. No representation is made by
the Underwriter, the Sellers, the Master Servicer, the Depositor, the Trustee or
any of their affiliates as to the accuracy or completeness of such information.
Terms defined herein are exclusive to this section.
GENERAL. Financial Security Assurance Inc. (the "Certificate Insurer") is a
monoline insurance company incorporated in 1984 under the laws of the State of
New York. The Certificate Insurer is licensed to engage in financial guaranty
insurance business in all 50 states, the District of Columbia and Puerto Rico.
The Certificate Insurer and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities-- thereby enhancing the credit rating of those
securities--in consideration for the payment of a premium to the insurer. The
Certificate Insurer and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. The Certificate Insurer insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy the Certificate Insurer's underwriting criteria.
The Certificate Insurer is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
US WEST Capital Corporation and The Tokio Marine and Fire Insurance Co., Ltd. No
shareholder of Holdings is obligated to pay any debt of the Certificate Insurer
or any claim under any insurance policy issued by the Certificate Insurer or to
make any additional contribution to the capital of the Certificate Insurer.
The principal executive offices of the Certificate Insurer are located at
350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
REINSURANCE. Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written or reinsured from third parties by the
Certificate Insurer or any of its domestic operating insurance company
subsidiaries are reinsured among such companies on an agreed-upon percentage
substantially
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proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the Certificate Insurer
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with other reinsurers under various quota share treaties and
on a transaction-by-transaction basis. Such reinsurance is utilized by the
Certificate Insurer as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit the
Certificate Insurer's obligations under any financial guaranty insurance policy.
RATINGS OF CLAIMS-PAYING ABILITY. The Certificate Insurer's claims-paying
ability is rated "Aaa" by Moody's Investors Service, Inc. and "AAA" by Standard
& Poor's Ratings Services, Nippon Investors Service Inc. and Standard & Poor's
(Australia) Pty. Ltd. Such ratings reflect only the views of the respective
rating agencies, are not recommendations to buy, sell or hold securities and are
subject to revision or withdrawal at any time by such rating agencies. See
"Ratings" herein.
CAPITALIZATION. The following table sets forth the capitalization of the
Certificate Insurer and its wholly owned subsidiaries on the basis of generally
accepted accounting principles as of March 31, 1997 (in thousands). The New York
State Insurance Department recognizes only statutory accounting practices for
determining and reporting the financial condition and results of operations of
an insurance company, for determining its solvency under the New York Insurance
Law, and for determining whether its financial condition warrants the payment of
a dividend to its stockholders. No consideration is given by the New York State
Insurance Department to financial statements prepared in accordance with
generally accepted accounting principles in making such determinations.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
<S> <C>
(UNAUDITED)
Deferred Premium Revenue (net of prepaid reinsurance premiums)................ $ 361,589
--------------
Shareholder's Equity:
Common Stock................................................................ 15,000
Additional Paid-In Capital.................................................. 654,127
Unrealized Loss on Investments (net of deferred income taxes)............... (2,030)
Accumulated Earnings........................................................ 157,842
--------------
Total Shareholder's Equity.................................................... 824,939
--------------
Total Deferred Premium Revenue and Shareholder's Equity....................... $ 1,186,528
--------------
--------------
</TABLE>
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of Financial Security and Subsidiaries, and
the notes thereto, incorporated by reference herein. Copies of the statutory
quarterly and annual statements filed with the State of New York Insurance
Department by the Certificate Insurer are available upon request to the State of
New York Insurance Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE. The financial statements
of the Certificate Insurer included in, or as exhibits to, the following
documents, which have been filed with the Commission by Holdings, are hereby
incorporated by reference in this Prospectus Supplement:
(a) Annual Report on Form 10-K for the year ended December 31, 1996, and
(b) Quarterly Report on Form 10-Q for the period ended March 31, 1997.
All financial statements of the Certificate Insurer included in documents
filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Securities shall be deemed to be incorporated
by reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing such documents.
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The Depositor will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon the oral or written requires of such
person, a copy of any or all of the foregoing financial statements incorporated
herein by reference. Requests for such copies should be directed to Morgan
Stanley ABS Capital I Inc., 1585 Broadway, 2nd Floor, New York, New York 10036.
INSURANCE REGULATION. The Certificate Insurer is licensed and subject to
regulation as a financial guaranty insurance corporation under the laws of the
State of New York, its state of domicile. In addition, the Certificate Insurer
and its insurance subsidiaries are subject to regulation by insurance laws of
the various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State of
New York, the Certificate Insurer is subject to Article 69 of the New York
Insurance Law which, among other things, limits the business of each such
insurer to financial guaranty insurance and related lines, requires that each
such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions ("single risks") and the
volume of transactions ("aggregate risks") that may be underwritten by each such
insurer. Other provisions of the New York Insurance Law, applicable to non-life
insurance companies such as the Certificate Insurer, regulate, among other
things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.
OVERCOLLATERALIZATION PROVISIONS
OVERCOLLATERALIZATION RESULTING FROM CASH FLOW STRUCTURE. The Pooling and
Servicing Agreement requires that, on each Distribution Date, Net Monthly Excess
Cashflow with respect to a Loan Group be applied on such Distribution Date as an
accelerated payment of principal on the related Classes of Class A Certificates
then entitled to receive distributions of principal but only to the limited
extent hereafter described. "Net Monthly Excess Cashflow" equals the excess of
(i) the sum of (I) the excess, if any of (x) the interest which is collected on
the Mortgage Loans in such Loan Group prior to the related Determination Date
for payments due during the related Due Period or otherwise remitted in
connection with any Prepayment made during the related Prepayment Period or
other interest portion of any Net Liquidation Proceeds received during the
related Due Period (net of the Servicing Fee, the Trustee Fee and the Insurance
Premium Amount with respect to such Loan Group) plus the interest portion of any
P&I Advances and any Compensating Interest paid by the Master Servicer with
respect to such Due Period over (y) the sum of the interest which accrues on the
related Classes of Class A Certificates during the related Accrual Period (such
excess, the "Total Monthly Excess Spread" with respect to such Loan Group) and
(II) the Subordination Reduction Amount with respect to such Loan Group and such
Distribution Date, over (ii) the portion of the Total Monthly Excess Cashflow
that is used to cover the amounts described in subparagraph (i) under
"Description of the Certificates--Distributions."
This has the effect of accelerating the amortization of the related Classes
of Class A Certificates then entitled to receive distributions of principal
relative to the amortization of the Mortgage Loans in the related Loan Group. To
the extent that any Net Monthly Excess Cashflow is not so used (and is not
required to satisfy requirements with respect to the other Loan Group), 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 paid to the holders
of the Subordinate Certificates.
Pursuant to the Pooling and Servicing Agreement, each Loan Group's Net
Monthly Excess Cashflow will be applied as an accelerated payment of principal
on the Classes of Class A Certificates then entitled to receive distributions of
principal until the Subordinated Amount has increased to the level required.
"Subordinated Amount" means, with respect to each Loan Group and Distribution
Date, the excess, if any, of (x) the aggregate Loan Balances of the Mortgage
Loans in such Loan Group as of the close of business on the last day of the
related Due Period (taking into account all payments of principal, other than
Prepayments, due during the related Due Period and received on or prior to the
related Determination Date or, in connection with Curtailments and Net
Liquidation Proceeds, collected during the related
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Due Period together with all Prepayments received on such Mortgage Loans in such
Loan Group during the related Prepayment Period) over (y) the related Class
Certificate Balance of the Class A Certificates as of such Distribution Date
after taking into account the payment of the Class A Distribution Amount (except
for any Subordination Deficit or Subordination Increase Amount with respect to
such Loan Group on such Distribution Date). With respect to each Loan Group, any
amount of Net Monthly Excess Cashflow actually applied as an accelerated payment
of principal is a "Subordination Increase Amount." The required level of the
Subordinated Amount for each Loan Group with respect to a Distribution Date is
the "Specified Subordinated Amount." The Pooling and Servicing Agreement
generally provides that the Specified Subordinated Amount may, over time,
decrease or increase, subject to certain floors, caps and triggers.
In the event that the required level of the Specified Subordinated Amount
with respect to a Loan Group is permitted to decrease or "step down" on a
Distribution Date in the future, the Pooling and Servicing Agreement provides
that a portion of the principal which would otherwise be distributed to the
Class A Certificateholders on such Distribution Date may be distributed to the
holders of the Subordinate Certificates on such Distribution Date. This has the
effect of decelerating the amortization of Class A Certificates relative to the
amortization of the Mortgage Loans and of reducing the related Subordinated
Amount. With respect to any Loan Group and Distribution Date, the excess, if
any, of (x) the Subordinated Amount on such Distribution Date after taking into
account all distributions to be made on such Distribution Date (except for any
distributions of Subordination Reduction Amounts as described in this paragraph)
over (y) the Specified Subordinated Amount is the "Excess Subordinated Amount"
for such Loan Group and Distribution Date. If, on any Distribution Date, the
Excess Subordinated Amount is, or, after taking into account all other
distributions to be made on such Distribution Date, 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 holders of the related Class A Certificates on
such Distribution Date may instead be distributed to the holders of the
Subordinate 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 Class A
Certificates relating to the applicable Loan Group on such Distribution Date;
such amount being the "Subordination Reduction Amount" with respect to the
related Loan Group for such Distribution Date. As a result of the cash flow
structure of the Trust Fund, Subordination Reduction Amounts may result even
prior to the occurrence of any decrease or "step down" in the Specified
Subordinated Amount. That is because the holders of the Class A Certificates
generally will, except for the provisions relating to the Subordination
Reduction Amount, be entitled to receive 100% of collected principal with
respect to the related Loan Group even though the Class A Class Certificate
Balance, following the accelerated amortization resulting from the application
of the Net Monthly Excess Cashflow, will be less than 100% of the related Loan
Group's aggregate loan balance. Accordingly, in the absence of the provisions
relating to Subordination Reduction Amounts, the Subordinated Amount would
increase above the Specified Subordinated Amount requirements even without the
further application of any Net Monthly Excess Cashflow.
The Pooling and Servicing Agreement provides generally that, on any
Distribution Date, all amounts (other than Prepayments) collected on account of
principal on or prior to the related Determination Date (other than any such
amount applied to the payment of a Subordination Reduction Amount) with respect
to payments due on the Mortgage Loans in a Loan Group during the related Due
Period, plus any Curtailments and Liquidation Proceeds received during the
related Due Period and any Prepayments received during the related Prepayment
Period, will be distributed to the Class A Certificateholders then entitled to
receive distributions of principal on such Distribution Date. If any Mortgage
Loan became a Liquidated Mortgage Loan during such prior Due 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 Loan Balance of any Mortgage Loan which becomes a
Liquidated Mortgage Loan shall
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thenceforth equal zero. The Pooling and Servicing Agreement does not contain any
provisions which require that the amount of any Realized Loss be distributed to
the Class A Certificateholders on the Distribution 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 Loan Group,
which, to the extent that such reduction causes the Subordinated Amount to be
less than the Specified Subordinated Amount applicable to the related
Distribution Date, will require the payment of a Subordination Increase Amount
on such Distribution Date (or, if insufficient funds are available on such
Distribution Date, on subsequent Distribution Dates, until the Subordinated
Amount equals the related Specified Subordinated Amount). The effect of the
foregoing is to allocate losses to the holders of the Subordinate Certificates
by reducing, or eliminating entirely, payments of Net Monthly Excess Cashflow
and of Subordination Reduction Amounts which such holders would otherwise
receive.
OVERCOLLATERALIZATION AND THE POLICY. The Pooling and Servicing Agreement
defines a "Subordination Deficit" with respect to a Loan Group and Distribution
Date to be the amount, if any, by which (x) the aggregate of the Class
Certificate Balances relating to such Loan Group after taking into account all
distributions to be made on such Distribution Date, exceeds (y) the aggregate
Loan Balances of the Mortgage Loans in the related Loan Group as of the close of
business on the last day of the related Due Period (taking into account all
payments of principal, other than Prepayments, due during the related Due Period
and received on or prior to the related Determination Date or, in connection
with Curtailments and Net Liquidation Proceeds, collected during the related Due
Period, together with all Prepayments received on such Mortgage Loans in such
Loan Group during the related Prepayment Period). The Pooling and Servicing
Agreement requires the Trustee to make a claim for an Insured Payment under the
Policy not later than the third Business Day prior to any Distribution 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 holders of the Class A Certificates entitled to such Insured
Payment on such Distribution Date. Investors in the Class A Certificates should
realize that, under extreme loss or delinquency scenarios applicable to the
Mortgage Loans, they may temporarily receive no distributions of principal when
they would otherwise be entitled thereto under the principal allocation
provisions described herein. Nevertheless, the exposure to risk of loss of
principal of the holders of the Class A Certificates depends in part on the
ability of the Certificate Insurer to satisfy its obligations under the relevant
Policy. In that respect and to the extent that the Certificate Insurer satisfies
such obligations, the holders of the Class A Certificates are insulated from
shortfalls in Available Funds (to the extent such shortfall results in a
Subordination Deficit) that may arise.
CROSSCOLLATERALIZATION PROVISIONS
In addition to the use of Total Monthly Excess Cashflow with respect to a
Loan Group to cover related Subordination Increase Amounts, Available Funds
Shortfalls and Subordination Deficits, such Total Monthly Excess Cashflow will
be available to cover such requirements for the other Loan Group as described
under the caption "Description of the Certificates--Distributions" herein.
THE POOLING AND SERVICING AGREEMENT
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
The Sellers will make the representations, among others, as to each Mortgage
Loan conveyed by the Sellers to the Depositor as of the Closing Date.
Pursuant to the Pooling and Servicing Agreement, upon the discovery by the
Depositor, the Sellers, the Master Servicer, the Certificate Insurer or the
Trustee that any representations and warranties with respect to the Mortgage
Loans were untrue in any material respect as of the Closing Date with the result
that the interests of the holders of the Certificates or of the Certificate
Insurer are materially and adversely affected, the party discovering such breach
is required to give prompt written notice to the other parties.
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Upon the earliest to occur of a Seller's discovery or its receipt of notice
of breach from any of the other parties, the Seller will be required promptly to
cure such breach in all material respects or, on the second Monthly Remittance
Date next succeeding such discovery or receipt of notice, the Seller shall (i)
substitute in lieu of each Mortgage Loan which has given rise to the requirement
for action by the Seller a Qualified Replacement Mortgage (as such term is
defined in the Pooling and Servicing Agreement) and deliver the Substitution
Adjustment to the Master Servicer for deposit in the Collection Account on
behalf of the Trust Fund on such Monthly Remittance Date or (ii) purchase such
Mortgage Loan from the Trust Fund at a purchase price equal to the Loan Purchase
Price (as defined below) thereof. A "Substitution Adjustment" means, with
respect to any deleted Mortgage Loan, if the Loan Balance of such deleted
Mortgage Loan is greater than the outstanding and principal balance of the
related Qualified Replacement Mortgage, an amount equal to such difference
together with the sum of (i) all P&I Advances and Servicing Advances made with
respect to such deleted Mortgage Loan, to the extent unreimbursed to the Master
Servicer and (ii) all P&I Advances and Servicing Advances which the Master
Servicer has not previously remitted with respect to such deleted Mortgage Loan.
Notwithstanding any provision of the Pooling and Servicing Agreement to the
contrary, with respect to any Mortgage Loan which is not in default or as to
which no default is imminent, no such repurchase or substitution will be made
unless the Seller obtains for the Trustee and the Certificate Insurer an opinion
of counsel experienced in federal income tax matters and acceptable to the
Trustee and the Certificate Insurer to the effect that such a repurchase or
substitution would not give rise to a tax imposed as a result of a "prohibited
transaction" under the Code (a "Prohibited Transaction Tax") for the Trust Fund
or otherwise subject the Trust Fund to tax and would not jeopardize the status
of either the Master REMIC or the Subsidiary REMIC as a REMIC (a "REMIC
Opinion") addressed to the Trustee and the Certificate Insurer and acceptable to
the Trustee and the Certificate Insurer. Any Mortgage Loan as to which
repurchase or substitution was delayed pursuant to the Pooling and Servicing
Agreement shall be repurchased or substituted for (subject to compliance with
the provisions of the Pooling and Servicing Agreement) upon the earlier of (a)
the occurrence of a default or imminent default with respect to such Mortgage
Loan and (b) receipt by the Trustee and the Certificate Insurer of a REMIC
Opinion. The obligation of the Seller so to substitute or purchase any Mortgage
Loan constitutes the sole remedy respecting a discovery of any such statement
which is untrue in any material respect available to the holders of the
Certificates, the Trustee and the Certificate Insurer except as provided below.
Notwithstanding the foregoing, pursuant to the Pooling and Servicing
Agreement, the Sellers agree to indemnify the Trust Fund for any breach of a
representation or warranty relating to the legality of the Mortgage Loans
(including, without limitation, the origination of such Mortgage Loans) and the
mortgage loan documents thereto.
"Loan Purchase Price" means the outstanding loan balance of the related
Mortgage Loan on the Cut-off Date, less any principal amounts previously
distributed to the holders of the Certificates relating to such Mortgage Loan
(such amount, the "Loan Balance" of such Mortgage Loan) as of the date of
purchase (assuming that the Master Servicer has already remitted to the Trustee
all amounts in the Collection Account on the related Monthly Remittance Date
less amounts that the Master Servicer is authorized to withdraw from the
Collection Account in accordance with the Pooling and Servicing Agreement), plus
one month's interest at the related Mortgage Rate on the outstanding Loan
Balance thereof together with the aggregate amount of all unreimbursed P&I
Advances and Servicing Advances theretofore made with respect to such Mortgage
Loan, all P&I Advances and Servicing Advances which the Master Servicer has
theretofore failed to remit with respect to such Mortgage Loan and all
reimbursed P&I Advances to the extent that the reimbursement is not made from
the mortgagor or from proceeds with respect to a Liquidated Mortgage Loan.
SALE AND ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Sellers will, pursuant to the Pooling and Servicing
Agreement, sell and assign to the Depositor without recourse (except as provided
therein) their entire interest in and to the
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Mortgage Loans, including the Mortgages on the Mortgaged Properties securing the
Mortgage Loans and the right to receive all payments on, and proceeds with
respect to, the Mortgage Loans after the Cut-off Date. On the Closing Date,
simultaneously with the sale from the Sellers to the Depositor, the Depositor
will, pursuant to the Pooling and Servicing Agreement, sell and assign to the
Trust Fund, without recourse (except as otherwise provided therein), its entire
interest in and to the Mortgage Loans, including the Mortgages on the Mortgaged
Properties securing the Mortgage Loans and the right to receive all payments on,
or proceeds with respect to, the Mortgage Loans after the Cut-off Date. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
Pooling and Servicing Agreement. The Trustee will, concurrently with the sale
and assignment of the Mortgage Loans as described above, countersign and deliver
the Certificates to or upon the order of the Depositor.
The Depositor will deliver to the Trustee with respect to each Mortgage Loan
(i) the mortgage note endorsed without recourse to the Trustee to reflect the
transfer of the Mortgage Loan, (ii) the original mortgage with evidence of
recording indicated thereon and (iii) an assignment of the mortgage in
recordable form to the Trustee, reflecting the transfer of the Mortgage Loan.
Such assignments of Mortgage Loans are required to be recorded by or on behalf
of he Depositor in the appropriate offices for real property records. The
Trustee, concurrently with the Depositor's assignment, will deliver the
Certificates to the Depositor in exchange for the Mortgage Loans. In certain
circumstances, the original of the mortgage note may be unavailable, in which
case the Seller will deliver a lost note affidavit with a copy of the mortgage
note attached as more particularly set forth in the Pooling and Servicing
Agreement.
The Files (as defined in the Pooling and Servicing Agreement) will be
delivered to the Trustee on the Closing Date. Thereafter the Trustee will review
the Files and if any document required to be included in any Loan File is found
to be defective in any material respect and such defect is not cured within 30
days following notification thereof to the Master Servicer by the Trustee, the
Seller will be required to repurchase or substitute the related Mortgage Loan.
THE MASTER SERVICER
The information set forth in the following paragraphs has been provided by
the Master Servicer. None of the Depositor, the Trustee, the Underwriter, the
Certificate Insurer or any of their respective affiliates have made or will make
any representation as to the accuracy or completeness of such information.
Ocwen Federal Bank FSB, a federally-chartered savings bank, headquartered in
West Palm Beach, Florida, will serve as the Master Servicer for the Mortgage
Loans pursuant to the Pooling and Servicing Agreement (in such capacity, the
"Master Servicer"). The Master Servicer is a wholly-owned subsidiary of Ocwen
Financial Corporation, a public financial services holding company. At March 31,
1997, the Master Servicer had approximately $2.566 billion in assets,
approximately $2.316 billion in liabilities and approximately $250 million in
equity. At March 31, 1997, the Master Servicer's tangible and leveraged capital
ratio was approximately 9.48% and its risk-based capital ratio was approximately
13.22%. For the year ended December 31, 1996, the Master Servicer's income from
continuing operations was approximately $49 million and for the quarter ended
March 31, 1997, the Master Servicer's income from continuing operations was
approximately $19 million.
The major business of the Master Servicer has been the resolution of
nonperforming single-family, multi-family and commercial mortgage loan
portfolios acquired from the Resolution Trust Corporation, from private
investors, and most recently, from the United States Department of Housing and
Urban Development ("HUD") through HUD's auction of defaulted FHA Loans. The
Master Servicer is a market leader in the nonperforming mortgage loan
acquisition business, having acquired in excess of $3.8 billion of such mortgage
loans over the past six years.
The following table sets forth, for the non-conforming credit mortgage loan
("BCD Mortgage Loan") servicing portfolio serviced by the Master Servicer as of
December 31, 1995, December 31, 1996, and as of March 31, 1997 certain
information relating to the delinquency experience (including loans in
foreclosure included in the Master Servicer's servicing portfolio (which
portfolio does not include mortgage loans that
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are subserved by others)) at the end of the indicated periods. The indicated
periods of delinquency are based on the number of days past due on a contractual
basis. No mortgage loan is considered delinquent for these purposes until it is
one month past due on a contractual basis. The information contained in the
monthly remittance reports which will be sent to investors will be compiled
using the same methodology as that used to compile the information contained in
the table below.
DELINQUENCIES AND FORECLOSURES
(DOLLAR IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995 AS OF DECEMBER 31, 1996
------------------------------------------------ ------------------------------------------------
BY NO. PERCENT BY PERCENT BY BY NO. PERCENT BY PERCENT BY
OF BY DOLLAR NO. OF DOLLAR OF BY DOLLAR NO. OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
----------- --------- ----------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio......... 1,694 $ 194,717 100% 100% 2,834 $ 305,085 100% 100%
Period of Delinquency:
30-59 Days............ 35 3,201 2.07% 1.64% 107 10,554 3.78% 3.46%
60-89 Days............ 18 2,157 1.06% 1.11% 38 4,321 1.34% 1.42%
90 days or more....... 37 5,676 2.18% 2.91% 138 17,969 4.87% 5.89%
----- --------- --- --- ----- --------- --- -----
Total Delinquent
Loans................. 90 11,034 5.31% 5.67% 283 32,844 9.99% 10.77%
----- --------- --- --- ----- --------- --- -----
----- --------- --- --- ----- --------- --- -----
Loans in
Foreclosure(1)........ 29 $ 4,292 1.71% 2.20% 136 $ 17,805 4.80% 5.84%
----- --------- --- --- ----- --------- --- -----
----- --------- --- --- ----- --------- --- -----
<CAPTION>
AS OF MARCH 31, 1997
------------------------------------------------
BY NO. PERCENT BY PERCENT BY
OF BY DOLLAR NO. OF DOLLAR
LOANS AMOUNT LOANS AMOUNT
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Total Portfolio......... 3,276 $ 355,480 100% 100%
Period of Delinquency:
30-59 Days............ 68 7,565 2.08% 2.13%
60-89 Days............ 56 6,195 1.71% 1.74%
90 days or more....... 182 22,078 5.56% 6.21%
----- --------- --- -----
Total Delinquent
Loans................. 306 $ 35,838 9.34% 10.08%
----- --------- --- -----
----- --------- --- -----
Loans in
Foreclosure(1)........ 172 $ 20,905 5.25% 5.88%
----- --------- --- -----
----- --------- --- -----
</TABLE>
- ------------------------
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
REAL ESTATE OWNED
(DOLLAR IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF DECEMBER 31,
1995 1996 AS OF MARCH 31, 1997
---------------------- ---------------------- ----------------------
BY NO. BY NO. BY NO.
OF BY DOLLAR OF BY DOLLAR OF BY DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio............................. 1,694 $ 194,717 2,834 $ 305,085 3,276 $ 355,480
Foreclosed Loans(1)......................... 0 0 34 3,329 22 2,396
Foreclosed Ratio(2)......................... 0.00% 0.00% 1.20% 1.09% 0.67% 0.67%
</TABLE>
- ------------------------------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to which
has been acquired by Ocwen Federal Bank FSB.
(2) The Foreclosure Ratio is equal to the aggregate principle balance or number
of Foreclosed Loans divided by the aggregate principal balance, or number,
as applicable, of mortgage loans in the Total Portfolio at the end of the
indicated period.
LOAN GAIN (LOSS) EXPERIENCE
(DOLLAR IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR ENDED MARCH 31,
ENDED DECEMBER ENDED DECEMBER 1997
31, 1995 31, 1996 ---------------
----------------- ----------------- BY DOLLAR
BY DOLLAR AMOUNT BY DOLLAR AMOUNT AMOUNT
----------------- ----------------- ---------------
<S> <C> <C> <C>
Total Portfolio(1)......................................... $ 194,717 $ 305,085 $ 355,480
Net Gains/(Losses)(2)...................................... $ 0 $ 24 $ (142)
Net Gains/(Losses) as a Percentage of Total Portfolio...... 0.00% 0.01% -0.04%
</TABLE>
- ------------------------------
(1) "Total Portfolio" on the date stated above is the principal balances of the
mortgage loans outstanding on the last day of the period.
(2) "Net Gains/(Losses)" are actual gains or losses incurred on liquidated
properties and shortfall payoffs for each respective period. Gains or losses
are calculated after repayment of all principal, prepayment penalties,
foreclosure costs and accrued interest to the date of liquidation. However,
premium paid to purchase the loans and other direct origination costs are
not included in the calculation.
S-62
<PAGE>
SERVICING AND SUB-SERVICING
The Master Servicer is required to deposit to the Collection Account, within
one Business Day following receipt, all principal and interest collections on
the Mortgage Loans received after the Cut-Off Date, including any Prepayments,
the proceeds of any liquidation of a Mortgage Loan net of expenses and
unreimbursed P&I Advances and Servicing Advances ("Net Liquidation Proceeds")
and any income from REO Properties, but net of (i) the Servicing Fee with
respect to each Mortgage Loan and other servicing compensation (including any
Servicing Fees and other servicing compensation for prior months not paid in
full including, without limitation, any such insufficiency which relates to
Compensating Interest), (ii) Net Liquidation Proceeds to the extent that such
Net Liquidation Proceeds exceed the sum of (I) the Loan Balance of the related
Mortgage Loan, plus (II) accrued and unpaid interest on such Mortgage Loan (net
of the Servicing Fee) to the date of such liquidation, (iii) reimbursements for
P&I Advances not otherwise reimbursed from Liquidation Proceeds, and (iv)
reimbursement for amounts deposited in the Collection Account representing
payments of principal and/or interest on a Mortgage Loan by a mortgagor which
are subsequently returned by a depository institution as unpaid.
The Master Servicer may make withdrawals for its own account from the
amounts on deposit in the Collection Account with respect to each Loan Group,
for the following purposes:
(i) to withdraw investment earnings on amounts on deposit in the
Collection Account;
(ii) to withdraw amounts that have been deposited to the Collection
Account in error;
(iii) to reimburse the Master Servicer for any P&I Advance or Servicing
Advance that the Master Servicer has determined to be a Nonrecoverable
Advance; and
(iv) to clear and terminate the Collection Account following the
termination of the Trust Fund.
The Master Servicer will remit to the Trustee for deposit in the
Distribution Account the Monthly Remittance Amount not later than the related
Monthly Remittance Date and Loan Purchase Prices and Substitution Adjustments
two Business Days following the related purchase or substitution, as the case
may be.
The Master Servicer may reimburse itself for any P&I Advances paid from the
Master Servicer's own funds, from collections on the Mortgage Loans with respect
to the related Loan Group or from Net Monthly Excess Cashflow. The Master
Servicer will not be obligated to make a P&I Advance if it determines that such
P&I Advance, if made, would be a Nonrecoverable Advance. In the event that the
Master Servicer determines that a P&I Advance would be a Nonrecoverable Advance,
the Master Servicer shall give written notice of such determination to the
Trustee and the Certificate Insurer; the Trustee shall promptly furnish a copy
of such notice to the holders of the Certificates; PROVIDED, FURTHER, that the
Master Servicer shall be entitled to recover any unreimbursed P&I Advances from
the Liquidation Proceeds for the related Mortgage Loan.
The Master Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, (i) expenditures in connection with a foreclosed Mortgage
Loan prior to the liquidation thereof, including, without limitation,
expenditures for real estate property taxes, hazard insurance premiums, certain
amounts due with respect to senior liens and property restoration or
preservation expenses ("Preservation Expenses"), (ii) the cost of any
enforcement or judicial proceedings, including foreclosures and attorneys' fees
associated with the foregoing and (iii) the cost of the management and
liquidation of Mortgaged Property acquired by the Master Servicer on behalf of
the Trustee through foreclosure or deed-in-lieu of foreclosure (each, an "REO
Property") in satisfaction of the related Mortgage, but the Master Servicer
shall not be obligated to make any such Servicing Advance if the Master Servicer
has determined that such Servicing Advance would be a Nonrecoverable Advance.
Such costs will constitute "Servicing Advances." The Master Servicer may
reimburse itself for a Servicing Advance (x) 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
S-63
<PAGE>
Liquidation Proceeds realized upon the liquidation of the related Mortgage Loan
or (y) from funds deposited in the Collection Account as specified in the
Pooling and Servicing Agreement. A "Nonrecoverable Advance" means any portion of
a P&I Advance or a Servicing Advance proposed to made or previously made which
has not been previously reimbursed to the Master Servicer, and which the Master
Servicer has determined in its good faith business judgment will not or, in the
case of a proposed P&I Advance or Servicing Advance, would not, be ultimately
recoverable by the Master Servicer from payments and collections on the related
Mortgage Loan.
Subject to the terms of the Pooling and Servicing Agreement, the Master
Servicer, and in the absence of the exercise thereof by the Master Servicer, the
Certificate Insurer, will have the right and the option, but not the obligation,
to purchase for its own account any Mortgage Loan which becomes delinquent, in
whole or in part, as to three consecutive monthly installments or any Mortgage
Loan as to which enforcement proceedings have been brought by the Master
Servicer. The purchase price for any such Mortgage Loan is equal to the Loan
Purchase Price thereof, which purchase price shall be delivered to the Trustee.
The Master Servicer is required to cause to be liquidated any Mortgage Loan
relating to a Mortgaged Property as to which ownership has been effected in the
name of the Master Servicer or sub-servicer on behalf of the Trust Fund and
which has not been liquidated within the later of (a) two years after the
acquisition of the Mortgaged Property by the Trust Fund, (b) the extended time
period granted by the Internal Revenue Service, or (c) the extended time period
deemed to be granted pursuant to the provisions of Section 1.856-6(g)(s) of the
Treasury Regulations following the failure of the Internal Revenue Service to
respond an extension request letter at such price as the Master Servicer deems
necessary to comply with this requirement.
If so required by the terms of any Mortgage Loan, the Master Servicer will
be required to cause hazard insurance to be maintained with respect to the
related Mortgaged Property and to advance sums on account of the premiums
therefor if not paid by the mortgagor if permitted by the terms of such Mortgage
Loan to the extent that such insurance is available at commercially reasonable
rates.
The Master Servicer will be permitted under the Pooling and Servicing
Agreement to enter into subservicing agreements for any servicing and
administration of Mortgage Loans with (i) any institution which is a FHLMC or
FNMA approved seller-servicer for mortgage loans and has equity of at least
$1,500,000, or (ii) any institution which is an affiliate of the Master
Servicer. The Certificate Insurer will have the right to remove a sub-servicer
and approve the appointment of a sub-servicer as and to the extent provided in
the Pooling and Servicing Agreement.
Notwithstanding any subservicing agreement, the Master Servicer will not be
relieved of its obligations under the Pooling and Servicing Agreement and the
Master Servicer will be obligated to the same extent and under the same terms
and conditions as if it alone were servicing and administering the Mortgage
Loans. The Master Servicer shall be entitled to enter into any agreement with a
sub-servicer for indemnification of the Master Servicer by such sub-servicer and
nothing contained in such sub-servicing agreement shall be deemed to limit or
modify the Pooling and Servicing Agreement.
The Master Servicer will be required to deliver to the Trustee, the
Certificate Insurer, and the Rating Agencies: (1) on or before March 31 of each
year, commencing in 1998, an officers' certificate stating, as to each signer
thereof, that (i) a review of the activities of the Master Servicer during such
preceding calendar year and of performance under the 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 Pooling and Servicing Agreement for such
year, or, if there has been a default in the fulfillment of all 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 default; and (2) on or before March 31 of each year, commencing in
1998, a letter or letters of a firm of independent, nationally recognized
certified public accountants reasonably acceptable to the Certificate
S-64
<PAGE>
Insurer dated as of the date of the Master Servicer's fiscal audit stating that
such firm has examined the Master Servicer's overall servicing operations
substantially in accordance with the requirements of either the Uniform Single
Attestation Program for Mortgage Bankers established by the Mortgage Bankers
Association of America or the Audit Program for Mortgages serviced for FHLMC,
and stating such firm's conclusions relating thereto.
The Master Servicer will be entitled to receive a fee on each Mortgage Loan
for each Due Period (the "Servicing Fee") equal to one twelfth of the product of
0.50% (the "Servicing Fee Rate") and the Loan Balance of such Mortgage Loan as
of the beginning of such Due Period or, with respect to the first Due Period,
the principal balance for the Mortgage Loan as of the Cut-off Date. In addition,
the Master Servicer will retain any benefit from the investment of funds in the
Collection Account and will collect and retain, as additional servicing
compensation, any late fees, penalty charges, prepayment premiums, bad check
fees, extension, modification or extension fees and other assumption fees or
similar charges allowed by applicable laws with respect to the Mortgage Loans.
When a Mortgage Loan is prepaid in full (a "Prepayment") or in part (a
"Curtailment") between due dates, the borrower is required to pay interest on
the amount prepaid only to the date of prepayment and not thereafter.
Prepayments by borrowers received from the day after the prior Determination
Date to and including the Determination Date in the month of a Distribution Date
(the "Prepayment Period") will be distributed to holders of the Certificates on
such Distribution Date. Pursuant to the Pooling and Servicing Agreement, to the
extent not otherwise covered by amounts otherwise described in the Pooling and
Servicing Agreement, the Servicing Fee for any month will be reduced by an
amount of not more than one-half of the Servicing Fee with respect to any
shortfall in an interest payment which arises from such Prepayment (a
"Prepayment Interest Shortfall") sufficient to pass through to holders of the
Certificates the full amount of interest to which they would be entitled in
respect of such Mortgage Loan on the related Distribution Date (such amount is
herein referred to as "Compensating Interest"). To the extent the Compensating
Interest does not cover a Prepayment Interest Shortfall, such amount (a "Net
Prepayment Interest Shortfall") shall not, unless covered by distributions
discussed in "Description of the Certificates--Distributions," be paid to
Certificateholders. If shortfalls in interest as a result of prepayments in any
month exceed the Compensating Interest for such month, the amount of interest
available to be distributed to holders of the Certificates will be reduced by
the amount of such excess.
REMOVAL AND RESIGNATION OF MASTER SERVICER
The Certificate Insurer or the holders of the Class A Certificates as
provided in the Pooling and Servicing Agreement, with the consent of the
Certificate Insurer, will have the right pursuant to the Pooling and Servicing
Agreement, to remove the Master Servicer upon the occurrence of: (a) certain
acts of bankruptcy or insolvency on the part of the Master Servicer; (b) certain
failures on the part of the Master Servicer to perform its obligations under the
Pooling and Servicing Agreement; or (c) the failure to cure material breaches of
the Master Servicer's representations in the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement also provides that the Certificate
Insurer may remove the Master Servicer upon the occurrence of certain additional
events.
The Master Servicer is not permitted to resign from the obligations and
duties imposed on it under the Pooling and Servicing Agreement except upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of the Master Servicer
so causing such conflict being of a type and nature carried on by the Master
Servicer on the date of the Pooling and Servicing Agreement. Any such
determination permitting the resignation of the Master Servicer is required to
be evidenced by an opinion of counsel to such effect which shall be delivered to
the Trustee and the Certificate Insurer.
Upon removal or resignation of the Master Servicer, the Trustee (x) may
solicit bids for a successor Master Servicer and (y) pending the appointment of
a successor Master Servicer as a result of soliciting such bids, shall serve as
Master Servicer. The Trustee, it if is unable to obtain a qualifying bid and is
S-65
<PAGE>
prevented by law from acting as Master Servicer, will be required to appoint, or
petition a court of competent jurisdiction to appoint, any housing and home
finance institution, bank or mortgage servicing institution designated as an
approved seller/servicer by the Federal Home Loan Mortgage Corporation ("FHLMC")
or the Federal National Mortgage Association ("FNMA") having equity of not less
than $1,500,000 (or such lower level as may be acceptable to the Certificate
Insurer) and acceptable to the Certificate Insurer and the holders of the Class
R Certificates (provided that if the Certificate Insurer and such holders cannot
agree as to the acceptability of such successor Master Servicer, the decision of
the Certificate Insurer shall control) as the successor to the Master Servicer
in the assumption of all or any part of the responsibilities, duties or
liabilities of the Master Servicer.
No removal or resignation of the Master Servicer will become effective until
the Trustee or a successor servicer shall have assumed the Master Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement.
AMENDMENT
The Pooling and Servicing Agreement may be amended from time to time by the
Depositor, the Sellers, the Master Servicer and the Trustee with the consent of
the Certificate Insurer and without the consent of the holders of the
Certificates, (i) to cure any ambiguity (ii) to correct or supplement any
provision therein or (iii) to make any other provisions with respect to matters
or questions arising under the Pooling and Servicing Agreement that shall not be
inconsistent with the provisions of the Pooling and Servicing Agreement provided
that such action pursuant to clause (iii) will not, in the opinion of counsel
satisfactory to the Trustee and the Certificate Insurer, adversely affect in any
material respect the interest of any holder of the Certificates or the
Certificate Insurer. The Pooling and Servicing Agreement may also be amended by
the Depositor, the Sellers, the Master Servicer and the Trustee, with the
consent of the holders of Certificates evidencing not less than a majority of
the aggregate Class Certificate Balance of the Class of Certificates affected by
such amendment for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Pooling and Servicing
Agreement or of modifying in any manner the rights of holders of the
Certificates or the terms of the Policy; provided, however, that no such
amendment may (i) increase or reduce in any manner the amount of, or accelerate
or delay the timing of, collections of payments on Mortgage Loans or
distributions that are required to be made on any Certificate without the
consent of the holder of such Certificate or (ii) reduce the aforesaid
percentage required to consent to any such amendment, without the consent of the
holders of all Certificates then outstanding.
The Pooling and Servicing Agreement may also be amended, from time to time,
by the Master Servicer, the Depositor, the Sellers and the Trustee, with the
consent of the Certificate Insurer and without consent of the holders of the
Certificates, to modify, eliminate or add to the provisions of the Pooling and
Servicing Agreement to the extent necessary to (i) maintain the qualification of
the REMICs, under the Code or avoid, or minimize the risk of, the imposition of
any tax on the Trust Fund under the Code that would be a claim against the Trust
Fund's assets, or (ii) prevent the Trust Fund from entering into any "prohibited
transaction" as defined in the Code.
Notwithstanding the foregoing, no amendment may be made unless the Trustee
shall have received an opinion of counsel to the effect that such amendment will
not cause either the Master REMIC or the Subsidiary REMIC to be disqualified as
a REMIC, or subject the Trust to "prohibited transaction" or "prohibited
contribution" taxes.
Class A Certificates held by either the Depositor or any affiliate thereof
will not be counted as outstanding for purposes of the approval of any
amendment, waiver or other consent or vote required by the Pooling and Servicing
Agreement.
S-66
<PAGE>
LIST OF CERTIFICATEHOLDERS
Upon written request of the Master Servicer, the Trustee will provide to the
Master Servicer, within 15 days after receipt of such request, a list of the
names and addresses of all holders of the Certificates of record as of the most
recent Record Date. Upon written request by three or more holders of the Class A
Certificates who in the aggregate hold Certificates that evidence not less than
25% of the aggregate Class Certificate Balance of the Class A Certificates and
if such request is accompanied by a copy of the communication that such holders
propose to transmit, the Trustee or the Certificate Registrar, at its
discretion, will either afford such holders access during business hours to the
current list of holders of the Class A Certificates for purposes of
communicating with other holders of the Class A Certificates with respect to
their rights under the Pooling and Servicing Agreement or the Trustee will
disseminate such communication to all holders of the Certificates.
The Pooling and Servicing Agreement will not provide for the holding of any
annual or other meetings of holders of the Certificates.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The obligations created by the Pooling and Servicing Agreement will
terminate upon the last action required to be taken by the Trustee on the final
Distribution Date following the earlier of (i) the final payment or other
liquidation of the last Mortgage Loan remaining in the Trust Fund and the
disposition of all property acquired by foreclosure or deed in lieu of
foreclosure of any Mortgage Loan and (ii) the purchase by the Class R
Optionholder, the Master Servicer or the Certificate Insurer from the Trust Fund
of all remaining Mortgage Loans and all property acquired in respect of any
Mortgage Loan remaining in the Trust Fund. 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 the Pooling
and Servicing Agreement. Written notice of termination of the Pooling and
Servicing Agreement will be given to each holder of a Certificate by the
Trustee.
At its option, the Class R Optionholder (or if the Class R Optionholder does
not exercise such option, the Master Servicer or the Certificate Insurer) may
purchase on any Distribution Date on which such a purchase is permitted as
described below, all (but not fewer than all) remaining Mortgage Loans, in whole
only, and other property acquired by foreclosure, deed in lieu of foreclosure,
or otherwise then constituting the Trust Fund but in no event less than at a
price equal to the greater of (i) the sum of 100% of the aggregate Loan Balance
of the related Mortgage Loans as of the day of purchase and any Reimbursement
Amounts not otherwise paid to the Certificate Insurer minus amounts remitted
from the Collection Account to the Distribution Account representing collections
of principal on the Mortgage Loans during the current Due Period, plus one
month's interest on such amount computed at the weighted average Mortgage Rate,
plus all accrued and unpaid Servicing Fees plus the aggregate amount of any
unreimbursed P&I Advances and Servicing Advances unpaid plus P&I Advances which
the Master Servicer has theretofore failed to remit and (ii) the aggregate Class
Certificate Balances of the Class A Certificates on such date of purchase, one
month's interest at the Pass-Through Rate for each of the outstanding Class A
Certificates on the date of purchase and any Reimbursement Amounts not otherwise
paid to the Certificate Insurer. The right of the Class R Optionholder (or if
the Class R Optionholder does not exercise such option, the Master Servicer or
the Certificate Insurer) to make any such purchase is not exercisable until the
Distribution Date on which, after giving effect to principal distributions on
the Certificates that would otherwise be made on such Distribution Date, the
aggregate Loan Balance of the Mortgage Loans has declined to less than 10% (the
"Optional Termination Date") of the sum of the Original Loan Group Balances. The
termination of the Trust Fund is required to be effected in a manner consistent
with applicable federal income tax regulations and its REMIC status.
S-67
<PAGE>
In addition to the foregoing, following a final determination by the
Internal Revenue Service or by a court of competent jurisdiction, in either 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 either the Master REMIC or
the Subsidiary REMIC does not and will no longer qualify as a "REMIC" pursuant
to Section 860D of the Code (the "Final Determination") the Trustee shall within
30 calendar days following such Final Determination adopt a plan of complete
liquidation of each of the Master REMIC and the Subsidiary REMIC as contemplated
by Section 860F(a)(4) of the Code and the Trust Fund shall be terminated within
90 days of the adoption of such plan.
THE TRUSTEE
Texas Commerce Bank National Association, a national banking association
organized and existing under the laws of the United States, will be named
Trustee pursuant to the Pooling and Servicing Agreement. The Trustee will
initially serve as custodian for the Files.
Pursuant to the Pooling and Servicing Agreement, the Trustee is required at
all times to be a banking association organized and doing business under the
laws of the United States of America or of any State, authorized under such laws
to exercise corporate trust powers and subject to supervision or examination by
federal or state authority. If at any time the Trustee shall cease to be
eligible in accordance with the provisions described in this paragraph, the
Trustee shall give notice of such ineligibility to the Master Servicer, the
Certificate Insurer and holders of the Certificates and shall resign in the
manner and with the effect specified in the Pooling and Servicing Agreement.
Pursuant to the Pooling and Servicing Agreement the Trustee will be entitled
to receive a monthly fee (the "Trustee Fee") equal to one twelfth of the product
of a percentage (The "Trustee Fee Rate") specified in the Pooling and Servicing
Agreement and the Class A Certificate Balance. The Trustee Fee will not be paid
by the Master Servicer out of the Master Servicer's Fee.
The Trustee may be removed upon the occurrence of any one of the following
events (whatever the reason for such event and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain events of bankruptcy or insolvency
on the part of the Trustee; or (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If any such event occurs and is continuing, then and in every such case (i)
the Certificate Insurer or (ii) with the prior written consent of the
Certificate Insurer (which is required not to be unreasonably withheld) (x) the
Master Servicer or (y) the holders of a majority of the percentage interests
represented by the Class A Certificates or, if there are no Class A Certificates
then outstanding, by a majority of the percentage interests represented by the
Class X-1, Class X-2 and Class R Certificates, may appoint a successor trustee.
The Trustee, or any successor trustee or trustees, may resign at any time by
giving written notice to the Master Servicer, the Depositor and the Certificate
Insurer. Upon receiving notice of resignation, the Master Servicer is required
to promptly appoint a successor trustee or trustees, with the consent of the
Certificate Insurer, meeting the eligibility requirements set forth above in the
manner set forth in the Pooling and Servicing Agreement. If no successor trustee
shall have been appointed and have accepted appointment within 30 days after the
giving of such notice of resignation, the resigning trustee may petition any
court of competent jurisdiction for the appointment of a successor trustee. Such
court may thereupon, after such notice, if any, as it may deem proper and
prescribe, appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall become effective upon the acceptance of appointment by such
successor trustee.
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<PAGE>
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or property securing the same
may at the time be located, the Master Servicer and the Trustee acting jointly
shall have the power and shall execute and deliver all instruments to appoint
one or more persons approved by the Trustee to act as co-trustee or co-trustees,
jointly with the Trustee, or separate trustee or separate trustees, of all or
any part of the Trust Fund, and to vest in such person or persons, in such
capacity, such title to the Trust Fund, or any part thereof, and, subject to the
provisions of the Pooling and Servicing Agreement, such powers, duties,
obligations, rights and trusts as the Master Servicer and the Trustee may
consider necessary or desirable.
YIELD AND PREPAYMENT CONSIDERATIONS
DELAY IN DISTRIBUTIONS ON THE FIXED RATE CERTIFICATES
The effective yield to holders of the Fixed Rate Certificates will be less
than the yields otherwise produced by their Pass-Through Rates and purchase
prices because (i) on each Distribution Date the interest payable thereon is the
interest accrued during the calendar month preceding the month of such
Distribution Date which ends 24 days prior to such Distribution Date and (ii)
during each Accrual Period, interest accrues on a Certificate Principal Balance
that is less than the Certificate Principal Balance of the Fixed Rate
Certificates actually outstanding for the first 24 days of such Accrual Period.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of such prepayment for the month
in which such prepayment is made. In addition, the application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"), to any
Mortgage Loan will adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on such
Mortgage Loan. See "Certain Legal Aspects of the Mortgage Loans--Soldiers' and
Sailors' Civil Relief Act of 1940" in the Prospectus. The Master Servicer is
obligated to pay from its own funds only those interest shortfalls attributable
to full and partial prepayments by the mortgagors on the Mortgage Loans, but
only to the extent of one-half of its Servicing Fee for the related Mortgage
Loans for the related Due Period. See "Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses" herein.
Accordingly, the effect of (i) any principal prepayments on the Mortgage Loans,
to the extent that any resulting shortfall (a "Prepayment Interest Shortfall")
exceeds any payments made by the Master Servicer from its own funds
("Compensating Interest"), or (ii) any shortfalls resulting from the application
of the Relief Act, will be to reduce the aggregate amount of interest collected
that is available for distribution to Certificateholders. Any such shortfalls
will be allocated among the Certificates as provided herein under "Description
of the Certificates--Distributions" and "--Overcollateralization Provisions."
The Policy will not cover any such shortfalls.
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Class A Certificates, the aggregate
amount of distributions on the Class A Certificates and the yield to maturity of
the Class A Certificates will be related to the rate and timing of payments of
the principal on the related Mortgage Loans. The rate of principal payments on
the Mortgage Loans will in turn be affected by the amortization schedules of
such Mortgage Loans and by the rate of principal repayments thereon (including
for this purpose payments resulting from refinancings, liquidations of the
Mortgage Loans due to defaults, casualties, condemnations and repurchases,
whether optional or required, by the Depositor or the Sellers, as the case may
be). The Mortgage Loans generally may be prepaid by the mortgagors at any time;
however, as described under "The Mortgage Pool" herein,
S-69
<PAGE>
with respect to a majority of the Mortgage Loans in each Loan Group, a
prepayment may subject the related mortgagor to a prepayment charge.
Prepayments, liquidations and repurchases of the Mortgage Loans will result
in distributions in respect of the principal to the holders of the Class A
Certificates then entitled to receive such distributions that otherwise would be
distributed over the remaining terms of the Mortgage Loans. See "Yield and
Prepayment Considerations" in the Prospectus. Since the rates of payment of
principal on the Mortgage Loans will depend on future events and a variety of
factors (as described more fully herein and in the Prospectus under "Yield and
Prepayment Considerations"), no assurance can be given as to such rate or the
rate or principal prepayments. The extent to which the yield to maturity of the
Class A Certificates may vary from the anticipated yield will depend upon the
degree to which Class A Certificates are purchased at a discount or premium and
the degree to which the timing of payments thereon is sensitive to prepayments
on the related Mortgage Loans. Further, in the case of Class A Certificates
purchased at a discount, an investor should consider the risk that a slower than
anticipated rate of principal payments on the related Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of Class A Certificates purchased at a premium, an
investor should consider the risk that a faster than anticipated rate of
principal payments could result in an actual yield to such investor that is
lower than the anticipated yield. In general, the earlier a prepayment of
principal on the Mortgage Loans, the greater will be the effect on the yield to
maturity of an investor in the related Class A Certificates. As a result, in the
case of Class A Certificates of any class, the effect on an investor's yield of
principal payments occurring on the related Mortgage Loans at a rate higher (or
lower) than the rate anticipated by the investor during the period immediately
following the issuance of such class of Class A Certificates would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments.
It is highly unlikely that the Mortgage Loans will prepay at any constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate, and the prepayment charges imposed in connection with prepayments on
certain of the Mortgage Loans will have an uncertain effect on the rate and
timing of prepayments on the Mortgage Loans in the related Loan Group. Moreover,
the timing of prepayments on the Mortgage Loans in each Loan Group may
significantly affect the actual yield to maturity on the related Class A
Certificates, even if the average rate of principal payments experienced over
time is consistent with an investor's expectation.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease. Other factors affecting prepayment of
mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. There can be no certainty as to the rate of prepayments on the
Mortgage Loans during any period or over the life of the Certificates. See
"Yield and Prepayment Considerations" in the Prospectus.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. In addition, default rates generally are higher
for mortgage loans used to refinance an existing mortgage loan. In the event of
a mortgagor's default on a Mortgage Loan, other than as provided by the Policy
as described herein, there can be no assurance that recourse will be available
beyond the specific Mortgaged Property pledged as security for repayment. See
"The Mortgage Pool--Underwriting Standards; Representations" herein.
BALLOON MORTGAGE LOANS
The Balloon Mortgage Loans in the Trust Fund will not be fully amortizing
over their terms to maturity, and will require substantial principal payments at
their stated maturity. Balloon Mortgage Loans
S-70
<PAGE>
involve a greater degree of risk than self-amortizing loans because the ability
of a mortgagor to make a Balloon Payment typically will depend upon its ability
either to fully refinance the Balloon Mortgage Loan or to sell the related
Mortgaged Property at a price sufficient to permit the mortgagor to make the
Balloon Payment. The ability of a mortgagor to accomplish either of these goals
will be affected by a number of factors, including the value of the related
Mortgaged Property, the level of available mortgage rates at the time of sale or
refinancing, the mortgagor's equity in the related Mortgaged Property, tax laws,
prevailing general economic conditions and the availability of credit for loans
secured by residential property. Because the ability of a mortgagor to make a
Balloon Payment typically will depend upon its ability either to refinance the
Balloon Mortgage Loan or to sell the related Mortgaged Property, there is a risk
that the Balloon Mortgage Loans may default at maturity. Any defaulted Balloon
Payment that extends the maturity of a Balloon Mortgage Loan may delay
distributions of principal on the related Class A Certificates and thereby
extend the weighted average life of the related Class A Certificates and, if the
related Class A Certificates were purchased at a discount, reduce the yield
thereon.
SPECIAL YIELD CONSIDERATIONS WITH RESPECT TO THE FIXED RATE CERTIFICATES
Because the Mortgage Rates on the Mortgage Loans in the Fixed Rate Group are
fixed, such rates will not change in response to changes in market interest
rates. Accordingly, if mortgage market interest rates or market yields for
securities similar to the Fixed Rate Certificates were to rise, the market value
of the Fixed Rate Certificates may decline.
SPECIAL YIELD CONSIDERATIONS WITH RESPECT TO THE ADJUSTABLE RATE CERTIFICATES
The Mortgage Rates on the Mortgage Loans in the Adjustable Rate Group adjust
semi-annually based upon the Index, whereas the Pass-Through Rate on the
Adjustable Rate Certificates adjusts monthly based upon One-Month LIBOR as
described under "Description of the Certificates--Calculation of One-Month
LIBOR" herein, subject to the Available Funds Cap and the Net Lifetime Cap, with
the result that increase in the Pass-Through Rate on the Adjustable Rate
Certificates may be limited for extended periods in a rising interest rate
environment. The interest due on the Mortgage Loans in the Adjustable Rate Group
during any Due Period may not equal the amount of interest that would accrue at
One-Month LIBOR plus the applicable spread on the Adjustable Rate Certificates
during the related Interest Accrual Period, however, any such shortfall will be
payable to the holders of the Adjustable Rate Certificates as limited by the Net
Lifetime Cap to the extent and in the priority provided herein. In addition, the
Index and One-Month LIBOR may respond differently to economic and market
factors. Thus, it is possible, for example, that if both One-Month LIBOR and the
Index rise during the same period, One-Month LIBOR may rise more rapidly than
the Index or may rise higher than the Index, potentially resulting in a Basis
Risk Excess to holders of the Adjustable Rate Certificates. The Policy does not
cover any Basic Risk Excess or Basic Risk Carryover Amounts.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the 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 lives of the Class A
Certificates will be influenced by the rate at which principal on the related
Mortgage Loans is paid, which may be in the form of scheduled payments or
prepayments (including prepayments of principal by the borrower as well as
amounts received by virtue of condemnation, insurance or foreclosure with
respect to the Mortgage Loans), and the timing thereof.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement (the "Prepayment
Assumption") assumes a prepayment rate for the Mortgage Loans in the Fixed Rate
Group of 100% of the Prepayment Vector, and a prepayment rate for the Mortgage
Loans in the Adjustable Rate Group of 25% CPR. A 100% Prepayment Vector assumes
that the outstanding balance of a pool of mortgage loans prepays at a rate of
3.00% CPR
S-71
<PAGE>
in the first month of the life of such pool, such rate increasing by an
additional approximate 1.545% CPR each month thereafter through the twelfth
month of the life of such pool, and such rate thereafter remaining at 20% CPR
for the remainder of the life of such pool. An 80% Prepayment Vector assumes,
for example, that the outstanding balance of a pool of mortgage loans prepays at
a rate of 2.40% CPR in the first month of the life of such pool, such rate
increasing by an additional approximate 1.236% CPR each month thereafter through
the twelfth month of the life of such pool, and such rate thereafter remaining
at 16% CPR for the remainder of the life of such pool. No representation is made
that the Mortgage Loans in the Fixed Rate Group will prepay at the
above-described rates or any other rate. The Constant Prepayment Rate model
("CPR"), assumes that the outstanding principal balance of a pool of mortgage
loans prepays at a specified constant annual rate of CPR. In generating monthly
cash flows, this rate is converted to an equivalent constant monthly rate. To
assume 20% CPR or any other CPR percentage is to assume that the stated
percentage of the outstanding principal balance of the pool is prepaid over the
course of a year. No representation is made that the Mortgage Loans in the
Adjusted Rate Group will prepay at 20% CPR or any other rate.
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Fixed Rate Group(1)............................... 0% 50% 100% 150%
Adjustable Rate Group(2).......................... 0% 15% 25% 40%
<CAPTION>
SCENARIO V
-------------
<S> <C>
Fixed Rate Group(1)............................... 200%
Adjustable Rate Group(2).......................... 50%
</TABLE>
- ------------------------------
(1) As a percentage of the Prepayment Assumption
(2) CPR
The table on page S-74 indicates the percentage of the initial Certificate
Principal Balance of the Class A Certificates of each class that would be
outstanding after each of the dates shown at various percentages of the
Prepayment Assumption and the corresponding weighted average lives of such
classes of Certificates. The table is based on the following assumptions (the
"Modeling Assumptions"): (i) the Mortgage Pool consists of thirteen Mortgage
Loans with the characteristics set forth in the table below, (ii) distributions
on such Certificates are received, in cash, on the 25th day of each month,
commencing in July 1997, (iii) the Mortgage Loans prepay at the percentages
indicated in the table above, (iv) no defaults or delinquencies occur in the
payment by mortgagors of principal and interest on the Mortgage Loans and no
shortfalls due to the application of the Relief Act are incurred, (v) none of
the Depositor, the Sellers, the majority holder of the Class R Certificates, the
Certificate Insurer, the Master Servicer or any other person purchases from the
Trust Fund any Mortgage Loan pursuant to any obligation or option under the
Agreement, except as indicated in footnote (2) in the tables, (vi) scheduled
monthly payments on the Mortgage Loans are received on the first day of each
month commencing in July 1997, and are computed prior to giving effect to any
prepayments received in the prior month, (vii) prepayments representing payment
in full of individual Mortgage Loans are received on the last day of each month
commencing in June 1997, and include 30 days' interest thereon, (viii) the
scheduled monthly payment for each Mortgage Loan is calculated based on its
principal balance, Mortgage Rate, original term to maturity and remaining term
to maturity such that the Mortgage Loan will amortize in amounts sufficient to
repay the remaining principal balance of such Mortgage Loan by its remaining
term to maturity, (ix) the Certificates are purchased on June 27, 1997, (x) the
Index remains constant at 5.8750% per annum and the Mortgage Rate on each
Adjustable Rate Group Mortgage Loan is adjusted on the next Adjustment Date (and
on subsequent Adjustment Dates if necessary) to equal the Index plus the
applicable Gross Margin, subject to the applicable Periodic Rate Cap, (xi)
one-month LIBOR remains constant at 5.6875% per annum, (xii) the monthly payment
on each Adjustable Rate Group Mortgage Loan is adjusted on the Due Date
immediately following the next Adjustment Date (and on subsequent Adjustment
Dates, if necessary) to equal a fully amortizing monthly payment as described in
clause (viii) above and (xiii) the sum of the Servicing Fee Rate and the Trustee
Fee Rate and the Insurance Premium Rate, expressed as a percentage, is equal to
0.73% per annum.
S-72
<PAGE>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
PRINCIPAL BALANCE GROSS ORIGINAL REMAINING MONTHS
AS OF THE MORTGAGE RATE AMORTIZING TERM AMORTIZING TERM TO NEXT GROSS MARGINS
CUT-OFF DATE ($) LOAN GROUP (%) (MONTHS) (MONTHS) ADJUSTMENT (%)
- --------------------- ----------- ------------- ----------------- ----------------- ----------------- -------------
<C> <S> <C> <C> <C> <C> <C>
90,526.13 Fixed 9.450 360 343(1) N/A N/A
2,135,027.09 Fixed 10.388 187 184 N/A N/A
15,501,446.78 Fixed 10.736 360 358 N/A N/A
748,219.84 Adjustable 9.750 360 355 1 6.000
2,765,970.96 Adjustable 9.505 360 356 2 6.162
4,793,479.47 Adjustable 9.301 360 357 3 6.034
5,926,886.52 Adjustable 9.285 360 358 4 5.809
6,860,829.13 Adjustable 9.378 360 359 5 5.835
2,226,989.12 Adjustable 8.969 360 360 6 5.898
1,902,824.03 Adjustable 9.681 360 359 11 6.051
60,441,071.68 Adjustable 10.175 360 358 22 6.044
1,405,243.43 Adjustable 10.030 360 357 33 6.301
46,485.82 Adjustable 11.750 360 359 59 7.000
<CAPTION>
INITIAL
PRINCIPAL BALANCE MAXIMUM PERIODIC SUBSEQUENT
AS OF THE MORTGAGE RATE RATE PERIODIC RATE CAP
CUT-OFF DATE ($) (%) CAP (%) (%)
- --------------------- ------------- ------------- -----------------
<C> <C> <C> <C>
90,526.13 N/A N/A N/A
2,135,027.09 N/A N/A N/A
15,501,446.78 N/A N/A N/A
748,219.84 16.250 1.000 1.000
2,765,970.96 16.182 1.124 1.034
4,793,479.47 15.843 1.029 1.010
5,926,886.52 15.793 1.010 1.000
6,860,829.13 15.878 1.033 1.000
2,226,989.12 15.469 1.000 1.000
1,902,824.03 16.227 1.000 1.000
60,441,071.68 16.674 2.992 1.000
1,405,243.43 16.530 3.000 1.000
46,485.82 18.250 3.000 1.000
</TABLE>
- ------------------------
(1) Remaining term to stated maturity is 163 months.
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the table. Any such
discrepancy may have an effect upon the percentages of the initial Class
Certificate Balance outstanding (and the weighted average life) of each class of
the Class A Certificate set forth in the table. In addition, since the actual
Mortgage Loans included in each Loan Group will have characteristics that differ
from those assumed in preparing the table set forth below and, with respect to
the Adjustable Rate Certificates, since it is not likely the level of the Index
will remain constant as assumed, the Class A Certificates of each class may
mature earlier or later than indicated by the table. Based on the foregoing
assumptions, the table indicates the weighted average life of each class of the
Class A Certificates and sets forth the percentages of the initial Class
Certificate Balance of each such class of the Class A Certificates that would be
outstanding after each of the Distribution Dates shown, at various percentages
of the Prepayment Assumption. Neither the prepayment model used herein nor any
other prepayment model or assumption purports to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans included in either Loan
Group. Variations in the prepayment experience and the balance of the related
Mortgage Loans that prepay may increase or decrease the percentages of initial
Class Certificate Balances (and weighted average lives) shown in the following
table. Such variations may occur even if the average prepayment experience of
all such Mortgage Loans equals any of the specified percentages of the
prepayment assumption.
S-73
<PAGE>
PERCENT OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING AT THE
SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-1 CERTIFICATES
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DISTRIBUTION DATE SCENERIO I SCENERIO II SCENERIO III SCENERIO IV SCENERIO V
- ----------------------------------------------------- ------------- ------------- --------------- --------------- -------------
Closing Date ............. 100 100 100 100 100
June 25, 1998 ............. 97 90 83 75 68
June 25, 1999 ............. 96 80 65 52 39
June 25, 2000 ............. 95 71 51 36 24
June 25, 2001 ............. 94 63 40 25 14
June 25, 2002 ............. 93 56 32 17 8
June 25, 2003 ............. 92 49 25 12 5
June 25, 2004 ............. 90 44 20 8 3
June 25, 2005 ............. 89 39 16 5 1
June 25, 2006 ............. 87 34 12 4 1
June 25, 2007 ............. 85 30 10 2 0
June 25, 2008 ............. 83 26 7 1 0
June 25, 2009 ............. 80 23 6 1 0
June 25, 2010 ............. 78 20 4 0 0
June 25, 2011 ............. 74 17 3 0 0
June 25, 2012 ............. 71 15 2 0 0
June 25, 2013 ............. 68 13 2 0 0
June 25, 2014 ............. 66 11 1 0 0
June 25, 2015 ............. 63 10 1 0 0
June 25, 2016 ............. 60 8 0 0 0
June 25, 2017 ............. 57 7 0 0 0
June 25, 2018 ............. 53 6 0 0 0
June 25, 2019 ............. 49 5 0 0 0
June 25, 2020 ............. 45 4 0 0 0
June 25, 2021 ............. 40 3 0 0 0
June 25, 2022 ............. 35 2 0 0 0
June 25, 2023 ............. 29 2 0 0 0
June 25, 2024 ............. 23 1 0 0 0
June 25, 2025 ............. 15 0 0 0 0
June 25, 2026 ............. 7 0 0 0 0
June 25, 2027 ............. 0 0 0 0 0
Weighted Average Life
in Years (1)........................................ 19.69 7.80 4.33 2.90 2.15
Weighted Average Life
in Years (2)........................................ 19.66 6.91 3.80 2.47 1.84
<CAPTION>
CLASS A-2 CERTIFICATES
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DISTRIBUTION DATE SCENERIO I SCENERIO II SCENERIO III SCENERIO IV SCENERIO V
- ----------------------------------------------------- ------------- ------------- --------------- --------------- -------------
Closing Date ............. 100 100 100 100 100
June 25, 1998 ............. 96 82 72 57 47
June 25, 1999 ............. 96 68 53 33 22
June 25, 2000 ............. 95 57 39 20 12
June 25, 2001 ............. 95 48 29 12 6
June 25, 2002 ............. 94 41 22 7 3
June 25, 2003 ............. 94 34 16 4 1
June 25, 2004 ............. 93 29 12 2 0
June 25, 2005 ............. 92 24 9 1 0
June 25, 2006 ............. 91 20 7 0 0
June 25, 2007 ............. 90 17 5 0 0
June 25, 2008 ............. 89 14 3 0 0
June 25, 2009 ............. 87 12 2 0 0
June 25, 2010 ............. 86 10 2 0 0
June 25, 2011 ............. 84 8 1 0 0
June 25, 2012 ............. 82 7 1 0 0
June 25, 2013 ............. 80 6 0 0 0
June 25, 2014 ............. 77 5 0 0 0
June 25, 2015 ............. 74 4 0 0 0
June 25, 2016 ............. 71 3 0 0 0
June 25, 2017 ............. 68 2 0 0 0
June 25, 2018 ............. 64 2 0 0 0
June 25, 2019 ............. 59 1 0 0 0
June 25, 2020 ............. 54 1 0 0 0
June 25, 2021 ............. 48 1 0 0 0
June 25, 2022 ............. 42 0 0 0 0
June 25, 2023 ............. 35 0 0 0 0
June 25, 2024 ............. 27 0 0 0 0
June 25, 2025 ............. 19 0 0 0 0
June 25, 2026 ............. 9 0 0 0 0
June 25, 2027 ............. 0 0 0 0 0
Weighted Average Life
in Years (1)........................................ 21.45 5.49 3.23 1.85 1.37
Weighted Average Life
in Years (2)........................................ 21.41 5.16 3.00 1.73 1.28
</TABLE>
- ------------------------
(1) The weighted average life of a Certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from the
date of issuance of the Certificate to the related Distribution Date, (b)
adding the results and (c) dividing the sum by the initial Class Certificate
Balance of the Certificate.
(2) Calculated pursuant to footnote one but assumes the majority holder of the
Class R Certificates exercises its option to purchase the Mortgage Loans.
See "Pooling and Servicing Agree-
ment--Termination; Retirement of the Certificate" herein.
There is no assurance that prepayments of the Mortgage Loans will conform to
any of the levels of the Prepayment Assumption indicated in the table above, or
to any other level, or that the actual weighted average life of the Class A
Certificates of any class will conform to any of the weighted average life
S-74
<PAGE>
assumptions set forth in the table above. Furthermore, the information contained
in the table with respect to the weighted average life of the Class A
Certificates of each class is not necessarily indicative of the weighted average
life that might be calculated or projected under different or varying prepayment
or Index level assumptions.
The characteristics of the Mortgage Loans in each Loan Group will differ
from those assumed in preparing the table above. In addition, it is unlikely
that any Mortgage Loan will prepay at any constant percentage until maturity,
that all of the Mortgage Loans will prepay at the same rate or that, in the case
of the Adjustable Rate Group, the level of the Index will remain constant or at
any level for any period of time. The timing of changes in the rate of
prepayments may significantly affect the actual yield to maturity to investors,
even if the average rate of principal prepayments and, in the case of the
Adjustable Rate Group, the level of the Index is consistent with the
expectations of investors.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of the Class A
Certificates offered hereunder. This discussion and the discussion under
"Federal Income Tax Consequences" in the Prospectus is directed solely to
Certificateholders that hold the Certificates as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986 (the "Code") and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinion referred to
below, are subject to change or differing interpretations, which could apply
retroactively. Taxpayers and preparers of tax returns (including those filed by
a REMIC) should be aware that under applicable Treasury regulations a provider
of advice of specific issues of law is not considered an income tax return
preparer unless the advice (i) is given with respect to events that have
occurred at the time the advice is rendered and is not given with respect to the
consequences of contemplated actions, and (ii) is directly relevant to the
determination of an entry on a tax return. Accordingly, taxpayers should consult
their own tax advisors and tax return preparers regarding the preparation of any
item on a tax return, even where the anticipated tax treatment has been
discussed herein. In addition to the federal income tax consequences described
herein, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
Certificates. See "State and Other Tax Consequences" in the Prospectus.
Certificateholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
Upon the issuance of the Class A Certificates, Latham & Watkins, counsel to
the Depositor, will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as two separate REMICs
under the Code.
For federal income tax purposes, the Class A Certificates and the Class X
Certificates will represent "regular interests" in the Master REMIC and will
generally be treated as representing ownership of debt instruments issued by the
Master REMIC and the Class R Certificates will constitute the sole class of
"residual interests" in the REMIC. See "Federal Income Tax
Consequences--Taxation of the REMIC and Its Holders" in the Prospectus. Holders
of Class A Certificates and Class X Certificates must report income attributable
to such investment under an accrual method of accounting, regardless of their
usual method of accounting for federal income tax purposes.
For federal income tax reporting purposes, the Class A Certificates may be
treated as having been issued with original issue discount. The prepayment
assumption that will be used with respect to the Class A-1 Certificates and the
Class A-2 Certificates in determining the rate of accrual of original issue
discount, market discount and premium, if any, for federal income tax purposes
will be based on the
S-75
<PAGE>
assumption that, subsequent to the date of any determination the Mortgage Loans
will prepay at a rate equal to 100% of the Prepayment Vector and 25% CPR. No
representation is made that the Mortgage Loans will prepay at this rate or at
any other rate. See "Federal Income Tax Consequen-
ces--Taxation of Debt Securities--Interest and Acquisition Discount" in the
Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers of
the Class A Certificates should be aware that the OID Regulations do not
adequately address certain issues relevant to securities such as the Class A
Certificates. In addition, there is considerable uncertainty concerning the
application of the OID Regulations to REMIC Regular Certificates such as the
Class A Certificates that provide for payments based on a variable rate. It is
possible that the IRS could determine that some or all of the scheduled interest
payments are not "qualified stated interest" and should be included in the Class
A Certificates' stated redemption price at maturity (i.e. principal) resulting
in the Class A Certificates having original issue discount. A determination that
the Class A Certificates are issued with original issue discount could cause the
holders of Class A Certificates to have taxable interest income in respect of
their investment before they receive cash distributions to which such income
relates. Because of the uncertainty concerning the application of Section
1272(a)(6) of the Code to such Certificates and because the rules of the OID
Regulations relating to debt instruments having a variable rate of interest are
limited in their application in ways that could preclude their application to
such Certificates even in the absence of Section 1272(a)(6) of the Code, the IRS
could assert that the Class A-1 Certificates and Class A-2 Certificates are
issued with original issue discount or should be governed by the rules
applicable to debt instruments having contingent payments or by some other
method not yet set forth in regulations. Prospective purchasers of the Class A
Certificates are advised to consult their tax advisors concerning the tax
treatment of such Certificates.
A reasonable method of reporting original issue discount with respect to the
Class A Certificates if the IRS determines such Certificates do not bear
qualified stated interest and are therefore issued with original issue discount,
generally would be to report all income with respect to such Certificates as
original issue discount for each period, computing such original issue discount
(i) by assuming that the value of the applicable index will remain constant for
purposes of determining the original yield to maturity of, and projecting future
distributions on, each Class of such Certificates, thereby treating such
Certificates as fixed rate instruments to which the original issue discount
computation rules described in the Prospectus can be applied, and (ii) by
accounting for any positive or negative variation in the actual value of the
applicable index in any period from its assumed value as a current adjustment to
original issue discount with respect to such period. See "Federal Income Tax
Consequences--Taxation of Debt Securities-- Interest and Acquisition Discount"
in the Prospectus.
The Class A Certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of a Class A Certificate
will be treated as holding a certificate with amortizable bond premium will
depend on such Certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of the Class A Certificates should consult their tax
advisors regarding the possibility of making an election to amortize such
premium. See "Federal Income Tax Consequences--General--Premium" in the
Prospectus.
The Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Class A Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code generally to the extent that such Class A
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. To the extent the manufactured housing loans meet the requirements of
Section 25(e)(10) of the Code, the Class A Certificates will be treated as
assets described in the foregoing sections of the Code. Moreover, the Class A
Certificates will represent qualifying assets under Section
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<PAGE>
860G(a)(3) of the Code if acquired by a REMIC within the time periods prescribed
by the Code and, effective September 1, 1997, will be treated as "permitted
assets" for a financial securitization investment trust ("FASIT") under Section
860L(c)(1)(G) of the Code. See "Servicing the Mortgage
Loans--Termination" herein and "Federal Income Tax
Consequences--General--Taxation of Debt
Securities--Status as Real Property Loans" in the Prospectus.
It is possible that the Trust Fund could be considered to be a "single class
REMIC." In that case, a portion of its servicing, administrative and other
non-interest expenses will be allocated as a separate item to those Class A and
Class X Certificateholders that are pass-through interest holders. In general, a
"single class REMIC" is a REMIC that either (i) would be classified as an
investment trust in the absence of a REMIC election, or (ii) is substantially
similar to an investment trust and was structured with the principal purpose of
avoiding the allocation of "allocable investment expenses" (that is, expenses
normally allowable under Section 212 of the Code, which may include servicing
and administrative fees) to holders of REMIC regular interests. Under temporary
Treasury regulations, each holder of a regular or a residual interest in a
single class REMIC is allocated (i) a share of the REMIC's allocable investment
expenses and (ii) a corresponding amount of additional income. Section 67 of the
Code permits an individual trust or estate to deduct miscellaneous itemized
expenses (including Section 212 expenses) only to the extent such expenses, in
the aggregate, exceed 2% of such holder's adjusted gross income. Consequently,
an individual, trust or estate that holds a regular interest in a single class
REMIC (either directly or through a pass-through entity) will recognize
additional income with respect to such regular interest to the extent that its
share of allocable investment expenses, when combined with its other
miscellaneous itemized deductions, is less than 2% of its adjusted gross income.
Any such additional income would be treated as interest income. In addition,
Code Section 68 provides that the amount of itemized deduction otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount ($121,200, or, in the case of a separate return of
a married individual within the meaning of Code Section 7703 for the taxable
year 1997, $60,100, each as adjusted for inflation for each year thereafter)
will be reduced by the lesser of (i) 3% of the excess of adjusted gross income
over the applicable amount, or (ii) 80% of the amount of itemized deductions
otherwise allowable for each taxable year. The amount of such additional taxable
income recognized by holders who are subject to the limitations of either
Section 67 or Section 68 of the Code may be substantial and may reduce the
after-tax yield to such holders of an investment in the Certificates of an
affected REMIC also should be aware that miscellaneous itemized deductions,
including allocable investment expenses attributable to a single class REMIC are
not deductible for purposes of the alternative minimum tax ("AMT"). Absent
further clarification as to whether the Trust Fund would be a single-class
REMIC, the tax returns of the REMICs and reports to Certificateholders will be
prepared on the basis that it will not be so classified. Prospective purchasers
of Class A Certificates that are individuals or pass-through entities having
individual members are advised to consult their tax advisors as to the
applicability and effect of the single class REMIC rules.
The holders of the Residual Certificates must include the taxable income of
the REMIC in their federal taxable income. The resulting tax liability of the
holders may exceed cash distributions to such holders during certain periods.
All or a portion of the taxable income from a Residual Certificate recognized by
a holder may be treated as "excess inclusion" income which, with limited
exceptions, is subject to U.S. federal income tax.
Prospective purchasers of a Residual Certificate should consider carefully
the tax consequences of an investment in Residual Certificates discussed in the
Prospectus and should consult their own tax advisors with respect to those
consequences. See "Federal Income Tax Consequences--Taxation on Holders of
Residual Interest Securities" in the Prospectus. Specifically, prospective
holders of Residual Certificates should consult their tax advisors regarding
whether, at the time of acquisition, a Residual Certificate will be treated as a
"noneconomic" residual interest, a "non-significant value" residual interest and
a "tax avoidance potential" residual interest. See "Federal Income Tax
Consequences--Taxation of Holders of
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<PAGE>
Residual Interest Securities" in the Prospectus. Additionally, for information
regarding Prohibited Transactions and Treatment of Realized Losses, see "Federal
Income Tax Consequences" in the Prospectus.
For further information regarding federal income tax consequences of
investing in the Class A Certificates, see "Federal Income Tax Consequences" in
the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
between the Depositor and the Underwriter (the "Underwriting Agreement"), the
Underwriter has agreed to purchase 100% of the aggregate principal amount of
each Class of Class A Certificates.
The Underwriting Agreement provides that the obligations of the Underwriter
to pay for and accept delivery of the Class A Certificates are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The Underwriter is obligated to take and pay for all of the Class A
Certificates to be purchased by them if any are taken.
The Underwriter and the Depositor have agreed that the closing of the sale
of the Class A Certificates to the Underwriter will occur six business days
after the date of this Prospectus Supplement or such later date as they may
mutually agree.
The Underwriter initially proposes to offer all or part of the Class A
Certificates directly to the public at offering prices for each series as set
forth herein and may offer a portion of the Class A Certificates to dealers at a
price which represents a concession not in excess of the of the amounts
(approximate) set forth below for the respective Class of the Class A
Certificates. The Underwriter may allow, and such dealers may reallow, a
concession not in excess of the amounts set forth below for the respective Class
of the Class A Certificates for certain dealers. After the initial public
offering, the public offering prices and such concessions may from time to time
be varied by the Underwriters.
<TABLE>
<CAPTION>
CONCESSIONS REALLOWANCE
TO DEALERS CONCESSION
----------- -----------
<S> <C> <C>
Class A-1.......................................................... 0.18% 0.12%
Class A-2.......................................................... 0.18% 0.12%
</TABLE>
The Sellers have agreed to indemnify the Underwriter against certain
liabilities including liabilities under the Securities Act of 1933, as amended.
The Underwriter intends to make a secondary market in the Class A
Certificates, but has no obligation to do so. There can be no assurance that a
secondary market for the Class A Certificates will develop or, if it does
develop, that it will continue or that it will provide holders of the Class A
Certificates with a sufficient level of liquidity of, or trading markets for,
the Class A Certificates.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Act.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Class A
Certificates to purchase the Mortgage Loans from the Sellers.
REPORT OF EXPERTS
The consolidated financial statements of Financial Security Assurance Inc.
for the three years ended December 31, 1996, incorporated by reference into this
Prospectus Supplement have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report thereon incorporated by reference
herein in reliance upon the authority of such firm as experts in accounting and
auditing.
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<PAGE>
LEGAL INVESTMENT
The Class A Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") for
so long as they are rated in at least the second highest rating category by one
or more nationally recognized statistical rating agencies, and, as such, are
legal investments for certain entities to the extent provided in SMMEA. SMMEA
provides, however, that states could override its provision on legal investment
and restrict or condition investment in mortgage related securities by taking
statutory action on or prior to October 3, 1991.
The Depositor makes no representations as to the proper characterization of
the Class A Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Class A Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Class A Certificates. Accordingly, all institutions
whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their legal advisors in determining whether and to what
extent the Class A Certificates constitute a legal investment or are subject to
investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the Code impose certain requirements on employee benefit plans and certain
other retirement plans and arrangements (including, but not limited to,
individual retirement accounts and annuities), as well as on collective
investment funds and certain separate and general accounts in which such plans
or arrangements are invested (all of which are hereinafter referred to as a
"Plan"). Generally, ERISA applies to investments made by Plans. Among other
things, ERISA requires that the assets of Plans be held in trust and that the
trustee, or other duly authorized fiduciary, have exclusive authority and
discretion to manage and control the assets of such Plans. ERISA also imposes
certain duties on persons who are fiduciaries of Plans. Under ERISA, any person
who exercises any authority or control respecting the management or disposition
of the assets of a Plan is considered to be a fiduciary of such Plan (subject to
certain exceptions not here relevant).
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Certificates should determine whether such an investment is permitted under the
governing Plan instruments and is prudent and appropriate for the Plan in view
of its overall investment policy and the composition and diversification of its
portfolio. More generally, any Plan fiduciary which proposes to cause a Plan to
acquire any of the Certificates or any other person proposing to use the assets
of a Plan to acquire any of the Certificates should consult with its counsel
with respect to the potential consequences under ERISA and the Code (including
under the prohibited transactions rules described below) of the acquisition and
ownership of such Certificates.
Certain employee benefit plans, such as governmental plans and church plans
(if no election has been made under section 410(d) of the Code), are not subject
to the restrictions of ERISA, and assets of such plans may be invested in the
Certificates without regard to the ERISA considerations described below, subject
to other applicable federal and state law. However, any such governmental or
church plan which is qualified under section 401(a) of the Code and exempt from
taxation under section 501(a) of the Code is subject to the prohibited
transaction rules set forth in section 503 of the Code.
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<PAGE>
PROHIBITED TRANSACTIONS
GENERAL
Sections 406 and 407 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of a Plan and "disqualified persons" (within
the meaning of the Code) and "parties in interest" (within the meaning of ERISA,
collectively "Parties in Interest") who have certain specified relationships to
the Plan, unless an exemption applies (see below). Therefore, a Plan fiduciary
or any other person using the assets of a Plan considering an investment in the
Certificates should also consider whether such an investment might constitute or
give rise to a prohibited transaction under ERISA or the Code, or whether there
is an applicable exemption.
PLAN ASSET REGULATION
The United States Department of Labor ("DOL") has issued final regulations
defining the "assets" of a Plan for purposes of ERISA and the prohibited
transaction provisions of the Code (29 C.F.R. Section 2510.3-101, the "Plan
Asset Regulation"). The Plan Asset Regulation describes the circumstances under
which the assets of an entity in which a Plan invests will be considered to be
"plan assets" such that any person who exercises control over such assets would
be subject to ERISA's fiduciary standards. Under the Plan Asset Regulation,
generally when a Plan invests in another entity, the Plan's assets do not
include, solely by reason of such investment, any of the underlying assets of
the entity. However, the Plan Asset Regulation provides that, if a Plan acquires
an "equity interest" in an entity that is neither a "publicly-offered security"
(defined as a security which is widely held, freely transferable and registered
under the Securities Exchange Act of 1934, as amended) nor a security issued by
an investment company registered under the Investment Company Act of 1940, as
amended, the assets of the entity will be treated as assets of the Plan unless
certain exceptions apply. If the Certificates were deemed to be equity interests
and no statutory, regulatory or administrative exemption applies, the Trust Fund
could be considered to hold plan assets by reason of a Plan's investment in the
Certificates. Such plan assets would include an undivided interest in any assets
held by the Trust Fund. In such an event, the Trustee and other persons, in
providing services with respect to the Trust Fund's assets, may be Parties in
Interest with respect to such Plans, subject to the fiduciary responsibility
provisions of ERISA, including the prohibited transaction provisions with
respect to transactions involving the Trust Fund's assets.
Under the Plan Asset Regulation, the term "equity interest" is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." Although the Plan Asset Regulation is silent with respect to the
question of which law constitutes "applicable local law" for this purpose, the
DOL has stated that these determinations should be made under the state law
governing interpretation of the instrument in question. In the preamble to the
Plan Assets Regulation, the DOL declined to provide a precise definition of what
features are equity features or the circumstances under which such features
would be considered "substantial," noting that the question of whether a plan's
interest has substantial equity features is an inherently factual one, but that
in making a determination it would be appropriate to take into account whether
the equity features are such that a Plan's investment would be a practical
vehicle for the indirect provision of investment management services.
THE UNDERWRITER'S EXEMPTION
The DOL has granted to Morgan Stanley & Co. Incorporated ("Morgan Stanley")
an administrative exemption (Prohibited Transaction Exemption 90-24, 55 Fed.
Reg. 20,548 (1990) (the "Exemption") from certain of the prohibited transaction
rules of ERISA and the related excise tax provisions of Section 4975 of the Code
with respect to the initial purchase, the holding and the subsequent resale by
Plans of certificates in pass-through trusts that consist of certain
receivables, loans, and other obligations that meet
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<PAGE>
the conditions and requirements of the Exemption. Morgan Stanley believes that
the Exemption will apply to the acquisition and holding of Class A Certificates
by Plans.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the Class A Certificates by a Plan is on terms
(including the price for such Class A 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 Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust Fund;
(3) the Class A 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 one of Standard & Poor's, Moody's, Duff & Phelps Inc.
("Duff & Phelps") or Fitch Investors Service, L.P. ("Fitch");
(4) the Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Class A Certificates represents not
more than reasonable compensation for underwriting such Class A
Certificates; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Mortgage Loans to the Trust Fund
represents not more than the fair market value of such Mortgage Loans; the
sum of all payments made to and retained by the Master Servicer and any
other servicer represents not more than reasonable compensation for such
person's services under the Pooling and Servicing Agreement and
reimbursements of such person's reasonable expenses in connection therewith;
and
(6) the Plan investing in the Class A Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
The Trust Fund must also meet the following requirements:
(i) the corpus of the Trust Fund must consists solely of assets of
the type that have been included in other investment pools;
(ii) certificates evidencing interests in such other investment pools
must have been rated in one of the three highest rating categories of
S&P, Moody's, Fitch or Duff & Phelps for at least one year prior to the
Plan's acquisition of the Class A Certificates; and
(iii) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at least
one year prior to any Plan's acquisition of the Class A Certificates.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when any person who has
discretionary authority or renders investment advice with respect to the
investment of plan assets causes a Plan to acquire certificates in a trust,
provided that, among other requirements: (i) such person (or its affiliate) is
an obligor with respect to five percent or less of the fair market value of the
obligations or receivables contained in the trust; (ii) the Plan is not a plan
with respect to which any member of the Restricted Group (as defined below) is
the "plan sponsor" (as defined in Section 3(16)(B) of ERISA); (iii) in the case
of an acquisition in connection with the initial issuance of certificates, at
least fifty percent of each class of certificates in which Plans have invested
is acquired by persons independent of the Restricted Group (as defined below)
and at least fifty percent of the aggregate interest in the trust fund is
acquired by persons independent of the Restricted Group; (iv) 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 (v) immediately after the
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<PAGE>
acquisition, no more than twenty-five percent of the assets of the Plan with
respect to which such person has discretionary authority or renders investment
advice are invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity. The Exemption does
not apply to Plans sponsored by the Sellers, the Depositor, the Underwriter, the
Trustee, the Master Servicer, the Certificate Insurer, any obligor with respect
to Mortgage Loans included in the Trust Fund constituting more than five percent
of the aggregate unamortized principal balance of the assets in the Trust Fund,
or any affiliate of any of such parties (the "Restricted Group").
The Exemption may apply to the acquisition, holding and transfer of the
Class A Certificates by Plans if all of the conditions of the Exemption are met,
including those within the control of the investor. As of the date hereof, there
is no single Mortgage Loan included in the Trust Fund that constitutes more than
five percent of the aggregate unamortized principal balance of the assets of the
Trust Fund.
INSURANCE COMPANY PURCHASERS
Purchasers that are insurance companies should consult with their legal
advisors with respect to the applicability of Prohibited Transaction Class
Exemption ("PTE") 95-60, regarding transactions by insurance company general
accounts. In addition to any exemption that may be available under PTE 95-60 for
the purchase and holding of Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the Code, for
transactions involving an insurance company general account. Pursuant to Section
401(c) of ERISA, the DOL is required to issue final regulations ("401(c)
Regulations") no later than December 31, 1997 which are to provide guidance for
the purpose of determining, in cases where insurance policies supported by an
insurer's general account are issued to or for the benefit of a Plan on or
before December 31, 1998, which general account assets constitute plan assets.
Section 401(c) of ERISA generally provides that, until the date which is 18
months after the 401(c) Regulations become final, no person shall be subject to
liability under Part 4 of Title I of ERISA and Section 4975 of the Code on the
basis of a claim that the assets of an insurance company general account
constitute plan assets, unless (i) as otherwise provided by the Secretary of
Labor in the 401(c) Regulations to prevent avoidance of the regulations or (ii)
an action is brought by the Secretary of Labor for certain breaches of fiduciary
duty which would also constitute a violation of federal or state criminal law.
Any assets of an insurance company general account which support insurance
policies issued to a Plan after December 31, 1998 or issued to Plans on or
before December 31, 1998 for which the insurance company does not comply with
the 401(c) Regulations may be treated as plan assets. In addition, because
Section 401(c) does not relate to insurance company separate accounts, separate
account assets are still treated as plan assets of any Plan invested in such
separate account. Insurance companies contemplating the investment of general
account assets in the Certificates should consult with their legal counsel with
respect to the applicability of Section 401(c) of ERISA, including the general
account's ability to continue to hold the Certificates after the date which is
18 months after the date the 401(c) Regulations become final.
LEGAL MATTERS
The validity of the Certificates and certain income tax matters will be
passed upon for the Depositor by Latham & Watkins. In addition, Latham & Watkins
will pass upon certain legal matters on behalf of the Underwriter. Morrison &
Foerster LLP will pass upon certain legal matters on behalf of the Sellers.
RATINGS
It is a condition to the issuance to the Class A Certificates that they be
rated AAA by S&P and Aaa by Moody's.
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<PAGE>
The ratings assigned by Moody's to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the mortgage loans
by the related certificateholders under the agreements pursuant to which such
certificates are issued. Moody's ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on the mortgage pool is adequate to make the
payments required by such certificates. Moody's ratings on such certificates do
not, however, constitute a statement regarding frequency of payments of the
mortgage loans.
The ratings assigned by S&P to mortgage pass-through certificates address
the likelihood of the receipt of all distributions on the mortgage loans by the
related Certificateholders under the agreements pursuant to which such
certificates are issued. S&P's ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on such mortgage pool is adequate to make payments
required by such certificates. S&P's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans.
The ratings of the Rating Agencies do not address (i) the possibility that,
as a result of principal prepayments, Certificateholders may receive a lower
than anticipated yield or (ii) the ability of the Trust Fund to pay any Basis
Risk Carryover Amount.
The security ratings assigned to the Class A Certificates should be
evaluated independently from similar ratings on other types of securities. 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 Rating Agencies.
The Depositor has not requested a rating of the Class A Certificates by any
rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Class A
Certificates, or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Class A
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
S-83
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ------------------------------------------------------------------------------------------ ----------------------
<S> <C>
401(c) Regulations........................................................................ S-82
Accrual Period............................................................................ S-10
Adjustable Rate Group..................................................................... S-8, S-25
Adjustable Rate Margin.................................................................... S-6
Adjustable Rate Certificates.............................................................. S-6, S-45
Adjustment Date........................................................................... S-9, S-32
AMT....................................................................................... S-77
Agreement................................................................................. S-54
Available Funds Cap....................................................................... S-6
Available Funds Shortfall................................................................. S-48
Available Funds........................................................................... S-51
Balloon Payment........................................................................... S-26
Balloon Mortgage Loan..................................................................... S-9, S-26
Basic Risk Excess......................................................................... S-12
Basic Risk Carryover Amount............................................................... S-12
BCD Mortgage Loan......................................................................... S-61
beneficial owner.......................................................................... S-51
BIF....................................................................................... S-46
Book-Entry Certificates................................................................... S-51
Business Day.............................................................................. S-11, S-54
Carry Forward Amount...................................................................... S-12
Cede...................................................................................... S-8
Cedel..................................................................................... S-7
Certificate Group......................................................................... S-11
Certificate Owners........................................................................ S-7, S-51
Certificate Insurer....................................................................... S-7, S-55
Certificateholders........................................................................ S-45
Certificates.............................................................................. S-6, S-45
Chase..................................................................................... S-8
Citibank.................................................................................. S-8
Class A Certificates...................................................................... S-6, S-10, S-45
Class R Certificates...................................................................... S-10, S-45
Class X Certificates...................................................................... S-10, S-45
Class Certificate Balance................................................................. S-6
Class A Distribution Amount............................................................... S-10
Class R Optionholder...................................................................... S-19
Class..................................................................................... S-6
Closing Date.............................................................................. S-7
Code...................................................................................... S-20, S-75
Collection Account........................................................................ S-17, S-45
Compensating Interest..................................................................... S-67, S-69
CPR....................................................................................... S-72
Current Interest.......................................................................... S-11
Curtailment............................................................................... S-65
Cut-Off Date.............................................................................. S-7, S-25
Debt Ratio................................................................................ S-41
Definitive Certificate.................................................................... S-53
Depositor................................................................................. S-7
Determination Date........................................................................ S-14
Distribution Date......................................................................... S-7, S-10
Distribution Account...................................................................... S-47
DOL....................................................................................... S-80
</TABLE>
S-84
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ------------------------------------------------------------------------------------------ ----------------------
<S> <C>
DTC....................................................................................... S-7, S-51
Due Date.................................................................................. S-26
Due Period................................................................................ S-14
Duff & Phelps............................................................................. S-81
Eligible Account.......................................................................... S-46
ERISA..................................................................................... S-20, S-79
Euroclear................................................................................. S-7
European Depositaries..................................................................... S-7, S-51
Excess Subordinated Amount................................................................ S-58
Exemption................................................................................. S-80
FASIT..................................................................................... S-77
FHLML..................................................................................... S-66
Final Determination....................................................................... S-68
Final Scheduled Distribution Amount....................................................... S-19
Fitch..................................................................................... S-81
Fixed Rate Certificates................................................................... S-6, S-45
Fixed Rate Group.......................................................................... S-8, S-45
FNMA...................................................................................... S-66
Full Documentation........................................................................ S-42
Gross Margin.............................................................................. S-9, S-32
HUD....................................................................................... S-61
Index..................................................................................... S-26
Insurance Premium Amount.................................................................. S-12
Insurance Premium Rate.................................................................... S-12
Insured Payments.......................................................................... S-16
Introductory Rate Loans................................................................... S-32
IRS....................................................................................... S-76
LIBOR Determination Date.................................................................. S-50
LIBOR Business Day........................................................................ S-51
Liquidated Mortgage Loan.................................................................. S-14
Lite Documentation........................................................................ S-42
Loan Balance.............................................................................. S-60
Loan Purchase Price....................................................................... S-60
Loan Group................................................................................ S-8, S-55
Master Servicer........................................................................... S-7, S-, S-61
Maximum Mortgage Rate..................................................................... S-32
Minimum Mortgage Rate..................................................................... S-32
Modeling Assumptions...................................................................... S-72
Monthly Remittance Date................................................................... S-14
Moody's................................................................................... S-49. S-70
Morgan Stanley............................................................................ S-80
Mortgaged Properties...................................................................... S-8, S-25
Net Liquidation Proceeds.................................................................. S-63
Net Lifetime Cap.......................................................................... S-12
Net Prepayment Interest Shortfall......................................................... S-65
Net Monthly Excess Cashflow............................................................... S-50, S-57
Nonrecoverable Advance.................................................................... S-64
Notice.................................................................................... S-54
Original Pool Balance..................................................................... S-19
OID Regulations........................................................................... S-76
One-Month LIBOR........................................................................... S-6, S-50
Optional Termination Date................................................................. S-18, S-67
Order..................................................................................... S-54
Originators............................................................................... S-7, S-41
</TABLE>
S-85
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ------------------------------------------------------------------------------------------ ----------------------
<S> <C>
Owner..................................................................................... S-54
P&I Advances.............................................................................. S-17
Participants.............................................................................. S-51
Parties in Interest....................................................................... S-80
Pass-Through Rate......................................................................... S-47
Percentage Interest....................................................................... S-47
Periodic Rate Cap......................................................................... S-32
Permitted Investments..................................................................... S-45
Plan Sponsor.............................................................................. S-82
Plan Asset Regulation..................................................................... S-80
Plan...................................................................................... S-79
Policy.................................................................................... S-53
Pooling and Servicing Agreement........................................................... S-10
Prepayment Period......................................................................... S-65
Prepayment Assumption..................................................................... S-71
Prepayment................................................................................ S-65
Prepayment Interest Shortfall............................................................. S-65
Preservation Expenses..................................................................... S-63
Principal Distribution Amount............................................................. S-13
prohibited contribution................................................................... S-66
prohibited transaction.................................................................... S-66
PTE....................................................................................... S-82
Qualifying Rate........................................................................... S-42
Rating Agency............................................................................. S-21
Realized Loss............................................................................. S-58
Record Date............................................................................... S-10
Reference Banks........................................................................... S-50
Register.................................................................................. S-47
Registrar................................................................................. S-47
Regular Interests......................................................................... S-50
Reimbursement Amount...................................................................... S-42
Relevant Depository....................................................................... S-51
Relief Act................................................................................ S-69
REMIC Opinion............................................................................. S-60
REMIC..................................................................................... S-19, S-58
REO Property.............................................................................. S-63
Reserve Interest Rate..................................................................... S-42
Residual Interest......................................................................... S-50
Restricted Group.......................................................................... S-82
Riegle Act................................................................................ S-23
S&P....................................................................................... S-21, S-24
SAIF...................................................................................... S-46
Sellers................................................................................... S-7
Servicing Advances........................................................................ S-63
Servicing Fee Rate........................................................................ S-17, S-65
Servicing Fee............................................................................. S-17, S-65
Six-Month LIBOR........................................................................... S-41
SMMEA..................................................................................... S-20, S-79
Specified Subordinated Amount............................................................. S-58
Stated Income Documentation............................................................... S-42
Subordinate Certificates.................................................................. S-10, S-39
Subordinated Amount....................................................................... S-57
</TABLE>
S-86
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ------------------------------------------------------------------------------------------ ----------------------
<S> <C>
Subordination Deficit................................................... S-15, S-59
Subordination Increase Amount........................................... S-15, S-58
Subordination Reduction Amount.......................................... S-58
Substitution Adjustment................................................. S-60
Tax Counsel............................................................. S-20
Tax Avoidance Potential................................................. S-66
Total Available Funds................................................... S-49
Total Monthly Excess Cashflow........................................... S-47
Total Monthly Excess Spread............................................. S-57
Trust Fund.............................................................. S-2
Trustee................................................................. S-7, S-46
Trustee Fee............................................................. S-68
Trustee Fee Rate........................................................ S-68
Underwriting Agreement.................................................. S-78
</TABLE>
S-87
<PAGE>
PROSPECTUS
MORGAN STANLEY ABS CAPITAL I INC.
DEPOSITOR
$1,000,000,000
(AGGREGATE AMOUNT)
ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
------------------------
THIS PROSPECTUS RELATES TO THE ISSUANCE OF ASSET BACKED CERTIFICATES (THE
"CERTIFICATES") AND ASSET BACKED NOTES (THE "NOTES" AND, TOGETHER WITH THE
CERTIFICATES, THE "SECURITIES"), WHICH MAY BE SOLD FROM TIME TO TIME IN ONE OR
MORE SERIES (EACH, A "SERIES") BY MORGAN STANLEY ABS CAPITAL I INC. (THE
"DEPOSITOR") OR BY A TRUST FUND (AS DEFINED BELOW) ON TERMS DETERMINED AT THE
TIME OF SALE AND DESCRIBED IN THIS PROSPECTUS AND THE RELATED PROSPECTUS
SUPPLEMENT. THE SECURITIES OF A SERIES WILL CONSIST OF CERTIFICATES WHICH
EVIDENCE BENEFICIAL OWNERSHIP OF A TRUST ESTABLISHED BY THE DEPOSITOR (EACH, A
"TRUST FUND"), AND/OR NOTES SECURED BY THE ASSETS OF A TRUST FUND. AS SPECIFIED
IN THE RELATED PROSPECTUS SUPPLEMENT, THE TRUST FUND FOR A SERIES OF SECURITIES
WILL INCLUDE ASSETS (THE "TRUST FUND ASSETS") WHICH WILL CONSIST OF: (A) SINGLE
FAMILY MORTGAGE LOANS (THE "LOANS"), INCLUDING (I) MORTGAGE LOANS SECURED BY
FIRST, SECOND AND/OR MORE SUBORDINATE LIENS ON ONE- TO FOUR-FAMILY RESIDENTIAL
PROPERTIES, (II) CLOSED-END AND/OR MORE REVOLVING HOME EQUITY LOAN (THE "HOME
EQUITY LOANS") SECURED BY FIRST, SECOND AND/OR MORE SUBORDINATE LIENS ON ONE- TO
FOUR-FAMILY RESIDENTIAL PROPERTIES, (III) HOME IMPROVEMENT INSTALLMENT SALE
CONTRACTS AND INSTALLMENT LOAN AGREEMENTS (THE "HOME IMPROVEMENT CONTRACTS")
THAT ARE EITHER UNSECURED OR SECURED BY FIRST, SECOND AND/OR MORE SUBORDINATE
LIENS ON ONE- TO FOUR-FAMILY RESIDENTIAL PROPERTIES, OR BY PURCHASE MONEY
SECURITY INTERESTS IN THE HOME IMPROVEMENTS FINANCED THEREBY (THE "HOME
IMPROVEMENTS"), INCLUDING LOANS INSURED UNDER THE FHA TITLE I CREDIT INSURANCE
PROGRAM ADMINISTERED PURSUANT TO THE NATIONAL HOUSING ACT OF 1934, AND (IV)
MANUFACTURED HOUSING INSTALLMENT SALES CONTRACTS AND INSTALLMENT LOAN AGREEMENTS
(THE "MANUFACTURED HOUSING CONTRACTS," AND TOGETHER WITH THE HOME IMPROVEMENT
CONTRACTS, THE "CONTRACTS") SECURED BY FIRST, SECOND AND/OR MORE SUBORDINATE
LIENS ON MANUFACTURED HOMES (AS DEFINED HEREIN) OR BY MORTGAGES ON REAL ESTATE
ON WHICH THE RELATED MANUFACTURED HOMES ARE LOCATED; (B) MORTGAGE-BACKED
SECURITIES ISSUED OR GUARANTEED BY THE GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
("GNMA"), THE FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FNMA") OR THE FEDERAL HOME
LOAN MORTGAGE CORPORATION ("FHLMC") (THE "AGENCY SECURITIES"); (C) PRIVATELY
ISSUED MORTGAGE-BACKED SECURITIES ("PRIVATE MORTGAGE-BACKED SECURITIES" OR
"PMBS"); AND (D) ALL MONIES DUE THEREUNDER NET, IF AND AS PROVIDED IN THE
RELATED PROSPECTUS SUPPLEMENT, OF CERTAIN AMOUNTS PAYABLE TO THE SERVICER OF THE
LOANS, AGENCY SECURITIES OR PRIVATE MORTGAGE-BACKED SECURITIES. THE TRUST FUND
ASSETS WILL BE ACQUIRED BY THE DEPOSITOR, EITHER DIRECTLY OR INDIRECTLY, FROM
ONE OR MORE INSTITUTIONS (EACH, A "SELLER"), WHICH MAY BE AFFILIATES OF THE
DEPOSITOR, AND CONVEYED BY THE DEPOSITOR TO THE RELATED TRUST FUND. A TRUST FUND
MAY INCLUDE A NUMBER OF DIFFERENT TYPES AND CONCENTRATIONS OF TRUST FUND ASSETS
TO THE EXTENT DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT. A TRUST FUND ALSO
MAY INCLUDE INSURANCE POLICIES, SURETY BONDS, CASH ACCOUNTS, REINVESTMENT
INCOME, GUARANTIES OR LETTERS OF CREDIT TO THE EXTENT DESCRIBED IN THE RELATED
PROSPECTUS SUPPLEMENT. SEE "INDEX OF DEFINED TERMS" ON PAGE 127 OF THIS
PROSPECTUS FOR THE LOCATION OF THE DEFINITIONS OF CERTAIN CAPITALIZED TERMS.
--------------------------
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES,
SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 18.
------------------------
THE CERTIFICATES OF A GIVEN SERIES WILL REPRESENT BENEFICIAL INTERESTS IN,
AND THE NOTES OF A GIVEN SERIES WILL REPRESENT OBLIGATIONS OF, THE RELATED
TRUST FUND ONLY AND WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
DEPOSITOR, MORGAN STANLEY & CO. INCORPORATED, THE MASTER SERVICER, ANY
SELLER OR ANY AFFILIATES THEREOF, EXCEPT TO THE EXTENT DESCRIBED IN THE
RELATED PROSPECTUS SUPPLEMENT. THE SECURITIES AND THE LOANS WILL NOT BE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY
OR BY THE DEPOSITOR OR ANY OTHER PERSON OR ENTITY, EXCEPT IN EACH
CASE TO THE EXTENT DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE 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 OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
PRIOR TO ISSUANCE THERE WILL HAVE BEEN NO MARKET FOR THE SECURITIES OF ANY
SERIES AND THERE CAN BE NO ASSURANCE THAT A SECONDARY MARKET FOR ANY SECURITIES
WILL DEVELOP, OR IF IT DOES DEVELOP, THAT IT WILL CONTINUE OR PROVIDE
SECURITYHOLDERS WITH A SUFFICIENT LEVEL OF LIQUIDITY OF INVESTMENT.
THE SECURITIES OFFERED BY THIS PROSPECTUS AND BY THE RELATED PROSPECTUS
SUPPLEMENT ARE OFFERED BY MORGAN STANLEY & CO. INCORPORATED ("MORGAN STANLEY")
AND THE OTHER UNDERWRITERS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT, IF
ANY, SUBJECT TO PRIOR SALE, TO WITHDRAWAL, CANCELLATION OR MODIFICATION OF THE
OFFER WITHOUT NOTICE TO, DELIVERY TO AND ACCEPTANCE BY MORGAN STANLEY AND THE
OTHER UNDERWRITERS, IF ANY, AND CERTAIN FURTHER CONDITIONS. RETAIN THIS
PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE
SALES OF THE SECURITIES OFFERED HEREBY UNLESS ACCOMPANIED BY A PROSPECTUS
SUPPLEMENT.
--------------------------
MORGAN STANLEY & CO.
INCORPORATED
JUNE 5, 1997
<PAGE>
Each Series of Securities will be issued in one or more classes. Each class
of Certificates of a Series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on the related Trust Fund Assets. Each class of Notes of a Series will be
secured by the related Trust Fund Assets or, if so specified in the related
Prospectus Supplement, a portion thereof. A Series of Securities may include one
or more classes that are senior in right of payment to one or more other classes
of Securities of such Series. One or more classes of Securities of a Series may
be entitled to receive distributions of principal, interest or any combination
thereof prior to one or more other classes of Securities of such Series or after
the occurrence of specified events, in each case as specified in the related
Prospectus Supplement.
Distributions to holders of Securities ("Securityholders") will be made
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the Securities
of a Series will be made from the related Trust Fund Assets or proceeds thereof
pledged for the benefit of the Securityholders as specified in the related
Prospectus Supplement.
The related Prospectus Supplement will describe any insurance or guarantee
provided with respect to the related Series of Securities including, without
limitation, any insurance or guarantee provided by the Department of Housing and
Urban Development, the United States Department of Veterans' Affairs or any
private insurer or guarantor. Unless otherwise specified in the related
Prospectus Supplement, the only obligations of the Depositor with respect to a
Series of Securities will be to obtain certain representations and warranties
from each Seller or each originator (the "Originator") of the Trust Fund Assets
and to assign to the Trustee for the related Series of Securities the
Depositor's rights with respect to such representations and warranties. The
principal obligations of the Master Servicer named in the related Prospectus
Supplement with respect to the related Series of Securities will be limited to
obligations pursuant to certain representations and warranties and to its
contractual servicing obligations, including any obligation it may have to
advance delinquent payments on the related Trust Fund Assets.
The yield on each class of Securities of a Series will be affected by, among
other things, the rate of payments of principal (including prepayments) on the
related Trust Fund Assets and the timing of receipt of such payments as
described under "Risk Factors --Prepayment and Yield Considerations and
Reinvestment Risk" and "Yield and Prepayment Considerations" herein and in the
related Prospectus Supplement. A Trust Fund may be subject to early termination
under the circumstances described under "The Agreements--Termination; Optional
Termination" herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, one or more elections may
be made to treat a Trust Fund or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. See
"Federal Income Tax Consequences."
Until 90 days after the date of each prospectus supplement, all dealers
effecting transactions in the securities covered by such prospectus supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
------------------------
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things, set
forth with respect to such Securities, as appropriate: (i) the aggregate
principal amount, interest rate and authorized denominations of each class of
such Series of Securities; (ii) information as to the assets comprising the
Trust Fund, including the general characteristics of the related Trust Fund
Assets included therein and, if applicable, the insurance policies, surety
bonds, guaranties, letters of credit or other instruments or agreements included
in the Trust Fund or otherwise, and the amount and source of any reserve account
or other cash account; (iii) the circumstances, if any, under which the Trust
Fund may be subject to early termination; (iv) the circumstances, if any, under
which the Notes of such Series are subject to redemption; (v) the method used to
calculate the amount of principal to be distributed or paid with respect to each
class of Securities; (vi) the order of application of distributions or payments
to each of the classes within such Series, whether sequential, pro rata, or
otherwise; (vii) the Distribution Dates with respect to such Series; (viii)
additional information with respect to the method of distribution of such
Securities; (ix) whether one or more REMIC elections will be made with respect
to the Trust Fund and, if so, the designation of the regular interests and the
residual interests; (x) the aggregate original percentage ownership interest in
the Trust Fund to be evidenced by each class of Certificates; (xi)
2
<PAGE>
the stated maturity of each class of Notes of such Series; (xii) information as
to the nature and extent of subordination with respect to any class of
Securities that is subordinate in right of payment to any other class; and
(xiii) information as to the Seller, the Master Servicer and the Trustee.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part of
the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain descriptions of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices located as follows:
Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and Northeast Regional Office, Seven World Trade Center, Suite 1300, New
York, New York 10048. The Commission also maintains a Web site at
http://www.sec.gov from which such Registration Statement and exhibits may be
obtained.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
All documents subsequently filed by or on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), after the date of this Prospectus and prior to the
termination of any offering of the Securities issued by such Trust Fund shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all purposes of this
Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus. Neither the Depositor nor the Master Servicer for any Series intends
to file with the Commission periodic reports with respect to the related Trust
Fund following completion of the reporting period required by Rule 15d-1 or
Regulation 15D under the Exchange Act.
The Trustee or such other entity specified in the related Prospectus
Supplement on behalf of any Trust Fund will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to the Corporate
Trust Office of the Trustee or the address of such other entity specified in the
accompanying Prospectus Supplement. Included in the accompanying Prospectus
Supplement is the name, address, telephone number and, if available, facsimile
number of the office or contact person at the Corporate Trust Office of the
Trustee or such other entity.
Requests to the Depositor should be directed in writing to Morgan Stanley
ABS Capital I Inc., c/o Morgan Stanley & Co. Incorporated, 1585 Broadway, 2nd
Floor, New York, New York 10036, Attention: President, or by telephone at (212)
761-4000. The Depositor has determined that its financial statements are not
material to the offering of any class of Securities.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities will be forwarded to Securityholders. However, such reports will
neither be examined nor reported on by an independent public accountant. See
"Description of the Securities--Reports to Securityholders."
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of Terms...................................................................... 5
Risk Factors.......................................................................... 18
The Trust Fund........................................................................ 28
Use of Proceeds....................................................................... 44
The Depositor......................................................................... 44
Description of the Securities......................................................... 44
Credit Enhancement.................................................................... 60
Yield and Prepayment Considerations................................................... 65
The Agreements........................................................................ 68
Certain Legal Aspects of the Loans.................................................... 82
Federal Income Tax Consequences....................................................... 97
State Tax Consequences................................................................ 119
Erisa Considerations.................................................................. 119
Legal Investment...................................................................... 123
Method of Distribution................................................................ 125
Legal Matters......................................................................... 125
Financial Information................................................................. 125
Rating................................................................................ 126
Index of Defined Terms................................................................ 127
</TABLE>
4
<PAGE>
SUMMARY OF TERMS
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE RELATED PROSPECTUS
SUPPLEMENT WITH RESPECT TO THE SERIES OF SECURITIES OFFERED THEREBY AND TO THE
RELATED AGREEMENT (AS SUCH TERM IS DEFINED BELOW) WHICH WILL BE PREPARED IN
CONNECTION WITH EACH SERIES OF SECURITIES. UNLESS OTHERWISE SPECIFIED,
CAPITALIZED TERMS USED AND NOT DEFINED IN THIS SUMMARY OF TERMS HAVE THE
MEANINGS GIVEN TO THEM IN THIS PROSPECTUS AND IN THE RELATED PROSPECTUS
SUPPLEMENT. SEE "INDEX OF DEFINED TERMS" ON PAGE 127 OF THIS PROSPECTUS FOR THE
LOCATION OF THE DEFINITIONS OF CERTAIN CAPITALIZED TERMS.
<TABLE>
<S> <C>
Title of Securities................. Asset Backed Certificates (the "Certificates") and
Asset Backed Notes (the "Notes" and, together with
the Certificates, the "Securities"), which are
issuable in Series.
Depositor........................... Morgan Stanley ABS Capital I Inc., a wholly-owned
subsidiary of Morgan Stanley Group Inc. None of
Morgan Stanley, Morgan Stanley Group Inc. or any
other affiliate of the Depositor, the Master
Servicer, the Trustee or the Seller has guaranteed or
is otherwise obligated with respect to the Securities
of any Series. See "The Depositor."
Trustee............................. The trustee(s) (the "Trustee") for each Series of
Securities will be specified in the related
Prospectus Supplement. See "The Agreements" herein
for a description of the Trustee's rights and
obligations.
Master Servicer..................... The entity or entities named as Master Servicer (the
"Master Servicer") in the related Prospectus
Supplement. See "The Agreements--Certain Matters
Regarding the Master Servicer and the Depositor."
Trust Fund Assets................... Assets of the Trust Fund for a Series of Securities
will include assets (the "Trust Fund Assets") which
will consist of Loans, Agency Securities and/or
Private Mortgage-Backed Securities, together with
payments in respect of such Trust Fund Assets, as
specified in the related Prospectus Supplement. At
the time of issuance of Securities of a Series, the
Depositor will cause Loans, Agency Securities and/or
Private Mortgage-Backed Securities comprising the
related Trust Fund to be assigned to the Trustee,
without recourse. The Loans, Agency Securities and/or
Private Mortgage-Backed Securities will be collected
in a pool (each, a "Pool") as of the first day of the
month of the issuance of the related Series of
Securities or such other date specified in the
related Prospectus Supplement (the "Cut-off Date"). A
Trust Fund may include a number of different types
and concentrations of Trust Fund Assets to the extent
described in the related Prospectus Supplement. Trust
Fund Assets also may include insurance policies,
surety bonds, cash accounts, spread accounts,
reinvestment income, guaranties, letters of credit,
interest rate cap agreements or interest rate swap
agreements. See "Credit Enhancement." In addition, if
the related Prospectus Supplement so provides, the
related Trust
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Funds Asset will include the funds on deposit in an
account (a "Pre-Funding Account") which will be used
to purchase additional Loans during the period
specified in such Prospectus Supplement. See "The
Agreements--Pre-Funding Account."
A. Loans............................ The Loans will consist of (i) mortgage loans secured
by first, second and/or more subordinate liens on
one-to four-family residential properties or security
interests in shares issued by cooperative housing
corporations (each, a "Mortgage Loan"), (ii)
closed-end loans (the "Closed-End Loans") and/or
revolving home equity loans or certain balances
thereof (the "Revolving Credit Line Loans," together
with the Closed-End Loans, the "Home Equity Loans")
secured by first, second and/or more subordinate
liens on one- to four-family residential properties,
(iii) home improvement installment sales contracts
and installment loan agreements (the "Home
Improvement Contracts") that are either unsecured or
secured by first, second and/or more subordinate
liens on one- to four-family residential properties,
or by security interests in the home improvements
financed thereby (the "Home Improvements"), including
loans insured under the FHA Title I Credit Insurance
program administered pursuant to the National Housing
Act of 1934, and (iv) manufactured housing
installment sales contracts and installment loan
agreements (the "Manufactured Housing Contracts" and
together with the Home Improvement Contracts, the
"Contracts") secured by first, second and/or more
subordinate liens on Manufactured Homes (as defined
herein) or by mortgages on real estate on which the
related Manufactured Homes are located. All Loans,
Agency Securities and Private Mortgage-Backed
Securities will have been purchased by the Depositor,
either directly or through an affiliate, from one or
more Sellers.
As specified in the related Prospectus Supplement,
the Home Equity Loans will, and the Contracts may, be
secured by mortgages or deeds of trust or other
similar security instruments creating a lien on a
Mortgaged Property, which may be subordinated to one
or more senior liens on the Mortgaged Property, as
described in the related Prospectus Supplement. As
specified in the related Prospectus Supplement,
Contracts may be unsecured or secured by purchase
money security interests in the Home Improvements or
Manufactured Homes financed thereby. The Mortgaged
Properties, Home Improvements and Manufactured Homes
are collectively referred to herein as the
"Properties."
B. Agency Securities................ The Agency Securities will consist of (i) fully
modified pass-through mortgage-backed certificates
guaranteed as to timely payment of principal and
interest by the Government
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
National Mortgage Association ("GNMA Certificates"),
(ii) guaranteed mortgage pass-through certificates
issued and guaranteed as to timely payment of
principal and interest by the Federal National
Mortgage Association ("FNMA Certificates"), (iii)
mortgage participation certificates issued and
guaranteed as to timely payment of interest and,
unless otherwise specified in the related Prospectus
Supplement, ultimate payment of principal by the
Federal Home Loan Mortgage Corporation ("FHLMC
Certificates"), (iv) stripped mortgage-backed
securities representing an undivided interest in all
or a part of either the principal distributions (but
not the interest distributions) or the interest
distributions (but not the principal distributions)
or in some specified portion of the principal and
interest distributions (but not all of such
distributions) on certain GNMA, FNMA, FHLMC or other
government agency or government- sponsored agency
certificates and, unless otherwise specified in the
related Prospectus Supplement, guaranteed to the same
extent as the underlying securities, (v) another type
of guaranteed pass-through certificate issued or
guaranteed by GNMA, FNMA, FHLMC or other government
agency or government-sponsored agency and described
in the related Prospectus Supplement, or (vi) a
combination of such Agency Securities. All GNMA
Certificates will be backed by the full faith and
credit of the United States. No FNMA or FHLMC
Certificates will be backed, directly or indirectly,
by the full faith and credit of the United States.
The Agency Securities may consist of pass-through
securities issued under the GNMA I Program, the GNMA
II Program, FHLMC's Cash or Guarantor Program or
another program specified in the Prospectus
Supplement. The payment characteristics of the
Mortgage Loans underlying the Agency Securities will
be described in the related Prospectus Supplement.
See "The Trust Fund--Agency Securities."
C. Private Mortgage-Backed Private Mortgage-Backed Securities may include (i)
Securities........................ pass-through certificates representing beneficial
interests in certain mortgage loans or (ii)
collateralized mortgage obligations ("CMOs") secured
by such mortgage loans. Although mortgage loans
underlying a Private Mortgage-Backed Security may be
insured or guaranteed by the United States or an
agency or instrumentality thereof, they need not be,
and the Private Mortgage-Backed Securities themselves
will not be, so insured or guaranteed. Unless
otherwise specified in the Prospectus Supplement
relating to a Series of Securities, payments on the
Private Mortgage-Backed Securities will be
distributed directly to the Trustee as registered
owner of such Private Mortgage-Backed Securities. The
Prospectus Supplement for each Series of Securities
will specify, with respect to any Private
Mortgage-Backed Securities owned by the related Trust
Fund: (i) the aggregate
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
approximate principal amount and type of Private
Mortgage-Backed Securities; (ii) certain
characteristics of the mortgage loans underlying the
Private Mortgage-Backed Securities, including (A) the
payment features of such mortgage loans, (B) the
approximate aggregate principal amount, if known, of
the underlying mortgage loans which are insured or
guaranteed by a governmental entity, (C) the
servicing fee or range of servicing fees with respect
to such mortgage loans, and (D) the minimum and
maximum stated maturities of the mortgage loans at
origination; (iii) the maximum original
term-to-stated maturity of the Private
Mortgage-Backed Securities; (iv) the weighted average
term-to-stated maturity of the Private
Mortgage-Backed Securities; (v) the pass-through or
certificate rate or ranges thereof for the Private
Mortgage-Backed Securities; (vi) the weighted average
pass-through or certificate rate of the Private
Mortgage-Backed Securities; (vii) the issuer of the
Private Mortgage-Backed Securities (the "PMBS
Issuer"), the servicer of the Private Mortgage-Backed
Securities (the "PMBS Servicer") and the trustee of
the Private Mortgage-Backed Securities (the "PMBS
Trustee"); (viii) certain characteristics of credit
support, if any, such as reserve funds, insurance
policies, letters of credit, financial guaranty
insurance policies or third party guarantees,
relating to the mortgage loans underlying the Private
Mortgage-Backed Securities, or to such Private
Mortgage-Backed Securities themselves; (ix) the terms
on which underlying mortgage loans for such Private
Mortgage-Backed Securities may, or are required to,
be repurchased prior to stated maturity; and (x) the
terms on which substitute mortgage loans may be
delivered to replace those initially deposited with
the PMBS Trustee. See "The Trust Fund-- Private
Mortgage-Backed Securities."
Description of the Securities....... Each Security will represent a beneficial ownership
interest in, or be secured by the assets of, a Trust
Fund created by the Depositor pursuant to an
Agreement among the Depositor, the Master Servicer
and the Trustee for the related Series. The
Securities of any Series may be issued in one or more
classes as specified in the related Prospectus
Supplement. A Series of Securities may include one or
more classes of senior Securities (collectively, the
"Senior Securities") and one or more classes of
subordinate Securities (collectively, the
"Subordinated Securities"). Certain Series or classes
of Securities may be covered by insurance policies or
other forms of credit enhancement, in each case as
described under "Credit Enhancement" herein and in
the related Prospectus Supplement.
One or more classes of Securities of each Series (i)
may be entitled to receive distributions allocable
only to principal, only to interest or to any
combination thereof; (ii) may be entitled to receive
distributions only of prepayments of
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principal throughout the lives of the Securities or
during specified periods; (iii) may be subordinated
in the right to receive distributions of scheduled
payments of principal, prepayments of principal,
interest or any combination thereof to one or more
other classes of Securities of such Series throughout
the lives of the Securities or during specified
periods or may be subordinated with respect to
certain losses and delinquencies; (iv) may be
entitled to receive such distributions only after the
occurrence of events specified in the related
Prospectus Supplement; (v) may be entitled to receive
distributions in accordance with a schedule or
formula or on the basis of collections from
designated portions of the related Trust Fund Assets;
(vi) as to Securities entitled to distributions
allocable to interest, may be entitled to receive
interest at a rate per annum specified, or calculated
in the method described, in the related Prospectus
Supplement; and (vii) as to Securities entitled to
distributions allocable to interest, may be entitled
to distributions allocable to interest only after the
occurrence of events specified in the related
Prospectus Supplement and may accrue interest until
such events occur, in each case as specified in the
related Prospectus Supplement. The timing and amounts
of such distributions may vary among classes or over
time, as specified in the related Prospectus
Supplement.
Distributions on the Securities..... Distributions on the Securities entitled thereto will
be made monthly, quarterly, semi-annually or at such
other intervals and on the dates specified in the
related Prospectus Supplement (each, a "Distribution
Date") out of the payments received in respect of the
assets of the related Trust Fund or Funds or other
assets pledged for the benefit of the Securities as
described under "Credit Enhancement" herein to the
extent specified in the related Prospectus
Supplement. The amount allocable to payments of
principal and interest on any Distribution Date will
be determined as specified in the related Prospectus
Supplement. The Prospectus Supplement for a Series of
Securities will describe the method of allocating
distributions among Securities of different classes
as well as the method for allocating distributions
among Securities for any particular class.
Unless otherwise specified in the related Prospectus
Supplement, the aggregate original principal balance
of the Securities will not exceed the aggregate
distributions allocable to principal that such
Securities will be entitled to receive. If specified
in the related Prospectus Supplement, the Securities
will have an aggregate original principal balance
equal to the aggregate unpaid principal balance of
the Trust Fund Assets as of the related Cut-off Date
and will bear interest in the aggregate at a rate
equal to the interest rate borne by the underlying
Loans (the "Loan Rate") net of the aggregate
servicing fees and any other amounts specified in
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the related Prospectus Supplement (the "Pass-Through
Rate") or at such other interest rate as may be
specified in such Prospectus Supplement. If specified
in the related Prospectus Supplement, the aggregate
original principal balance of the Securities and
interest rates on the classes of Securities will be
determined based on the cash flow on the Trust Fund
Assets.
The rate at which interest will be passed through or
paid to holders of each class of Securities entitled
thereto may be a fixed rate or a rate that is subject
to change from time to time from the time and for the
periods, in each case, as specified in the related
Prospectus Supplement. Any such rate may be
calculated on a loan-by-loan, weighted average or
notional amount, as applicable, in each case as
described in the related Prospectus Supplement.
Credit Enhancement.................. The assets in a Trust Fund or the Securities of one
or more classes in the related Series may have the
benefit of one or more types of credit enhancement as
described in the related Prospectus Supplement. The
protection against losses afforded by any such credit
support may be limited. The type, characteristics and
amount of credit enhancement will be determined based
on the characteristics of the Trust Fund Assets and
other factors and will be established on the basis of
requirements of each Rating Agency rating the
Securities of such Series. See "Credit Enhancement."
A. Subordination.................... A Series of Securities may consist of one or more
classes of Senior Securities and one or more classes
of Subordinated Securities. The rights of the holders
of the Subordinated Securities of a Series to receive
distributions with respect to the assets in the
related Trust Fund will be subordinated to such
rights of the holders of the Senior Securities of the
same Series to the extent described in the related
Prospectus Supplement. This subordination is intended
to enhance the likelihood of regular receipt by
holders of Senior Securities of the full amount of
monthly payments of principal and interest due them.
The protection afforded to the holders of Senior
Securities of a Series by means of the subordination
feature will be accomplished by (i) the preferential
right of such holders to receive, prior to any
distribution being made in respect of the related
Subordinated Securities, the amounts of interest
and/or principal due them on each Distribution Date
out of the funds available for distribution on such
date in the related Security Account and, to the
extent described in the related Prospectus
Supplement, by the right of such holders to receive
future distributions on the assets in the related
Trust Fund that would otherwise have been payable to
the holders of Subordinated Securities; (ii) reducing
the ownership interest (if applicable) of the related
Subordinated Securities; (iii) a combination of
clauses (i) and (ii) above; or
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(iv) as otherwise described in the related Prospectus
Supplement. If so specified in the related Prospectus
Supplement, subordination may apply only in the event
of certain types of losses not covered by other forms
of credit support, such as hazard losses not covered
by standard hazard insurance policies or losses due
to the bankruptcy or fraud of the borrower. The
related Prospectus Supplement will set forth
information concerning, among other things, the
amount of subordination of a class or classes of
Subordinated Securities in a Series, the
circumstances in which such subordination will be
applicable, and the manner, if any, in which the
amount of subordination will decrease over time.
B. Reserve Account.................. One or more reserve accounts or other cash accounts
(each, a "Reserve Account") may be established and
maintained for each Series of Securities. The related
Prospectus Supplement will specify whether or not
such Reserve Accounts will be included in the corpus
of the Trust Fund for such Series and will also
specify the manner of funding such Reserve Accounts
and the conditions under which the amounts in any
such Reserve Accounts will be used to make
distributions to holders of Securities of a
particular class or released from such Reserve
Accounts.
C. Letter of Credit................. If so specified in the related Prospectus Supplement,
credit support may be provided by one or more letters
of credit. A letter of credit may provide limited
protection against certain losses in addition to or
in lieu of other credit support, such as, in the case
of Loans, losses resulting from delinquent payments,
losses from risks not covered by standard hazard
insurance policies, losses due to bankruptcy of a
borrower and application of certain provisions of the
federal Bankruptcy Code, and losses due to denial of
insurance coverage due to misrepresentations made in
connection with the origination or sale of a Loan.
The issuer of the letter of credit (the "L/C Bank")
will be obligated to honor demands with respect to
such letter of credit, to the extent of the amount
available thereunder to provide funds under the
circumstances and subject to such conditions as are
specified in the related Prospectus Supplement. The
liability of the L/C Bank under its letter of credit
will be reduced by the amount of unreimbursed
payments thereunder.
The maximum liability of a L/C Bank under its letter
of credit will be an amount equal to a percentage
specified in the related Prospectus Supplement of the
initial aggregate outstanding principal balance of
the Loans in the related Trust Fund or one or more
Classes of Securities of the related Series (the "L/C
Percentage"). The maximum amount available at any
time to be paid under a letter of credit will be
determined in the manner specified therein and in the
related Prospectus Supplement.
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D. Insurance Policies; Surety Bonds If so specified in the related Prospectus Supplement,
and Guarantees.................... credit support for a Series may be provided by an
insurance policy and/or a surety bond issued by one
or more insurance companies or sureties. Such
certificate guarantee insurance or surety bond will
guarantee timely distributions of interest and/or
full distributions of principal on the basis of a
schedule of principal distributions set forth in or
determined in the manner specified in the related
Prospectus Supplement. If specified in the related
Prospectus Supplement, one or more bankruptcy bonds,
special hazard insurance policies, other insurance or
third-party guarantees may be used to provide
coverage for the risks of default or types of losses
set forth in such Prospectus Supplement.
E. Over-Collateralization........... If so provided in the Prospectus Supplement for a
Series of Securities, a portion of the interest
payment on each Loan may be applied as an additional
distribution in respect of principal to reduce the
principal balance of a certain class or classes of
Securities and, thus, accelerate the rate of payment
of principal on such class or classes of Securities.
F. Loan Pool Insurance Policy....... A mortgage pool insurance policy or policies may be
obtained and maintained for Loans relating to any
Series of Securities, which shall be limited in
scope, covering defaults on the related Loans in an
initial amount equal to a specified percentage of the
aggregate principal balance of all Loans included in
the Pool as of the related Cut-off Date.
G. FHA Insurance.................... If specified in the related Prospectus Supplement,
all or a portion of the Loans relating to any Series
of Securities may be (i) insured by the Federal
Housing Administration (the "FHA") and/or (ii)
partially guaranteed by the Department of Veterans'
Affairs (the "VA"). See "Certain Legal Aspects of the
Loans--The Title I Program."
H. Cross-Collateralization.......... If specified in the related Prospectus Supplement,
separate classes of a Series of Securities may
evidence the beneficial ownership of, or be secured
by, separate groups of assets included in a Trust
Fund. In such case, credit support may be provided by
a cross- collateralization feature which requires
that distributions be made with respect to Securities
evidencing a beneficial ownership interest in, or
secured by, one or more asset groups prior to
distributions to Subordinated Securities evidencing a
beneficial ownership interest in, or secured by,
other asset groups within the same Trust Fund. See
"Credit Enhancement--Cross-Collateralization."
If specified in the related Prospectus Supplement,
the coverage provided by one or more forms of credit
support may apply concurrently to two or more
separate Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds
to which such credit support relates and the
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manner of determining the amount of the coverage
provided to such Trust Funds thereby and of the
application of such coverage to the identified Trust
Funds. See "Credit
Enhancement--Cross-Collateralization."
I. Other Arrangements............... Other arrangements as described in the related
Prospectus Supplement including, but not limited to,
one or more bankruptcy bonds, special hazard
insurance policies, other insurance or third-party
guarantees, interest rate swap agreements, interest
rate cap agreements or other similar arrangements
will be described in the related Prospectus
Supplement. An interest rate swap agreement involves
an agreement between two parties under which one
party makes to the other party periodic payments
based on a fixed rate of interest and receives in
return periodic payments based on a variable rate of
interest, which rates of interest are calculated on
the basis of a specified notional amount of principal
for a specified period of time as will be described
in the related Prospectus Supplement. An interest
rate cap agreement involves an agreement between two
parties in which one party agrees to make payments to
the other party when a designated market interest
rate goes above a designated level on predetermined
dates or during a specified time period as will be
described in the related Prospectus Supplement.
Advances............................ The Master Servicer and, if applicable, each mortgage
servicing institution that services a Loan in a Pool
on behalf of the Master Servicer (each, a
"Sub-Servicer") may be obligated to advance amounts
(each, an "Advance") corresponding to delinquent
interest and/or principal payments on such Loan
(including, in the case of Cooperative Loans, unpaid
maintenance fees or other charges under the related
proprietary lease), net of the Servicing Fee if so
specified in the related Prospectus Supplement, until
the date, as specified in the related Prospectus
Supplement, following the date on which the related
Property is sold at a foreclosure sale or the related
Loan is otherwise liquidated. Any obliga- tion to
make Advances may be subject to limitations as
specified in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement,
Advances may be drawn from a cash account available
for such purpose as described in such Prospectus
Supplement. Advances will be reimbursable to the
extent described under "Description of the
Securities--Advances" herein and in the related
Prospectus Supplement.
In the event the Master Servicer or Sub-Servicer
fails to make a required Advance, the Trustee may be
obligated to advance such amounts otherwise required
to be advanced by the Master Servicer or
Sub-Servicer. See "Description of the
Securities--Advances."
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Optional Termination................ The Master Servicer or the party specified in the
related Prospectus Supplement, including the holder
of the residual interest in a REMIC, may have the
option to effect early retirement of a Series of
Securities through the purchase of the Trust Fund
Assets. The Master Servicer will deposit the proceeds
of any such purchase in the Security Account for each
Trust Fund as described under "The Agreements--
Payments on Loans; Deposits to Security Account." Any
such purchase of Trust Fund Assets and property
acquired in respect of Trust Fund Assets evidenced by
a Series of Securities will be made at the option of
the Master Servicer, such other person or, if
applicable, such holder of the REMIC residual
interest, at a price specified in the related
Prospectus Supplement. The exercise of such right
will effect early retirement of the Securities of
that Series, but the right of the Master Servicer,
such other person, or, if applicable, such holder of
the REMIC residual interest, to so purchase is
subject to the principal balance of the related Trust
Fund Assets being less than the percentage specified
in the related Prospectus Supplement of the aggregate
principal balance of the Trust Fund Assets at the
Cut-off Date for the Series. Upon such requirement
being satisfied, the parties specified in the related
Prospectus Supplement may purchase all Trust Fund
Assets and thereby effect retirement of such Series
of Securities. In such event, the applicable purchase
price will be sufficient to pay the aggregate
outstanding principal balance of such Series of
Securities and any undistributed shortfall in
interest of such Series of Securities as will be
described in the related Prospectus Supplement. The
foregoing is subject to the provision that if a REMIC
election is made with respect to a Trust Fund, any
repurchase pursuant to clause (ii) above will be made
only in connection with a "qualified liquidation"
within the meaning of Section 860F(g)(4) of the Code.
Legal Investment.................... The Prospectus Supplement for each series of
Securities will specify which, if any, of the classes
of Securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA").
Classes of Securities that qualify as "mortgage
related securities" will be legal investments for
certain types of institutional investors to the
extent provided in SMMEA, subject, in any case, to
any other regulations which may govern investments by
such institutional investors. Institutions whose
investment activities are subject to review by
federal or state authorities should consult with
their counsel or the applicable authorities to
determine whether an investment in a particular class
of Securities (whether or not such class constitutes
a "mortgage related security") complies with
applicable guidelines, policy statements or
restrictions. See "Legal Investment."
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Federal Income Tax Consequences..... The federal income tax consequences to
Securityholders will vary depending on whether one or
more elections are made to treat the Trust Fund or
specified portions thereof as a REMIC under the
provisions of the Internal Revenue Code of 1986, as
amended (the "Code"). The Prospectus Supplement for
each Series of Securities will specify whether such
an election will be made. If a REMIC election is
made, Securities representing regular interests in a
REMIC will generally be taxable to holders in the
same manner as evidences of indebtedness issued by
the REMIC. Stated interest on such regular interests
will be taxable as ordinary income and taken into
account using the accrual method of accounting,
regardless of the holder's normal accounting method.
If no REMIC election is made, interest (other than
original issue discount ("OID")) on Securities that
are characterized as indebtedness for federal income
tax purposes will be includible in income by holders
thereof in accordance with their usual method of
accounting. Certain classes of Securities may be
issued with OID. A holder should be aware that the
Code and the Treasury regulations promulgated
thereunder do not adequately address certain issues
relevant to prepayable securities, such as the
Securities. Holders that will be required to report
income with respect to the related Securities under
the accrual method of accounting will do so without
giving effect to delays and reductions in
distributions attributable to a default or
delinquency on the Trust Fund Asset, except possibly
to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of
income (including OID) reported by a holder of a
Security in any period could significantly exceed the
amount of cash distributed to such holder in that
period.
If a REMIC election is made with respect to a Series
of Securities, then, upon the issuance of those
Securities, special counsel to the Depositor will
issue an opinion generally to the effect that the
arrangement by which such Securities are issued will
be treated as a REMIC as long as all of the
provisions of the applicable Agreement are complied
with and the statutory and regulatory requirements
are satisfied. Such Securities will be designated as
"regular interests" or "residual interests" in a
REMIC. A REMIC will not be subject to entity-level
tax. Rather, the taxable income or net loss of a
REMIC will be taken into account by the holders of
residual interests. Such holders will report their
proportionate share of the taxable income of the
REMIC whether or not they receive cash distributions
from the REMIC attributable to such income. A portion
(or, in some cases, all) of the income from a
residual interest (i) may not be subject to offset by
losses from other activities, (ii) for a holder that
is subject to tax under the Code on unrelated
business taxable income, may be treated as unrelated
business
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taxable income and (iii) for a foreign holder, may
not qualify for exemption from or reduction of
withholding. In addition, (i) residual interests are
subject to transfer restrictions and (ii) certain
transfers of residual interests will not be
recognized for federal income tax purposes. Further,
individual holders are subject to limitations on the
deductibility of expenses of the REMIC.
If so specified in the Prospectus Supplement for a
Series of Securities, then, upon the issuance of
those Securities, special counsel to the Depositor
will issue an opinion generally to the effect that
the arrangement by which such Securities are issued
will be classified as a grantor trust under Subpart
E, Part I of Subchapter J of the Code and not as an
association taxable as a corporation. If so provided
in the Prospectus Supplement for a Series of
Securities representing interests in Trust Fund
Assets, holders of Securities of such Series will be
treated as owning directly rights to receive certain
payments of interest or principal, or both, on the
assets held in the Trust Fund for such Series. All
income with respect to a Stripped Security will be
accounted for as OID and, unless otherwise specified
in the related Prospectus Supplement, will be
reported by the Trustee on an accrual basis, which
may be prior to the receipt of cash associated with
such income.
If so specified in the Prospectus Supplement for a
Series of Securities, special counsel to the
Depositor will issue an opinion generally to the
effect that the Trust Fund will not be treated as an
association or a publicly traded partnership taxable
as a corporation as long as all of the provisions of
the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied.
If Notes are issued by such Trust Fund, such Notes
will be treated as indebtedness for federal income
tax purposes. The holders of the Certificates issued
by such Trust Fund, if any, will agree to treat the
Certificates as equity interests in a partnership.
Generally, gain or loss will be recognized on a sale
of Securities in the amount equal to the difference
between the amount realized and the seller's tax
basis in the Securities sold. The material federal
income tax consequences for investors associated with
the purchase, ownership and disposition of the
Securities are set forth herein under "Federal Income
Tax Consequences." The material federal income tax
consequences for investors associated with the
purchase, ownership and disposition of Securities of
any particular Series will be set forth under the
heading "Federal Income Tax Consequences" in the
related Prospectus Supplement. See "Federal Income
Tax Consequences."
Erisa Considerations................ A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or the
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Code should carefully review with its legal advisors
whether the purchase or holding of Securities could
give rise to a transaction prohibited or not
otherwise permissible under ERISA or the Code.
Certain exemptions from the prohibited transaction
rules could be applicable to the acquisition of the
Securities. See "ERISA Considerations." The U.S.
Department of Labor has issued an individual
exemption, Prohibited Transaction Exemption 90-24, to
Morgan Stanley & Co. Incorporated that generally
exempts from the application of certain of the
prohibited transaction provisions of ERISA and the
Code, transactions relating to the purchase, sale and
holding of pass-through certificates underwritten by
such underwriter such as certain classes of the
Securities and the servicing and operation of asset
pools, provided that certain conditions are satisfied
as will be described in the related Prospectus
Supplement. Certain classes of Securities may not be
transferred unless the Trustee and the Depositor are
furnished with a letter of representation or an
opinion of counsel to the effect that such transfer
will not result in a violation of the prohibited
transaction provisions and will not subject the
Trustee, the Depositor or the Master Servicer to
additional obligations. See "Description of the
Securities--General" and "ERISA Considerations."
Rating.............................. It will be a requirement for issuance of any Series
that the Securities offered by this Prospectus and
the related Prospectus Supplement be rated by at
least one Rating Agency in one of its four highest
applicable rating categories. The rating or ratings
applicable to Securities of each Series offered
hereby and by the related Prospectus Supplement will
be as set forth in the related Prospectus Supplement.
A securities rating should be evaluated independently
of similar ratings on different types of securities.
A securities rating does not address the effect that
the rate of prepayments on Loans for a Series may
have on the yield to investors in the Securities of
such Series. See "Risk Factors--Ratings are not
Recommendations."
Risk Factors........................ For a discussion of certain risks associated with an
investment in the Securities, see "Risk Factors" on
page 18 herein and in the related Prospectus
Supplement.
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RISK FACTORS
Investors should consider the following factors in connection with the
purchase of the Securities.
LACK OF SECONDARY MARKET LIMITS LIQUIDITY
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or will continue for the life of the Securities of such
Series. Morgan Stanley & Co. Incorporated, through one or more of its
affiliates, and the other underwriters, if any, specified in the related
Prospectus Supplement, presently expect to make a secondary market in
securities, but have no obligation to do so.
LIMITED SOURCES OF PAYMENTS--NO RECOURSE TO SELLERS, DEPOSITOR OR MASTER
SERVICER
The Depositor does not have, nor is it expected to have, any significant
assets. Unless otherwise specified in the related Prospectus Supplement, the
Securities of a Series will be payable solely from the Trust Fund for such
Securities and will not have any claim against or security interest in the Trust
Fund for any other Series. There will be no recourse to the Depositor or any
other person for any failure to receive distributions on the Securities.
Further, at the times set forth in the related Prospectus Supplement, certain
Trust Fund Assets and/or any balance remaining in the Security Account
immediately after making all payments due on the Securities of such Series,
after making adequate provision for future payments on certain classes of
Securities and after making any other payments specified in the related
Prospectus Supplement, may be promptly released or remitted to the Depositor,
the Master Servicer, any credit enhancement provider or any other person
entitled thereto and will no longer be available for making payments to
Securityholders. Consequently, holders of Securities of each Series must rely
solely upon payments with respect to the Trust Fund Assets and the other assets
constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any credit enhancement for such
Series, for the payment of principal of and interest on the Securities of such
Series.
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer, any Seller or any of their respective
affiliates. The only obligations, if any, of the Depositor with respect to the
Trust Fund Assets or the Securities of any Series will be to obtain certain
representations and warranties from each Seller or each originator (the
"Originator") of the Trust Fund Assets and to assign to the Trustee for the
related Series of Securities the Depositor's rights with respect to such
representations and warranties. The Depositor does not have, and is not expected
in the future to have, any significant assets with which to meet any obligation
to repurchase Trust Fund Assets with respect to which there has been a breach of
any representation or warranty. If, for example, the Depositor were required to
repurchase a Trust Fund Asset, its only sources of funds to make such repurchase
would be from funds obtained (i) from the enforcement of a corresponding
obligation, if any, on the part of the related Seller or Originator of such
Trust Fund Asset, or (ii) to the extent provided in the related Prospectus
Supplement, from a Reserve Account or similar credit enhancement established to
provide funds for such repurchases. The only obligations of the Master Servicer,
other than its master servicing obligations, with respect to the Trust Fund
Assets or the Securities of any Series will be pursuant to certain
representations and warranties. The Master Servicer may be required to
repurchase or substitute for any Trust Fund Asset with respect to which such
representations and warranties are breached. There is no assurance, however,
that the Master Servicer will have the financial ability to effect any such
repurchase or substitution.
The only obligations of any Seller or Originator with respect to Trust Fund
Assets or the Securities of any Series will be pursuant to certain
representations and warranties and certain document delivery requirements. A
Seller or Originator may be required to repurchase or substitute for any Trust
Fund Asset with respect to which such representations and warranties or document
delivery requirements are
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breached. There is no assurance, however, that such Seller or Originator will
have the financial ability to effect such repurchase or substitution.
LIMITATIONS ON CREDIT ENHANCEMENT FOR PROTECTION AGAINST LOSSES
LIMITATION REGARDING TYPES OF LOSSES COVERED. Although credit enhancement
is intended to reduce the risk of delinquent payments or losses to holders of
Securities entitled to the benefit thereof, the amount of such credit
enhancement will be limited, as set forth in the related Prospectus Supplement,
and may be subject to periodic reduction in accordance with a schedule or
formula or otherwise decline, and could be depleted under certain circumstances
prior to the payment in full of the related Series of Securities, and as a
result Securityholders of the related Series may suffer losses. Moreover, such
credit enhancement may not cover all potential losses or risks. For example,
credit enhancement may or may not cover fraud or negligence by a loan originator
or other parties. In addition, the Trustee will generally be permitted to
reduce, terminate or substitute all or a portion of the credit enhancement for
any Series of Securities, provided the applicable Rating Agency indicates that
the then-current rating of the Securities of such Series will not be adversely
affected. See "Credit Enhancement."
DISPROPORTIONATE BENEFITS TO CERTAIN CLASSES AND SERIES. A Series of
Securities may include one or more classes of Subordinated Securities, if
provided in the related Prospectus Supplement. Although subordination is
intended to reduce the likelihood of temporary shortfalls and ultimate losses to
holders of the related Senior Securities, the amount of subordination will be
limited and may decline under certain circumstances. In addition, if principal
payments on one or more classes of Securities of a Series are made in a
specified order of priority, any related credit enhancement may be exhausted
before the principal of the later paid classes of Securities of such Series has
been repaid in full. As a result, the impact of losses and shortfalls
experienced with respect to the Trust Fund Assets may fall primarily upon those
classes of Securities having a latter right of payments. Moreover, if a form of
credit enhancement covers the Securities of more than one Series and losses on
the related Trust Fund Assets exceed the amount of such credit enhancement, it
is possible that the holders of Securities of one (or more) such Series will be
disproportionately benefited by such credit enhancement to the detriment of the
holders of Securities of one (or more) other such Series. The amount of any
applicable credit enhancement supporting one or more other classes of Securities
will be determined on the basis of criteria established by each Rating Agency
rating such classes of Securities as described below under "--Ratings are not
Recommendations."
LIMITATIONS ON FHA INSURANCE FOR TITLE I LOANS. The related Prospectus
Supplement will specify the number and percentage of Title I Loans, if any,
included in the related Trust Fund that are partially insured by the FHA
pursuant to the Title I Program. Since the FHA insurance amount for the Title I
Loans is limited as described herein under "Certain Legal Aspects of the
Loans--The Title I Program" and in the related Prospectus Supplement, and since
the adequacy of such FHA insurance is dependent upon future events, including
reductions for the payment of FHA claims, no assurance can be given that the FHA
insurance is or will be adequate to cover 90% of all potential losses on the
Title I Loans included in the related Trust Fund. If the FHA insurance for the
Title I Loans is reduced to zero, such Loans will be effectively uninsured from
and after the date of such reduction. Under the Title I Program, until a claim
for insurance reimbursement is submitted to the FHA, the FHA does not review or
approve for qualification for insurance the individual Title I Loan insured
thereunder (as is typically the case with other federal loan insurance
programs). Consequently, the FHA has not acknowledged that any of the Title I
Loans are eligible for FHA insurance, nor has the FHA reviewed or approved the
underwriting and qualification by the originating lenders of any individual
Title I Loan. See "Certain Legal Aspects of the Loans--The Title I Program."
The availability of FHA reimbursement following a default on a Title I Loan
is subject to a number of conditions, including strict compliance by the
originating lender of such loan, the Seller, the FHA claims administrator, the
Master Servicer and any subservicer with the FHA regulations in originating and
servicing such Title I Loan, and limits on the aggregate insurance coverage
available in the lender's
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insurance company reserve account. For example, the FHA Regulations provide
that, prior to originating a Title I Loan, a Title I lender must exercise
prudence and diligence in determining whether the borrower and any co-maker or
co-signer is solvent and an acceptable credit risk with a reasonable ability to
make payments on the loan. Although the related Seller will represent and
warrant that the Title I Loans have been originated and serviced in compliance
with all FHA regulations, these regulations are susceptible to substantial
interpretation. Failure to comply with all FHA regulations may result in a
denial of FHA claims, and there can be no assurance that the FHA's enforcement
of the FHA regulations will not become more strict in the future. See "Certain
Legal Aspects of the Loans--The Title I Program."
BASIS RISK AND POSSIBLE INTEREST SHORTFALLS
The Trust Fund Assets may accrue interest at variable rates based on changes
in specified indexes (as set forth in the related Prospectus Supplement) which
may adjust monthly, quarterly, annually or otherwise. The Securities, however,
may accrue interest at interest rates based on different indexes and may adjust
on different periods. As a result, there may be periods during which the
weighted average rate of interest at which the Trust Fund Assets are accruing
interest is less than the rate of interest on the Securities. The resulting
shortfall in interest collections on the Trust Fund Assets vis-a-vis the amount
of interest owed on the Securities will, unless otherwise specified in the
related Prospectus Supplement, be borne by the holders of such Securities.
PREPAYMENT AND YIELD CONSIDERATIONS AND REINVESTMENT RISK
PREPAYMENT AND YIELD CONSIDERATIONS; YIELD MAY VARY. The timing of
principal payments of the Securities of a Series will be affected by a number of
factors, including the following: (i) the rate, timing and extent of prepayments
(including for this purpose prepayments resulting from refinancing or
liquidations of the Loans due to defaults, casualties, condemnations and
repurchases by the Depositor or the Master Servicer) of the Loans comprising the
Trust Fund, which prepayments may be influenced by a variety of factors,
including general economic conditions, prevailing interest rate levels, the
availability of alternative financing and homeowner mobility, (ii) the manner of
allocating principal and/or payments among the classes of Securities of a Series
as specified in the related Prospectus Supplement, (iii) the exercise by the
party entitled thereto of any right of optional termination and (iv) the rate
and timing of payment defaults and losses incurred with respect to the Trust
Fund Assets. The repurchase of Loans by a Seller, an Originator or the Master
Servicer may result from repurchases of Trust Fund Assets due to material
breaches of such Seller's, such Originator's or the Master Servicer's
representations and warranties, as applicable. The yields to maturity and
weighted average lives of the Securities will be affected primarily by the rate
and timing of prepayment of the Loans comprising the Trust Fund Assets. The
"yield to maturity" is the rate of return an investor in a Security will receive
if such Security is held to its maturity date taking into account the purchase
price, redemption value, time to maturity, interest rate borne by such Security
and the time between interest payments. The "weighted average life" of a
Security refers to the amount of time that would elapse from the date of its
issuance until each dollar applicable to principal of such Security is
distributed to the investor. The yields to maturity and weighted average lives
of the Securities will also be affected by the distribution of amounts remaining
in any Pre-Funding Account following the end of the related Funding Period. A
delay in distributions of principal resulting in an extension of the weighted
average life of a Security or an acceleration in distributions of principal
resulting in a reduction of the weighted average life of a Security may
adversely impact the yield to maturity anticipated by an investor in such
Security. See "Yield and Prepayment Considerations" and "The
Agreements--Pre-Funding Account."
REINVESTMENT RISK DUE TO PREPAYMENT OF LOANS. Any reinvestment risks
resulting from a faster or slower incidence of prepayment of Loans held by a
Trust Fund will be borne entirely by the holders of one or more classes of the
related Series of Securities. Amounts received by an investor from distributions
on a Security may be reinvested at prevailing interest rates which may be higher
or lower than the interest rate
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payable on the Securities. In general, if prevailing interest rates fall
significantly below the Loan Rates borne by the Loans, such Loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above such Loan Rates. If, however, prevailing interest rates
rise appreciably above the Loan Rates borne by the Loans, such Loans are more
likely to experience a lower prepayment rate than if prevailing rates remain at
or below such Loan Rates. Thus, an investor may receive accelerated principal
payments on the Securities held by the investor for reinvestment at a time when
prevailing interest rates are lower than the interest rate payable on such
Securities. Conversely, an investor may not receive any prepayments on such
Securities at a time when any such prepayments could be reinvested at interest
rates higher than those payable on the Securities. See "Yield and Prepayment
Considerations" and "The Agreements--Pre-Funding Account."
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the Securities were to accrue through the day immediately preceding
each Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate. See "Description of the
Securities--Distributions on Securities--Distributions of Interest."
GREATER RISK CONSIDERATIONS DUE TO GEOGRAPHIC CONCENTRATION
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency on loans
generally. Any concentration of the Loans relating to any Series of Securities
in any such region may present risk considerations in addition to those
generally present for similar loan-backed securities without such concentration.
See "The Mortgage Pool" in the related Prospectus Supplement for further
information regarding the geographic concentration of the Loans underlying the
Securities of any Series.
NATURE OF SECURITY MAY AFFECT PAYMENTS ON LOANS
LOW CREDIT QUALITY BORROWERS MAY AFFECT PAYMENTS. Certain of the Loans
underlying a Series of Securities may have been made to lower credit quality
borrowers who have marginal credit and fall into one of two categories:
customers with moderate income, limited assets and other income characteristics
which cause difficulty in borrowing from banks and other traditional lending
sources, and customers with a derogatory credit report, including a history of
irregular employment, previous bankruptcy filings, repossession of property,
charged-off loans and garnishment of wages. The average Loan Rate on those Loans
made to these types of borrowers is generally higher than that charged by
lenders that typically impose more stringent credit requirements. The payment
experience on loans made to these types of borrowers is likely to be different
from that on loans made to borrowers with higher credit quality, and is likely
to be more sensitive to changes in the economic climate in the areas in which
such borrowers reside.
BALLOON PAYMENTS MAY AFFECT PAYMENTS. Certain of the Loans as of the
related Cut-off Date may not be fully amortizing over their terms to maturity
and, thus, will require substantial principal payments (i.e., balloon payments)
at their stated maturity. Loans with balloon payments involve a greater degree
of risk because the ability of a borrower to make a balloon payment typically
will depend upon its ability either to timely refinance the loan or to timely
sell the related Property. The ability of a borrower to accomplish either of
these goals will be affected by a number of factors, including the level of
available mortgage rates at the time of sale or refinancing, the borrower's
equity in the related Property, the financial condition of the borrower and tax
laws. Losses on such Loans that are not otherwise covered by the credit
enhancement described in the applicable Prospectus Supplement will be borne by
the holders of one or more classes of Securities of the related Series.
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PROPERTY VALUES MAY BE INSUFFICIENT. There are several factors that could
adversely affect the value of Properties such that the outstanding balance of
the related Loans, together with any senior financing on the Properties, if
applicable, would equal or exceed the value of the Properties. Among the factors
that could adversely affect the value of the Properties are an overall decline
in the residential real estate market in the areas in which the Properties are
located or a decline in the general condition of the Properties as a result of
failure of borrowers to maintain adequately the Properties or of natural
disasters that are not necessarily covered by insurance, such as earthquakes and
floods. In the case of Home Equity Loans, such decline could extinguish the
value of the interest of a junior mortgagee in the Property before having any
effect on the interest of the related senior mortgagee. If such a decline
occurs, the actual rates of delinquencies, foreclosures and losses on all Loans
could be higher than those currently experienced in the mortgage lending
industry in general. Losses on such Loans that are not otherwise covered by the
credit enhancement described in the applicable Prospectus Supplement will be
borne by the holders of one or more classes of Securities of the related Series.
DELAYS IN LIQUIDATION AND RECEIPT OF PROCEEDS DUE TO LITIGATION. Even
assuming that the Properties provide adequate security for the Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Loans and corresponding delays in the receipt of related proceeds by
Securityholders could occur. An action to foreclose on a Property securing a
Loan is regulated by state statutes and rules and is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in some
states an action to obtain a deficiency judgment is not permitted following a
nonjudicial sale of a Property. In the event of a default by a borrower, these
restrictions, among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Property or to obtain liquidation proceeds
sufficient to repay all amounts due on the related Loan. In addition, the Master
Servicer will be entitled to deduct from related liquidation proceeds all
expenses reasonably incurred in attempting to recover amounts due on defaulted
Loans and not yet repaid, including payments to senior lienholders, legal fees
and costs of legal action, real estate taxes and maintenance and preservation
expenses.
DISPROPORTIONATE EFFECT OF LIQUIDATION EXPENSES MAY AFFECT
PROCEEDS. Liquidation expenses with respect to defaulted loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted loan having a small remaining principal balance as it would in
the case of a defaulted loan having a large remaining principal balance, the
amount realized after expenses of liquidation would be smaller as a percentage
of the outstanding principal balance of the small loan than would be the case
with the defaulted loan having a large remaining principal balance.
HOME EQUITY LOANS; JUNIOR LOANS CREATE ADDITIONAL RISK OF LOSS. Since the
mortgages and deeds of trust securing the Home Equity Loans will be primarily
junior liens subordinate to the rights of the mortgagee under the related senior
mortgage(s) or deed(s) of trust, the proceeds from any liquidation, insurance or
condemnation proceeds will be available to satisfy the outstanding balance of
such junior lien only to the extent that the claims of such senior mortgagees
have been satisfied in full, including any related foreclosure costs. In
addition, a junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to any senior mortgage, in which case it
must either pay the entire amount due on any senior mortgage to the related
senior mortgagee at or prior to the foreclosure sale or undertake the obligation
to make payments on any such senior mortgage in the event the mortgagor is in
default thereunder. The Trust Fund will not have any source of funds to satisfy
any senior mortgages or make payments due to any senior mortgagees and may
therefore be prevented from foreclosing on the related property.
CONSUMER PROTECTION LAWS MAY AFFECT LOANS. Applicable state laws generally
regulate interest rates and other charges, require certain disclosures, and
require licensing of certain originators and servicers of Loans. In addition,
most states have other laws, public policy and general principles of equity
relating to
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the protection of consumers, unfair and deceptive practices and practices which
may apply to the origination, servicing and collection of the Loans. Depending
on the provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Master Servicer to damages
and administrative sanctions. See "Certain Legal Aspects of the Loans."
POTENTIAL LIABILITY FOR ENVIRONMENTAL CONDITIONS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of cleanup.
In several states, such a lien has priority over the lien of an existing
mortgage against such property. In addition under the laws of some states and
under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), a lender may be liable, as an "owner" or
"operator," for costs of addressing releases or threatened releases of hazardous
substances that require remedy at a property, if agents or employees of the
lender have become sufficiently involved in the operations of the borrower,
regardless of whether the environmental damage or threat was caused by a prior
owner. A lender also risks such liability on foreclosure of the related
property. See "Certain Legal Aspects of the Loans--Environmental Risks."
SECURITY INTEREST RISKS ASSOCIATED WITH CERTAIN LOAN ASSETS
SECURITY INTERESTS RELATING TO CONTRACTS SECURED BY HOME IMPROVEMENTS OR
MANUFACTURED HOMES. Certain Contracts may be secured by security interests in
Home Improvements or Manufactured Homes that are not considered to be real
property because they are not permanently affixed to real estate. Perfection of
security interests in such Home Improvements or Manufactured Homes and
enforcement of rights to realize upon the value of such Home Improvements or
Manufactured Homes as collateral for the Contracts are subject to a number of
Federal and state laws, including the Uniform Commercial Code as adopted in each
state and each state's certificate of title statutes. The steps necessary to
perfect the security interest in Home Improvements or a Manufactured Home will
vary from state to state. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer of a Contract will not amend any certificate of
title to change the lienholder specified therein from such Master Servicer to
the applicable Trustee and will not deliver any certificate of title to such
Trustee or note thereon such Trustee's interest. Consequently, in some states,
in the absence of such an amendment, the assignment to such Trustee of the
security interest in the Home Improvements or a Manufactured Home may not be
effective or such security interest may not be perfected and, in the absence of
such notation or delivery to such Trustee, the assignment of the security
interest in the Home Improvements or Manufactured Home may not be effective
against creditors of the Master Servicer or a trustee in bankruptcy of the
Master Servicer. While the Depositor cannot quantify the expense and
administrative burden involved by the Master Servicer taking such actions, in a
transaction with a diversified pool of Contracts consisting of a large number of
Contracts with relatively small principal balances, the expense and
administrative burden of such actions may be prohibitive. If any related credit
enhancement is exhausted and a Contract is in default, then recovery of amounts
due on such Contracts is dependent on repossession and resale of the Home
Improvements or Manufactured Home securing such Contract. Certain other factors
may limit the ability of the Master Servicer to realize upon the Home
Improvements or Manufactured Homes or may limit the amount realized to less than
the amount due.
Manufactured Homes, unlike Mortgaged Properties, and Home Improvement,
generally depreciate in value. Consequently, at any time after origination it is
possible, especially in the case of Contracts with high Loan-to-Value Ratios at
origination, that the market value of a Manufactured Home or Home Improvement
may be lower than the principal amount outstanding under the related Contract.
The Home Improvement Contracts will be originated by a commercial bank, a
savings and loan association, a
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commercial mortgage banker or other financial institution in the ordinary course
of business. For more information concerning Home Improvement Contracts and
Manufactured Housing Contracts, see "The Trust Fund--The Loans--Home Improvement
Contracts" and "--Manufactured Housing Contracts."
UNSECURED CONTRACTS. The obligations of the borrower under certain
Contracts included as part of the related Trust Fund Assets may not be secured
by an interest in the related real estate or otherwise, and the related Trust
Fund, as the owner of such Loan, will be a general unsecured creditor as to such
obligations. As a consequence, in the event of a default under an unsecured
Contract, the related Trust Fund will have recourse only against the borrower's
assets generally, along with all other general unsecured creditors of the
borrower. In a bankruptcy or insolvency proceeding relating to a borrower on an
unsecured Contract, the obligations of the borrower under such Contract may be
discharged in their entirety, notwithstanding the fact that the portion of such
borrower's assets made available to the related Trust Fund as a general
unsecured creditor to pay amounts due and owing thereunder are insufficient to
pay all such amounts. A borrower on an unsecured Contract may not demonstrate
the same degree of concern over performance of its obligations under such
Contract as if such obligations were secured by a family residence owned by such
borrower.
CERTAIN FEDERAL LAWS MAY AFFECT THE LOANS
CONSUMER PROTECTION LAWS MAY AFFECT COLLECTIONS. The Loans may also be
subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public assistance
or the exercise of any right under the Consumer Credit Protection Act, in
the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and
(iv) for Loans that were originated or closed after November 7, 1989,
the Home Equity Loan Consumer Protection Act of 1988, which requires
additional application disclosures, limits changes that may be made to the
loan documents without the borrower's consent and restricts a lender's
ability to declare a default or to suspend or reduce a borrower's credit
limit to certain enumerated events.
These laws impose specific statutory liabilities upon lenders who fail to
comply with the provisions of such laws. In addition, violation of such laws may
limit the ability to collect all or a part of the principal of or interest on
the Loans and could subject assignees to damages and administrative enforcement.
See "Certain Legal Aspects of the Loans--Consumer Protection Laws."
THE RIEGLE ACT MAY AFFECT ENFORCEABILITY OF LOANS. Certain mortgage loans
may be subject to the Riegle Community Development and Regulatory Improvement
Act of 1994 (the "Riegle Act") which incorporates the Home Ownership and Equity
Protection Act of 1994. These provisions impose additional disclosure and other
requirements on creditors with respect to non-purchase money mortgage loans with
high interest rates or high up-front fees and charges. The provisions of the
Riegle Act apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee of the
creditor would generally be subject to all claims and defenses that the consumer
could assert against the creditor, including, without limitation, the right to
rescind the mortgage loan.
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HOLDER IN DUE COURSE RULES MAY AFFECT COLLECTIONS. The Contracts are also
subject to the Preservation of Consumers' Claims and Defenses regulations of the
Federal Trade Commission and other similar federal and state statutes and
regulations (collectively, the "Holder in Due Course Rules"), which protect the
homeowner from defective craftsmanship or incomplete work by a contractor. These
laws permit the obligor to withhold payment if the work does not meet the
quality and durability standards agreed to by the homeowner and the contractor.
The Holder in Due Course Rules have the effect of subjecting any assignee of the
seller in a consumer credit transaction to all claims and defenses which the
obligor in the credit sale transaction could assert against the seller of the
goods.
Violations of certain provisions of these federal laws may limit the ability
of the Master Servicer to collect all or part of the principal of or interest on
the Loans and in addition could subject the Trust Fund to damages and
administrative enforcement. Losses on such Loans that are not otherwise covered
by the credit enhancement described in the related Prospectus Supplement will be
borne by the holders of one or more classes of Securities of the related Series.
See "Certain Legal Aspects of the Loans."
RATINGS ARE NOT RECOMMENDATIONS
It will be a condition to the issuance of a class of Securities offered
hereby that they be rated in one of the four highest rating categories by the
Rating Agency identified in the related Prospectus Supplement. Any such rating
would be based on, among other things, the adequacy of the value of the related
Trust Fund Assets and any credit enhancement with respect to such class and will
represent such Rating Agency's assessment solely of the likelihood that holders
of such class of Securities will receive payments to which such Securityholders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ from
that originally anticipated or the likelihood of early optional termination of
the Series of Securities. Such rating shall not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor purchasing a Security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series of Securities, such rating might also be lowered or
withdrawn because of, among other reasons, an adverse change in the financial or
other condition of a credit enhancement provider or a change in the rating of
such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a class of Securities will be determined on the basis of criteria
established by each Rating Agency rating classes of such Series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of similar loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required with respect to each
such class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of similar loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Loans. No assurance can be given that the values of any Properties have
remained or will remain at their levels on the respective dates of origination
of the related Loans. If the residential real estate markets should experience
an overall decline in property values such that the outstanding principal
balances of the Loans in a particular Trust Fund and any secondary financing on
the related Properties become equal to or greater than the value of the
Properties, the rates of delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending
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industry. In addition, adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the Loans and, accordingly, the rates of
delinquencies, foreclosures and losses with respect to any Trust Fund. To the
extent that such losses are not covered by credit enhancement, such losses will
be borne, at least in part, by the holders of one or more classes of Securities
of the related Series. See "Rating."
BOOK-ENTRY REGISTRATION MAY REDUCE LIQUIDITY
If issued in book-entry form, such registration may reduce the liquidity of
the Securities in the secondary trading market since investors may be unwilling
to purchase Securities for which they cannot obtain physical certificates. Since
transactions in book-entry Securities can be effected only through the
Depository Trust Company ("DTC"), participating organizations, Financial
Intermediaries and certain banks, the ability of a Securityholder to pledge a
book-entry Security to persons or entities that do not participate in the DTC
system may be limited due to lack of a physical certificate representing such
Securities. Security Owners will not be recognized as Securityholders, as such
term is used in the related Agreement, and Security Owners will be permitted to
exercise the rights of Securityholders only indirectly through DTC and its
Participants.
In addition, Securityholders may experience some delay in their receipt of
distributions of interest and principal on book-entry Securities since
distributions are required to be forwarded by the Trustee to DTC and DTC will
then be required to credit such distributions to the accounts of Depository
participants which thereafter will be required to credit them to the accounts of
Securityholders either directly or indirectly through Financial Intermediaries.
See "Description of the Securities--Book-Entry Registration of Securities."
REINVESTMENT RISK RELATED TO PRE-FUNDING ACCOUNTS
If so provided in the related Prospectus Supplement, on the related Closing
Date the Depositor will deposit cash from the proceeds of the issuance of the
related Series of Securities in an amount (the "Pre-Funded Amount") specified in
such Prospectus Supplement into an account (the "Pre-Funding Account"). In no
event shall the Pre-Funded Amount exceed 25% of the initial aggregate principal
amount of the Certificates and/or Notes of the related Series of Securities. The
Pre-Funded Amount will be used to purchase Loans ("Subsequent Loans") in a
period from the related Closing Date to a date not more than three months after
such Closing Date (such period, the "Funding Period") from the Depositor (which,
in turn, will acquire such Subsequent Loans from the Seller or Sellers specified
in the related Prospectus Supplement). The Pre-Funding Account will be
maintained with the Trustee for the related Series of Securities and is designed
solely to hold funds to be applied by such Trustee during the Funding Period to
pay to the Depositor the purchase price for Subsequent Loans. Monies on deposit
in the Pre-Funding Account will not be available to cover losses on or in
respect of the related Loans. To the extent that the entire Pre-Funded Amount
has not been applied to the purchase of Subsequent Loans by the end of the
related Funding Period, any amounts remaining in the Pre-Funding Account will be
distributed as a prepayment of principal to Certificateholders and/or
Noteholders on the Distribution Date immediately following the end of the
Funding Period, in the amounts and pursuant to the priorities set forth in the
related Prospectus Supplement. Any reinvestment risk resulting from such
prepayment will be borne entirely by the holders of one or more classes of the
related Series of Certificates.
BANKRUPTCY AND INSOLVENCY RISKS
INSOLVENCY OF DEPOSITOR MAY CAUSE LOSSES AND DELAYS. The Seller and the
Depositor will treat the transfer of the Loans by the Seller to the Depositor as
a sale for accounting purposes. The Depositor and the Trust Fund will treat the
transfer of Loans from the Depositor to the Trust Fund as a sale for accounting
purposes. As a sale of the Loans by the Seller to the Depositor, the Loans would
not be part of the Seller's bankruptcy estate and would not be available to the
Seller's creditors. However, in the event of
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the insolvency of the Depositor, it is possible that the bankruptcy trustee or a
creditor of the Depositor may attempt to recharacterize the sale of the Loans by
the Depositor to the Trust Fund as a borrowing by the Depositor, secured by a
pledge of the Loans. In such a case, this position, if argued before or accepted
by a court, could prevent timely payments of amounts due on the Securities and
result in a reduction of payments due on the Securities. If the sale of the
Loans by the Depositor to the Trust Fund is recharacterized as a borrowing by
the Depositor, the Loans will be part of the Depositor's bankruptcy estate and
may be available to repay other creditors of the Depositor as well as the Trust
Fund. Depending on the priority of the Trustee's security interest in the Loans,
the successful recharacterization of such sale as a borrowing may result in an
insufficient amount remaining to pay the Trust Fund after the claims of other
secured creditors of the Depositor have been reimbursed from any cash flow
relating to the Loans or proceeds from the disposition of the Loans and/or other
creditors have shared in the distribution of such cash flow or proceeds. Even if
the sale of the Loans is not so recharacterized, any litigation due to the
bankruptcy of the Depositor could result in a delay in payments from the cash
flow of the Loans to the Trustee.
INSOLVENCY OF MASTER SERVICER MAY PREVENT REPLACING MASTER SERVICER. In the
event of a bankruptcy or insolvency of the Master Servicer, the bankruptcy
trustee or receiver may have the power to prevent the Trustee or the
Securityholders from appointing a successor Master Servicer.
Each Agreement will specify the time period during which cash collections
may be commingled with the Master Servicer's own funds prior to each
Distribution Date and such time period will also be specified in the related
Prospectus Supplement. In the event of the insolvency of the Master Servicer and
if such cash collections are commingled with the Master Servicer's own funds for
at least ten days, the Trust Fund will likely not have a perfected interest in
such collections since such collections would not have been deposited in a
segregated account within ten days after the collection thereof, and the
inclusion thereof in the bankruptcy estate of the Master Servicer may result in
delays in payment and failure to pay amounts due on the Securities of the
related Series.
INSOLVENCY OF LOAN DEBTOR MAY CAUSE LOSSES AND DELAYS. In addition, federal
and state statutory provisions, including the federal bankruptcy laws and state
laws affording relief to debtors, may interfere with or affect the ability of
the secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on a
mortgaged property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the mortgaged
property is not the debtor's principal residence and the court determines that
the value of the mortgaged property is less than the principal balance for the
mortgage loan, for the reduction of the secured indebtedness to the value of the
mortgaged property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to any
automatic stay, could result in delays in receiving payments on the Loans
underlying a Series of Securities and possible reductions in the aggregate
amount of such payments.
TAX CONSEQUENCES OF OWNING ORIGINAL ISSUE DISCOUNT SECURITIES
Debt Securities that are Compound Interest Securities will be, and certain
of the other Debt Securities may be, issued with original discount for federal
income tax purposes. A holder of Debt Securities issued with original issue
discount will be required to include original issue discount in ordinary gross
income for federal income tax purposes as it accrues, in advance of receipt of
the cash attributable to such income. Accrued but unpaid interest on the Debt
Securities that are Compound Interest Securities generally will be treated as
original issue discount for this purpose. See "Federal Income Tax
Consequences--General--Interest and Acquisition Discount" and "--Market
Discount" herein.
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VALUE OF TRUST FUND ASSETS MAY BE INSUFFICIENT
There is no assurance that the market value of the Trust Fund Assets or any
other assets relating to a Series of Securities described under "Credit
Enhancement" herein will at any time be equal to or greater than the principal
amount of the Securities of such Series then outstanding, plus accrued interest
thereon. Moreover, upon an event of default under the Agreement for a Series of
Securities and a sale of the related Trust Fund Assets or upon a sale of the
assets of a Trust Fund for a Series of Securities, the Trustee, the Master
Servicer, the credit enhancer, if any, and any other service provider specified
in the related Prospectus Supplement generally will be entitled to receive the
proceeds of any such sale to the extent of unpaid fees and other amounts owing
to such persons under the related Agreement prior to distributions to
Securityholders. Upon any such sale, the proceeds thereof may be insufficient to
pay in full the principal of and interest on the Securities of such Series.
VALUE OF INDEXED SECURITIES MAY BE AFFECTED
An investment in Securities indexed, as to principal, premium and/or
interest, to one or more values of currencies (including exchange rates and swap
indices between currencies), commodities, interest rates or other indices
entails significant risks that are not associated with similar investments in a
conventional fixed-rate debt security. If the interest rate of such a Security
is so indexed, it may result in an interest rate that is less than that payable
on a conventional fixed-rate debt security issued at the same time, including
the possibility that no interest will be paid, and, if the principal amount of
such a Security is so indexed, the principal amount payable) on the related
final Distribution Date may be less than the original purchase price of such
Security if allowed pursuant to the terms of such Security, including the
possibility that no principal will be paid. The secondary market for such
Securities will be affected by a number of factors, independent of the
characteristics of the Trust Fund Assets, structure of the cash flows and the
value of the applicable currency commodity, interest rate or other index,
including the volatility of the applicable currency, commodity, interest rate or
other index, the time remaining to the maturity of such Securities, the amount
outstanding of such Securities and market interest rates. The value of the
applicable currency, commodity, interest rate or other index depends on a number
of interrelated factors, including economic, financial and political events.
Additionally, if the formula used to determine the principal amount, premium, if
any, or interest payable with respect to such Securities contains a multiple or
leverage factor, the effect of any change in the applicable currency, commodity,
interest rate or other index may be increased. The historical experience of the
relevant currencies, commodities, interest rates or other indices should not be
taken as an indication of future performance of such currencies, commodities,
interest rates or other indices during the term of any Security. The credit
ratings assigned to any Series or class of Securities, in no way, are reflective
of the potential impact of the factors discussed above, or any other factors, on
the market value of the Securities. Accordingly, prospective investors should
consult their own financial and legal advisors as to the risks entailed by an
investment in such Securities and the suitability of such Securities in light of
their particular circumstances.
THE TRUST FUND
GENERAL
The Securities of each Series will represent interests in the assets of the
related Trust Fund, and the Notes of each Series will be secured by the pledge
of the assets of the related Trust Fund. The Trust Fund for each Series will be
held by the Trustee for the benefit of the related Securityholders. Each Trust
Fund will consist of assets (the "Trust Fund Assets") consisting of a pool
(each, a "Pool") comprised of Loans, Agency Securities and/or Private
Mortgage-Backed Securities as specified in the related Prospectus Supplement,
together with payments in respect of such Loans, and certain other accounts,
obligations or agreements, in each case, as specified in the related Prospectus
Supplement.* The Pool will be created on the first day of the month of the
issuance of the related Series of Securities or such other date specified in the
related Prospectus Supplement (the "Cut-off Date"). The Securities will be
entitled to payment from
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the assets of the related Trust Fund or Funds or other assets pledged for the
benefit of the Securityholders, as specified in the related Prospectus
Supplement, and will not be entitled to payments in respect of the assets of any
other trust fund established by the Depositor.
The Trust Fund Assets will be acquired by the Depositor, either directly or
through affiliates, from sellers (the "Sellers"). The Sellers may be affiliates
of the Depositor. Loans acquired by the Depositor will have been originated in
accordance with the underwriting criteria described below under "The Loans--
Underwriting Standards." The Depositor will cause the Trust Fund Assets to be
assigned without recourse to the Trustee named in the related Prospectus
Supplement for the benefit of the holders of the Securities of the related
Series. The Master Servicer named in the related Prospectus Supplement will
service the Trust Fund Assets, either directly or through other servicing
institutions ("Sub-Servicers"), pursuant to a Pooling and Servicing Agreement
among the Depositor, the Master Servicer and the Trustee with respect to a
Series consisting of Certificates, or a master servicing agreement (each, a
"Master Servicing Agreement") between the Trustee and the Master Servicer with
respect to a Series consisting of Certificates and Notes, and will receive a fee
for such services. See "The Agreements." With respect to Loans serviced by the
Master Servicer through a Sub-Servicer, the Master Servicer will remain liable
for its servicing obligations under the related Agreement as if the Master
Servicer alone were servicing such Loans.
As used herein, "Agreement" means, with respect to a Series consisting of
Certificates, the Pooling and Servicing Agreement, and with respect to a Series
consisting of Certificates and Notes, the Trust Agreement, the Indenture and the
Master Servicing Agreement, as the context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the trustee of
such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding of the related Trust Fund Assets and other assets
contemplated herein specified and in the related Prospectus Supplement and the
proceeds thereof, issuing Securities and making payments and distributions
thereon and certain related activities. No Trust Fund is expected to have any
source of capital other than its assets and any related credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Depositor with respect to a Series of Securities will be to
obtain certain representations and warranties from the Sellers or the
Originators and to assign to the Trustee for such Series the Depositor's rights
with respect to such representations and warranties. See "The
Agreements--Assignment of the Trust Fund Assets." The obligations of the Master
Servicer with respect to the Loans will consist principally of its contractual
servicing obligations under the related Agreement (including its obligation to
enforce the obligations of the Sub-Servicers or Sellers, or both, as more fully
described herein under "The Trust Fund--Representations by Sellers or
Originators; Repurchases" and "The Agreements--Sub-Servicing By Sellers" and "--
Assignment of the Trust Fund Assets") and its obligation, if any, to make
certain cash advances in the event of delinquencies in payments on or with
respect to the Loans in the amounts described herein under
- ------------------------
* Whenever the terms "Pool," "Certificates," "Notes" and "Securities" are used
in this Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Pool and the Securities of one Series
including the Certificates representing certain undivided interests in,
and/or Notes secured by the assets of, a single Trust Fund consisting
primarily of the Loans, Agency Securities or Private Mortgage-Backed
Securities in such Pool. Similarly, the term "Pass-Through Rate" will refer
to the Pass-Through Rate borne by the Certificates and the term "interest
rate" will refer to the interest rate borne by the Notes of one specific
Series, as applicable, and the term "Trust Fund" will refer to one specific
Trust Fund.
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"Description of the Securities--Advances." The obligations of the Master
Servicer to make advances may be subject to limitations, to the extent provided
herein and in the related Prospectus Supplement.
The following is a brief description of the assets expected to be included
in the Trust Funds. If specific information respecting the Trust Fund Assets is
not known at the time the related Series of Securities initially is offered,
more general information of the nature described below will be provided in the
related Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Securities (the "Detailed
Description"). A copy of the Agreement with respect to each Series of Securities
will be 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 Loans, Agency Securities and/or Private
Mortgage-Backed Securities relating to such Series will be attached to the
Agreement delivered to the Trustee upon delivery of the Securities.
THE LOANS
GENERAL. Unless otherwise specified in the related Prospectus Supplement,
Loans will consist of mortgage loans or deeds of trust secured by first or
subordinated liens on one- to four-family residential properties, Home Equity
Loans, Home Improvement Contracts or Manufactured Housing Contracts. For
purposes hereof, "Home Equity Loans" includes "Closed-End Loans" and "Revolving
Credit Line Loans." If so specified, the Loans may include cooperative apartment
loans ("Cooperative Loans") secured by security interests in shares issued by
private, non-profit, cooperative housing corporations ("Cooperatives") and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in such Cooperatives' buildings. As more fully
described in the related Prospectus Supplement, the Loans may be "conventional"
loans or loans that are insured or guaranteed by a governmental agency such as
the FHA or VA. The Loans will have been originated in accordance with the
underwriting criteria specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Loans in a Pool will have monthly payments due on the first day of each month.
The payment terms of the Loans to be included in a Trust Fund will be described
in the related Prospectus Supplement and may include any of the following
features (or combination thereof), all as described below or in the related
Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from time to
time in relation to an index (which will be specified in the related Prospectus
Supplement), a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate, a rate that otherwise
varies from time to time, or a rate that is convertible from an adjustable rate
to a fixed rate. Changes to an adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates or a combination of such limitations.
As specified in the related Prospectus Supplement, the Loans will provide either
for payments in level monthly installments (except in the case of Loans with
balloon payments) consisting of interest equal to one-twelfth of the specified
interest rate borne by such Loan (the "Loan Rate") times the unpaid principal
balance, with the remainder of such payment applied to principal, for payments
that are allocated to principal and interest according to the daily simple
interest method, or for payments that are allocated to principal and interest
according to the "sum of the digits" or "Rule of 78s" methods. Accrued interest
may be deferred and added to the principal of a Loan for such periods and under
such circumstances as may be specified in the related Prospectus Supplement.
Loans may provide for the payment of interest at a rate lower than the Loan Rate
for a period of time or for the life of the Loan, and the amount of any
difference may be contributed from funds supplied by the seller of the Property
or another source.
(b) Principal may be payable on a level debt service basis to fully amortize
the Loan over its term, may be calculated on the basis of an assumed
amortization schedule that is significantly longer than the original term to
maturity or on an interest rate that is different from the Loan Rate or may not
be amortized during all or a portion of the original term. Payment of all or a
substantial portion of the
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principal may be due on maturity ("balloon payment"). Principal may include
interest that has been deferred and added to the principal balance of the Loan.
(c) Monthly payments of principal and interest may be fixed for the life of
the Loan, may increase over a specified period of time or may change from period
to period. Loans may include limits on periodic increases or decreases in the
amount of monthly payments and may include maximum or minimum amounts of monthly
payments.
(d) Prepayments of principal may be subject to a prepayment fee, which may
be fixed for the life of the Loan or may decline over time, and may be
prohibited for the life of the Loan or for certain periods ("lockout periods").
Certain Loans may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection with any
such subsequent prepayment. Other Loans may permit prepayments without payment
of a fee unless the prepayment occurs during specified time periods. The Loans
may include "due on sale" clauses which permit the mortgagee to demand payment
of the entire Loan in connection with the sale or certain transfers of the
related Property. Other Loans may be assumable by persons meeting the then
applicable underwriting standards of the related Seller.
A Trust Fund may contain certain Loans ("Buydown Loans") that include
provisions whereby a third party partially subsidizes the monthly payments of
the borrowers on such Loans during the early years of such Loans, the difference
to be made up from a fund (a "Buydown Fund") contributed by such third party at
the time of origination of the Loan. A Buydown Fund will be in an amount equal
either to the discounted value or full aggregate amount of future payment
subsidies. The underlying assumption of buydown plans is that the income of the
borrower will increase during the buydown period as a result of normal increases
in compensation and inflation, so that the borrower will be able to meet the
full loan payments at the end of the buydown period. To the extent that this
assumption as to increased income is not fulfilled, the possibility of defaults
on Buydown Loans is increased. The related Prospectus Supplement will contain
information with respect to any Buydown Loan concerning limitations on the
interest rate paid by the borrower initially, on annual increases in the
interest rate and on the length of the buydown period.
The real property which secures repayment of the Loans is referred to as the
"Mortgaged Properties." Home Improvement Contracts and Manufactured Housing
Contracts may, and the other Loans will, be secured by mortgages or deeds of
trust or other similar security instruments creating a lien on a Mortgaged
Property. In the case of Home Equity Loans, such liens generally will be
subordinated to one or more senior liens on the related Mortgaged Properties as
described in the related Prospectus Supplement. As specified in the related
Prospectus Supplement, Home Improvement Contracts and Manufactured Housing
Contracts may be unsecured or secured by purchase money security interests in
the Home Improvements and Manufactured Homes financed thereby. The Mortgaged
Properties, and the Home Improvements and the Manufactured Homes are
collectively referred to herein as the "Properties." The Properties relating to
Loans will consist primarily of detached or semi-detached one- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments, and certain other dwelling units ("Single
Family Properties") or "mixed used properties" which consist of structures of
not more than three stories which include one- to four-family residential
dwelling units and space used for retail, professional or other commercial uses.
Such Properties may include vacation and second homes, investment properties and
leasehold interests. In the case of leasehold interests, the term of the
leasehold will exceed the scheduled maturity of the Loan by at least five years,
unless otherwise specified in the related Prospectus Supplement. The Properties
may be located in any one of the fifty states, the District of Columbia, Guam,
Puerto Rico or any other territory of the United States.
Loans with certain Loan-to-Value Ratios and/or certain principal balances
may be covered wholly or partially by primary mortgage guaranty insurance
policies (each, a "Primary Mortgage Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the applicable Prospectus
Supplement.
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The aggregate principal balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the sole basis for a
representation that a given percentage of the Loans is secured by Single Family
Properties that are owner-occupied will be either (i) the making of a
representation by the borrower at origination of the Loan either that the
underlying Property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the Property as a primary
residence or (ii) a finding that the address of the underlying Property is the
borrower's mailing address.
HOME EQUITY LOANS. As more fully described in the related Prospectus
Supplement, interest on each Revolving Credit Line Loan, excluding introduction
rates offered from time to time during promotional periods, is computed and
payable monthly on the average daily outstanding principal balance of such Loan.
Principal amounts on a Revolving Credit Line Loan may be drawn down (up to a
maximum amount as set forth in the related Prospectus Supplement) or repaid
under each Revolving Credit Line Loan from time to time, but may be subject to a
minimum periodic payment. Except to the extent provided in the related
Prospectus Supplement, the Trust Fund will not include any amounts borrowed
under a Revolving Credit Line Loan after the Cut-off Date. The full amount of a
Closed-End Loan is advanced at the inception of the Loan and generally is
repayable in equal (or substantially equal) installments of an amount to fully
amortize such Loan at its stated maturity. Except to the extent provided in the
related Prospectus Supplement, the original terms to stated maturity of
Closed-End Loans will not exceed 360 months. Under certain circumstances, under
either a Revolving Credit Line Loan or a Closed-End Loan, a borrower may choose
an interest only payment option and is obligated to pay only the amount of
interest which accrues on the Loan during the billing cycle. An interest only
payment option may be available for a specified period before the borrower must
begin paying at least the minimum monthly payment of a specified percentage of
the average outstanding balance of the Loan.
HOME IMPROVEMENT CONTRACTS. The Trust Fund Assets for a Series of
Securities may consist, in whole or in part, of Home Improvement Contracts
originated by a commercial bank, a savings and loan association, a commercial
mortgage banker or other financial institution in the ordinary course of
business. The Home Improvements securing the Home Improvement Contracts may
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels. As specified in the related Prospectus Supplement, the
Home Improvement Contracts will either be unsecured or secured by mortgages on
Single Family Properties which are generally subordinate to other mortgages on
the same Property, or secured by purchase money security interests in the Home
Improvements financed thereby. Except as otherwise specified in the related
Prospectus Supplement, the Home Improvement Contracts will be fully amortizing
and may have fixed interest rates or adjustable interest rates and may provide
for other payment characteristics as described below and in the related
Prospectus Supplement. The initial Loan-to-Value Ratio of a Home Improvement
Contract is computed in the manner described in the related Prospectus
Supplement.
MANUFACTURED HOUSING CONTRACTS. The Trust Fund Assets for a Series may
consist, in whole or part, of conventional manufactured housing installment
sales contracts and installment loan agreements (the "Manufactured Housing
Contracts" and together with the Home Improvement Contracts, the "Contracts"),
originated by a manufactured housing dealer in the ordinary course of business.
As specified in the related Prospectus Supplement, the Manufactured Housing
Contracts will be secured by either Manufactured Homes (as defined below),
located in any of the fifty states or the District of Columbia or by Mortgages
on the real estate on which the Manufactured Homes are located.
Unless otherwise specified in the related Prospectus Supplement, the
manufactured homes (the "Manufactured Homes") securing the Manufactured Housing
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
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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."
Manufactured Homes, unlike Mortgaged Properties, and Home Improvements,
generally depreciate in value. Consequently, at any time after origination it is
possible, especially in the case of Contracts with high Loan-to-Value Ratios at
origination, that the market value of a Manufactured Home or Home Improvement
may be lower than the principal amount outstanding under the related Contract.
ADDITIONAL INFORMATION. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to the Depositor, with respect to the Loans contained in the
related Pool, including (i) the aggregate outstanding principal balance and the
average outstanding principal balance of the Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Loan (e.g., single family
residences, individual units in condominium apartment buildings, two- to four-
family dwelling units, other real property, Home Improvements or Manufactured
Homes), (iii) the original terms to maturity of the Loans, (iv) the largest
principal balance and the smallest principal balance of any of the Loans, (v)
the earliest origination date and latest maturity date of any of the Loans, (vi)
the Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as applicable, of the
Loans, (vii) the Loan Rates or annual percentage rates ("APR") or range of Loan
Rates or APR's borne by the Loans, (viii) the maximum and minimum per annum Loan
Rates, and (ix) the geographical location of the Loans. If specific information
respecting the Loans is not known to the Depositor at the time the related
Securities are initially offered, more general information of the nature
described above will be provided in the related Prospectus Supplement, and
specific information will be set forth in the Detailed Description.
The "Loan-to-Value Ratio" of a Loan at any given time is the fraction,
expressed as a percentage, the numerator of which is the original principal
balance of the related Loan and the denominator of which is the Collateral Value
of the related Property. Except as otherwise specified in the related Prospectus
Supplement, the "Combined Loan-to-Value Ratio" of a Loan at any given time is
the ratio, expressed as a percentage, of (i) the sum of (a) the original
principal balance of the Loan (or, in the case of a Revolving Credit Line Loan,
the maximum amount thereof available) and (b) the outstanding principal balance
at the date of origination of the Loan of any senior mortgage loan(s) or, in the
case of any open-ended senior mortgage loan, the maximum available line of
credit with respect to such mortgage loan, regardless of any lesser amount
actually outstanding at the date of origination of the Loan, to (ii) the
Collateral Value of the related Property. Except as otherwise specified in the
related Prospectus Supplement, the "Collateral Value" of the Property, other
than with respect to certain Loans the proceeds of which were used to refinance
an existing mortgage loan (each, a "Refinance Loan"), is the lesser of (a) the
appraised value determined in an appraisal obtained by the originator at
origination of such Loan and (b) the sales price for such Property. In the case
of Refinance Loans, the "Collateral Value" of the related Property is the
appraised value thereof determined in an appraisal obtained at the time of
refinancing.
No assurance can be given that values of the Properties have remained or
will remain at their levels on the dates of origination of the related Loans. If
the residential real estate market should experience an overall decline in
property values such that the sum of the outstanding principal balances of the
Loans and any primary or secondary financing on the Properties, as applicable,
in a particular Pool become equal to or greater than the value of the
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions and other factors (which may or may not
affect real property values) may affect the timely payment by borrowers of
scheduled payments of principal and interest on the Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any Pool.
To the
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extent that such losses are not covered by subordination provisions or
alternative arrangements, such losses will be borne, at least in part, by the
holders of the Securities of the related Series.
UNDERWRITING STANDARDS. The Loans will be acquired by the Depositor, either
directly or through affiliates, from the Sellers. The Depositor does not
originate Loans and has not identified specific Originators or Sellers of Loans
from whom the Depositor, either directly or through affiliates, will purchase
Loans. Unless otherwise specified in the related Prospectus Supplement, the
Loans will be originated in accordance with the following underwriting criteria.
Each Seller or Originator will represent and warrant that all Loans originated
and/or sold by it to the Depositor or one of its affiliates will have been
underwritten in accordance with standards consistent with those utilized by
lenders generally during the period of origination for similar types of loans.
As to any Loan insured by the FHA or partially guaranteed by the VA, the Seller
or Originator will represent that it has complied with underwriting policies of
the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Mortgaged Property, Home Improvements or Manufactured Home, as
applicable, as collateral. In general, a prospective borrower applying for a
Loan is required to fill out a detailed application designed to provide to the
underwriting officer pertinent credit information, including, among other
things, the principal balance and payment history with respect to any senior
mortgage, if any, which, unless otherwise specified in the related Prospectus
Supplement, will be verified by the related Seller or Originator. As part of the
description of the borrower's financial condition, the borrower generally is
required to provide a current list of assets and liabilities and a statement of
income and expenses, as well as an authorization to apply for a credit report
which summarizes the borrower's credit history with local merchants and lenders
and any record of bankruptcy. In most cases, an employment verification is
obtained from an independent source (typically the borrower's employer) which
verification reports, among other things, the length of employment with that
organization and the borrower's current salary. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
In determining the adequacy of the property to be used as collateral, an
appraisal, if applicable, will generally be made of each property considered for
financing. The appraiser is generally required to inspect the property, issue a
report on its condition and, if applicable, verify construction, if new, has
been completed. The appraisal is based on the market value of comparable
properties, the estimated rental income (if considered applicable by the
appraiser) and the cost of replacing the collateral. The value of the property
being financed, as indicated by the appraisal, must be such that it currently
supports, and is anticipated to support in the future, the outstanding loan
balance.
The maximum loan amount will vary depending upon a borrower's credit grade
and loan program but will not generally exceed an amount specified in the
related Prospectus Supplement. Variations in maximum loan amount limits will be
permitted based on compensating factors. Compensating factors may generally
include, to the extent specified in the related Prospectus Supplement, low
loan-to-value ratio, low debt-to-income ratio, stable employment, favorable
credit history and the nature of the underlying first mortgage loan, if
applicable.
Each Seller's or Originator's underwriting standards will generally permit
loans with loan-to-value ratios at origination of up to 100% depending on the
loan program, type and use of the property, creditworthiness of the borrower and
debt-to-income ratio.
After obtaining all applicable employment, credit and property information,
the related Seller or Originator will use a debt-to-income ratio to assist in
determining whether the prospective borrower has sufficient monthly income
available to support the payments of principal and interest on the loan in
addition to other monthly credit obligations. The "debt-to-income ratio" is the
ratio of the borrower's total
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monthly payments to the borrower's gross monthly income. The maximum monthly
debt-to-income ratio will vary depending upon a borrower's credit grade and loan
program but will not generally exceed an amount specified in the related
Prospectus Supplement. Variations in the monthly debt-to-income ratio limit will
be permitted based on compensating factors to the extent specified in the
related Prospectus Supplement.
Certain of the types of Loans that may be included in a Trust Fund are
recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Loans are underwritten
on the basis of a judgment that the borrowers have the ability to make the
monthly payments required initially. In some instances, a borrower's income may
not be sufficient to permit continued loan payments as such payments increase.
These types of Loans may also be underwritten primarily upon the basis of
loan-to-value ratios or other favorable credit factors.
MODIFICATION OF LOANS
The Master Servicer may agree, subject to the terms and conditions set forth
in the related Agreement, to modify, waive or amend any term of a Loan in a
manner that is consistent with the servicing standard set forth in the related
Agreement and related Prospectus Supplement; PROVIDED HOWEVER, that such
modification, waiver or amendment may not affect the tax status of the Trust
Fund or cause any tax to be imposed on the Trust Fund or materially impair the
security for the related Loan.
AGENCY SECURITIES
Government National Mortgage Association. GNMA is a wholly-owned corporate
instrumentality of the United States within the United Stated Department of
Housing and Urban Development ("HUD"). Section 306(g) of Title II of the
National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA
to, among other things, guarantee the timely payment of the principal of and
interest on certificates which represent an interest in a pool of mortgage loans
insured by the FHA under the Housing Act or Title V of the Housing Act of 1949
("FHA Loans"), or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or chapter 37 of Title 38, United States
Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guarantee under this subsection." In order to meet
its obligations under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an amount which is at any
time sufficient to enable GNMA, with no limitations as to amount, to perform its
obligations under its guarantee.
GNMA CERTIFICATES. Each GNMA Certificate held in a Trust Fund (which may be
a GNMA I Certificate or a GNMA II Certificate) will be a "fully modified
pass-through" mortgaged-backed certificate issued and serviced by a mortgage
banking company or other financial concern ("GNMA Issuer") approved by GNMA or
approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The mortgage
loans underlying the GNMA Certificates held in a Trust Fund will consist of FHA
Loans and/or VA Loans. Each such mortgage loan is secured by a one- to
four-family residential property or a manufactured home. GNMA will approve the
issuance of each such GNMA Certificate in accordance with a guaranty agreement
(a "Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to its
Guaranty Agreement, a GNMA Issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each such GNMA Certificate,
even if the payments received by the GNMA Issuer on the FHA Loans or VA Loans
underlying each such GNMA Certificate are less than the amounts due on each such
GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA
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Certificate will have an original maturity of not more than 40 years (but may
have original maturities of substantially less than 40 years). Each such GNMA
Certificate will provide for the payment by or on behalf of the GNMA Issuer to
the registered holder of such GNMA Certificate of scheduled monthly payments of
principal and interest equal to the registered holder's proportionate interest
in the aggregate amount of the monthly principal and interest payment on each
FHA Loan or VA Loan underlying such GNMA Certificate, less the applicable
servicing and guarantee fee which together equal the difference between the
interest on the FHA Loans or VA Loans and the pass-through rate on the GNMA
Certificate. In addition, each payment will include proportionate pass-through
payments of any prepayments of principal on the FHA Loans or VA Loans underlying
such GNMA Certificate and liquidation proceeds in the event of a foreclosure or
other disposition of any such FHA Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer
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will be the same irrespective of whether the GNMA Certificates are backed by
graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-buydown
loans are available in respect of graduated payment or buydown mortgages. GNMA
Certificates related to a Series of Certificates may be held in book-entry form.
GNMA also guarantees the timely payment of principal of and interest on
"fully modified pass-through" mortgage-backed securities issued and serviced by
certain mortgage banking companies and other financial concerns ("FNMA Project
Issuers") based upon and backed by pools of multi-family residential mortgage
loans coinsured by FHA and GNMA Project Issuers under the Housing Act ("GNMA
Project Certificates"). The Prospectus Supplement for a Series of Certificates
that includes GNMA Project Certificates will set forth additional information
regarding the GNMA guaranty program, servicing of the mortgage pool, the payment
of principal and interest on GNMA Project Certificates and other matters with
respect to multi-family residential mortgage loans that qualify for the GNMA
guaranty.
FEDERAL NATIONAL MORTGAGE ASSOCIATION. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act (the "Charter Act"). FNMA was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately-managed corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA CERTIFICATES. FNMA Certificates are either Guaranteed Mortgage
Pass-Through Certificates ("FNMA MBS") or Stripped Mortgage-Backed Securities
("FNMA SMBS"). The following discussion of FNMA Certificates applies equally to
both FNMA MBS and FNMA SMBS, except as otherwise indicated. Each FNMA
Certificate included in the Trust Fund for a Series will represent a fractional
undivided interest in a pool of mortgage loans formed by FNMA. Each such pool
will consist of mortgage loans of one of the following types: (i) fixed-rate
level installment conventional mortgage loans; (ii) fixed-rate level installment
mortgage loans that are insured by FHA or partially guaranteed by the VA; (iii)
adjustable rate conventional mortgage loans; or (iv) adjustable rate mortgage
loans that are insured by the FHA or partially guaranteed by the VA. Each
mortgage loan must meet the applicable standards set forth under the FNMA
purchase program. Each such mortgage loan will be secured by a first lien on a
one- to four-family residential property. Each such FNMA Certificate will be
issued pursuant to a trust indenture. Original maturities of substantially all
of the conventional, level payment mortgage loans underlying a FNMA Certificate
are expected to be between either 8 to 15 years or 20 to 40 years. The original
maturities of substantially all of the fixed rate level payment FHA Loans or VA
Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA MBS (and the series pass-through rate payable with
respect to a FNMA SMBS) is equal to the lowest interest rate of any mortgage
loan in the related pool, less a specified minimum annual percentage
representing servicing compensation and FNMA's guaranty fee. Under a regular
servicing option (pursuant to which the mortgagee or other servicer assumes the
entire risk of foreclosure losses), the annual interest rates on the mortgage
loans underlying a FNMA Certificate will be between 50 basis points and 250
basis points greater than the annual pass-through rate if a FNMA MBS or the
series pass-through rate if a FNMA SMBS; and under a special servicing option
(pursuant to which FNMA assumes the entire risk for foreclosure losses), the
annual interest rates on the mortgage loans underlying a FNMA Certificate will
generally be between 55
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basis points and 255 basis points greater than the annual FNMA Certificate
pass-through rate if a FNMA MBS, or the series pass-through rate if a FNMA SMBS.
FNMA guarantees to each registered holder of a FNMA Certificate that it will
distribute on a timely basis amounts representing such holder's proportionate
share of scheduled principal and interest payments at the applicable
pass-through rate provided for by such FNMA Certificate on the underlying
mortgage loans, whether or not received, and such holder's proportionate share
of the full principal amount of any foreclosed or other finally liquidated
mortgage loan, whether or not such principal amount is actually recovered. The
obligations of FNMA under its guarantees are obligations solely of FNMA and are
not backed by, nor entitled to, the full faith and credit of the United States.
If FNMA were unable to satisfy its obligations, distributions to holders of FNMA
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
FNMA Certificates would be affected by delinquent payments and defaults on such
mortgage loans.
FNMA SMBS are issued in series of two or more classes, with each class
representing a specified undivided fractional interest in principal
distributions and interest distributions (adjusted to the series pass-through
rate) on the underlying pool of mortgage loans. The fractional interests of each
class in principal and interest distributions are not identical, but the classes
in the aggregate represent 100% of the principal distributions and interest
distributions (adjusted to the series pass-through rate) on the respective pool.
Because of such difference between the fractional interests in principal and
interest of each class, the effective rate of interest on the principal of each
class of FNMA SMBS may be significantly higher or lower than the series
pass-through rate and/or the weighted average interest rate of the underlying
mortgage loans.
Unless otherwise specified by FNMA, FNMA Certificates evidencing interests
in pools of mortgages formed on or after May 1, 1985 will be available in
book-entry form only. Distributions of principal and interest on each FNMA
Certificate will be made by FNMA on the 25th day of each month to the persons in
whose name the FNMA Certificate is entered in the books of the Federal Reserve
Banks (or registered on the FNMA Certificate register in the case of fully
registered FNMA Certificates) as of the close of business on the last day of the
preceding month. With respect to FNMA Certificates issued in book-entry form,
distributions thereon will be made by wire, and with respect to fully registered
FNMA Certificates, distributions thereon will be made by check.
FEDERAL HOME LOAN MORTGAGE CORPORATION. FHLMC is a publicly held United
States government-sponsored enterprise created pursuant to the Federal Home Loan
Mortgage Corporation Act, Title III of the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the Federal
Home Loan Banks. FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of FHLMC currently
consists of the purchase of first lien conventional mortgage loans FHA Loans, VA
Loans or participation interests in such mortgage loans and the sale of the
loans or participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality, type and class
as to meet generally the purchase standards imposed by private institutional
mortgage investors.
FHLMC CERTIFICATES. Each FHLMC Certificate represents an undivided interest
in a pool of mortgage loans that may consist of first lien conventional loans,
FHA Loans or VA Loans (a "FHLMC Certificate Group"). FHLMC Certificates are sold
under the terms of a Mortgage Participation Certificate Agreement. A FHLMC
Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program. Unless otherwise described in the Prospectus Supplement, Mortgage loans
underlying the FHLMC Certificates held by a Trust Fund will consist of mortgage
loans with original terms to maturity of between 10 and 40 years. Each such
mortgage loan must meet the applicable standards set forth in the
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FHLMC Act. A FHLMC Certificate Group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate Group. Under the Guarantor
Program, any such FHLMC Certificate Group may include only whole loans or
participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the timely
payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate Group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
ultimate receipt by such holder of all principal on the underlying mortgage
loans, without any offset or deduction, to the extent of such holder's pro rata
share thereof, but does not, except if and to the extent specified in the
Prospectus Supplement for a Series of Certificates, guarantee the timely payment
of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the
timely payment of principal based on the difference between the pool factor
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guarantees, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guarantee of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any Federal
Home Loan Bank and do not constitute debts or obligations of the United States
or any Federal Home Loan Bank. The obligations of FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by, nor entitled to, the full
faith and credit of the United States. If FHLMC were unable to satisfy such
obligations, distributions to holders of FHLMC Certificates would consist solely
of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, with respect to pools formed prior to June 1,
1987, there is no limitation on the amount by which interest rates on the
mortgage loans underlying a FHLMC Certificate may exceed the pass-through rate
on the FHLMC Certificate. With respect to FHLMC Certificates issued on or after
June 1, 1987, the maximum interest rate on the mortgage loans underlying such
FHLMC Certificates may exceed the pass through rate of the FHLMC Certificates by
50 to 100 basis points. Under such program, FHLMC purchases groups of whole
mortgage loans from sellers at specified percentages of their unpaid principal
balances, adjusted for accrued or prepaid interest, which when applied to the
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interest rate of the mortgage loans and participations purchased, results in the
yield (expressed as a percentage) required by FHLMC. The required yield, which
includes a minimum servicing fee retained by the servicer, is calculated using
the outstanding principal balance. The range of interest rates on the mortgage
loans and participations in a FHLMC Certificate group under the Cash Program
will vary since mortgage loans and participations are purchased and assigned to
a FHLMC Certificate group based upon their yield to FHLMC rather than on the
interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC
Certificate is established based upon the lowest interest rate on the underlying
mortgage loans, minus a minimum servicing fee and the amount of FHLMC's
management and guaranty income as agreed upon between the seller and FHLMC. For
FHLMC Certificate Groups formed under the Guarantor Program with certificate
numbers beginning with 18-012, the range between the lowest and the highest
annual interest rates on the mortgage loans in a FHLMC Certificate group may not
exceed two percentage points.
FHLMC Certificates duly presented for registration of ownership on or before
the last business day of a month are registered effective as of the first day of
the month. The first remittance to a registered holder of a FHLMC Certificate
will be distributed so as to be received normally by the 15th day of the second
month following the month in which the purchaser became a registered holder of
the FHLMC Certificates. Thereafter, such remittance will be distributed monthly
to the registered holder so as to be received normally by the 15th day of each
month. The Federal Reserve Bank of New York maintains book-entry accounts with
respect to FHLMC Certificates sold by FHLMC on or after January 2, 1985, and
makes payments of principal and interest each month to the registered holders
thereof in accordance with such holders' instructions.
FHLMC also issues mortgage participation certificates representing an
undivided interest in a group of multi-family residential mortgage loans or
participations in multi-family residential mortgage loans purchased by FHLMC
("FHLMC Project Certificates"). The Prospectus Supplement for a Series of
Securities issued by a Trust Fund that includes FHLMC Project Certificates will
set forth additional information regarding multi-family residential mortgage
loans that qualify for purchase by FHLMC.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA, GNMA
or other government agency or government-sponsored agency Certificates. The
underlying securities will be held under a trust agreement by FHLMC, FNMA, GNMA
or another government agency or government-sponsored agency, each as trustee, or
by another trustee named in the related Prospectus Supplement. FHLMC, FNMA, GNMA
or another government agency or government-sponsored agency will guarantee each
stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security, unless otherwise
specified in the related Prospectus Supplement.
OTHER AGENCY SECURITIES. If specified in the related Prospectus Supplement,
a Trust Fund may include other mortgage pass-through certificates issued or
guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies. The characteristics of any such mortgage pass-
through certificates will be described in such Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be held in
a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of mortgage
loans, or (b) collateralized mortgage obligations ("CMO's") secured by mortgage
loans. Private Mortgage-Backed Securities will have been issued pursuant
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to a PMBS agreement (the "PMBS Agreement"). The seller/servicer of the
underlying mortgage loans (the "PMBS Servicer") will have entered into the PMBS
Agreement with a trustee (the "PMBS Trustee") under the PMBS Agreement. The PMBS
Trustee or its agent, or a custodian, will possess the mortgage loans underlying
such Private Mortgage-Backed Security. Mortgage loans underlying a Private
Mortgage-Backed Security will be serviced by the PMBS Servicer directly or by
one or more sub-servicers who may be subject to the supervision of the PMBS
Servicer. The PMBS Servicer will be approved as a servicer by FNMA or FHLMC and,
if FHA Loans underlie the Private Mortgage-Backed Securities, approved by the
Department of Housing and Urban Development ("HUD") as an FHA mortgagee.
The Issuer of the PMBS (the "PMBS Issuer") will be a financial institution
or other entity engaged generally in the business of mortgage lending or the
acquisition of mortgage loans, a public agency or instrumentality of a state,
local or federal government, or a limited purpose or other corporation organized
for the purpose of, among other things, establishing trusts and acquiring and
selling housing loans to such trusts and selling beneficial interests in such
trusts. If so specified in the Prospectus Supplement, the PMBS Issuer may be an
affiliate of the Depositor. If the PMBS Issuer is not an affiliate of the
Depositor, the related PMBS (i) will be acquired in the secondary market and not
pursuant to an initial offering of such PMBS, (ii) such PMBS Issuer will
generally not be involved in the issuance of the Securities other than as set
forth in the next two succeeding sentences and (iii) such PMBS will be freely
transferable pursuant to Rule 144(k) promulgated under the Securities Act of
1933, as amended. The obligations of the PMBS Issuer will generally be limited
to certain representations and warranties with respect to the assets conveyed by
it to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the mortgage loans underlying
the Private Mortgage-Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
UNDERLYING LOANS. The mortgage loans underlying the Private Mortgage-
Backed Securities may consist of fixed rate, level payment, fully amortizing or
graduated payment mortgage loans, buydown loans, adjustable rate mortgage loans,
or loans having balloon or other special payment features. Such mortgage loans
may be Single Family Loans, Multifamily Loans, Cooperative Loans or Contracts
secured by Manufactured Homes. As specified in the related Prospectus
Supplement, (i) no mortgage loan underlying the Private Mortgage-Backed
Securities will have had a Combined Loan-to-Value Ratio at origination in excess
of the percentage set forth in the related Prospectus Supplement, (ii) each
underlying mortgage loan will have had an original term to stated maturity of
not less than 5 years and not more than 40 years, (iii) each underlying mortgage
loan (other than Cooperative Loans) will be required to be covered by a standard
hazard insurance policy (which may be a blanket policy), and (iv) each mortgage
loan (other than Cooperative Loans or Contracts secured by a Manufactured Home)
will be covered by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the mortgage loans underlying the
Private Mortgage-Backed Securities or with respect to the Private
Mortgage-Backed Securities themselves.
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ADDITIONAL INFORMATION. The Prospectus Supplement for a Series for which
the related Trust Fund includes Private Mortgage-Backed Securities will specify
(i) the aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the mortgage loans underlying the Private Mortgage-Backed
Securities including (A) the payment features of such mortgage loans, (B) the
approximate aggregate principal balance, if known, of underlying mortgage loans
insured or guaranteed by a governmental entity, (C) the servicing fee or range
of servicing fees with respect to the underlying mortgage loans, and (D) the
minimum and maximum stated maturities of the underlying mortgage loans at
origination, (iii) the maximum original term-to-stated maturity of the Private
Mortgage-Backed Securities, (iv) the weighted average term-to-stated maturity of
the Private Mortgage-Backed Securities, (v) the pass-through or certificate rate
of the Private Mortgage-Backed Securities, (vi) the weighted average
pass-through or certificate rate of the Private Mortgage-Backed Securities,
(vii) the PMBS Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the
PMBS Trustee for such Private Mortgage-Backed Securities, (viii) certain
characteristics of credit support, if any, such as reserve funds, insurance
policies, letters of credit or guarantees relating to the mortgage loans
underlying the Private Mortgage-Backed Securities or to such Private
Mortgage-Backed Securities themselves, (ix) the terms on which the underlying
mortgage loans for such Private Mortgage-Backed Securities may, or are required
to, be purchased prior to their stated maturity or the stated maturity of the
Private Mortgage-Backed Securities and (x) the terms on which other mortgage
loans may be substituted for those originally underlying the Private
Mortgage-Backed Securities.
REPRESENTATIONS BY SELLERS OR ORIGINATORS; REPURCHASES
Each Seller or Originator will have made representations and warranties in
respect of the Loans sold by such Seller or originated by such Originator and
evidenced by all, or a part, of a Series of Securities. Except as otherwise
specified in the related Prospectus Supplement, such representations and
warranties include, among other things: (i) that title insurance (or in the case
of Properties located in areas where such policies are generally not available,
an attorney's certificate of title) and any required hazard insurance policy
were effective at origination of each Loan, other than a Cooperative Loan, and
that each policy (or certificate of title as applicable) remained in effect on
the date of purchase of the Loan from the Originator by the Seller or the
Depositor or from the Seller by or on behalf of the Depositor; (ii) that the
Seller or Originator had good title to each such Loan and such Loan was subject
to no offsets, defenses, counterclaims or rights of rescission except to the
extent that any buydown agreement may forgive certain indebtedness of a
borrower; (iii) that each Loan constituted a valid lien on, or a perfected
security interest with respect to, the Property (subject only to permissible
liens disclosed, if applicable, title insurance exceptions, if applicable, and
certain other exceptions described in the Agreement) and that the Property was
free from damage and was in acceptable condition; (iv) that there were no
delinquent tax or assessment liens against the Property; (v) that no required
payment on a Loan was delinquent more than the number of days specified in the
related Prospectus Supplement; and (vi) that each Loan was made in compliance
with, and is enforceable under, all applicable local, state and federal laws and
regulations in all material respects.
If so specified in the related Prospectus Supplement, the representations
and warranties of a Seller or Originator in respect of a Loan will be made not
as of the Cut-off Date but as of the date on which such Originator sold the Loan
to the Seller or the Depositor or such Seller sold the Loan to the Depositor or
one of its affiliates. Under such circumstances, a substantial period of time
may have elapsed between the sale date and the date of initial issuance of the
Series of Securities evidencing an interest in such Loan. Since the
representations and warranties of a Seller or Originator do not address events
that may occur following the sale of a Loan by such Seller or Originator, its
repurchase obligation described below will not arise if the relevant event that
would otherwise have given rise to such an obligation with respect to a Loan
occurs after the date of sale of such Loan by such Originator to the Seller or
the Depositor or by such Seller to the Depositor or its affiliates. However, the
Depositor will not include any Loan in the Trust Fund for any Series of
Securities if anything has come to the Depositor's attention that would cause it
to believe
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that the representations and warranties of a Seller or Originator will not be
accurate and complete in all material respects in respect of such Loan as of the
date of initial issuance of the related Series of Securities. If the Master
Servicer is also a Seller or Originator of Loans with respect to a particular
Series of Securities, such representations will be in addition to the
representations and warranties made by the Master Servicer in its capacity as a
Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the Seller or
Originator, will promptly notify the relevant Seller or Originator of any breach
of any representation or warranty made by it in respect of a Loan which
materially and adversely affects the interests of the Securityholders in such
Loan. Unless otherwise specified in the related Prospectus Supplement, if such
Seller or Originator cannot cure such breach within 90 days following notice
from the Master Servicer or the Trustee, as the case may be, then such Seller or
Originator will be obligated either (i) to repurchase such Loan from the Trust
Fund at a price (the "Purchase Price") equal to 100% of the unpaid principal
balance thereof as of the date of the repurchase plus accrued interest thereon
to the first day of the month following the month of repurchase at the Loan Rate
(less any Advances or amount payable as related servicing compensation if the
Seller or Originator is the Master Servicer) or (ii) substitute for such Loan a
replacement loan that satisfies the criteria specified in the related Prospectus
Supplement. If a REMIC election is to be made with respect to a Trust Fund,
unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or a holder of the related residual certificate generally will be
obligated to pay any prohibited transaction tax which may arise in connection
with any such repurchase or substitution and the Trustee must have received a
satisfactory opinion of counsel that such repurchase or substitution will not
cause the Trust Fund to lose its status as a REMIC or otherwise subject the
Trust Fund to a prohibited transaction tax. The Master Servicer may be entitled
to reimbursement for any such payment from the assets of the related Trust Fund
or from any holder of the related residual certificate. See "Description of the
Securities--General." Except in those cases in which the Master Servicer is the
Seller or Originator, the Master Servicer will be required under the applicable
Agreement to enforce this obligation for the benefit of the Trustee and the
holders of the Securities, following the practices it would employ in its good
faith business judgment were it the owner of such Loan. This repurchase or
substitution obligation will constitute the sole remedy available to holders of
Securities or the Trustee for a breach of representation by a Seller or
Originator.
Neither the Depositor nor the Master Servicer (unless the Master Servicer is
the Seller or Originator) will be obligated to purchase or substitute a Loan if
a Seller or Originator defaults on its obligation to do so, and no assurance can
be given that Sellers or Originators will carry out their respective repurchase
or substitution obligations with respect to Loans. However, to the extent that a
breach of a representation and warranty of a Seller or Originator may also
constitute a breach of a representation made by the Master Servicer, the Master
Servicer may have a repurchase or substitution obligation as described below
under "The Agreements--Assignment of Trust Fund Assets."
SUBSTITUTION OF TRUST FUND ASSETS
Substitution of Trust Fund Assets will be permitted in the event of breaches
of representations and warranties with respect to any original Trust Fund Asset
or in the event the documentation with respect to any Trust Fund Asset is
determined by the Trustee to be incomplete. The period during which such
substitution will be permitted generally will be indicated in the related
Prospectus Supplement. Substitution of Trust Fund Assets will be permitted if,
among other things, the credit criteria relating to the origination of the
initial Trust Fund Assets is the same as the credit criteria relating to the
origination of the substitute Trust Fund Assets. The related Prospectus
Supplement will describe any other conditions upon which Trust Fund Assets may
be substituted for Trust Fund Assets initially included in the Trust Fund.
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USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Trust Fund Assets, (ii) to establish any Pre-Funding
Account, Capitalized Interest Account or Reserve Account as described in the
related Prospectus Supplement and (iii) to pay the costs of structuring and
issuing such Securities, including the costs of obtaining any credit enhancement
as described under "Credit Enhancement". The Depositor expects to sell
Securities in Series from time to time, but the timing and amount of offerings
of Securities will depend on a number of factors, including the volume of Trust
Fund Assets acquired by the Depositor, prevailing interest rates, availability
of funds and general market conditions.
THE DEPOSITOR
Morgan Stanley ABS Capital I Inc., the Depositor, is a direct, wholly-owned
subsidiary of Morgan Stanley Group Inc. and was incorporated in the State of
Delaware on January 7, 1997. The principal executive offices of the Depositor
are located at 1585 Broadway, 2nd Floor, New York, New York 10036. Its telephone
number is (212) 761-4000. The Depositor does not have, nor is it expected in the
future to have, any significant assets.
Neither the Depositor nor any of the Depositor's affiliates will insure or
guarantee distributions on the Securities of any Series.
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to separate agreements
(each, a "Pooling and Servicing Agreement" or a "Trust Agreement") among the
Depositor, the Master Servicer and the Trustee. A form of Pooling and Servicing
Agreement and Trust Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Each Series of Notes will be
issued pursuant to an indenture (the "Indenture") between the related Trust Fund
and the entity named in the related Prospectus Supplement as trustee (the
"Trustee") with respect to such Series, and the related Loans will be serviced
by the Master Servicer pursuant to a Master Servicing Agreement. A form of
Indenture and Master Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. A Series of
Securities may consist of both Notes and Certificates. Each Agreement, dated as
of the related Cut-off Date, will be among the Depositor, the Master Servicer
and the Trustee for the benefit of the holders of the Securities of such Series.
The provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust Fund. The
following are descriptions of the material provisions which may appear in each
Agreement. The Prospectus Supplement for a Series of Securities will describe
any provision of the Agreement relating to such Series that mainly differs from
the description thereof contained in this Prospectus. The descriptions are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Agreement for each Series of Securities and the applicable
Prospectus Supplement.
GENERAL
Unless otherwise specified in the related Prospectus Supplement, the
Securities of each Series will be issued in book-entry or fully registered form,
in the authorized denominations specified in the related Prospectus Supplement,
will, in the case of Certificates, evidence specified beneficial ownership
interests in, and in the case of Notes, be secured by, the assets of the related
Trust Fund created pursuant to each Agreement and will not be entitled to
payments in respect of the assets included in any other Trust Fund established
by the Depositor. Unless otherwise specified in the related Prospectus
Supplement, the Securities will not represent obligations of the Depositor or
any affiliate of the Depositor. Certain of the Loans may be guaranteed or
insured as set forth in the related Prospectus Supplement. Each Trust Fund will
consist of, to the extent provided in the related Agreement, (i) the Trust Fund
Assets, as from time to
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time are subject to the related Agreement (exclusive of any amounts specified in
the related Prospectus Supplement ("Retained Interest")), including all payments
of interest and principal received with respect to the Loans after the Cut-off
Date (to the extent not applied in computing the principal balance of such Loans
as of the Cut-off Date (the "Cut-off Date Principal Balance")); (ii) such assets
as from time to time are required to be deposited in the related Security
Account, as described below under "The Agreements--Payments on Loans; Deposits
to Security Account"; (iii) property which secured a Loan and which is acquired
on behalf of the Securityholders by foreclosure or deed in lieu of foreclosure
and (iv) any insurance policies or other forms of credit enhancement required to
be maintained pursuant to the related Agreement. If so specified in the related
Prospectus Supplement, a Trust Fund may also include one or more of the
following: reinvestment income on payments received on the Trust Fund Assets, a
Reserve Account, a mortgage pool insurance policy, a special hazard insurance
policy, a bankruptcy bond, one or more letters of credit, a surety bond,
guaranties or similar instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each class
of Certificates of a Series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on, and each class of Notes of a Series will be secured by, the related Trust
Fund Assets. A Series of Securities may include one or more classes that are
senior in right to payment to one or more other classes of Securities of such
Series. Certain Series or classes of Securities may be covered by insurance
policies, surety bonds or other forms of credit enhancement, in each case as
described under "Credit Enhancement" herein and in the related Prospectus
Supplement. One or more classes of Securities of a Series may be entitled to
receive distributions of principal, interest or any combination thereof.
Distributions on one or more classes of a Series of Securities may be made prior
to one or more other classes, after the occurrence of specified events, in
accordance with a schedule or formula or on the basis of collections from
designated portions of the related Trust Fund Assets, in each case as specified
in the related Prospectus Supplement. The timing and amounts of such
distributions may vary among classes or over time as specified in the related
Prospectus Supplement.
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities will be made by the Trustee on
each Distribution Date (i.e., monthly, quarterly, semi-annually or at such other
intervals and on the dates as are specified in the related Prospectus
Supplement) in proportion to the percentages specified in the related Prospectus
Supplement. Distributions will be made to the persons in whose names the
Securities are registered at the close of business on the dates specified in the
related Prospectus Supplement (each, a "Record Date"). Distributions will be
made in the manner specified in the related Prospectus Supplement to the persons
entitled thereto at the address appearing in the register maintained for holders
of Securities (the "Security Register"); PROVIDED, HOWEVER, that the final
distribution in retirement of the Securities will be made only upon presentation
and surrender of the Securities at the office or agency of the Trustee or other
person specified in the notice to Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the Corporate
Trust Office of the Trustee as set forth in the related Prospectus Supplement.
No service charge will be made for any registration of exchange or transfer of
Securities of any Series, but the Trustee may require payment of a sum
sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities entitled
only to a specified percentage of payments of either interest or principal or a
notional amount of either interest or principal on the related Loans or a class
of Securities entitled to receive payments of interest and principal on the
Loans only after payments to other classes or after the occurrence of certain
specified events by or on behalf of any employee benefit plan or other
retirement arrangement (including individual retirement accounts and annuities,
Keogh plans and collective investment funds in which such plans, accounts or
arrangements are invested) subject to provisions of ERISA or the Code, may
result in prohibited transactions, within the meaning of ERISA and the Code. See
"ERISA Considerations." Unless otherwise
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specified in the related Prospectus Supplement, the transfer of Securities of
such a class will not be registered unless the transferee (i) represents that it
is not, and is not purchasing on behalf of, any such plan, account or
arrangement or (ii) provides an opinion of counsel satisfactory to the Trustee
and the Depositor that the purchase of Securities of such a class by or on
behalf of such plan, account or arrangement is permissible under applicable law
and will not subject the Trustee, the Master Servicer or the Depositor to any
obligation or liability in addition to those undertaken in the Agreements.
As to each Series, an election may be made to treat the related Trust Fund
or designated portions thereof as a "real estate mortgage investment conduit" or
"REMIC" as defined in the Code. The related Prospectus Supplement will specify
whether a REMIC election is to be made. Alternatively, the Agreement for a
Series may provide that a REMIC election may be made at the discretion of the
Depositor or the Master Servicer and may only be made if certain conditions are
satisfied. As to any such Series, the terms and provisions applicable to the
making of a REMIC election will be set forth in the related Prospectus
Supplement. If such an election is made with respect to a Series, one of the
classes will be designated as evidencing the sole class of "residual interests"
in the related REMIC, as defined in the Code. All other classes of Securities in
such a Series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each Series with respect to which a REMIC election is
to be made, the Trustee, the Master Servicer or a holder of the related residual
certificate will be obligated to take all actions required in order to comply
with applicable laws and regulations and will be obligated to pay any prohibited
transaction taxes. The Trustee or the Master Servicer, unless otherwise provided
in the related Prospectus Supplement, will be entitled to reimbursement for any
such payment from the assets of the Trust Fund or from any holder of the related
residual certificate.
INDEXED SECURITIES
To the extent specified in any Prospectus Supplement, any class of
Securities of a given Series may consist of Securities ("Indexed Securities") in
which the principal amount payable at the final scheduled payment date (the
"Indexed Principal Amount") is determined by reference to a measure (the
"Index") which will be related to (i) the difference in the rate of exchange
between United States dollars and a currency or composite currency (the "Indexed
Currency") specified in the applicable Prospectus Supplement (such Indexed
Securities, "Currency Indexed Securities"); (ii) the difference in the price of
a specified commodity (the "Indexed Commodity") on specified dates (such Indexed
Securities, "Commodity Indexed Securities"); (iii) the difference in the level
of a specified stock index (the "Stock Index"), which may be based on U.S. or
foreign stocks, on specified dates (such Indexed Securities, "Stock Indexed
Securities"); or (iv) such other objective price or economic measures as are
described in the applicable Prospectus Supplement. The manner of determining the
Indexed Currency, the Indexed Commodity, the Stock Index or other price or
economic measures used in such determination will be set forth in the applicable
Prospectus Supplement, together with information concerning tax consequences to
the holders of such Indexed Securities.
If the determination of the Indexed Principal Amount of an Indexed Security
is based on an Index calculated or announced by a third party and such third
party either suspends the calculation or announcement of such Index or changes
the basis upon which such Index is calculated (other than changes consistent
with policies in effect at the time such Indexed Security was issued and
permitted changes described in the applicable Prospectus Supplement), then such
Index shall be calculated for purposes of such Indexed Security by an
independent calculation agent named in the applicable Prospectus Supplement on
the same basis, and subject to the same conditions and controls, as applied to
the original third party. If for any reason such Index cannot be calculated on
the same basis and subject to the same conditions and controls as applied to the
original third party, then the Indexed Principal Amount of such Indexed Security
will be calculated in the manner set forth in the applicable Prospectus
Supplement. Any determination of such independent calculation agent will in the
absence of manifest error be binding on all parties.
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Interest on an Indexed Security will be payable based on the amount
designated in the applicable Prospectus Supplement (the "Face Amount"). The
applicable Prospectus Supplement will describe whether the principal amount of
the related Indexed Security, if any, that would be payable upon redemption or
repayment prior to the applicable final scheduled Distribution Date will be the
Face Amount of the Indexed Security, the Indexed Principal Amount of such
Indexed Security at the time of redemption or repayment, or another amount
described in such Prospectus Supplement.
DISTRIBUTIONS ON SECURITIES
GENERAL. In general, the method of determining the amount of distributions
on a particular Series of Securities will depend on the type of credit support,
if any, that is used with respect to such Series. See "Credit Enhancement." Set
forth below are descriptions of various methods that may be used to determine
the amount of distributions on the Securities of a particular Series. The
Prospectus Supplement for each Series of Securities will describe the method to
be used in determining the amount of distributions on the Securities of such
Series.
Distributions allocable to principal and interest on the Securities will be
made by the Trustee out of, and only to the extent of, funds in the related
Security Account, including any funds transferred from any Reserve Account (a
"Reserve Account"). As between Securities of different classes and as between
distributions of principal (and, if applicable, between distributions of
Principal Prepayments, as defined below, and scheduled payments of principal)
and interest, distributions made on any Distribution Date will be applied as
specified in the related Prospectus Supplement. The Prospectus Supplement will
also describe the method for allocating the distributions among Securities of a
particular class.
AVAILABLE FUNDS. All distributions on the Securities of each Series on each
Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. "Available Funds" for each Distribution Date will
generally equal the amount on deposit in the related Security Account on such
Distribution Date (net of related fees and expenses payable by the related Trust
Fund) other than amounts to be held therein for distribution on future
Distribution Dates.
DISTRIBUTIONS OF INTEREST. Interest will accrue on the aggregate principal
balance of the Securities (or, in the case of Securities entitled only to
distributions allocable to interest, the aggregate notional amount) of each
class of Securities (the "Class Security Balance") entitled to interest from the
date, at the Pass-Through Rate or interest rate, as applicable (which in either
case may be a rate per annum specified, or calculated in the method described,
in such Prospectus Supplement), and for the periods specified in such Prospectus
Supplement. To the extent funds are available therefor, interest accrued during
each such specified period on each class of Securities entitled to interest
(other than a class of Securities that provides for interest that accrues, but
is not currently payable, referred to hereafter as "Accrual Securities") will be
distributable on the Distribution Dates specified in the related Prospectus
Supplement until the aggregate Class Security Balance of the Securities of such
class has been distributed in full or, in the case of Securities entitled only
to distributions allocable to interest, until the aggregate notional amount of
such Securities is reduced to zero or for the period of time designated in the
related Prospectus Supplement. The original Class Security Balance of each
Security will equal the aggregate distributions allocable to principal to which
such Security is entitled. Distributions allocable to interest on each Security
that is not entitled to distributions allocable to principal will be calculated
based on the notional amount of such Security. The notional amount of a Security
will not evidence an interest in or entitlement to distributions allocable to
principal but will be used solely for convenience in expressing the calculation
of interest and for certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be
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reduced from the yield that would otherwise be obtainable if interest payable on
the Security were to accrue through the day immediately preceding such
Distribution Date, and the effective yield (at par) to Securityholders will be
less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the related
Prospectus Supplement, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate Class Security Balance of such
class of Securities on that Distribution Date. Distributions of interest on any
class of Accrual Securities will commence only after the occurrence of the
events specified in such Prospectus Supplement. Prior to such time, the
beneficial ownership interest in the Trust Fund or the principal balance, as
applicable, of such class of Accrued Securities, as reflected in the aggregate
Class Security Balance of such class of Accrual Securities, will increase on
each Distribution Date by the amount of interest that accrued on such class of
Accrual Securities during the preceding interest accrual period but that was not
required to be distributed to such class on such Distribution Date. Any such
class of Accrual Securities will thereafter accrue interest on its outstanding
Class Security Balance as so adjusted.
DISTRIBUTIONS OF PRINCIPAL. The related Prospectus Supplement will specify
the method by which the amount of principal to be distributed on the Securities
on each Distribution Date will be calculated and the manner in which such amount
will be allocated among the classes of Securities entitled to distributions of
principal. The aggregate Class Security Balance of any class of Securities
entitled to distributions of principal generally will be the aggregate original
Class Security Balance of such class of Securities specified in such Prospectus
Supplement, reduced by all distributions reported to the holders of such
Securities as allocable to principal and, (i) in the case of Accrual Securities,
unless otherwise specified in the related Prospectus Supplement, increased by
all interest accrued but not then distributable on such Accrual Securities and
(ii) in the case of adjustable rate Securities, subject to the effect of
negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more classes of
Securities will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers, including payments
received in advance of their scheduled due dates and are not accompanied by
amounts representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or for
the periods specified in such Prospectus Supplement. Any such allocation of
principal payments to such class or classes of Securities will have the effect
of accelerating the amortization of such Securities while increasing the
interests evidenced by one or more other classes of Securities in the Trust
Fund. Increasing the interests of the other classes of Securities relative to
that of certain Securities is intended to preserve the availability of the
subordination provided by such other Securities. See "Credit
Enhancement--Subordination."
UNSCHEDULED DISTRIBUTIONS. If specified in the related Prospectus
Supplement, the Securities will be subject to receipt of distributions before
the next scheduled Distribution Date under the circumstances and in the manner
described below and in such Prospectus Supplement. If applicable, the Trustee
will be required to make such unscheduled distributions on the day and in the
amount specified in the related Prospectus Supplement if, due to substantial
payments of principal (including Principal Prepayments) on the Trust Fund
Assets, the Trustee or the Master Servicer determines that the funds available
or anticipated to be available from the Security Account and, if applicable, any
Reserve Account, may be insufficient to make required distributions on the
Securities on such Distribution Date. Unless otherwise specified in the related
Prospectus Supplement, the amount of any such unscheduled distribution that is
allocable to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Securities on the next
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) or interest rate (if any) on the amount of
the unscheduled distribution allocable to principal for the period and to the
date specified in such Prospectus Supplement.
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ADVANCES
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date (from
its own funds, funds advanced by Sub-Servicers or funds held in the Security
Account for future distributions to the holders of Securities of the related
Series), an amount equal to the aggregate of payments of interest and/or
principal that were delinquent on the related Determination Date (as such term
is defined in the related Prospectus Supplement) and were not advanced by any
Sub-Servicer, net of the Servicing Fee if so specified in the related Prospectus
Supplement, subject to the Master Servicer's determination that such advances
may be recoverable out of late payments by borrowers, Liquidation Proceeds,
Insurance Proceeds or otherwise. In the case of Cooperative Loans, the Master
Servicer also may be required to advance any unpaid maintenance fees and other
charges under the related proprietary leases as specified in the related
Prospectus Supplement. In addition, to the extent provided in the related
Prospectus Supplement, a cash account may be established to provide for Advances
to be made in the event of certain Trust Fund Assets payment defaults or
collection shortfalls.
In making Advances, the Master Servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to holders of the Securities,
rather than to guarantee or insure against losses. If Advances are made by the
Master Servicer from cash being held for future distribution to Securityholders,
the Master Servicer will replace such funds on or before any future Distribution
Date to the extent that funds in the applicable Security Account on such
Distribution Date would be less than the amount required to be available for
distributions to Securityholders on such date. Any Master Servicer funds
advanced will be reimbursable to the Master Servicer out of recoveries on the
specific Loans with respect to which such Advances were made (e.g., late
payments made by the related borrower, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any Loan purchased by the Depositor, a Sub-
Servicer or a Seller pursuant to the related Agreement). Advances by the Master
Servicer (and any advances by a Sub-Servicer) also will be reimbursable to the
Master Servicer (or Sub-Servicer) from cash otherwise distributable to
Securityholders (including the holders of Senior Securities) to the extent that
the Master Servicer determines that any such Advances previously made are not
ultimately recoverable as described above. To the extent provided in the related
Prospectus Supplement, the Master Servicer also will be obligated to make
Advances, to the extent recoverable out of Insurance Proceeds, Liquidation
Proceeds or otherwise, in respect of certain taxes and insurance premiums not
paid by borrowers on a timely basis. Funds so advanced are reimbursable to the
Master Servicer to the extent permitted by the related Agreement. The
obligations of the Master Servicer to make advances may be supported by a cash
advance reserve fund, a surety bond or other arrangement, in each case as
described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, in the
event the Master Servicer or a Sub-Servicer fails to make a required Advance,
the Trustee will be obligated to make such Advance in its capacity as successor
servicer. If the Trustee makes such an Advance, it will be entitled to be
reimbursed for such Advance to the same extent and degree as the Master Servicer
or a Sub-Servicer is entitled to be reimbursed for Advances. See
"--Distributions on Securities" above.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date, the
Master Servicer or the Trustee will furnish to each Securityholder of record of
the related Series a statement setting forth, to the extent applicable to such
Series of Securities, among other things:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if so
specified in the related Prospectus Supplement, any applicable prepayment
penalties included therein;
(ii) the amount of such distribution allocable to interest;
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(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the Subordinated
Securityholders on such Distribution Date, and (b) withdrawn from the
Reserve Account, if any, that is included in the amounts distributed to the
Senior Securityholders;
(v) the outstanding principal balance or notional amount of each class
of the related Series after giving effect to the distribution of principal
on such Distribution Date;
(vi) the percentage of principal payments on the Loans (excluding
prepayments), if any, which each such class will be entitled to receive on
the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if any,
which each such class will be entitled to receive on the following
Distribution Date;
(viii) the related amount of the servicing compensation retained or
withdrawn from the Security Account by the Master Servicer, and the amount
of additional servicing compensation received by the Master Servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
(ix) the number and aggregate principal balances of Loans (A) delinquent
(exclusive of Loans in foreclosure) (1) 1 to 30 days, (2) 31 to 60 days, (3)
61 to 90 days and (4) 91 or more days and (B) in foreclosure and delinquent
(1) 1 to 30 days, (2) 31 to 60 days, (3) 61 to 90 days and (4) 91 or more
days, as of the close of business on the last day of the calendar month
preceding such Distribution Date;
(x) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure;
(xi) the Pass-Through Rate or interest rate, as applicable, if adjusted
from the date of the last statement, of any such class expected to be
applicable to the next distribution to such class;
(xii) if applicable, the amount remaining in any Reserve Account at the
close of business on the Distribution Date;
(xiii) the Pass-Through Rate or interest rate, as applicable, as of the
day prior to the immediately preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, pool policies or
other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Security of the relevant class having the Percentage Interest
specified in the related Prospectus Supplement. The report to Securityholders
for any Series of Securities may include additional or other information of a
similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record during
a portion of such calendar year, for the applicable portion of such year and (b)
such other customary information as may be deemed necessary or desirable for
Securityholders to prepare their tax returns.
CATEGORIES OF CLASSES OF SECURITIES
The Securities of any Series may be comprised of one or more classes. Such
classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical
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categories. The Prospectus Supplement for a series of Securities may identify
the classes which comprise such Series by reference to the following categories.
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Principal Types
Accretion Directed.................................. A class that receives principal payments from the
accreted interest from specified Accrual classes. An
Accretion Directed class also may receive principal
payments from principal paid on the underlying Trust
Fund Assets for the related Series.
Component Securities................................ A class consisting of "Components." The Components of a
class of Component Securities may have different
principal and/or interest payment characteristics but
together constitute a single class. Each Component of a
class of Component Securities may be identified as
falling into one or more of the categories in this
chart.
Notional Amount Securities.......................... A class having no principal balance and bearing interest
on the related notional amount. The notional amount is
used for purposes of the determination of interest
distributions.
Planned Principal Class (also sometimes referred to A class that is designed to receive principal payments
as "PACs").......................................... using a predetermined principal balance schedule derived
by assuming two constant prepayment rates for the
underlying Trust Fund Assets. These two rates are the
endpoints for the "structuring range" for the Planned
Principal Class. The Planned Principal Classes in any
Series of Securities may be subdivided into different
categories (e.g., Primary Planned Principal Classes,
Secondary Planned Principal Classes and so forth) having
different effective structuring ranges and different
principal payment priorities. The structuring range for
the Secondary Planned Principal Class of a Series of
Securities will be narrower than that for the Primary
Planned Principal Class of such Series.
Scheduled Principal Class........................... A class that is designed to receive principal payments
using a predetermined principal balance schedule but is
not designated as a Planned Principal Class or Targeted
Principal Class. In many cases, the schedule is derived
by assuming two constant prepayment rates for the
underlying Trust Fund Assets. These two rates are the
endpoints for the "structuring range" for the Scheduled
Principal Class.
Sequential Pay Class................................ Classes that receive principal payments in a prescribed
sequence, that do not have
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
- -------------------------------------------------------- --------------------------------------------------------
predetermined principal balance schedules and that under
all circumstances receive payments of principal
continuously from the first Distribution Date on which
they receive principal until they are retired. A single
class that receives principal payments before or after
all other classes in the same Series of Securities may
be identified as a Sequential Pay Class.
Strip............................................... A class that receives a constant proportion, or "strip,"
of the principal payments on the underlying Trust Fund
Assets.
<S> <C>
Support Class (also sometimes referred to as A class that receives principal payments on any
"companion classes")................................ Distribution Date only if scheduled payments have been
made on specified Planned Principal Classes, Targeted
Principal Classes and/or Scheduled Principal Classes on
such Distribution Date.
Targeted Principal Class (also sometimes referred to A class that is designed to receive principal payments
as "TACs").......................................... using a predetermined principal balance schedule derived
by assuming a single constant prepayment rate for the
underlying Trust Fund Assets.
INTEREST TYPES
Fixed Rate.......................................... A class with an interest rate that is fixed throughout
the life of the class.
Floating Rate....................................... A class with an interest rate that resets periodically
based upon a designated index and that varies directly
with changes in such index as specified in the related
Prospectus Supplement. Interest payable to a Floating
Rate class on a Distribution Date may be subject to a
cap based on the amount of funds available to pay
interest on such Distribution Date.
Inverse Floating Rate............................... A class with an interest rate that resets periodically
based upon a designated index as specified in the
related Prospectus Supplement and that varies inversely
with changes in such index.
Variable Rate....................................... A class with an interest rate that resets periodically
and is calculated by reference to the rate or rates of
interest applicable to specified assets or instruments
(e.g., the Loan Rates borne by the underlying Loans).
Auction Rate........................................ A class with an interest rate that resets periodically
to an auction rate that is calculated on the basis of
auction procedures described in the related Prospectus
Supplement.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
- -------------------------------------------------------- --------------------------------------------------------
Interest Only....................................... A class that receives some or all of the interest
payments made on the underlying Trust Fund Assets or
other assets of the Trust Fund and little or no
principal. Interest Only classes have either a nominal
principal balance or a notional amount. A nominal
principal balance represents actual principal that will
be paid on the class. It is referred to as nominal since
it is extremely small compared to other classes. A
notional amount is the amount used as a reference to
calculate the amount of interest due on an Interest Only
class that is not entitled to any distributions in
respect of principal.
<S> <C>
Principal Only...................................... A class that does not bear interest and is entitled to
receive only distributions in respect of principal.
Partial Accrual..................................... A class that accretes a portion of the amount of accrued
interest thereon, which amount will be added to the
principal balance of such class on each applicable
Distribution Date, with the remainder of such accrued
interest to be distributed currently as interest on such
class. Such accretion may continue until a specified
event has occurred or until such Partial Accrual class
is retired.
Accrual............................................. A class that accretes the amount of accrued interest
otherwise distributable on such class, which amount will
be added as principal to the principal balance of such
class on each applicable Distribution Date. Such
accretion may continue until some specified event has
occurred or until such Accrual Class is retired.
</TABLE>
INDICES APPLICABLE TO FLOATING RATE AND INVERSE FLOATING RATE CLASSES
Unless otherwise specified in the related Prospectus Supplement, the indices
applicable to Floating Rate and Inverse Floating Rate Classes either will be
LIBOR, the Eleventh District Cost of Funds Index, the Treasury Index or the
Prime Rate, in each case calculated as described below.
LIBOR
Unless otherwise specified in the related Prospectus Supplement, on the
LIBOR Determination Date (as such term is defined in the related Prospectus
Supplement) for each class of Securities of a Series as to which the applicable
interest rate is determined by reference to an index denominated as LIBOR, the
Person designated in the related Agreement (the "Calculation Agent") will
determine LIBOR by reference to the quotations, as set forth on the Reuters
Screen LIBO Page (as defined in the International Swap Dealers Association, Inc.
Code of Standard Wording, Assumptions and Provisions for Swaps, 1986 Edition),
offered by the principal London office of each of the designated reference banks
meeting the criteria set forth below (the "Reference Banks") for making
one-month United States dollar deposits in leading banks in the London Interbank
market, as of 11:00 a.m. (London time) on such LIBOR
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Determination Date. In lieu of relying on the quotations for those Reference
Banks that appear at such time on the Reuters Screen LIBO Page, the Calculation
Agent will request each of the Reference Banks to provide such offered
quotations at such time.
LIBOR will be established by the Calculation Agent on each LIBOR
Determination Date as follows:
(a) If on any LIBOR Determination Date two or more Reference Banks provide
such offered quotations, LIBOR for the next Interest Accrual Period (as such
term is defined in the related Prospectus Supplement) shall be the arithmetic
mean of such offered quotations (rounded upwards if necessary to the nearest
whole multiple of 1/32%).
(b) If on any LIBOR Determination Date only one or none of the Reference
Banks provides such offered quotations, LIBOR for the next Interest Accrual
Period shall be whichever is the higher of (i) LIBOR as determined on the
previous LIBOR Determination Date or (ii) the Reserve Interest Rate. The
"Reserve Interest Rate" shall be the rate per annum which the Calculation Agent
determines to be either (i) the arithmetic mean (rounded upwards if necessary to
the nearest whole multiple of 1/32%) of the one-month United States dollar
lending rates that New York City banks selected by the Calculation Agent are
quoting, on the relevant LIBOR Determination Date, to the principal London
offices of at least two of the Reference Banks to which such quotations are, in
the opinion of the Calculation Agent, being so made, or (ii) in the event that
the Calculation Agent can determine no such arithmetic mean, the lowest
one-month United States dollar lending rate which New York City banks selected
by the Calculation Agent are quoting on such LIBOR Determination Date to leading
European banks.
(c) If on any LIBOR Determination Date for a class specified in the related
Prospectus Supplement, the Calculation Agent is required but is unable to
determine the Reserve Interest Rate in the manner provided in paragraph (b)
above, LIBOR for the next Interest Accrual Period shall be LIBOR as determined
on the preceding LIBOR Determination Date, or, in the case of the first LIBOR
Determination Date, LIBOR shall be deemed to be the per annum rate specified as
such in the related Prospectus Supplement.
Each Reference Bank (i) shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; (ii) shall not
control, be controlled by, or be under common control with the Calculation
Agent; and (iii) shall have an established place of business in London. If any
such Reference Bank should be unwilling or unable to act as such or if
appointment of any such Reference Bank is terminated, another leading bank
meeting the criteria specified above will be appointed.
The establishment of LIBOR on each LIBOR Determination Date by the
Calculation Agent and its calculation of the rate of interest for the applicable
classes for the related Interest Accrual Period shall (in the absence of
manifest error) be final and binding.
COFI
The Eleventh District Cost of Funds Index is designed to represent the
monthly weighted average cost of funds for savings institutions in Arizona,
California and Nevada that are member institutions of the Eleventh Federal Home
Loan Bank District (the "Eleventh District"). The Eleventh District Cost of
Funds Index for a particular month reflects the interest costs paid on all types
of funds held by Eleventh District member institutions and is calculated by
dividing the cost of funds by the average of the total amount of those funds
outstanding at the end of that month and of the prior month and annualizing and
adjusting the result to reflect the actual number of days in the particular
month. If necessary, before these calculations are made, the component figures
are adjusted by the Federal Home Loan Bank of San Francisco ("FHLBSF") to
neutralize the effect of events such as member institutions leaving the Eleventh
District or acquiring institutions outside the Eleventh District. The Eleventh
District Cost of Funds Index is weighted to reflect the relative amount of each
type of funds held at the end of the relevant month. The major components of
funds of Eleventh District member institutions are: (i) savings deposits, (ii)
time deposits,
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<PAGE>
(iii) FHLBSF advances, (iv) repurchase agreements and (v) all other borrowings.
Because the component funds represent a variety of maturities whose costs may
react in different ways to changing conditions, the Eleventh District Cost of
Funds Index does not necessarily reflect current market rates.
A number of factors affect the performance of the Eleventh District Cost of
Funds Index, which may cause it to move in a manner different from indices tied
to specific interest rates, such as United States Treasury bills or LIBOR.
Because the liabilities upon which the Eleventh District Cost of Funds Index is
based were issued at various times under various market conditions and with
various maturities, the Eleventh District Cost of Funds Index may not
necessarily reflect the prevailing market interest rates on new liabilities of
similar maturities. Moreover, as stated above, the Eleventh District Cost of
Funds Index is designed to represent the average cost of funds for Eleventh
District savings institutions for the month prior to the month in which it is
due to be published. Additionally, the Eleventh District Cost of Funds Index may
not necessarily move in the same direction as market interest rates at all
times, since as longer term deposits or borrowings mature and are renewed at
prevailing market interest rates, the Eleventh District Cost of Funds Index is
influenced by the differential between the prior and the new rates on those
deposits or borrowings. In addition, movements of the Eleventh District Cost of
Funds Index, as compared to other indices tied to specific interest rates, may
be affected by changes instituted by the FHLBSF in the method used to calculate
the Eleventh District Cost of Funds Index.
The FHLBSF publishes the Eleventh District Cost of Funds Index in its
monthly Information Bulletin. Any individual may request regular receipt by mail
of Information Bulletins by writing the Federal Home Loan Bank of San Francisco,
P.O. Box 7948, 600 California Street, San Francisco, California 94120, or by
calling (415) 616-1000. The Eleventh District Cost of Funds Index may also be
obtained by calling the FHLBSF at (415) 616-2600.
The FHLBSF has stated in its Information Bulletin that the Eleventh District
Cost of Funds Index for a month "will be announced on or near the last working
day" of the following month and also has stated that it "cannot guarantee the
announcement" of such index on an exact date. So long as such index for a month
is announced on or before the tenth day of the second following month, the
interest rate for each class of Securities of a Series as to which the
applicable interest rate is determined by reference to an index denominated as
COFI (each, a class of "COFI Securities") for the Interest Accrual Period
commencing in such second following month will be based on the Eleventh District
Cost of Funds Index for the second preceding month. If publication is delayed
beyond such tenth day, such interest rate will be based on the Eleventh District
Cost of Funds Index for the third preceding month.
Unless otherwise specified in the related Prospectus Supplement, if on the
tenth day of the month in which any Interest Accrual Period commences for a
class of COFI Securities the most recently published Eleventh District Cost of
Funds Index relates to a month prior to the third preceding month, the index for
such current Interest Accrual Period and for each succeeding Interest Accrual
Period will, except as described in the next to last sentence of this paragraph,
be based on the National Monthly Median Cost of Funds Ratio to SAIF-Insured
Institutions (the "National Cost of Funds Index") published by the Office of
Thrift Supervision (the "OTS") for the third preceding month (or the fourth
preceding month if the National Cost of Funds Index for the third preceding
month has not been published on such tenth day of an Interest Accrual Period).
Information on the National Cost of Funds Index may be obtained by writing the
OTS at 1700 G Street, N.W., Washington, D.C. 20552 or calling (202) 906-6677,
and the current National Cost of Funds Index may be obtained by calling (202)
906-6988. If on any such tenth day of the month in which an Interest Accrual
Period commences the most recently published National Cost of Funds Index
relates to a month prior to the fourth preceding month, the applicable index for
such Interest Accrual Period and each succeeding Interest Accrual Period will be
based on LIBOR, as determined by the Calculation Agent in accordance with the
Agreement relating to such Series of Securities. A change of index from the
Eleventh District Cost of Funds Index to an alternative index will result in a
change in the index level, and, particularly if LIBOR is the alternative index,
could increase its volatility.
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<PAGE>
The establishment of COFI by the Calculation Agent and its calculation of
the rates of interest for the applicable classes for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
TREASURY INDEX
Unless otherwise specified in the related Prospectus Supplement, on the
Treasury Index Determination Date (as such term is defined in the related
Prospectus Supplement) for each class of Securities of a Series as to which the
applicable interest rate is determined by reference to an index denominated as a
Treasury Index, the Calculation Agent will ascertain the Treasury Index for
Treasury securities of the maturity and for the period (or, if applicable, date)
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Treasury Index for any period means the
average of the yield for each business day during the period specified therein
(and for any date means the yield for such date), expressed as a per annum
percentage rate, on (i) U.S. Treasury securities adjusted to the "constant
maturity" (as further described below) specified in such Prospectus Supplement
or (ii) if no "constant maturity" is so specified, U.S. Treasury securities
trading on the secondary market having the maturity specified in such Prospectus
Supplement, in each case as published by the Federal Reserve Board in its
Statistical Release No. H.15(519). Statistical Release No. H.15(519) is
published on Monday or Tuesday of each week and may be obtained by writing or
calling the Publications Department at the Board of Governors of the Federal
Reserve System, 21st and C Streets, Washington, D.C. 20551 (202) 452-3244. If
the Calculation Agent has not yet received Statistical Release No. H.15(519) for
such week, then it will use such Statistical Release from the immediately
preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived from
the U.S. Treasury's daily yield curve. This curve, which relates the yield on a
security to its time to maturity, is based on the closing market bid yields on
actively traded Treasury securities in the over-the-counter market. These market
yields are calculated from composites of quotations reported by five leading
U.S. Government securities dealers to the Federal Reserve Bank of New York. This
method provides a yield for a given maturity even if no security with that exact
maturity is outstanding. In the event that the Treasury Index is no longer
published, a new index based upon comparable data and methodology will be
designated in accordance with the Agreement relating to the particular Series of
Securities. The Calculation Agent's determination of the Treasury Index, and its
calculation of the rates of interest for the applicable classes for the related
Interest Accrual Period, shall (in the absence of manifest error) be final and
binding.
PRIME RATE
Unless otherwise specified in the related Prospectus Supplement, on the
Prime Rate Determination Date (as such term is defined in the related Prospectus
Supplement) for each class of Securities of a Series as to which the applicable
interest rate is determined by reference to an index denominated as the Prime
Rate, the Calculation Agent will ascertain the Prime Rate for the related
Interest Accrual Period. Unless otherwise specified in the related Prospectus
Supplement, the Prime Rate for an Interest Accrual Period will be the "Prime
Rate" as published in the "Money Rates" section of The Wall Street Journal (or
if not so published, the "Prime Rate" as published in a newspaper of general
circulation selected by the Calculation Agent in its sole discretion) on the
related Prime Rate Determination Date. If a prime rate range is given, then the
average of such range will be used. In the event that the Prime Rate is no
longer published, a new index based upon comparable data and methodology will be
designated in accordance with the Agreement relating to the particular Series of
Securities. The Calculation Agent's determination of the Prime Rate and its
calculation of the rates of interest for the related Interest Accrual Period
shall (in the absence of manifest error) be final and binding.
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<PAGE>
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the related Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "Book-Entry Securities"). Persons acquiring beneficial
ownership interests in the Securities ("Security Owners") will hold their
Securities through the Depository Trust Company ("DTC") in the United States, or
CEDEL or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems. The
Book-Entry Securities will be issued in one or more certificates which equal the
aggregate principal balance of the Securities and will initially be registered
in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in CEDEL's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank, N.A., will
act as depositary for CEDEL and The Chase Manhattan Bank will act as depositary
for Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Except as described below, no person
acquiring a Book-Entry Security (each, a "beneficial owner") will be entitled to
receive a physical certificate representing such Security (a "Definitive
Security"). Unless and until Definitive Securities are issued, it is anticipated
that the only "Securityholders" of the Securities will be Cede & Co., as nominee
of DTC. Security Owners are only permitted to exercise their rights indirectly
through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant, and on
the records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and interest
on, the Securities from the Trustee through DTC and DTC participants. While the
Securities are outstanding (except under the circumstances described below),
under the rules, regulations and procedures creating and affecting DTC and its
operations (the "Rules"), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security Owners
have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will not
possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
Because of time zone differences, credits of securities received in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such
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business day. Cash received in CEDEL or Euroclear as a result of sales of
securities by or through a CEDEL Participant (as defined herein) or Euroclear
Participant (as defined herein) to a DTC Participant will be received with value
on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York ("Morgan" and in such capacity, the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Belgian Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Belgian Cooperative. The Belgian Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
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Morgan is the Belgian branch of a New York banking corporation which is a
member bank of the Federal Reserve System. As such, it is regulated and examined
by the Board of Governors of the Federal Reserve System and the New York State
Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear,
and receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Under a book-entry format, beneficial owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede & Co., as nominee of DTC. Distributions with
respect to Securities held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Consequences --Tax Treatment of Foreign Investors" and "--Tax
Consequences to Holders of the Notes --Backup Withholding." Because DTC can only
act on behalf of Financial Intermediaries, the ability of a beneficial owner to
pledge Book-Entry Securities to persons or entities that do not participate in
the Depository system, may be limited due to the lack of physical certificates
for such Book-Entry Securities. In addition, issuance of the Book-Entry
Securities in book-entry form may reduce the liquidity of such Securities in the
secondary market since certain potential investors may be unwilling to purchase
Securities for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust Fund will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Securities of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Securities are
issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Securities under the applicable Agreement only at the direction of
one or more Financial Intermediaries to whose DTC accounts the Book-Entry
Securities are credited, to the extent that such actions are taken on behalf of
Financial Intermediaries whose holdings include such Book-Entry Securities.
CEDEL or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Securityholder under the Agreement on behalf of a
CEDEL Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Securities which
conflict with actions taken with respect to other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Securities among participants of DTC, CEDEL and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
None of the Master Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
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CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of a
Series of Securities or with respect to the related Trust Fund Assets. Credit
enhancement may be in the form of a limited financial guaranty policy issued by
an entity named in the related Prospectus Supplement, the subordination of one
or more classes of the Securities of such Series, the establishment of one or
more Reserve Accounts, the use of a cross-collateralization feature, use of a
mortgage pool insurance policy, FHA Insurance, VA Guarantee, bankruptcy bond,
special hazard insurance policy, surety bond, letter of credit, guaranteed
investment contract, overcollateralization, interest rate swap agreement,
interest rate cap agreement or another method of credit enhancement contemplated
herein and described in the related Prospectus Supplement, or any combination of
the foregoing. Unless otherwise specified in the related Prospectus Supplement,
credit enhancement will not provide protection against all risks of loss and
will not guarantee repayment of the entire principal balance of the Securities
and interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, Securityholders
will bear their allocable share of any deficiencies.
SUBORDINATION
If so specified in the related Prospectus Supplement, protection afforded to
holders of one or more classes of Securities of a Series by means of the
subordination feature may be accomplished by the preferential right of holders
of one or more other classes of such Series (the "Senior Securities") to
distributions in respect of scheduled principal, Principal Prepayments, interest
or any combination thereof that otherwise would have been payable to holders of
one or more classes of subordinate Securities (the "Subordinated Securities")
under the circumstances and to the extent specified in the related Prospectus
Supplement. Protection may also be afforded to the holders of Senior Securities
of a Series by: (i) reducing the ownership interest (if applicable) of the
related Subordinated Securities; (ii) a combination of the immediately preceding
sentence and clause (i) above; or (iii) as otherwise described in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement,
delays in receipt of scheduled payments on the Loans and losses on defaulted
Loans may be borne first by the various classes of Subordinated Securities and
thereafter by the various classes of Senior Securities, in each case under the
circumstances and subject to the limitations specified in such Prospectus
Supplement. The aggregate distributions in respect of delinquent payments on the
Loans over the lives of the Securities or at any time, the aggregate losses in
respect of defaulted Loans which must be borne by the Subordinated Securities by
virtue of subordination and the amount of the distributions otherwise
distributable to the Subordinated Securityholders that will be distributable to
Senior Securityholders on any Distribution Date may be limited as specified in
the related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Loans or aggregate losses in respect of such Loans
were to exceed an amount specified in the related Prospectus Supplement, holders
of Senior Securities would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the related
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Securities on any Distribution Date may instead be
deposited into one or more Reserve Accounts established with the Trustee or
distributed to holders of Senior Securities. Such deposits may be made on each
Distribution Date, for specified periods or until the balance in the Reserve
Account has reached a specified amount and, following payments from the Reserve
Account to holders of Senior Securities or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Account to required levels, in
each case as specified in the related Prospectus Supplement. Amounts on deposit
in the Reserve Account may be released to the holders of certain classes of
Securities at the times and under the circumstances specified in such Prospectus
Supplement.
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If specified in the related Prospectus Supplement, various classes of Senior
Securities and Subordinated Securities may themselves be subordinate in their
right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-collateralization
mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus Supplement.
As between classes of Subordinated Securities, payments to holders of Senior
Securities on account of delinquencies or losses and payments to any Reserve
Account will be allocated as specified in the related Prospectus Supplement.
LETTER OF CREDIT
The letter of credit, if any, with respect to a Series of Securities will be
issued by the bank or financial institution specified in the related Prospectus
Supplement (the "L/C Bank"). Under the letter of credit, the L/C Bank will be
obligated to honor drawings thereunder in an aggregate fixed dollar amount, net
of unreimbursed payments thereunder, equal to the percentage specified in the
related Prospectus Supplement of the aggregate principal balance of the Loans on
the related Cut-off Date or of one or more Classes of Securities (the "L/C
Percentage"). If so specified in the related Prospectus Supplement, the letter
of credit may permit drawings in the event of losses not covered by insurance
policies or other credit support, such as losses arising from damage not covered
by standard hazard insurance policies, losses resulting from the bankruptcy of a
borrower and the application of certain provisions of the federal Bankruptcy
Code, or losses resulting from denial of insurance coverage due to
misrepresentations in connection with the origination of a Loan. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder. The obligations of the L/C Bank
under the letter of credit for each Series of Securities will expire at the
earlier of the date specified in the related Prospectus Supplement or the
termination of the Trust Fund. See "The Agreements--Termination; Optional
Termination." A copy of the letter of credit for a Series, if any, will be filed
with the Commission as an exhibit to a Current Report on Form 8-K to be filed
within 15 days of issuance of the Securities of the related Series.
INSURANCE POLICIES, SURETY BONDS AND GUARANTIES
If so provided in the Prospectus Supplement for a Series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Securities of the related Series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. In addition, if specified in the
related Prospectus Supplement, a Trust Fund may also include bankruptcy bonds,
special hazard insurance policies, other insurance or guaranties for the purpose
of (i) maintaining timely payments or providing additional protection against
losses on the assets included in such Trust Fund, (ii) paying administrative
expenses or (iii) establishing a minimum reinvestment rate on the payments made
in respect of such assets or principal payment rate on such assets. Such
arrangements may include agreements under which Securityholders are entitled to
receive amounts deposited in various accounts held by the Trustee upon the terms
specified in such Prospectus Supplement. A copy of any such instrument for a
Series will be filed with the Commission as an exhibit to a Current Report on
Form 8-K to be filed with the Commission within 15 days of issuance of the
Securities of the related Series.
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OVER-COLLATERALIZATION
If so provided in the Prospectus Supplement for a Series of Securities, a
portion of the interest payment on each Loan may be applied as an additional
distribution in respect of principal to reduce the principal balance of a
certain class or classes of Securities and, thus, accelerate the rate of payment
of principal on such class or classes of Securities.
RESERVE ACCOUNTS
If specified in the related Prospectus Supplement, credit support with
respect to a Series of Securities will be provided by the establishment and
maintenance with the Trustee for such Series of Securities, in trust, of one or
more Reserve Accounts for such Series. The related Prospectus Supplement will
specify whether or not any such Reserve Accounts will be included in the Trust
Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit therein
of cash, United States Treasury securities, instruments evidencing ownership of
principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in the related Prospectus Supplement, (ii) by the deposit therein from
time to time of certain amounts, as specified in the related Prospectus
Supplement to which the Subordinate Securityholders, if any, would otherwise be
entitled or (iii) in such other manner as may be specified in the related
Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in "Permitted
Investments" which may include (i) obligations of the United States or any
agency thereof, provided such obligations are backed by the full faith and
credit of the United States; (ii) general obligations of or obligations
guaranteed by any state of the United States or the District of Columbia
receiving the highest long-term debt rating of each Rating Agency rating the
related Series of Securities, or such lower rating as will not result in the
downgrading or withdrawal of the ratings then assigned to such Securities by
each such Rating Agency; (iii) commercial or finance company paper which is then
receiving the highest commercial or finance company paper rating of each such
Rating Agency, or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to such Securities by each such Rating
Agency; (iv) certificates of deposit, demand or time deposits, or bankers'
acceptances issued by any depository institution or trust company incorporated
under the laws of the United States or of any state thereof and subject to
supervision and examination by federal and/or state banking authorities,
provided that the commercial paper and/or long term unsecured debt obligations
of such depository institution or trust company (or in the case of the principal
depository institution in a holding company system, the commercial paper or
long-term unsecured debt obligations of such holding company, but only if
Moody's Investors Service, Inc. ("Moody's") is not a Rating Agency) are then
rated in one of the two highest long-term and the highest short-term ratings of
each such Rating Agency for such securities, or such lower ratings as will not
result in the downgrading or withdrawal of the rating then assigned to such
Securities by any such rating Agency; (iv) demand or time deposits or
certificates of deposit issued by any bank or trust company or savings
institution to the extent that such deposits are fully insured by the FDIC; (v)
guaranteed reinvestment agreements issued by any bank, insurance company or
other corporation containing, at the time of the issuance of such agreements,
such terms and conditions as will not result in the downgrading or withdrawal of
the rating then assigned to such Securities by any such Rating Agency; (vi)
repurchase obligations with respect to any security described in clauses (i) and
(ii) above, in either case entered into with a depository institution or trust
company (acting as principal) described in clause (iv) above; (vii) securities
(other than stripped bonds, stripped coupons or instruments sold at a purchase
price in excess of 115% of the face amount thereof) bearing interest or sold at
a discount and issued by any corporation incorporated under the laws of the
United States or any state thereof which, at the time of such investment, have
one of the two highest ratings of each Rating Agency (except that if the Rating
Agency is Moody's, such rating shall be the highest commercial paper rating of
Moody's for any such securities), or such lower rating as will not result in the
downgrading or withdrawal of
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the rating then assigned to such Securities by any such Rating Agency; (viii)
interests in any money market fund which at the date of acquisition of the
interests in such fund and throughout the time such interests are held in such
fund has the highest applicable rating by each such Rating Agency or such lower
rating as will not result in the downgrading or withdrawal of the ratings then
assigned to such Securities by each such Rating Agency; and (ix) short term
investment funds sponsored by any trust company or national banking association
incorporated under the laws of the United States or any state thereof which on
the date of acquisition has been rated by each such Rating Agency in their
respective highest applicable rating category or such lower rating as will not
result in the downgrading or withdrawal of the ratings then assigned to such
Securities by each such Rating Agency; provided, that no such instrument shall
be a Permitted Investment if such instrument evidences the right to receive
interest only payments with respect to the obligations underlying such
instrument. If a letter of credit is deposited with the Trustee, such letter of
credit will be irrevocable. Unless otherwise specified in the related Prospectus
Supplement, any instrument deposited therein will name the Trustee, in its
capacity as trustee for the holders of the Securities, as beneficiary and will
be issued by an entity acceptable to each Rating Agency that rates the
Securities of the related Series. Additional information with respect to such
instruments deposited in the Reserve Accounts will be set forth in the related
Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Securities of the related Series for the purposes, in the manner and
at the times specified in the related Prospectus Supplement.
POOL INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate pool insurance
policy ("Pool Insurance Policy") will be obtained for the Pool and issued by the
insurer (the "Pool Insurer") named in such Prospectus Supplement.
Each Pool Insurance Policy will, subject to the limitations described below,
cover loss by reason of default in payment on Loans in the Pool in an amount
equal to a percentage specified in such Prospectus Supplement of the aggregate
principal balance of such Loans on the Cut-off Date which are not covered as to
their entire outstanding principal balances by Primary Mortgage Insurance
Policies. As more fully described below, the Master Servicer will present claims
thereunder to the Pool Insurer on behalf of itself, the Trustee and the holders
of the Securities of the related Series. The Pool Insurance Policies, however,
are not blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Loans and only upon satisfaction of certain
conditions precedent described below. Unless otherwise specified in the related
Prospectus Supplement, the Pool Insurance Policies will not cover losses due to
a failure to pay or denial of a claim under a Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the Pool
Insurance Policy will provide that no claims may be validly presented unless (i)
any required Primary Mortgage Insurance Policy is in effect for the defaulted
Loan and a claim thereunder has been submitted and settled; (ii) hazard
insurance on the related Property has been kept in force and real estate taxes
and other protection and preservation expenses have been paid; (iii) if there
has been physical loss or damage to the Property, it has been restored to its
physical condition (reasonable wear and tear excepted) at the time of issuance
of the policy; and (iv) the insured has acquired good and merchantable title to
the Property free and clear of liens except certain permitted encumbrances. Upon
satisfaction of these conditions, the Pool Insurer will have the option either
(a) to purchase the property securing the defaulted Loan at a price equal to the
principal balance thereof plus accrued and unpaid interest at the Loan Rate to
the date of such purchase and certain expenses incurred by the Master Servicer
on behalf of the Trustee and Securityholders, or (b) to pay the amount by which
the sum of the principal balance of the defaulted Loan plus accrued and unpaid
interest at the Loan Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Property, in either case net of certain amounts paid or assumed to have been
paid under the related Primary Mortgage Insurance Policy. If any Property
securing
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a defaulted Loan is damaged and proceeds, if any, from the related hazard
insurance policy or the applicable special hazard insurance policy are
insufficient to restore the damaged Property to a condition sufficient to permit
recovery under the Pool Insurance Policy, the Master Servicer will not be
required to expend its own funds to restore the damaged Property unless it
determines that (i) such restoration will increase the proceeds to
Securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) such expenses will be recoverable by it
through proceeds of the sale of the Property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the Pool
Insurance Policy will not insure (and many Primary Mortgage Insurance Policies
do not insure) against loss sustained by reason of a default arising from, among
other things, (i) fraud or negligence in the origination or servicing of a Loan,
including misrepresentation by the borrower, the originator or persons involved
in the origination thereof, or (ii) failure to construct a Property in
accordance with plans and specifications. A failure of coverage attributable to
one of the foregoing events might result in a breach of the related Seller's or
Originator's representations described above, and, in such events might give
rise to an obligation on the part of such Seller or Originator to repurchase the
defaulted Loan if the breach cannot be cured by such Seller or Originator. No
Pool Insurance Policy will cover (and many Primary Mortgage Insurance Policies
do not cover) a claim in respect of a defaulted Loan occurring when the servicer
of such Loan, at the time of default or thereafter, was not approved by the
applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of claims
paid less the aggregate of the net amounts realized by the Pool Insurer upon
disposition of all foreclosed properties. The amount of claims paid will include
certain expenses incurred by the Master Servicer as well as accrued interest on
delinquent Loans to the date of payment of the claim, unless otherwise specified
in the related Prospectus Supplement. Accordingly, if aggregate net claims paid
under any Pool Insurance Policy reach the original policy limit, coverage under
that Pool Insurance Policy will be exhausted and any further losses will be
borne by the related Securityholders.
CROSS-COLLATERALIZATION
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust Fund may be evidenced by
separate classes of the related Series of Securities. In such case, credit
support may be provided by a cross-collateralization feature which requires that
distributions be made with respect to Securities evidencing a beneficial
ownership interest in, or secured by, one or more asset groups within the same
Trust Fund prior to distributions to Subordinated Securities evidencing a
beneficial ownership interest in, or secured by, one or more other asset groups
within such Trust Fund. Cross-collateralization may be provided by (i) the
allocation of certain excess amounts generated by one or more asset groups
within the same Trust Fund to one or more other asset groups within the same
Trust Fund or (ii) the allocation of losses with respect to one or more asset
groups to one or more other asset groups within the same Trust Fund. Such excess
amounts will be applied and/or such losses will be allocated to the class or
classes of Subordinated Securities of the related Series then outstanding having
the lowest rating assigned by any Rating Agency or the lowest payment priority,
in each case to the extent and in the manner more specifically described in the
related Prospectus Supplement. The Prospectus Supplement for a Series which
includes a cross-collateralization feature will describe the manner and
conditions for applying such cross-collateralization feature.
If specified in the related Prospectus Supplement, the coverage provided by
one or more forms of credit support described in this Prospectus may apply
concurrently to two or more related Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds 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 Trust Funds.
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OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust Fund may also
include bankruptcy bonds, special hazard insurance policies, other insurance,
guaranties, or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust Fund, (ii) paying administrative expenses or (iii)
establishing a minimum reinvestment rate on the payments made in respect of such
assets or principal payment rate on such assets. Such arrangements may include
agreements under which Securityholders are entitled to receive amounts deposited
in various accounts held by the Trustee upon the terms specified in such
Prospectus Supplement. If specified in the related Prospectus Supplement, the
Trust Fund may also include interest rate swap agreements or interest rate cap
agreements. An interest rate swap agreement involves an agreement between two
parties under which one party makes to the other party periodic payments based
on a fixed rate of interest and receives in return periodic payments based on a
variable rate of interest, which rates of interest are calculated on the basis
of a specified notional amount of principal for a specified period of time as
will be described in the related Prospectus Supplement. An interest rate cap
agreement involves an agreement between two parties in which one party agrees to
make payments to the other party when a designated market interest rate goes
above a designated level on predetermined dates or during a specified time
period as will be described in the related Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities will be
affected primarily by the amount and timing of principal payments received on or
in respect of the Trust Fund Assets included in the related Trust Fund. The
original terms to maturity of the Loans in a given Pool will vary depending upon
the type of Loans included therein. Each Prospectus Supplement will contain
information with respect to the type and maturities of the Loans in the related
Pool. The related Prospectus Supplement will specify the circumstances, if any,
under which the related Loans will be subject to prepayment penalties. The
prepayment experience on the Loans in a Pool will affect the weighted average
life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity loans
and home improvement contracts have been originated in significant volume only
during the past few years and the Depositor is not aware of any publicly
available studies or statistics on the rate of prepayment of such loans.
Generally, home equity loans and home improvement contracts are not viewed by
borrowers as permanent financing. Accordingly, the Loans may experience a higher
rate of prepayment than traditional first mortgage loans. On the other hand,
because home equity loans such as the Revolving Credit Line Loans generally are
not fully amortizing, the absence of voluntary borrower prepayments could cause
rates of principal payments lower than, or similar to, those of traditional
fully-amortizing first mortgage loans. The prepayment experience of the related
Trust Fund may be affected by a wide variety of factors, including general
economic conditions, prevailing interest rate levels, the availability of
alternative financing, homeowner mobility and the frequency and amount of any
future draws on any Revolving Credit Line Loans. Other factors that might be
expected to affect the prepayment rate of a pool of home equity mortgage loans
or home improvement contracts include the amounts of, and interest rates on, the
underlying senior mortgage loans, and the use of first mortgage loans as
long-term financing for home purchase and subordinate mortgage loans as
shorter-term financing for a variety of purposes, including home improvement,
education expenses and purchases of consumer durables such as automobiles.
Accordingly, the Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations on
the right of borrowers to deduct interest payments on home equity loans for
federal income tax purposes may further increase the rate of prepayments of the
Loans. The enforcement of a "due-on-sale" provision (as described below) will
have the same effect as a prepayment of the related Loan. See "Certain Legal
Aspects of the Loans--Due-on-Sale Clauses." The yield to an investor who
purchases Securities in the secondary market at a price other than par will vary
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from the anticipated yield if the rate of prepayment on the Loans is actually
different than the rate anticipated by such investor at the time such Securities
were purchased.
Collections on Revolving Credit Line Loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the minimum
monthly payment for such month or, during the interest-only period for certain
Revolving Credit Line Loans and, in more limited circumstances, Closed-End
Loans, with respect to which an interest-only payment option has been selected,
the interest and the fees and charges for such month or (ii) make payments as
high as the entire outstanding principal balance plus accrued interest and the
fees and charges thereon. It is possible that borrowers may fail to make the
required periodic payments. In addition, collections on the Loans may vary due
to seasonal purchasing and the payment habits of borrowers.
Unless otherwise specified in the related Prospectus Supplement, all
conventional Loans will contain due-on-sale provisions permitting the mortgagee
to accelerate the maturity of the loan upon sale or certain transfers by the
borrower of the related Property. Loans insured by the FHA, and Single Family
Loans partially guaranteed by the VA, are assumable with the consent of the FHA
and the VA, respectively. Thus, the rate of prepayments on such Loans may be
lower than that of conventional Loans bearing comparable interest rates. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
generally will enforce any due-on-sale or due-on-encumbrance clause, to the
extent it has knowledge of the conveyance or further encumbrance or the proposed
conveyance or proposed further encumbrance of the Property and reasonably
believes that it is entitled to do so under applicable law; PROVIDED, HOWEVER,
that the Master Servicer will not take any enforcement action that would impair
or threaten to impair any recovery under any related insurance policy. See "The
Agreements--Collection Procedures" and "Certain Legal Aspects of the Loans" for
a description of certain provisions of each Agreement and certain legal
developments that may affect the prepayment experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above such Loan Rates. Conversely, if prevailing interest
rates rise appreciably above the Loan Rates borne by the Loans, such Loans are
more likely to experience a lower prepayment rate than if prevailing rates
remain at or below such Loan Rates. However, there can be no assurance that such
will be the case.
When a full prepayment is made on a Loan, the borrower is charged interest
on the principal amount of the Loan so prepaid only for the number of days in
the month actually elapsed up to the date of the prepayment, rather than for a
full month. Unless otherwise provided in the related Prospectus Supplement, the
effect of prepayments in full will be to reduce the amount of interest passed
through or paid in the following month to holders of Securities because interest
on the principal amount of any Loan so prepaid generally will be paid only to
the date of prepayment. Partial prepayments in a given month may be applied to
the outstanding principal balances of the Loans so prepaid on the first day of
the month of receipt or the month following receipt. In the latter case, partial
prepayments will not reduce the amount of interest passed through or paid in
such month. Unless otherwise specified in the related Prospectus Supplement,
neither full nor partial prepayments will be passed through or paid until the
month following receipt.
Even assuming that the Properties provide adequate security for the Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Loans and corresponding delays in the receipt of related proceeds by
Securityholders could occur. An action to foreclose on a Property securing a
Loan is regulated by state statutes and rules and is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in some
states an action to obtain a deficiency judgment is not permitted following a
nonjudicial sale of a property. In the event of a default by a borrower, these
restrictions among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Property or to obtain
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liquidation proceeds sufficient to repay all amounts due on the related Loan. In
addition, the Master Servicer will be entitled to deduct from related
liquidation proceeds all expenses reasonably incurred in attempting to recover
amounts due on defaulted Loans and not yet repaid, including payments to senior
lienholders, legal fees and costs of legal action, real estate taxes and
maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the remaining principal balance of the small mortgage
loan than would be the case with the other defaulted mortgage loan having a
large remaining principal balance.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of certain originators and
servicers of Loans. In addition, most have other laws, public policy and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the Loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the Master Servicer to collect
all or part of the principal of or interest on the Loans, may entitle the
borrower to a refund of amounts previously paid and, in addition, could subject
the Master Servicer to damages and administrative sanctions.
If the rate at which interest is passed through or paid to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis, disproportionate
principal prepayments among Loans with different Loan Rates will affect the
yield on such Securities. In most cases, the effective yield to Securityholders
will be lower than the yield otherwise produced by the applicable Pass-Through
Rate or interest rate and purchase price, because while interest will accrue on
each Loan from the first day of the month (unless otherwise specified in the
related Prospectus Supplement), the distribution of such interest will not be
made earlier than the month following the month of accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related Prospectus
Supplement may have the option to purchase the assets of a Trust Fund thereby
effecting earlier retirement of the related Series of Securities. See "The
Agreements-- Termination; Optional Termination."
The relative contribution of the various factors affecting prepayment may
also vary from time to time. There can be no assurance as to the rate of payment
of principal of the Trust Fund Assets at any time or over the lives of the
Securities.
The Prospectus Supplement relating to a Series of Securities will discuss in
greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted average
lives and maturities of such Securities.
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THE AGREEMENTS
Set forth below is a description of the material provisions of each
Agreement which are not described elsewhere in this Prospectus. The description
is subject to, and qualified in its entirety by reference to, the provisions of
each Agreement. Where particular provisions or terms used in the Agreements are
referred to, such provisions or terms are as specified in the Agreements.
ASSIGNMENT OF THE TRUST FUND ASSETS
ASSIGNMENT OF THE LOANS. At the time of issuance of the Securities of a
Series, and except as otherwise specified in the related Prospectus Supplement,
the Depositor will cause the Loans comprising the related Trust Fund to be
assigned to the Trustee, without recourse, together with all principal and
interest received by or on behalf of the Depositor on or with respect to such
Loans after the Cut-off Date, other than principal and interest due on or before
the Cut-off Date and other than any Retained Interest specified in the related
Prospectus Supplement. The Trustee will, concurrently with such assignment,
deliver such Securities to the Depositor in exchange for the Loans. Each Loan
will be identified in a schedule appearing as an exhibit to the related
Agreement. Such schedule will include information as to the outstanding
principal balance of each Loan after application of payments due on or before
the Cut-off Date, as well as information regarding the Loan Rate or APR, the
maturity of the Loan, the Loan-to-Value Ratios or Combined Loan-to-Value Ratios,
as applicable, at origination and certain other information.
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Mortgage Loan or Home Equity Loan,
among other things, (i) the mortgage note or contract endorsed without recourse
in blank or to the order of the Trustee, (ii) the mortgage, deed of trust or
similar instrument (a "Mortgage") with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording office, in which
case the Depositor will deliver or cause to be delivered a copy of such Mortgage
together with a certificate that the original of such Mortgage was delivered to
such recording office), (iii) an assignment of the Mortgage to the Trustee,
which assignment will be in recordable form in the case of a Mortgage
assignment, and (iv) such other security documents, including those relating to
any senior interests in the Property, as may be specified in the related
Prospectus Supplement or the related Agreement. Unless otherwise specified in
the related Prospectus Supplement, the Depositor will promptly cause the
assignments of the related Loans to be recorded in the appropriate public office
for real property records, except in states in which, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in such Loans against the claim of any subsequent transferee
or any successor to or creditor of the Depositor or the Originators of such
Loans.
With respect to any Loans that are Cooperative Loans, the Depositor will
cause to be delivered to the Trustee the related original cooperative note
endorsed without recourse in blank or to the order of the Trustee, the original
security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate, related blank stock powers and any other document specified in the
related Prospectus Supplement. The Depositor will cause to be filed in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Contract, deliver or cause to be delivered to the
Trustee the original Contract and copies of documents and instruments related to
each Contract and, other than in the case of unsecured Contracts, the security
interest in the Property securing such Contract. In order to give notice of the
right, title and interest of Securityholders to the Contracts, the Depositor
will cause a UCC-1 financing statement to be executed by the Depositor or the
Seller identifying the Trustee as the secured party and identifying all
Contracts as collateral. Unless otherwise specified in the related Prospectus
Supplement, the Contracts will not be
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stamped or otherwise marked to reflect their assignment to the Trustee.
Therefore, if, through negligence, fraud or otherwise, a subsequent purchaser
were able to take physical possession of the Contracts without notice of such
assignment, the interest of Securityholders in the Contracts could be defeated.
See "Certain Legal Aspects of the Loans--The Contracts."
The Trustee (or the custodian hereinafter referred to) will review such Loan
documents within the time period specified in the related Prospectus Supplement
after receipt thereof, and the Trustee will hold such documents in trust for the
benefit of the related Securityholders. Unless otherwise specified in the
related Prospectus Supplement, if any such document is found to be missing or
defective in any material respect, the Trustee (or such custodian) will notify
the Master Servicer and the Depositor, and the Master Servicer will notify the
related Seller or Originator.
If such Seller or Originator cannot cure the omission or defect within the
time period specified in the related Prospectus Supplement after receipt of such
notice, such Seller or Originator will be obligated to either (i) purchase the
related Loan from the Trust Fund at the Purchase Price or (ii) if so specified
in the related Prospectus Supplement, remove such Loan from the Trust Fund and
substitute in its place one or more other Loans that meets certain requirements
set forth therein. There can be no assurance that a Seller or Originator will
fulfill this purchase or substitution obligation. Although the Master Servicer
may be obligated to enforce such obligation to the extent described above under
"The Trust Fund -- Representations by Sellers or Originators; Repurchases,"
neither the Master Servicer nor the Depositor will be obligated to purchase or
replace such Loan if the Seller or Originator defaults on its obligation, unless
such breach also constitutes a breach of the representations or warranties of
the Master Servicer or the Depositor, as the case may be. Unless otherwise
specified in the related Prospectus Supplement, this obligation to cure,
purchase or substitute constitutes the sole remedy available to the
Securityholders or the Trustee for omission of, or a material defect in, a
constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Securityholders in a Loan, the Master Servicer will be obligated either to cure
the breach in all material respects or to purchase (at the Purchase Price) or if
so specified in the related Prospectus Supplement, replace the Loan. Unless
otherwise specified in the related Prospectus Supplement, this obligation to
cure, purchase or substitute constitutes the sole remedy available to the
Securityholders or the Trustee for such a breach of representation by the Master
Servicer.
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC election is to be made, no purchase or substitution of a Loan will
be made if such purchase or substitution would result in a prohibited
transaction tax under the Code.
NO RECOURSE TO SELLERS, ORIGINATORS, DEPOSITOR OR MASTER SERVICER
As described above under "--Assignment of the Trust Fund Assets," the
Depositor will cause the Loans comprising the related Trust Fund to be assigned
to the Trustee, without recourse. However, each Seller or Originator will be
obligated to repurchase or substitute for any Loan as to which certain
representations and warranties are breached or for failure to deliver certain
documents relating to the Loans as described above under "--Assignment of the
Trust Fund Assets" and under "The Trust Fund-- Representations by Sellers or
Originators; Repurchases." These obligations to purchase or substitute
constitute the sole remedy available to the Securityholders or the Trustee for a
breach of any such representation or failure to deliver a constituent document.
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PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
The Master Servicer will establish and maintain or cause to be established
and maintained with respect to the related Trust Fund a separate account or
accounts for the collection of payments on the related Trust Fund Assets in the
Trust Fund (the "Security Account") which, unless otherwise specified in the
related Prospectus Supplement, must be either (i) maintained with a depository
institution the debt obligations of which (or in the case of a depository
institution that is the principal subsidiary of a holding company, the
obligations of which) are rated in one of the two highest rating categories by
the Rating Agency or Rating Agencies that rated one or more classes of the
related Series of Securities, (ii) an account or accounts the deposits in which
are fully insured by either the Bank Insurance Fund (the "BIF") of the FDIC or
the Savings Association Insurance Fund (as successor to the Federal Savings and
Loan Insurance Corporation ("SAIF")), (iii) an account or accounts the deposits
in which are insured by the BIF or SAIF (to the limits established by the FDIC),
and the uninsured deposits in which are otherwise secured such that, as
evidenced by an opinion of counsel, the Securityholders have a claim with
respect to the funds in the Security Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the depository
institution with which the Security Account is maintained, or (iv) an account or
accounts otherwise acceptable to each Rating Agency. The collateral eligible to
secure amounts in the Security Account is limited to Permitted Investments. A
Security Account may be maintained as an interest bearing account or the funds
held therein may be invested pending each succeeding Distribution Date in
Permitted Investments. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or its designee will be entitled to receive any
such interest or other income earned on funds in the Security Account as
additional compensation and will be obligated to deposit in the Security Account
the amount of any loss immediately as realized. The Security Account may be
maintained with the Master Servicer or with a depository institution that is an
affiliate of the Master Servicer, provided it meets the standards set forth
above.
The Master Servicer will deposit or cause to be deposited in the Security
Account for each Trust Fund, to the extent applicable and unless otherwise
specified in the related Prospectus Supplement and provided in the Agreement,
the following payments and collections received or advances made by or on behalf
of it subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date and exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement, any
applicable prepayment penalties, on the Loans;
(ii) all payments on account of interest on the Loans, net of applicable
servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred, and
unreimbursed Advances made, by the Master Servicer, if any) of the hazard
insurance policies and any Primary Mortgage Insurance Policies, to the
extent such proceeds are not applied to the restoration of the property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other cash
amounts (net of unreimbursed expenses incurred in connection with
liquidation or foreclosure ("Liquidation Expenses") and unreimbursed
Advances made, by the Master Servicer, if any) received and retained in
connection with the liquidation of defaulted Loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds received
on a monthly basis with respect to any properties acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof purchased
by the Master Servicer, the Depositor or any Seller or Originators as
described under "The Trust Funds--Representations by Sellers or Originators;
Repurchases" or under "--Assignment of Trust Fund Assets" above and all
proceeds of any Loan repurchased as described under "--Termination; Optional
Termination" below;
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(v) all payments required to be deposited in the Security Account with
respect to any deductible clause in any blanket insurance policy described
under "-- Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the Master
Servicer of funds held in the Security Account and, to the extent specified
in the related Prospectus Supplement, any payments required to be made by
the Master Servicer in connection with prepayment interest shortfalls; and
(vii) all other amounts required to be deposited in the Security Account
pursuant to the Agreement.
The Master Servicer (or the Depositor, as applicable) may from time to time
direct the institution that maintains the Security Account to withdraw funds
from the Security Account for the following purposes:
(i) to pay to the Master Servicer the servicing fees described in the
related Prospectus Supplement, the master servicing fees (subject to
reduction) and, as additional servicing compensation, earnings on or
investment income with respect to funds in the amounts in the Security
Account credited thereto;
(ii) to reimburse the Master Servicer for Advances, such right of
reimbursement with respect to any Loan being limited to amounts received
that represent late recoveries of payments of principal and/or interest on
such Loan (or Insurance Proceeds or Liquidation Proceeds with respect
thereto) with respect to which such Advance was made;
(iii) to reimburse the Master Servicer for any Advances previously made
which the Master Servicer has determined to be nonrecoverable;
(iv) to reimburse the Master Servicer from Insurance Proceeds for
expenses incurred by the Master Servicer and covered by the related
insurance policies;
(v) to reimburse the Master Servicer for unpaid master servicing fees
and unreimbursed out-of-pocket costs and expenses incurred by the Master
Servicer in the performance of its servicing obligations, such right of
reimbursement being limited to amounts received representing late recoveries
of the payments for which such advances were made;
(vi) to pay to the Master Servicer, with respect to each Loan or
property acquired in respect thereof that has been purchased by the Master
Servicer pursuant to the Agreement, all amounts received thereon and not
taken into account in determining the principal balance of such repurchased
Loan;
(vii) to reimburse the Master Servicer or the Depositor for expenses
incurred and reimbursable pursuant to the Agreement;
(viii) to withdraw any amount deposited in the Security Account and not
required to be deposited therein; and
(ix) to clear and terminate the Security Account upon termination of the
Agreement.
In addition, unless otherwise specified in the related Prospectus
Supplement, on or prior to the business day immediately preceding each
Distribution Date, the Master Servicer shall withdraw from the Security Account
the amount of Available Funds, to the extent on deposit, for deposit in an
account maintained by the Trustee for the related Series of Securities.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Trustee on behalf of the related Securityholders, into which the Depositor will
deposit cash from the proceeds of the issuance of the related Securities in an
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amount equal to the Pre-Funded Amount on the related Closing Date. The
Pre-Funded Amount will not exceed 25% of the initial aggregate principal amount
of the Certificates and/or Notes of the related Series. The Pre-Funding Account
will be maintained with the Trustee for the related Series of Securities and is
designed solely to hold funds to be applied by such Trustee during the Funding
Period to pay to the Depositor the purchase price for Subsequent Loans. Monies
on deposit in the Pre-Funding Account will not be available to cover losses on
or in respect of the related Loans. The Pre-Funded Amount will be used by the
related Trustee to purchase Subsequent Loans from the Depositor from time to
time during the Funding Period. Each Subsequent Loan that is purchased by the
related Trustee will be required to be underwritten in accordance with the
eligibility criteria set forth in the related Agreement and in the related
Prospectus Supplement. Such eligibility criteria will be determined in
consultation with the applicable Rating Agency or Rating Agencies prior to the
issuance of the related Series of Securities and are designed to ensure that if
such Subsequent Loans were included as part of the initial Loans, the credit
quality of such assets would be consistent with the initial rating or ratings of
the Securities of such Series. The Depositor will certify to the Trustee that
all conditions precedent to the transfer of the Subsequent Loans to the Trust
Fund, including, among other things, the satisfaction of the related eligibility
criteria, have been satisfied. It is a condition precedent to the transfer of
any Subsequent Loans to the Trust Fund that the applicable Rating Agency or
Rating Agencies, after receiving prior notice of the proposed transfer of the
Subsequent Loans to the Trust Fund, will not have advised the Depositor or the
related Trustee that the conveyance of the Subsequent Loans to the Trust Fund
will result in a qualification, modification or withdrawal of their current
rating of any Securities of such Series. Upon the purchase by the Trustee of a
Subsequent Loan, such Subsequent Loan will be included in the related Trust Fund
Assets. The Funding Period, if any, for a Trust Fund will begin on the related
Closing Date and will end on the date specified in the related Prospectus
Supplement, which in no event will be later than the date that is three months
after the related Closing Date. Monies on deposit in the Pre-Funding Account may
be invested in Permitted Investments under the circumstances and in the manner
described in the related Agreement. See the "Index of Defined Terms" on page 119
of this Prospectus for the location of the defined term "Permitted Investments."
Earnings on investment of funds in the Pre-Funding Account will be deposited
into the related Security Account or such other trust account as is specified in
the related Prospectus Supplement and losses will be charged against the funds
on deposit in the Pre-Funding Account. Any amounts remaining in the Pre-Funding
Account at the end of the Funding Period will be distributed to the related
Securityholders in the manner and priority specified in the related Prospectus
Supplement, as a prepayment of principal of the related Securities. The
Depositor will include information regarding the additional Subsequent Loans in
a Current Report on Form 8K to the extent that such information, individually or
in the aggregate, is material.
In addition, if so provided in the related Prospectus Supplement, the Master
Servicer will establish and maintain, in the name of the Trustee on behalf of
the related Securityholders, an account (the "Capitalized Interest Account")
into which the Depositor will deposit cash from the proceeds of the issuance of
the related Securities in such amount as is necessary to cover shortfalls in
interest on the related Series of Securities that may arise as a result of a
portion of the assets of the Trust Fund not being invested in Loans and the
utilization of the Pre-Funding Account as described above. The Capitalized
Interest Account shall be maintained with the Trustee for the related Series of
Securities and is designed solely to cover the above-mentioned interest
shortfalls. Monies on deposit in the Capitalized Interest Account will not be
available to cover losses on or in respect of the related Loans. Amounts on
deposit in the Capitalized Interest Account will be distributed to
Securityholders on the Distribution Dates occurring in the Funding Period to
cover any shortfalls in interest on the related Series of Securities as
described in the related Prospectus Supplement. To the extent that the entire
amount on deposit in the Capitalized Interest Account has not been applied to
cover shortfalls in interest on the related Series of Securities by the end of
the Funding Period, any amounts remaining in the Capitalized Interest Account
will be paid to the Depositor.
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SUB-SERVICING BY SELLERS
Each Seller of a Loan or any other servicing entity may act as the
Sub-Servicer for such Loan pursuant to an agreement (each, a "Sub-Servicing
Agreement"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely between
the Master Servicer and the Sub-Servicer, the Agreement pursuant to which a
Series of Securities is issued will provide that, if for any reason the Master
Servicer for such Series of Securities is no longer the Master Servicer of the
related Loans, the Trustee or any successor Master Servicer may assume the
Master Servicer's rights and obligations under such Sub-Servicing Agreement.
Notwithstanding any such subservicing arrangement, unless otherwise provided in
the related Prospectus Supplement, the Master Servicer will remain liable for
its servicing duties and obligations under the Master Servicing Agreement as if
the Master Servicer alone were servicing the Loans.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Loans and
will, consistent with each Agreement and any Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty, bankruptcy bond or
alternative arrangements, follow such collection procedures as are customary
with respect to loans that are comparable to the Loans. Consistent with the
above, the Master Servicer may, in its discretion, unless otherwise specified in
the related Prospectus Supplement (i) waive any assumption fee, late payment or
other charge in connection with a Loan and (ii) to the extent not inconsistent
with the coverage of such Loan by a Pool Insurance Policy, Primary Mortgage
Insurance Policy, FHA Insurance, VA Guaranty, bankruptcy bond or alternative
arrangements, if applicable, arrange with a borrower a schedule for the
liquidation of delinquencies running for no more than 125 days after the
applicable due date for each payment. Each Agreement and the related Prospectus
Supplement will specify the time period during which payments received by the
Master Servicer may be commingled with the Master Servicer's own funds prior to
each Distribution Date. To the extent the Master Servicer is obligated to make
or cause to be made Advances, such obligation will remain during any period of
such an arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any case
in which property securing a Loan has been, or is about to be, conveyed by the
mortgagor or obligor, the Master Servicer will, to the extent it has knowledge
of such conveyance or proposed conveyance, exercise or cause to be exercised its
rights to accelerate the maturity of such Loan under any due-on-sale clause
applicable thereto, but only if the exercise of such rights is permitted by
applicable law and will not impair or threaten to impair any recovery under any
Primary Mortgage Insurance Policy. If these conditions are not met or if the
Master Servicer reasonably believes it is unable under applicable law to enforce
such due-on-sale clause or if such Loan is a mortgage loan insured by the FHA or
partially guaranteed by the VA, the Master Servicer will enter into or cause to
be entered into an assumption and modification agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such person
becomes liable for repayment of the Loan and, to the extent permitted by
applicable law, the mortgagor remains liable thereon. Any fee collected by or on
behalf of the Master Servicer for entering into an assumption agreement will be
retained by or on behalf of the Master Servicer as additional servicing
compensation. See "Certain Legal Aspects of the Loans--Due-on-Sale Clauses." In
connection with any such assumption, the terms of the related Loan may not be
changed.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Loans." This approval is usually based on the purchaser's income and net worth
and numerous other factors. Although the Cooperative's approval is unlikely to
be unreasonably withheld or delayed, the necessity of acquiring such approval
could limit the number of potential purchasers for those shares and otherwise
limit the Trust Fund's ability to sell and realize the value of those shares.
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In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2)) of
a corporation that qualifies as a "cooperative housing corporation" within the
meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders
(as defined in Code Section 216(b)(2)). By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance that
Cooperatives relating to the Cooperative Loans will qualify under such Section
for any particular year. In the event that such a Cooperative fails to qualify
for one or more years, the value of the collateral securing any related
Cooperative Loans could be significantly impaired because no deduction would be
allowable to tenant-stockholders under Code Section 216(a) with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to maintain a
hazard insurance policy providing for no less than the coverage of the standard
form of fire insurance policy with extended coverage customary for the type of
Property in the state in which such Property is located. Such coverage will be
in an amount that is at least equal to the lesser of (i) the maximum insurable
value of the improvements securing such Loan or (ii) the greater of (y) the
outstanding principal balance of the Loan and (z) an amount such that the
proceeds of such policy shall be sufficient to prevent the mortgagor and/or the
mortgagee from becoming a co-insurer. All amounts collected by the Master
Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Property or released to the mortgagor or obligor in
accordance with the Master Servicer's normal servicing procedures) will be
deposited in the related Security Account. In the event that the Master Servicer
maintains a blanket policy insuring against hazard losses on all the Loans
comprising part of a Trust Fund, it will conclusively be deemed to have
satisfied its obligation relating to the maintenance of hazard insurance. Such
blanket policy may contain a deductible clause, in which case the Master
Servicer will be required to deposit from its own funds into the related
Security Account the amounts which would have been deposited therein but for
such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a Loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism. The foregoing list is merely indicative
of certain kinds of uninsured risks and is not intended to be all inclusive. If
the Property securing a Loan is located in a federally designated special flood
area at the time of origination, the Master Servicer will require the mortgagor
or obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of a specified percentage (generally
80% to 90%) of the full replacement value of the insured property in order to
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recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, then the insurer's liability in the event of
partial loss will not exceed the larger of (i) the actual cash value (generally
defined as replacement cost at the time and place of loss, less physical
depreciation) of the improvements damaged or destroyed or (ii) such proportion
of the loss as the amount of insurance carried bears to the specified percentage
of the full replacement cost of such improvements. Since the amount of hazard
insurance the Master Servicer may cause to be maintained on the improvements
securing the Loans declines as the principal balances owing thereon decrease,
and since improved real estate generally has appreciated in value over time in
the past, the effect of this requirement in the event of partial loss may be
that hazard insurance proceeds will be insufficient to restore fully the damaged
property. If specified in the related Prospectus Supplement, a special hazard
insurance policy will be obtained to insure against certain of the uninsured
risks described above. See "Credit Enhancement."
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will not require that a standard hazard or flood insurance policy be
maintained on the cooperative dwelling relating to any Cooperative Loan.
Generally, the Cooperative itself is responsible for maintenance of hazard
insurance for the property owned by the Cooperative and the tenant-stockholders
of that Cooperative do not maintain individual hazard insurance policies. To the
extent, however, that a Cooperative and the related borrower on a Cooperative
Loan do not maintain such insurance or do not maintain adequate coverage or any
insurance proceeds are not applied to the restoration of damaged property, any
damage to such borrower's cooperative dwelling or such Cooperative's building
could significantly reduce the value of the collateral securing such Cooperative
Loan to the extent not covered by other credit support.
If the Property securing a defaulted Loan is damaged and proceeds, if any,
from the related hazard insurance policy are insufficient to restore the damaged
Property, the Master Servicer is not required to expend its own funds to restore
the damaged Property unless it determines (i) that such restoration will
increase the proceeds to Securityholders on liquidation of the Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is not
available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer will
be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the defaulted
Loan are less than the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Trust Fund will realize a loss
in the amount of such difference plus the aggregate of expenses incurred by the
Master Servicer in connection with such proceedings and which are reimbursable
under the Agreement. In the unlikely event that any such proceedings result in a
total recovery which is, after reimbursement to the Master Servicer of its
expenses, in excess of the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Master Servicer will be entitled
to withdraw or retain from the Security Account amounts representing its normal
servicing compensation with respect to such Loan and, unless otherwise specified
in the related Prospectus Supplement, amounts representing the balance of such
excess, exclusive of any amount required by law to be forwarded to the related
borrower, as additional servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if the
Master Servicer or its designee recovers Insurance Proceeds which, when added to
any related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the Master Servicer, exceed the principal balance of such Loan
plus interest accrued thereon that is payable to Securityholders, the Master
Servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to such
Loan. In the event that the Master Servicer has expended its own funds to
restore the damaged Property and such funds have not been reimbursed under the
related hazard insurance policy, it will be entitled to withdraw from the
Security Account out of related Liquidation Proceeds or Insurance Proceeds an
amount equal to such expenses incurred by it, in which event the Trust Fund may
realize a loss
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up to the amount so charged. Since Insurance Proceeds cannot exceed deficiency
claims and certain expenses incurred by the Master Servicer, no such payment or
recovery will result in a recovery to the Trust Fund which exceeds the principal
balance of the defaulted Loan together with accrued interest thereon. See
"Credit Enhancement."
Unless otherwise specified in the related Prospectus Supplement or the
related Agreement, the proceeds from any liquidation of a Loan will be applied
in the following order of priority: first, to reimburse the Master Servicer for
any unreimbursed expenses incurred by it to restore the related Property and any
unreimbursed servicing compensation payable to the Master Servicer with respect
to such Loan; second, to reimburse the Master Servicer for any unreimbursed
Advances with respect to such Loan; third, to accrued and unpaid interest (to
the extent no Advance has been made for such amount) on such Loan; and fourth,
as a recovery of principal of such Loan.
REALIZATION UPON DEFAULTED LOANS
PRIMARY MORTGAGE INSURANCE POLICIES. If so specified in the related
Prospectus Supplement, the Master Servicer will maintain or cause to be
maintained, as the case may be, in full force and effect, a Primary Mortgage
Insurance Policy with regard to each Loan for which such coverage is required.
Primary Mortgage Insurance Policies reimburse certain losses sustained by reason
of defaults in payments by borrowers. Although the terms and conditions of
Primary Mortgage Insurance Policies differ, each Primary Mortgage Insurance
Policy will generally cover losses up to an amount equal to the excess of the
unpaid principal amount of a defaulted Loan (plus accrued and unpaid interest
thereon and certain approved expenses) over a specified percentage of the value
of the related Mortgaged Property. The Master Servicer will not cancel or refuse
to renew any such Primary Mortgage Insurance Policy in effect at the time of the
initial issuance of a Series of Securities that is required to be kept in force
under the applicable Agreement unless the replacement Primary Mortgage Insurance
Policy for such cancelled or nonrenewed policy is maintained with an insurer
whose claims-paying ability is sufficient to maintain the current rating of the
classes of Securities of such Series that have been rated.
FHA INSURANCE; VA GUARANTIES. Loans designated in the related Prospectus
Supplement as insured by the FHA will be insured by the FHA as authorized under
the United States Housing Act of 1937, as amended. In addition to the Title I
Program of the FHA, see "Certain Legal Aspects of the Loans--The Title I
Program," certain Loans will be insured under various FHA programs including the
standard FHA 203(b) program to finance the acquisition of one- to four-family
housing units and the FHA 245 graduated payment mortgage program. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Loans insured by FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No FHA-insured
Loans relating to a Series may have an interest rate or original principal
amount exceeding the applicable FHA limits at the time of origination of such
loan.
Loans designated in the related Prospectus Supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended (a "VA Guaranty"). The Serviceman's Readjustment Act of
1944, as amended, permits a veteran (or in certain instances the spouse of a
veteran) to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one-to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guaranty of mortgage loans of up
to 30 years' duration. However, no Loan guaranteed by the VA will have an
original principal amount greater than five times the partial VA guaranty for
such Loan. The maximum guaranty that may be issued by the VA under a VA
guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 1803(a), as
amended.
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SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each Series of Securities will be
equal to the percentage per annum described in the related Prospectus Supplement
(which may vary under certain circumstances) of the outstanding principal
balance of each Loan, and such compensation will be retained by it from
collections of interest on such Loan in the related Trust Fund (the "Master
Servicing Fee"). Unless otherwise specified in the related Prospectus
Supplement, as compensation for its servicing duties, a Sub-Servicer or, if
there is no Sub-Servicer, the Master Servicer will be entitled to a monthly
servicing fee as described in the related Prospectus Supplement. In addition,
unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or Sub-Servicer will retain all prepayment charges, assumption fees and
late payment charges, to the extent collected from borrowers, and any benefit
that may accrue as a result of the investment of funds in the applicable
Security Account (unless otherwise specified in the related Prospectus
Supplement).
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Trust Fund and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit enhancement
arrangements, payment of the fees and disbursements of the Trustee, any
custodian appointed by the Trustee, the certificate registrar and any paying
agent, and payment of expenses incurred in enforcing the obligations of
Sub-Servicers and Sellers. The Master Servicer will be entitled to reimbursement
of expenses incurred in enforcing the obligations of Sub-Servicers and Sellers
under certain limited circumstances.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each year,
a firm of independent public accountants will furnish a statement to the Trustee
to the effect that, on the basis of the examination by such firm conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Master Servicer of mortgage loans or private
asset backed securities, or under pooling and servicing agreements substantially
similar to each other (including the related Agreement), was conducted in
compliance with such agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Audit Program for Mortgages
serviced for FHLMC, or the Uniform Single Attestation Program for Mortgage
Bankers, it is required to report. In rendering its statement such firm may
rely, as to matters relating to the direct servicing of Loans by Sub-Servicers,
upon comparable statements for examinations conducted substantially in
compliance with the Uniform Single Attestation Program for Mortgage Bankers or
the Audit Program for Mortgages serviced for FHLMC (rendered within one year of
such statement) of firms of independent public accountants with respect to the
related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or before a
specified date in each year, of an annual statement signed by two officers of
the Master Servicer to the effect that the Master Servicer has fulfilled its
obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers of
the Master Servicer may be obtained by Securityholders of the related Series
without charge upon written request to the Master Servicer at the address set
forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Pooling and Servicing Agreement or Master
Servicing Agreement, as applicable, will be named in the related Prospectus
Supplement. Each Agreement will provide that the Master Servicer may not resign
from its obligations and duties under the Agreement except upon a determination
that its duties thereunder are no longer permissible under applicable law. The
Master
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Servicer may, however, be removed from its obligations and duties as set forth
in the Agreement. No such resignation will become effective until the Trustee or
a successor servicer has assumed the Master Servicer's obligations and duties
under the Agreement.
Each Agreement will further provide that neither the Master Servicer, the
Depositor nor any director, officer, employee, or agent of the Master Servicer
or the Depositor will be under any liability to the related Trust Fund or
Securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
PROVIDED, HOWEVER, that neither the Master Servicer, the Depositor nor any such
person will be protected against any liability which would otherwise be imposed
by reason of wilful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. Each Agreement will further provide that the
Master Servicer, the Depositor and any director, officer, employee or agent of
the Master Servicer or the Depositor will be entitled to indemnification by the
related Trust Fund and will be held harmless against any loss, liability or
expense incurred in connection with any legal action relating to the Agreement
or the Securities, other than any loss, liability or expense related to any
specific Loan or Loans (except any such loss, liability or expense otherwise
reimbursable pursuant to the Agreement) and any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Agreement will provide that
neither the Master Servicer nor the Depositor will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. The Master Servicer or the Depositor
may, however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the Agreement and the rights and duties
of the parties thereto and the interests of the Securityholders thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust Fund
and the Master Servicer or the Depositor, as the case may be, will be entitled
to be reimbursed therefor out of funds otherwise distributable to
Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master Servicer
is a party, or any person succeeding to the business of the Master Servicer,
will be the successor of the Master Servicer under each Agreement, provided that
such person is qualified to sell mortgage loans to, and service mortgage loans
on behalf of, FNMA or FHLMC and further provided that such merger, consolidation
or succession does not adversely affect the then current rating or ratings of
the class or classes of Securities of such Series that have been rated.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; MASTER SERVICING AGREEMENT. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) any failure by the Master Servicer to
distribute or cause to be distributed to Securityholders of any class any
required payment (other than an Advance) which continues unremedied for five
days after the giving of written notice of such failure to the Master Servicer
by the Trustee or the Depositor, or to the Master Servicer, the Depositor and
the Trustee by the holders of Securities of such class evidencing not less than
25% of the total distributions allocated to such class ("Percentage Interests");
(ii) any failure by the Master Servicer to make an Advance as required under the
Agreement, unless cured as specified therein; (iii) any failure by the Master
Servicer duly to observe or perform in any material respect any of its other
covenants or agreements in the Agreement which continues unremedied for thirty
days after the giving of written notice of such failure to the Master Servicer
by the Trustee or the Depositor, or to the Master Servicer, the Depositor and
the Trustee by the holders of Securities of any class evidencing not less than
25% of the aggregate Percentage Interests constituting such class; and (iv)
certain events of insolvency, readjustment
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of debt, marshalling of assets and liabilities or similar proceeding and certain
actions by or on behalf of the Master Servicer indicating its insolvency,
reorganization or inability to pay its obligations.
If specified in the related Prospectus Supplement, the Agreement will permit
the Trustee to sell the Trust Fund Assets and the other assets of the Trust Fund
described under "Credit Enhancement" herein in the event that payments in
respect thereto are insufficient to make payments required in the Agreement. The
assets of the Trust Fund will be sold only under the circumstances and in the
manner specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, so long as
an Event of Default under an Agreement remains unremedied, the Depositor or the
Trustee may, and at the direction of holders of Securities of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
such class and under such other circumstances as may be specified in such
Agreement, the Trustee shall terminate all of the rights and obligations of the
Master Servicer under the Agreement relating to such Trust Fund and in and to
the related Trust Fund Assets, whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement, including, if specified in the related Prospectus Supplement, the
obligation to make Advances, and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a mortgage loan servicing institution with a net worth of a least
$10,000,000 to act as successor to the Master Servicer under the Agreement.
Pending such appointment, the Trustee is obligated to act in such capacity. The
Trustee and any such successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation payable to the
Master Servicer under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, no
Securityholder, solely by virtue of such holder's status as a Securityholder,
will have any right under any Agreement to institute any proceeding with respect
to such Agreement, unless such holder previously has given to the Trustee
written notice of default and unless the holders of Securities of any class of
such Series evidencing not less than 25% of the aggregate Percentage Interests
constituting such class have made written request upon the Trustee to institute
such proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity, and the Trustee for 60 days has neglected or
refused to institute any such proceeding.
INDENTURE. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default in the payment of any principal of or interest on any
Note of such Series which continues unremedied for five days after the giving of
written notice of such default is given as specified in the related Prospectus
Supplement; (ii) failure to perform in any material respect any other covenant
of the Depositor or the Trust Fund in the Indenture which continues for a period
of thirty (30) days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) certain events
of bankruptcy, insolvency, receivership or liquidation of the Depositor or the
Trust Fund; or (iv) any other Event of Default provided with respect to Notes of
that Series including but not limited to certain defaults on the part of the
issuer, if any, of a credit enhancement instrument supporting such Notes.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series have an
interest rate of 0%, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the holders of
more than 50% of the Percentage Interests of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration,
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elect to maintain possession of the collateral securing the Notes of such Series
and to continue to apply distributions on such collateral as if there had been
no declaration of acceleration if such collateral continues to provide
sufficient funds for the payment of principal of and interest on the Notes of
such Series as they would have become due if there had not been such a
declaration. In addition, the Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a Series following an Event of Default, other
than a default in the payment of any principal or interest on any Note of such
Series for five days or more, unless (a) the holders of 100% of the Percentage
Interests of the Notes of such Series consent to such sale, (b) the proceeds of
such sale or liquidation are sufficient to pay in full the principal of and
accrued interest, due and unpaid, on the outstanding Notes of such Series at the
date of such sale or (c) the Trustee determines that such collateral would not
be sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Trustee obtains the consent of the holders of 66 2/3% of the
Percentage Interests of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for five days or more in the payment of
principal of or interest on the Notes of a Series, the Indenture provides that
the Trustee will have a prior lien on the proceeds of any such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an Event of
Default, the amount available for distribution to the Noteholders would be less
than would otherwise be the case. However, the Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
Except as otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee shall be under no obligation to exercise any
of the rights or powers under the Indenture at the request or direction of any
of the holders of Notes of such Series, unless such holders offered to the
Trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer and the Trustee,
without the consent of any of the Securityholders, (i) to cure any ambiguity;
(ii) to correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein; or (iii) to make any other
revisions with respect to matters or questions arising under the Agreement which
are not inconsistent with the provisions thereof, provided that such action will
not adversely affect in any material respect the interests of any
Securityholder. An amendment will be deemed not to adversely affect in any
material respect the interests of the Securityholders if the person requesting
such amendment obtains a letter from each Rating Agency
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requested to rate the class or classes of Securities of such Series stating that
such amendment will not result in the downgrading or withdrawal of the
respective ratings then assigned to such Securities. In addition, to the extent
provided in the related Agreement, an Agreement may be amended without the
consent of any of the Securityholders, to change the manner in which the
Security Account is maintained, provided that any such change does not adversely
affect the then current rating on the class or classes of Securities of such
Series that have been rated. In addition, if a REMIC election is made with
respect to a Trust Fund, the related Agreement may be amended to modify,
eliminate or add to any of its provisions to such extent as may be necessary to
maintain the qualification of the related Trust Fund as a REMIC, provided that
the Trustee has received an opinion of counsel to the effect that such action is
necessary or helpful to maintain such qualification. Except as otherwise
specified in the related Prospectus Supplement, each Agreement may also be
amended by the Depositor, the Master Servicer and the Trustee with consent of
holders of Securities of such Series evidencing not less than 66% of the
aggregate Percentage Interests of each class affected thereby for the purpose of
adding any provisions to or changing in an manner or eliminating any of the
provisions of the Agreement or of modifying in any manner the rights of the
holders of the related Securities; PROVIDED, HOWEVER, that no such amendment may
(i) reduce in any manner the amount of or delay the timing of, payments received
on Loans which are required to be distributed on any Security without the
consent of the holder of such Security, or (ii) reduce the aforesaid percentage
of Securities of any class the holders of which are required to consent to any
such amendment without the consent of the holders of all Securities of such
class covered by such Agreement then outstanding. If a REMIC election is made
with respect to a Trust Fund, the Trustee will not be entitled to consent to an
amendment to the related Agreement without having first received an opinion of
counsel to the effect that such amendment will not cause such Trust Fund to fail
to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling and
Servicing Agreement and Trust Agreement for each Series of Securities will
terminate upon the payment to the related Securityholders of all amounts held in
the Security Account or by the Master Servicer and required to be paid to them
pursuant to such Agreement following the later of (i) the final payment of or
other liquidation of the last of the Trust Fund Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Trust Fund
Assets remaining in the Trust Fund and (ii) the purchase by the Master Servicer
or, if REMIC treatment has been elected and if specified in the related
Prospectus Supplement, by the holder of the residual interest in the REMIC (see
"Federal Income Tax Consequences"), from the related Trust Fund of all of the
remaining Trust Fund Assets and all property acquired in respect of such Trust
Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any such
purchase of Trust Fund Assets and property acquired in respect of Trust Fund
Assets evidenced by a Series of Securities will be made at the option of the
Master Servicer, such other person or, if applicable, such holder of the REMIC
residual interest, at a price specified in the related Prospectus Supplement.
The exercise of such right will effect early retirement of the Securities of
that Series, but the right of the Master Servicer, such other person or, if
applicable, such holder of the REMIC residual interest, to so purchase is
subject to the principal balance of the related Trust Fund Assets being less
than the percentage specified in the related Prospectus Supplement of the
aggregate principal balance of the Trust Fund Assets at the Cut-off Date for the
Series. Upon such requirement being satisfied, the parties specified in the
related Prospectus Supplement may purchase all Trust Fund Assets and thereby
effect retirement of such Series of Securities. In such event, the applicable
purchase price will be sufficient to pay the aggregate outstanding principal
balance of such Series of Securities and any undistributed shortfall in interest
of such Series of Securities as will be described in the related Prospectus
Supplement. The foregoing is subject to the provision that if a REMIC election
is made with respect to a Trust Fund, any repurchase pursuant to clause (ii)
above will be made only in connection with a "qualified liquidation" of the
REMIC within the meaning of Section 860F(g)(4) of the Code.
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INDENTURE. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the payment
of interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the Notes of such Series on the last scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor, the Master Servicer and any of
their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in nature, of
certain legal matters relating to the Loans. Because such legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the descriptions do not, except as expressly provided below,
reflect the laws of any particular state, nor to encompass the laws of all
states in which the security for the Loans is situated. The descriptions are
qualified in their entirety by reference to the applicable federal laws and the
appropriate laws of the states in which Loans may be originated.
GENERAL
The Loans for a Series may be secured by deeds of trust, mortgages, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to the loan is located. Deeds of trust are
used almost exclusively in California instead of mortgages. A mortgage creates a
lien upon the real property encumbered by the mortgage, which lien is generally
not prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust formally has three parties, the borrower-property
owner called the trustor (similar to a mortgagor), a lender (similar to a
mortgagee) called the beneficiary, and a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until the
debt is paid, in trust, generally with a power of sale, to the trustee to secure
payment of the obligation. A security deed and a deed to secure debt are special
types of deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid. The
trustee's authority under a deed of trust, the mortgagee's authority under a
mortgage and the grantee's authority under a security deed or deed to secure
debt are governed by law and, with respect to some deeds of trust, the
directions of the beneficiary.
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COOPERATIVES. Certain of Loans may be Cooperative Loans. The Cooperative
owns all the real property that comprises the project, including the land,
separate dwelling units and all common areas. The Cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes and hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction or purchase of the Cooperative's apartment
building. The interest of the occupant under proprietary leases or occupancy
agreements to which that Cooperative is a party are generally subordinate to the
interest of the holder of the blanket mortgage in that building. If the
Cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements. In addition, the 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 lump sum at final maturity.
The inability of the Cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage 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 a Trust Fund
including Cooperative Loans, the collateral securing the Cooperative Loans.
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 which 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 rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender 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.
FORECLOSURE/REPOSSESSION
DEED OF TRUST. Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In addition to any notice requirements
contained in a deed of trust, in some states (such as California), the trustee
must record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. In some
states (including California), the borrower-trustor has the right to reinstate
the loan at any time following default until shortly before the trustee's sale.
In general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
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expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated
within any applicable cure period, a notice of sale must be posted in a public
place and, in most states (including California), published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest of record in the real property. In California, the
entire process from recording a notice of default to a non-judicial sale usually
takes four to five months.
MORTGAGES. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burden of ownership,
including obtaining hazard insurance and making such repairs at its own expense
as are necessary to render the property suitable for sale. The lender will
commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be reduced by the receipt of
any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure, which are
generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents.
Some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for fair notice
require that borrowers under deeds of trust receive notice longer than that
prescribed by statute. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust does not involve sufficient state action to afford constitutional
protection to the borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or deed
of trust. See "--Junior Mortgages; Rights of Senior Mortgagees" below.
COOPERATIVE LOANS. The Cooperative shares 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
bylaws, as well as the proprietary lease or occupancy agreement, and 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. The proprietary lease or occupancy agreement generally
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permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by 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 will
usually 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 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 form the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such 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 value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements 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-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (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 foreclosure 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 foreclosure. 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 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.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give risks to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental
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Protection Agency ("EPA") may impose a lien on property where EPA has incurred
clean-up costs. However, a CERCLA lien is subordinate to pre-existing, perfected
security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
Property, even though the environmental damage or threat was caused by a prior
or current owner or operator. CERCLA imposes liability for such costs on any and
all "responsible parties," including owners or operators. However, CERCLA
excludes from the definition of "owner or operator" a secured creditor who holds
indicia of ownership primarily to protect its security interest (the "secured
creditor exclusion") but without "participating in the management" of the
Property. Thus, if a lender's activities begin to encroach on the actual
management of a contaminated facility or property, the lender may incur
liability as an "owner or operator" under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or property as an investment (including leasing
the facility or property to third party), or fails to market the property in a
timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the secured creditor exemption unavailable to a lender has been a matter
of judicial interpretation of the statutory language, and court decisions have
been inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the secured creditor exemption to the lender.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which was signed into law by President Clinton on September 30, 1996. The new
legislation provides that in order to be deemed to have participated in the
management of a mortgaged property, a lender must actually participate in the
operational affairs of the property or the borrower. The legislation also
provides that participation in the management of the property does not include
"merely having the capacity to influence, or unexercised right to control"
operations. Rather, a lender will lose the protection of the secured creditor
exemption only if it exercises decision-making control over the borrower's
environmental compliance and hazardous substance handling and disposal
practices, or assumes day-to-day management of all operational functions of the
mortgaged property.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment proof. The costs associated with environmental
cleanup may be substantial. It is conceivable that such costs arising from the
circumstances set forth above would result in a loss to Certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. In addition, under the Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996, the protections accorded to lenders
under CERCLA are also accorded to the holders of security interests in
underground storage tanks. It should be noted, however, that liability for
cleanup of petroleum contamination may be governed by state law, which may not
provide for any specific protection for secured creditors.
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Except as otherwise specified in the related Prospectus Supplement, at the
time the Loans were originated, no environmental assessment or a very limited
environmental assessment of the Properties was conducted.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In certain
other states (including California), this right of redemption applies only to
sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. In some states, there
is no right to redeem property after a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory and judicial restrictions that limit
the remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, including California, statutes and case law limit the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property at the time of the foreclosure sale. As a result of these prohibitions,
it is anticipated that in most instances the Master Servicer will utilize the
non-judicial foreclosure remedy and will not seek deficiency judgments against
defaulting borrowers.
Some state statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. In some states, exceptions to the anti-deficiency
statutes are provided for in certain instances where the value of the lender's
security has been impaired by acts or omissions of the borrower, for example, in
the event of waste of the property. Finally, other statutory provisions limit
any deficiency judgment against the former borrower following a foreclosure sale
to the excess of the outstanding debt over the fair market value of the property
at the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
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In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the
mortgaged property is not the debtor's principal residence and the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any such proceedings under the federal Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the Loans underlying a Series of Securities and possible
reductions in the aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party.
DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, each
conventional Loan will contain a due-on-sale clause which will generally provide
that if the mortgagor or obligor sells, transfers or conveys the Property, the
loan or contract may be accelerated by the mortgagee or secured party. Court
decisions and legislative actions have placed substantial restriction on the
right of lenders to enforce such clauses in many states. For instance, the
California Supreme Court in August 1978 held that due-on-sale clauses were
generally unenforceable. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn-St Germain Act"), subject to certain exceptions, preempts
state constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the Garn-St
Germain Act which ended in all cases not later than October 15, 1982, and (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered by the Act may
not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related Property to an
uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
Loans and the number of Loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for
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prepayment fees or penalties if the obligation is paid prior to maturity. In
certain states, there are or may be specific limitations upon the late charges
which a lender may collect from a borrower for delinquent payments. Certain
states also limit the amounts that a lender may collect from a borrower as an
additional charge if the loan is prepaid. Under certain state laws, prepayment
charges may not be imposed after a certain period of time following the
origination of mortgage loans with respect to prepayments on loans secured by
liens encumbering owner-occupied residential properties. Since many of the
Properties will be owner-occupied, it is anticipated that prepayment charges may
not be imposed with respect to many of the Loans. The absence of such a
restraint on prepayment, particularly with respect to fixed rate Loans having
higher Loan Rates, may increase the likelihood of refinancing or other early
retirement of such loans or contracts. Late charges and prepayment fees are
typically retained by servicers as additional servicing compensation.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V") provides that state usury limitations
shall not apply to certain types of residential first mortgage loans originated
by certain lenders after March 31, 1980. The Office of Thrift Supervision, as
successor to the Federal Home Loan Bank Board, is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized the states to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision which expressly rejects
an application of the federal law. Fifteen states adopted such a law prior to
the April 1, 1983 deadline. 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 and/or to limit discount points or other
charges.
THE CONTRACTS
GENERAL. The Contracts, other than those Contracts that are unsecured or
secured by mortgages on real estate (such Contracts are hereinafter referred to
in this section as "contracts") generally are "chattel paper" or constitute
"purchase money security interests" each as defined in the UCC. Pursuant to the
UCC, the sale of chattel paper is treated in a manner similar to perfection of a
security interest in chattel paper. Under the related Agreement, the Depositor
will transfer physical possession of the contracts to the Trustee or a
designated custodian or may retain possession of the contracts as custodian for
the Trustee. In addition, the Depositor will make an appropriate filing of a
UCC-1 financing statement in the appropriate states to, among other things, give
notice of the Trust Fund's ownership of the contracts. Unless otherwise
specified in the related Prospectus Supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Trustee. With respect to each transaction, a decision will be made as to
whether or not the contracts will be stamped or otherwise marked to reflect
their assignment from the Depositor to the Trustee, based upon, among other
things, the practices and procedures of the related Originator and Master
Servicer and after consultation with the applicable Rating Agency or Rating
Agencies. Therefore, if the contracts are not stamped or otherwise marked to
reflect their assignment from the Depositor to the Trustee and through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Trust Fund's interest in the contracts could be defeated. See "Risk
Factors--Security Interest Risks Associated with Certain Loans."
SECURITY INTERESTS IN HOME IMPROVEMENTS. The contracts that are secured by
the Home Improvements financed thereby grant to the originator of such contracts
a purchase money security interest in such Home Improvements to secure all or
part of the purchase price of such Home Improvements and related services. A
financing statement generally is not required to be filed to perfect a purchase
money security interest in consumer goods. Such purchase money security
interests are assignable. In general, a purchase money security interest grants
to the holder a security interest that has priority over a conflicting security
interest
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in the same collateral and the proceeds of such collateral. However, to the
extent that the collateral subject to a purchase money security interest becomes
a fixture, in order for the related purchase money security interest to take
priority over a conflicting interest in the fixture, the holder's interest in
such Home Improvement must generally be perfected by a timely fixture filing. In
general, a security interest does not exist under the UCC in ordinary building
material incorporated into an improvement on land. Home Improvement Contracts
that finance lumber, bricks, other types of ordinary building material or other
goods that are deemed to lose such characterization upon incorporation of such
materials into the related property, will not be secured by a purchase money
security interest in the Home Improvement being financed.
ENFORCEMENT OF SECURITY INTEREST IN HOME IMPROVEMENTS. So long as the Home
Improvement has not become subject to the real estate law, a creditor can
repossess a Home Improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment from a debtor for any deficiency on repossession and resale
of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
SECURITY INTERESTS IN THE MANUFACTURED HOMES. The Manufactured Homes
securing the Manufactured Housing Contracts may be located in all 50 states and
the District of Columbia. Security interests in manufactured homes may be
perfected either by notation of the secured party's lien on the certificate of
title or by delivery of the required documents and payment of a fee to the state
motor vehicle authority, depending on state law. Unless otherwise specified in
the related Prospectus Supplement, the security interests of the related Trustee
in the Manufactured Homes will not be noted on the certificates of title or by
delivery of the required documents and payment of fees to the applicable state
motor vehicle authorities. With respect to each transaction, a decision will be
made as to whether or not the security interests of the related Trustee in the
Manufactured Homes will be noted on the certificates of title and the required
documents and fees will be delivered to the applicable state motor vehicle
authorities based upon, among other things, the practices and procedures of the
related Originator and Master Servicer and after consultation with the
applicable Rating Agency or Rating Agencies. See "Risk Factors--Security
Interest Risks Associated with Certain Loans." In some nontitle states,
perfection pursuant to the provisions of the UCC is required. As manufactured
homes have become large and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the manufactured home under applicable state
real estate law. In order to perfect a security interest in a manufactured home
under real estate laws, the secured party must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the manufactured home is located.
If so specified in the related Prospectus Supplement, the Manufactured Housing
Contracts may contain provisions prohibiting the borrower from permanently
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attaching the Manufactured Home to its site. So long as the borrower does not
violate this agreement, a security interest in the Manufactured Home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest in
the Manufactured Home. If, however, a Manufactured Home is permanently attached
to its site, the related lender may be required to perfect a security interest
in the Manufactured Home under applicable real estate laws.
In the event that the owner of a Manufactured Home moves it to a state other
than the state in which such Manufactured Home initially is registered, under
the laws of most states the perfected security interest in the Manufactured Home
would continue for four months after such relocation and thereafter only if and
after the owner re-registers the Manufactured Home in such state. If the owner
were to relocate a Manufactured Home to another state and not re-register a
security interest in such state, the security interest in the Manufactured Home
would cease to be perfected. A majority of states generally require surrender of
a certificate of title to re-register a Manufactured Home; accordingly, the
secured party must surrender possession if it holds the certificate of title to
such Manufactured Home or, in the case of Manufactured Homes registered in
states which provide for notation of lien on the certificate of title, notice of
surrender would be given to the secured party noted on the certificate of title.
In states which do not require a certificate of title for registration of a
manufactured home, re-registration could defeat perfection.
Under the laws of most states, liens for repairs performed on a Manufactured
Home and liens for personal property taxes take priority over a perfected
security interest in the Manufactured Home.
CONSUMER PROTECTION LAWS. The so-called "Holder-in-Due Course" rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Trustee against such obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the origination
and lending pursuant to the contracts, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related contract.
APPLICABILITY OF USURY LAWS. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, as amended ("Title V"), provides
that, subject to the following conditions, state usury limitations shall not
apply to any contract which is secured by a first lien on certain kinds of
consumer goods. The contracts would be covered if they satisfy certain
conditions governing, among other things, the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT CONTRACTS
The Loans may also consist of installment contracts. Under an installment
contract ("Installment Contract") the seller (hereinafter referred to in this
section as the "lender") retains legal title to the
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property and enters into an agreement with the purchaser hereinafter referred to
in this section as the "borrower") for the payment of the purchase price, plus
interest, over the term of such contract. Only after full performance by the
borrower of the contract is the lender obligated to convey title to the property
to the purchaser. As with mortgage or deed of trust financing, during the
effective period of the Installment Contract, the borrower is generally
responsible for maintaining the property in good condition and for paying real
estate taxes, assessments and hazard insurance premiums associated with the
property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the Installment Contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an Installment Contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under Installment Contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the Installment Contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an Installment Contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Loan (including a borrower who is a
member of the National Guard or is in reserve status at the time of the
origination of the Loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of such borrower's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the Master Servicer to collect
full amounts of interest on certain of the Loans. Unless otherwise provided in
the related Prospectus Supplement, any shortfall in interest collections
resulting from the application of the Relief Act could result in losses to
Securityholders. The Relief Act also imposes limitations which would impair the
ability of the Master Servicer to foreclose on an affected Loan during the
borrower's period of active duty status. Moreover, the Relief Act permits the
extension of a Loan's maturity and the re-adjustment of its payment schedule
beyond the completion of military service. Thus, in the event that such a Loan
goes into default, there may be delays and losses occasioned by the inability to
realize upon the Property in a timely fashion.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the Loans comprising the Trust Fund for a Series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the Trust Fund (and therefore the
Securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard
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insurance and condemnation proceeds and to cause the property securing the Loan
to be sold upon default of the mortgagor, thereby extinguishing the junior
mortgagee's lien unless the junior mortgagee asserts its subordinate interest in
the property in foreclosure litigation and, possibly, satisfies the defaulted
senior mortgage. A junior mortgagee may satisfy a defaulted senior loan in full
and, in some states, may cure a default and bring the senior loan current, in
either event adding the amounts expended to the balance due on the junior loan.
In most states, absent a provision in the mortgage or deed of trust, no notice
of default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders confers
on the mortgagee the right both to receive all proceeds collected under any
hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under senior mortgages will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the senior mortgages. Proceeds in excess of the amount
of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line Loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
Cut-off Date with respect to any Mortgage will not be included in the Trust
Fund. The priority of the lien securing any advance made under the clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of such intervening junior trust
deeds or mortgages and other liens at the time of the advance. In most states,
the trust deed or mortgage lien securing mortgage loans of the type which
includes home equity credit lines applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the home equity credit line does not exceed the maximum
specified principal amount of the recorded trust deed or mortgage, except as to
advances made after receipt by the lender of a written notice of lien from a
judgment lien creditor of the trustor.
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THE TITLE I PROGRAM
GENERAL.
Certain of the Loans contained in a Trust Fund may be loans insured under
the FHA Title I Credit Insurance program created pursuant to Sections 1 and 2(a)
of the National Housing Act of 1934 (the "Title I Program"). Under the Title I
Program, the FHA is authorized and empowered to insure qualified lending
institutions against losses on eligible loans. The Title I Program operates as a
coinsurance program in which the FHA insures up to 90% of certain losses
incurred on an individual insured loan, including the unpaid principal balance
of the loan, but only to the extent of the insurance coverage available in the
lender's FHA insurance coverage reserve account. The owner of the loan bears the
uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under the
Title I Program include property improvement loans ("Property Improvement Loans"
or "Title I Loans"). A Property Improvement Loan or Title I Loan means a loan
made to finance actions or items that substantially protect or improve the basic
livability or utility of a property and includes single family improvement
loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan." With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from lender and the lender may distribute proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties. With
respect to a dealer Title I Loan, a dealer may include a seller, a contractor or
supplier of goods or services.
Loans insured under the Title I Program are required to have fixed interest
rates and, generally, provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually in order to correspond with the borrower's irregular flow of
income. The first or last payments (or both) may vary in amount but may not
exceed 150% of the regular installment payment, and the first payment may be due
no later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
may be established by the lender and must be fixed for the term of the loan and
recited in the note. Interest on an insured loan must accrue from the date of
the loan and be calculated according to the actuarial method. The lender must
assure that the note and all other documents evidencing the loan are in
compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such
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case, provided that the validity of any lien on the property has not been
impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
REQUIREMENTS FOR TITLE I LOANS. The maximum principal amount for Title I
Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I Loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I Loans with respect to multiple properties, and a borrower may
obtain more than one Title I Loan with respect to a single property, in each
case as long as the total outstanding balance of all Title I Loans in the same
property does not exceed the maximum loan amount for the type of Title I Loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property, and that the borrower have equity in the property being
improved at least equal to the amount of the Title I Loan if such loan amount
exceeds $15,000. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than six months after disbursement of the loan proceeds with one six month
extension if necessary, a completion certificate, signed by the borrower. The
lender is required to conduct an on-site inspection on any Title I Loan where
the principal obligation is $7,500 or more, and on any direct Title I Loan where
the borrower fails to submit a completion certificate.
FHA INSURANCE COVERAGE. Under the Title I Program, the FHA establishes an
insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance coverage in this account is
10% of the amount disbursed, advanced or expended by the lender in originating
or purchasing eligible loans registered with FHA for Title I insurance, with
certain adjustments. The balance in the insurance coverage reserve account is
the maximum amount of insurance claims the FHA is required to pay. Loans to be
insured under the Title I Program will be registered for insurance by the FHA
and the insurance coverage attributable to such loans will be included in the
insurance coverage reserve account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. The FHA charges a fee of
0.50% per annum of the net proceeds (the original balance) of any eligible loan
so reported and acknowledged for insurance by the originating lender. The FHA
bills the lender for the insurance premium on each insured loan annually, on
approximately the anniversary date of the loan's origination. If an insured loan
is prepaid during the year, FHA will not refund or abate the insurance premium.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans and
(ii) the amount of insurance coverage attributable to insured loans sold by the
lender, and such insurance coverage may be reduced for any FHA insurance claims
rejected by the FHA. The balance of the lender's
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FHA insurance coverage reserve account will be further adjusted as required
under Title I or by the FHA, and the insurance coverage therein may be earmarked
with respect to each or any eligible loans insured thereunder, if a
determination is made by the Secretary of HUD that it is in its interest to do
so. Origination and acquisitions of new eligible loans will continue to increase
a lender's insurance coverage reserve account balance by 10% of the amount
disbursed, advanced or expended in originating or acquiring such eligible loans
registered with the FHA for insurance under the Title I Program. The Secretary
of HUD may transfer insurance coverage between insurance coverage reserve
accounts with earmarking with respect to a particular insured loan or group of
insured loans when a determination is made that it is in the Secretary's
interest to do so.
The lender may transfer (except as collateral in a bona fide transaction)
insured loans and loans reported for insurance only to another qualified lender
under a valid Title I contract of insurance. Unless an insured loan is
transferred with recourse or with a guaranty or repurchase agreement, the FHA,
upon receipt of written notification of the transfer of such loan in accordance
with the Title I regulations, will transfer from the transferor's insurance
coverage reserve account to the transferee's insurance coverage reserve account
an amount, if available, equal to 10% of the actual purchase price or the net
unpaid principal balance of such loan (whichever is less). However, under the
Title I Program not more than $5,000 in insurance coverage shall be transferred
to or from a lender's insurance coverage reserve account during any October 1 to
September 30 period without the prior approval of the Secretary of HUD.
CLAIMS PROCEDURES UNDER TITLE I. Under the Title I Program the lender may
accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the lender
may either (a) proceed against the property under any security instrument, or
(b) make a claim under the lender's contract of insurance. If the lender chooses
to proceed against the property under a security instrument (or if it accepts a
voluntary conveyance or surrender of the property), the lender may file an
insurance claim only with the prior approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be filed
with the FHA no later than nine months after the date of default of such loan.
Concurrently with filing the insurance claim, the lender shall assign to the
United States of America the lender's entire interest in the loan note (or a
judgment in lieu of the note), in any security held and in any claim filed in
any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid a
claim, the FHA may require the lender to repurchase the paid claim and to accept
a reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. The FHA may contest any
insurance claim and make a demand for repurchase of the loan at any time up to
two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the lender.
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Under the Title I Program the amount of an FHA insurance claim payment, when
made, is equal to the Claimable Amount, up to the amount of insurance coverage
in the lender's insurance coverage reserve account. For the purposes hereof, the
"Claimable Amount" means an amount equal to 90% of the sum of: (a) the unpaid
loan obligation (net unpaid principal and the uncollected interest earned to the
date of default) with adjustments thereto if the lender has proceeded against
property securing such loan; (b) the interest on the unpaid amount of the loan
obligation from the date of default to the date of the claim's initial
submission for payment plus 15 calendar days (but not to exceed 9 months from
the date of default), calculated at the rate of 7% per annum; (c) the
uncollected court costs; (d) the attorney's fees not to exceed $500; and (e) the
expenses for recording the assignment of the security to the United States.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination, servicing
and enforcement of loans secured by Single Family Properties. These laws include
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, Real
Estate Settlement Procedures Act and Regulation B promulgated thereunder, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. In particular, Regulation Z requires certain
disclosures to the borrowers regarding the terms of the Loans; the Equal Credit
Opportunity Act and Regulation B promulgated thereunder 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 the Fair Credit
Reporting Act regulates the use and reporting of information related to the
borrower's credit experience. Certain provisions of these laws impose specific
statutory liabilities upon lenders who fail to comply therewith. In addition,
violations of such laws may limit the ability of the Sellers to collect all or
part of the principal of or interest on the Loans and could subject the Sellers
and in some case their assignees to damages and administrative enforcement.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the material anticipated federal income tax
consequences of the purchase, ownership, and disposition of the Securities and
is based on advice of Latham & Watkins, special counsel to the Depositor. The
summary is based upon the provisions of the Code, the regulations promulgated
thereunder, including, where applicable, proposed regulations, and the judicial
and administrative rulings and decisions now in effect, all of which are subject
to change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change, and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily upon investors
who will hold Securities as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Prospective investors are
advised to consult their own tax advisers concerning the federal, state, local
and any other tax consequences to them of the purchase, ownership and
disposition of the Securities.
The federal income tax consequences to holders of Securities will vary
depending on whether (i) the Securities of a Series are classified as
indebtedness; (ii) an election is made to treat the Trust Fund relating to a
particular Series of Securities as a real estate mortgage investment conduit
("REMIC") under the Internal Revenue Code of 1986, as amended (the "Code");
(iii) the Securities represent an ownership interest in some or all of the
assets included in the Trust Fund for a Series; or (iv) the Trust Fund relating
to a particular Series of Certificates is treated as a partnership. The
Prospectus Supplement for each
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Series of Securities will specify how the Securities will be treated for federal
income tax purposes and will discuss whether a REMIC election, if any, will be
made with respect to such Series. Prior to issuance of each Series of
Securities, the Depositor shall file with the Commission a Form 8-K on behalf of
the related Trust Fund containing an opinion of counsel to the Depositor with
respect to the validity of the information set forth under "Federal Income Tax
Consequences" herein and in the related Prospectus Supplement.
TAXATION OF DEBT SECURITIES
GENERAL. If Securities of a Series being issued as Certificates or Notes
are structured as indebtedness secured by the assets of the Trust Fund, assuming
compliance with all provisions of the related documents and applicable law,
Latham & Watkins, special counsel to the Depositor, is of the opinion that the
Securities will be treated as debt for United States federal income tax
purposes, and at the time such Securities are issued will deliver an opinion
generally to that effect.
STATUS AS REAL PROPERTY LOANS. Except to the extent otherwise provided in
the related Prospectus Supplement, Latham & Watkins will have advised the
Depositor that: (i) Securities held by a domestic building and loan association
will constitute "loans...secured by an interest in real property" within the
meaning of Code section 7701(a)(19)(C)(v); (ii) Securities held by a real estate
investment trust will constitute "real estate assets" within the meaning of Code
section 856(c)(5)(A) and interest on Securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code section 856(c)(3)(B) and (iii) Securities
representing interests in obligations secured by manufactured housing treated as
single family residences under Code Section 25(e)(10) will be considered
interests in "qualified mortgages" as defined in Code Section 860G(a)(3).
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
INTEREST AND ACQUISITION DISCOUNT. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities will be referred to hereinafter collectively as
"Debt Securities."
Debt Securities that are Compound Interest Securities (generally, securities
all or a portion of the interest on which is not paid currently) will, and
certain of the other Debt Securities may, be issued with "original issue
discount" ("OID"). The following discussion is based in part on the rules
governing OID which are set forth in Sections 1271-1275 of the Code and the
Treasury regulations issued thereunder on February 2, 1994 (the "OID
Regulations"). A holder of Debt Securities should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a DE MINIMIS amount
determined under the Code.
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The issue price of a Debt Security is the first price at which a substantial
amount of Debt Securities of that class are sold to the public (excluding bond
houses, brokers, underwriters or wholesalers). If less than a substantial amount
of a particular class of Debt Securities is sold for cash on or prior to the
related closing date, the issue price for such class will be treated as the fair
market value of such class on such closing date. The issue price of a Debt
Security also includes the amount paid by an initial Debt Security holder for
accrued interest that relates to a period prior to the issue date of the Debt
Security. The stated redemption price at maturity of a Debt Security includes
the original principal amount of the Debt Security, but generally will not
include distributions of interest if such distributions constitute "qualified
stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where Debt Securities do not provide for default remedies, the interest payments
will be included in the Debt Security's stated redemption price at maturity and
taxed as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the DE MINIMIS rule described below. In the case of a Debt Security with a
long first period which has non-DE MINIMIS OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Debt Security.
Under the DE MINIMIS rule OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (I.E., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report DE MINIMIS OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method holders may elect to accrue
all DE MINIMIS OID as well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable rate.
Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities
(as defined herein), and certain of the other Debt
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Securities, none of the payments under the instrument will be considered
qualified stated interest, and thus the aggregate amount of all payments will be
included in the stated redemption price.
The Internal Revenue Services (the "IRS") recently issued final regulations
(the "Contingent Regulations") governing the calculation of OID on instruments
having contingent interest payments. The Contingent Regulations specifically do
not apply for purposes of calculating OID on debt instruments subject to Code
Section 1272(a)(6), such as the Debt Securities. Additionally, the OID
Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the Trustee
intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in this Prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), there can be no
assurance that such methodology represents the correct manner of calculating
OID.
The holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the "daily portions" of such original issue discount. The daily portion
of OID includible in income by a holder will be computed by allocating to each
day during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Trust Fund Accounts,
the amount of OID for an accrual period (generally the period over which
interest accrues on the debt instrument) will equal the product of the yield to
maturity of the Debt Security and the adjusted issue price of the Debt Security
on the first day of such accrual period, reduced by any payments of qualified
stated interest allocable to such accrual period. The adjusted issue price of a
Debt Security on the first day of an accrual period is the sum of the issue
price of the Debt Security plus prior accruals of OID, reduced by the total
payments made with respect to such Debt Security on or before the first day of
such accrual period, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt instrument,
such as certain classes of the Debt Securities, that is subject to acceleration
due to prepayments on other debt obligations securing such instruments (a
"Pay-Through Security"), is computed by taking into account the anticipated rate
of prepayments assumed in pricing the debt instrument (the "Prepayment
Assumption"). The amount of OID that will accrue during an accrual period on a
Pay-Through Security is the excess (if any) of the sum of (a) the present value
of all payments remaining to be made on the Pay-Through Security as of the close
of the accrual period and (b) the payments during the accrual period of amounts
included in the stated redemption price at maturity of the Pay-Through Security,
over the adjusted issue price of the Pay-Through Security at the beginning of
the accrual period. The present value of the remaining payments is to be
determined on the basis of three factors: (i) the original yield to maturity of
the Pay-Through Security (determined on the basis of compounding at the end of
each accrual period and properly adjusted for the length of the accrual period),
(ii) events which have occurred before the end of the accrual period and (iii)
the assumption that the remaining payments will be made in accordance with the
original Prepayment Assumption. The effect of this method is to increase the
portions of OID required to be included in income by a holder of a Pay-Through
Security to take into account prepayments with respect to the Loans at a rate
that exceeds the Prepayment Assumption, and to decrease (but not below zero for
any period) the portions of original issue discount required to be included in
income by a holder of a Pay-Through Security to take into account prepayments
with respect to the Loans at a rate that is slower than the Prepayment
Assumption. Although original issue discount will be reported to holders of
Pay-Through Securities based on the Prepayment Assumption, no representation is
made to holders of Pay-Through Securities that Loans will be prepaid at that
rate or at any other rate.
The Depositor may adjust the accrual of OID on a class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the IRS were to
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require that OID be accrued without such adjustments, the rate of accrual of OID
for a class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include OID
in gross income, but such a holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. Holders of Securities will be
required to report income with respect to the related Securities under an
accrual method without giving effect to delays and reductions in distributions
attributable to a default or delinquency on the Trust Fund Assets, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of such a Security in any period could significantly exceed the amount of
cash distributed to such holder in that period. The holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the Securities is deducted
as a result of a Trust Fund Asset default. However, the timing and character of
such losses or reductions in income are uncertain and, accordingly, holders of
Securities should consult their own tax advisors on this point.
INTEREST WEIGHTED SECURITIES. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under "-- Tax Status as a Grantor Trust -- General" herein) the payments on
which consist solely or primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC or on Loans underlying
Pass-Through Securities ("Interest Weighted Securities"). The Depositor intends
to take the position that all of the income derived from an Interest Weighted
Security should be treated as OID and that the amount and rate of accrual of
such OID should be calculated by treating the Interest Weighted Security as a
Compound Interest Security. However, in the case of Interest Weighted Securities
that are entitled to some payments of principal and that are Regular Interest
Securities the IRS could assert that income derived from an Interest Weighted
Security should be calculated as if the Security were a security purchased at a
premium equal to the excess of the price paid by such holder for such Security
over its stated principal amount, if any. Under this approach, a holder would be
entitled to amortize such premium only if it has in effect an election under
Section 171 of the Code with respect to all taxable debt instruments held by
such holder, as described below. Alternatively, the IRS could assert that an
Interest Weighted Security should be taxable under the rules governing bonds
issued with contingent payments. Such treatment may be more likely in the case
of Interest Weighted Securities that are Stripped Securities as described below.
See "--Tax Status as a Grantor Trust--Discount or Premium on Pass-Through
Securities."
VARIABLE RATE DEBT SECURITIES. In the case of Debt Securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index, it appears that (i) the yield to maturity of such Debt
Securities and (ii) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on such Debt Securities, should be calculated
as if the interest index remained at its value as of the issue date of such
Securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt Security is uncertain, holders of variable rate Debt Securities should
consult their own tax advisers regarding the appropriate treatment of such
Securities for federal income tax purposes.
MARKET DISCOUNT. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A holder of a Debt Security
that acquires a Debt Security with more than a prescribed DE MINIMIS amount of
"market discount" (generally, the excess of the principal amount of the
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Debt Security over the purchaser's purchase price) will be required to include
accrued market discount in income as ordinary income in each month, but limited
to an amount not exceeding the principal payments on the Debt Security received
in that month and, if the Securities are sold, the gain realized. Such market
discount would accrue in a manner to be provided in Treasury regulations but,
until such regulations are issued, such market discount would in general accrue
either (i) on the basis of a constant yield (in the case of a Pay-Through
Security, taking into account a prepayment assumption) or (ii) in the ratio of
(a) in the case of Securities (or in the case of a Pass-Through Security, as set
forth below, the Loans underlying such Security) not originally issued with
original issue discount, stated interest payable in the relevant period to total
stated interest remaining to be paid at the beginning of the period or (b) in
the case of Securities (or, in the case of a Pass-Through Security, as described
below, the Loans underlying such Security) originally issued at a discount, OID
in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
PREMIUM. A holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the Tax Reform Act of 1986 (the "1986 Act") indicates
that premium is to be accrued in the same manner as market discount.
Accordingly, it appears that the accrual of premium on a class of Pay-Through
Securities will be calculated using the prepayment assumption used in pricing
such class. If a holder of a Debt Security makes an election to amortize premium
on a Debt Security, such election will apply to all taxable debt instruments
(including all REMIC regular interests and all pass-through certificates
representing ownership interests in a trust holding debt obligations) held by
the holder at the beginning of the taxable year in which the election is made,
and to all taxable debt instruments acquired thereafter by such holder, and will
be irrevocable without the consent of the IRS. Purchasers who pay a premium for
the Securities should consult their tax advisers regarding the election to
amortize premium and the method to be employed.
On June 27, 1996 the IRS issued proposed regulations (the "Amortizable Bond
Premium Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code Section
1272(a)(6) such as the Securities. Absent further guidance from the IRS, the
Trustee intends to account for amortizable bond premium in the manner described
above. Prospective purchasers of the Securities should consult their tax
advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including DE MINIMIS market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
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such holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
GENERAL. If a REMIC election is made with respect to a Series of
Securities, then upon the issuance of those Securities, assuming such election
is properly made, the provisions of the applicable Agreements are compiled with,
and the statutory and regulatory requirements are satisfied, Latham & Watkins,
special counsel to the Depositor, is of the opinion that the arrangement by
which the Securities of that Series are issued will be treated as a REMIC and at
the time the Securities are issued will deliver an opinion generally to that
effect and to the effect that the Securities designated as "regular interests"
in the REMIC will be regular interests in a REMIC and will be treated as
indebtedness issued by the REMIC, and that the Securities designated as the sole
class of "residual interests" in the REMIC will be treated as the "residual
interest" in the REMIC for United States federal income tax purposes for as long
as all of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a domestic building and loan association will constitute "a regular or a
residual interest in a REMIC" within the meaning of Code Section
7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's assets consist of
cash, government securities, "loans secured by an interest in real property,"
and other types of assets described in Code Section 7701(a)(19)(C)); and (ii)
Securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code Section 856(c)(6)(B), and income with respect
to the Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B) (assuming, for both purposes, that at least 95% of
the REMIC's assets are qualifying assets), and (iii) effective September 1,
1997, Regular Interest Securities held by a financial asset securitization
investment trust (a "FASIT") will qualify for treatment as "permitted assets"
within the meaning of section 860L(c)(1)(G) of the Code. If less than 95% of the
REMIC's assets consist of assets described in (i) or (ii) above, then a Security
will qualify for the tax treatment described in (i) or (ii) in the proportion
that such REMIC assets are qualifying assets.
STATUS OF MANUFACTURED HOUSING CONTRACTS. The federal income tax
regulations relating to a REMIC (the "REMIC Regulations") provide that
obligations secured by interests in manufactured housing that qualify as "single
family residences" within the meaning of Code Section 25(e)(10) may be treated
as "qualified mortgages" of the REMIC.
Under Section 25(e)(10), the term "single family residence" includes any
manufactured home which has a minimum of 400 square feet of living space and a
minimum width in excess of 102 inches and which is a kind of customarily used at
a fixed location.
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code section 593(d) to any taxable year beginning after December 31, 1995.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into account
by holders of the Residual Interest Securities. In the case of a "single class
REMIC," however, the expenses will be allocated, under Treasury regulations,
among the holders of the Regular Interest Securities and the holders
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of the Residual Interest Securities on a daily basis in proportion to the
relative amounts of income accruing to each holder of a Residual Interest
Security or Regular Interest Security on that day. In the case of a holder of a
Regular Interest Security who is an individual or a "pass-through interest
holder" (including certain pass-through entities but not including real estate
investment trusts), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the holder of a
Regular Interest Security, exceed 2% of such holder's adjusted gross income. In
addition, for taxable years beginning after December 31, 1990, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular Interest Security to
such a holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is similar
to such a trust and which is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise specified in the related
Prospectus Supplement, the expenses of the REMIC will be allocated to holders of
the related Residual Interest Securities.
TAXATION OF THE REMIC
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
CALCULATION OF REMIC INCOME. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Loans, and servicing
fees and other expenses of the REMIC. A holder of a Residual Interest Security
that is an individual or a "pass-through interest holder" (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such holder's adjusted
gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the startup
day (generally, the day that the interests are issued) (the "Startup Day"). That
aggregate basis will be allocated among the assets of the REMIC in proportion to
their respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the DE
MINIMIS rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the holders of the Regular
Interest Securities include such discount in income, but without regard to the
DE MINIMIS rules. See "Federal
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Income Tax Consequences--General" above. However, a REMIC that acquires loans at
a market discount must include such market discount in income currently, as it
accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
PROHIBITED TRANSACTIONS AND CONTRIBUTIONS TAX. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include: (i) subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC; (ii) subject to a limited
exception, the sale or other disposition of a cash flow investment; (iii) the
receipt of any income from assets not permitted to be held by the REMIC pursuant
to the Code; or (iv) the receipt of any fees or other compensation for services
rendered by the REMIC. It is anticipated that a REMIC will not engage in any
prohibited transactions in which it would recognize a material amount of net
income. In addition, subject to a number of exceptions, a tax is imposed at the
rate of 100% on amounts contributed to a REMIC after the close of the
three-month period beginning on the Startup Day. The holders of Residual
Interest Securities will generally be responsible for the payment of any such
taxes imposed on the REMIC. To the extent not paid by such holders or otherwise,
however, such taxes will be paid out of the Trust Fund and will be allocated pro
rata to all outstanding classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of a Security representing a residual interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount (if this occurs, it is likely that
cash distributions will exceed taxable income in later years). Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
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LIMITATION ON LOSSES. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Security will initially equal such holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisers.
DISTRIBUTIONS. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
Security. If the amount of such payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
SALE OR EXCHANGE. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
EXCESS INCLUSIONS. The portion of the REMIC taxable income of a holder of a
Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on such
holder's federal income tax return. Further, if the holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, such holder's excess inclusion income will
be treated as unrelated business taxable income of such holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations. See "--Tax Treatment
of Foreign Investors." The Small Business Job Protection Act of 1996 has
eliminated the special rule permitting Section 593 institutions ("thrift
institutions") to use net operating losses and other allowable deductions to
offset their excess inclusion income from REMIC residual certificates that have
"significant value" within the meaning of the REMIC Regulations, effective for
taxable years beginning after December 31, 1995, except with respect to residual
certificates continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1995, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Day multiplied
by
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(ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest Security at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest Security), increased by the aggregate of the daily
accruals for prior calendar quarters, and decreased (but not below zero) by the
amount of loss allocated to a holder and the amount of distributions made on the
Residual Interest Security before the beginning of the quarter. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of Residual
Interest Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "-- Tax Treatment of Foreign
Investors" below.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF RESIDUAL INTEREST SECURITIES. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Agreement will prohibit Disqualified Organizations
from owning a Residual Interest Security. In addition, no transfer of a Residual
Interest Security will be permitted unless the proposed transferee shall have
furnished to the Trustee an affidavit representing and warranting that it is
neither a Disqualified Organization nor an agent or nominee acting on behalf of
a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all Federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest Security is disregarded, the transferor would be
liable for any Federal income tax imposed upon taxable income derived by the
transferee from the REMIC. The REMIC Regulations provide no guidance as to how
to determine if a significant purpose of a transfer is to impede the assessment
or collection of tax. A similar type of limitation exists with respect to
certain transfers of residual interests by foreign persons to United States
persons. See "--Tax Treatment of Foreign Investors."
MARK TO MARKET RULES. Prospective purchasers of a REMIC Residual Interest
Security should be aware that the IRS recently finalized regulations (the
"Mark-to-Market Regulations") which provide that a REMIC Residual Interest
Security acquired after January 3, 1995 cannot be marked-to-market. The Mark-
to-Market Regulations replace the temporary regulations which allowed a REMIC
Residual Interest
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Security to be marked-to-market provided that it was not a negative value
residual interest and did not have the same economic effect as a negative value
residual interest. The IRS could issue subsequent regulations, which could apply
retroactively, providing additional or different requirements with respect to
such deemed negative value residual interests. Prospective purchasers of a REMIC
Residual Interest Security should consult their tax advisors regarding the
possible application of the Mark-to-Market Regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
GENERAL. If the related Prospectus Supplement does not specify that an
election will be made to treat the assets of the Trust Fund as one or more
REMICs or to treat the Trust Fund as a partnership, then Depositor will have
structured the Trust Fund (or the portion of its assets for which a REMIC
election will not be made) to be classified for United States federal income tax
purposes as a grantor trust under Subpart E, Part I of Subchapter J of the Code,
in which case, Latham & Watkins, special counsel to the Depositor, is of the
opinion that, assuming compliance with the Agreements and with applicable law,
such arrangement will not be treated as an association taxable as a corporation
for United States federal income tax purposes, and the Securities will be
treated as representing ownership interests in the related Trust Fund assets
(the Securities of such Series, "Pass-Through Securities") and at the time such
Pass-Through Securities are issued, special counsel to the Depositor will
deliver an opinion generally to that effect. In some Series there will be no
separation of the principal and interest payments on the Loans. In such
circumstances, a holder of a Pass-Through Security will be considered to have
purchased a pro rata undivided interest in each of the Loans. In other cases
("Stripped Securities"), sale of the Securities will produce a separation in the
ownership of all or a portion of the principal payments from all or a portion of
the interest payments on the Loans.
Each holder of a Pass-Through Security must report on its federal income tax
return its share of the gross income derived from the Loans (not reduced by the
amount payable as fees to the Trustee and the Servicer and similar fees
(collectively, the "Servicing Fee"), at the same time and in the same manner as
such items would have been reported under the holder's tax accounting method had
it held its interest in the Loans directly, received directly its share of the
amounts received with respect to the Loans, and paid directly its share of the
Servicing Fees. In the case of Pass-Through Securities other than Stripped
Securities, such income will consist of a pro rata share of all of the income
derived from all of the Loans and, in the case of Stripped Securities, such
income will consist of a pro rata share of the income derived from each stripped
bond or stripped coupon in which the holder owns an interest. The holder of a
Security will generally be entitled to deduct such Servicing Fees under Section
162 or Section 212 of the Code to the extent that such Servicing Fees represent
"reasonable" compensation for the services rendered by the Trustee and the
Servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, Servicing Fees (to the
extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing such holder's regular tax
liability only to the extent that such fees, when added to other miscellaneous
itemized deductions, exceed 2% of adjusted gross income and may not be
deductible to any extent in computing such holder's alternative minimum tax
liability. In addition, for taxable years beginning after December 31, 1990, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation in taxable years
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beginning after 1990) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year.
DISCOUNT OR PREMIUM ON PASS-THROUGH SECURITIES. The holder's purchase price
of a Pass-Through Security is to be allocated among the Loans in proportion to
their fair market values, determined as of the time of purchase of the
Securities. In the typical case, the Trustee (to the extent necessary to fulfill
its reporting obligations) will treat each Loan as having a fair market value
proportional to the share of the aggregate principal balances of all of the
Loans that it represents, since the Securities, unless otherwise specified in
the related Prospectus Supplement, will have a relatively uniform interest rate
and other common characteristics. To the extent that the portion of the purchase
price of a Pass-Through Security allocated to a Loan (other than to a right to
receive any accrued interest thereon and any undistributed principal payments)
is less than or greater than the portion of the principal balance of the Loan
allocable to the Security, the interest in the Loan allocable to the
Pass-Through Security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount represents
OID or market discount. In the case of a Loan with OID in excess of a prescribed
DE MINIMIS amount or a Stripped Security, a holder of a Security will be
required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory DE MINIMIS
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Security, rather than with respect to the
Security. A holder of a Security that acquires an interest in a Loan originated
after July 18, 1984 with more than a DE MINIMIS amount of market discount
(generally, the excess of the principal amount of the Loan over the purchaser's
allocable purchase price) will be required to include accrued market discount in
income in the manner set forth above. See "--Taxation of Debt Securities; Market
Discount" and "-- Premium" above.
In the case of market discount on a Pass-Through Security attributable to
Loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. Such treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
STRIPPED SECURITIES. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Loans, a right to receive only
principal payments on the Loans, or a right to receive certain payments of both
interest and principal. Certain Stripped Securities ("Ratio Strip Securities")
may represent a right to receive differing percentages of both the interest and
principal on each Loan. Pursuant to Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. Section 1286
of the Code applies the OID rules to stripped bonds and stripped coupons. For
purposes of computing original issue discount, a stripped bond or a stripped
coupon is treated as a debt instrument issued on the date that such stripped
interest is purchased with an issue price equal to its purchase price or, if
more than one stripped interest is purchased, the ratable share of the purchase
price allocable to such stripped interest.
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Servicing fees in excess of reasonable servicing fees ("excess servicing")
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (I.E., 1% interest on the Loan principal balance) or
the Securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-DE MINIMIS discount arising from a
subsequent transfer of the Securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on a Loan by
Loan basis, which could result in some Loans being treated as having more than
100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments "secured by" those loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat all payments to
be received by a holder with respect to the underlying Loans as payments on a
single installment obligation. The IRS could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the Trustee intends, absent contrary authority, to report income to holders of
Securities as OID, in the manner described above for Interest Weighted
Securities.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that (i) in certain Series, each non-Interest Weighted Security is composed of
an unstripped undivided ownership interest in Loans and an installment
obligation consisting of stripped principal payments; (ii) the non-Interest
Weighted Securities are subject to the contingent payment provisions of the
Contingent Regulations; or (iii) each Interest Weighted Stripped Security is
composed of an unstripped undivided ownership interest in Loans and an
installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
CHARACTER AS QUALIFYING LOANS. In the case of Stripped Securities, there is
no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans' character is not carried over to the
Securities in such circumstances. Pass-Through Securities will be, and, although
the matter is not free from doubt, Stripped Securities should be, considered to
represent "real estate assets" within the meaning of Section 856(c)(6)(B) of the
Code, and "loans secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code; interest income attributable to the
Securities should be considered to represent "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Section 856(c)(3)(B) of the Code. Reserves or funds underlying the
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Securities may cause a proportionate reduction in the above-described qualifying
status categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, a holder's tax basis in its Security is the price
such holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such holder's holding period, over the amount of ordinary income
actually recognized by the holder with respect to such Regular Interest
Security. For taxable years beginning after December 31, 1993, the maximum tax
rate on ordinary income for individual taxpayers is 39.6% and the maximum tax
rate on long-term capital gains reported after December 31, 1990 for such
taxpayers is 28%. The maximum tax rate on both ordinary income and long-term
capital gains of corporate taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
BACKUP WITHHOLDING. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a holder of a Security, other
than a holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to distributions
or the proceeds of a sale of certificates to or through brokers that represent
interest or original issue discount on the Securities. This withholding
generally applies if the holder of a Security (i) fails to furnish the Trustee
with its taxpayer identification number ("TIN"); (ii) furnishes the Trustee an
incorrect TIN; (iii) fails to report properly interest, dividends or other
"reportable payments" as defined in the Code; or (iv) under certain
circumstances, fails to provide the Trustee or such holder's securities broker
with a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that the holder is not subject to backup
withholding. Backup withholding will not apply, however, with respect to certain
payments made to holders of Securities, including payments to certain exempt
recipients (such as exempt organizations) and to certain Nonresidents (as
defined below). Holders of Securities should consult their tax advisers as to
their qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the holders of Securities and to the Master
Servicer for each calendar year the amount of any "reportable payments" during
such year and the amount of tax withheld, if any, with respect to payments on
the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
("Nonresidents"), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (ii) the recipient
is a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal
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income tax. Upon receipt of appropriate ownership statements, the issuer
normally will be relieved of obligations to withhold tax from such interest
payments. These provisions supersede the generally applicable provisions of
United States law that would otherwise require the issuer to withhold at a 30%
rate (unless such rate were reduced or eliminated by an applicable tax treaty)
on, among other things, interest and other fixed or determinable, annual or
periodic income paid to Nonresidents. Holders of Pass-Through Securities and
Stripped Securities, including Ratio Strip Securities, however, may be subject
to withholding to the extent that the Loans were originated on or before July
18, 1984.
Interest and OID of holders of Securities who are foreign persons are not
subject to withholding if they are effectively connected with a United States
business conducted by the holder. They will, however, generally be subject to
the regular United States income tax.
Payments to holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders of Residual Interest Securities
should assume that such income does not qualify for exemption from United States
withholding tax as "portfolio interest." It is clear that, to the extent that a
payment represents a portion of REMIC taxable income that constitutes excess
inclusion income, a holder of a Residual Interest Security will not be entitled
to an exemption from or reduction of the 30% (or lower treaty rate) withholding
tax rule. If the payments are subject to United States withholding tax, they
generally will be taken into account for withholding tax purposes only when paid
or distributed (or when the Residual Interest Security is disposed of). The
Treasury has statutory authority, however, to promulgate regulations which would
require such amounts to be taken into account at an earlier time in order to
prevent the avoidance of tax. Such regulations could, for example, require
withholding prior to the distribution of cash in the case of Residual Interest
Securities that do not have significant value. Under the REMIC Regulations, if a
Residual Interest Security has tax avoidance potential, a transfer of a Residual
Interest Security to a Nonresident will be disregarded for all federal tax
purposes. A Residual Interest Security has tax avoidance potential unless, at
the time of the transfer the transferor reasonably expects that the REMIC will
distribute to the transferee residual interest holder amounts that will equal at
least 30% of each excess inclusion, and that such amounts will be distributed at
or after the time at which the excess inclusions accrue and not later than the
calendar year following the calendar year of accrual. If a Nonresident transfers
a Residual Interest Security to a United States person, and if the transfer has
the effect of allowing the transferor to avoid tax on accrued excess inclusions,
then the transfer is disregarded and the transferor continues to be treated as
the owner of the Residual Interest Security for purposes of the withholding tax
provisions of the Code. See "--Taxation of Holders of Residual Interest
Securities-- Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST FUND AS A PARTNERSHIP
If the related Prospectus Supplement specifies that an election will be made
to treat the Trust Fund as a partnership, pursuant to Agreements upon which
counsel shall conclude that (1) the Trust Fund will not have certain
characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Securities has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation, then assuming compliance with the related Agreement and related
documents and applicable law, Latham & Watkins, special counsel to the
Depositor, is of the opinion that the Trust Fund will not be treated as an
association (or as a publicly traded partnership) taxable as a corporation for
United States federal income tax purposes, and upon the issuance of such
Securities, will deliver an opinion generally to that effect. If the Securities
are structured as indebtedness issued by the partnership, special counsel to the
Depositor also will opine that the Securities should be treated as debt for
United States federal income tax purposes, and, if the Securities are structured
as equity interests in the partnership, will opine that the Securities should be
treated as equity
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interest in the partnership for United States federal income tax purposes, in
each case assuming compliance with the related Agreements and applicable law.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and holders of Certificates could be liable
for any such tax that is unpaid by the Trust Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Trust Fund will agree, and the
holders of Notes will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. Special counsel to the Depositor will,
except as otherwise provided in the related Prospectus Supplement, advise the
Depositor that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, INDEXED SECURITIES, ETC. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Stripped Securities. Moreover, the discussion assumes
that the interest formula for the Notes meets the requirements for "qualified
stated interest" under the OID regulations, and that any OID on the Notes (I.E.,
any excess of the principal amount of the Notes over their issue price) does not
exceed a DE MINIMIS amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
Series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a holder of a Note as
ordinary interest income when received or accrued in accordance with such
holder's method of tax accounting. Under the OID regulations, a holder of a Note
issued with a de minimis amount of OID must include such OID in income, on a pro
rata basis, as principal payments are made on the Note. It is believed that any
prepayment premium paid as a result of a mandatory redemption will be taxable as
contingent interest when it becomes fixed and unconditionally payable. A
purchaser who buys a Note for more or less than its principal amount will
generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short- Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
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SALE OR OTHER DISPOSITION. If a holder of a Note sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular holder of a Note will equal the
holder's cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such holder in income with respect
to the Note and decreased by the amount of bond premium (if any) previously
amortized and by the amount of principal payments previously received by such
holder with respect to such Note. Any such gain or loss will be capital gain or
loss if the Note was held as a capital asset, except for gain representing
accrued interest and accrued market discount not previously included in income.
Capital losses generally may be used only to offset capital gains.
FOREIGN HOLDERS. Interest payments made (or accrued) to a holder of a Note
who is a nonresident alien, foreign corporation or other non-United States
person (a "foreign person") generally will be considered "portfolio interest,"
and generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust Fund or the Seller (including a holder of 10% of the outstanding
Certificates) or a "controlled foreign corporation" with respect to which the
Trust Fund or the Seller is a "related person" within the meaning of the Code
and (ii) provides the Depositor or other person who is otherwise required to
withhold U.S. tax with respect to the Notes with an appropriate statement (on
Form W-8 or a similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide the relevant signed statement to the withholding agent;
in that case, however, the signed statement must be accompanied by a Form W-8 or
substitute form provided by the foreign person that owns the Note. If such
interest is not portfolio interest, then it will be subject to United States
federal income and withholding tax at a rate of 30 percent, unless reduced or
eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
BACKUP WITHHOLDING. Each holder of a Note (other than an exempt holder such
as a corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt holder of a Note fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the opinion
of special counsel to the Depositor, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust Fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on Notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
Depositor, the Trust Fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated
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business taxable income," income to foreign holders generally would be subject
to U.S. tax and U.S. tax return filing and withholding requirements, and
individual holders might be subject to certain limitations on their ability to
deduct their share of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
TREATMENT OF THE TRUST FUND AS A PARTNERSHIP. The Trust Fund and the Master
Servicer will agree, and the holders of Certificates will agree by their
purchase of Certificates, to treat the Trust Fund as a partnership for purposes
of federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the assets
held by the Trust Fund, the partners of the partnership being the holders of
Certificates, and the Notes being debt of the partnership. However, the proper
characterization of the arrangement involving the Trust Fund, the Certificates,
the Notes, the Trust Fund and the Master Servicer is not clear because there is
no authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
holders of Certificates as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
INDEXED SECURITIES, ETC. The following discussion assumes that all payments
on the Certificates are denominated in U.S. dollars, none of the Certificates
are Indexed Securities or Stripped Securities, and that a Series of Securities
includes a single class of Certificates. If these conditions are not satisfied
with respect to any given Series of Certificates, additional tax considerations
with respect to such Certificates will be disclosed in the applicable Prospectus
Supplement.
PARTNERSHIP TAXATION. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each holder of a Certificate will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price (iii) prepayment premium payable to the holders of Certificates for such
month; and (iv) any other amounts of income payable to the holders of
Certificates for such month. Such allocation will be reduced by any amortization
by the Trust Fund of premium on Loans that corresponds to any excess of the
issue price of Certificates over their principal amount. All remaining taxable
income of the Trust Fund will be allocated to the Depositor. Based on the
economic arrangement of the parties, this approach for allocating Trust Fund
income should be permissible under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of income
to be allocated to holders of Certificates. Moreover, even under the foregoing
method of allocation, holders of Certificates may be allocated income equal to
the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis holders will in effect be required to report
income from
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the Certificates on the accrual basis and holders of Certificates may become
liable for taxes on Trust Fund income even if they have not received cash from
the Trust Fund to pay such taxes. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all holders of Certificates but
holders of Certificates may be purchasing Certificates at different times and at
different prices, holders of Certificates may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
All of the taxable income allocated to a holder of a Certificate that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including fees
to the Master Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to holders of Certificates on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on holders of Certificates.
DISCOUNT AND PREMIUM. It is believed that the Loans were not issued with
OID, and, therefore, the Trust Fund should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less than
the remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to holders of
Certificates.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust Fund will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, the Trust Fund will be considered
to contribute all of its assets and liabilities to a new partnership and,
immediately thereafter, to liquidate by distributing interests in the new
partnership to the Certificateholders, with the Trust Fund, as the new
partnership, thereafter continuing the business of the partnership deemed
liquidated. The Trust Fund will not comply with certain technical requirements
that might apply when such a constructive termination occurs. As a result, the
Trust Fund may be subject to certain tax penalties and may incur additional
expenses if it is required to comply with those requirements. Furthermore, the
Trust Fund might not be able to comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A holder's tax basis in a Certificate will generally equal the holder's cost
increased by the holder's share of Trust Fund income (includible in income) and
decreased by any distributions received with respect to such Certificate. In
addition, both the tax basis in the Certificates and the amount realized on a
sale of a Certificate would include the holder's share of the Notes and other
liabilities of the Trust Fund. A holder acquiring Certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a portion of such aggregate tax basis to the Certificates sold (rather
than maintaining a separate tax basis in each Certificate for purposes of
computing gain or loss on a sale of that Certificate).
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Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Loans would generally be treated as
ordinary income to the holder and would give rise to special tax reporting
requirements. The Trust Fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust Fund will elect to include market discount in
income as it accrues.
If a holder of a Certificate is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the holders of
Certificates in proportion to the principal amount of Certificates owned by them
as of the close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the holders of Certificates. The
Trust Fund's method of allocation between transferors and transferees may be
revised to conform to a method permitted by future regulations.
SECTION 754 ELECTION. In the event that a holder of a Certificate sells its
Certificates at a profit (loss), the purchasing holder of a Certificate will
have a higher (lower) basis in the Certificates than the selling holder of a
Certificate had. The tax basis of the Trust Fund's assets will not be adjusted
to reflect that higher (or lower) basis unless the Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Trust Fund
will not make such election. As a result, holders of Certificates might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Owner Trustee (as defined in the applicable
Prospectus Supplement) is required to keep or have kept complete and accurate
books of the Trust Fund. Such books will be maintained for financial reporting
and tax purposes on an accrual basis and the fiscal year of the Trust Fund will
be the calendar year. The Owner Trustee will file a partnership information
return (IRS Form 1065) with the IRS for each taxable year of the Trust Fund and
will report each holder's allocable share of items of Trust Fund income and
expense to holders and the IRS on Schedule K-1. The Trust Fund will provide the
Schedule K-l information to nominees that fail to provide the Trust Fund with
the information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Certificates.
Generally, holders must file tax returns that are consistent with the
information return filed by the Trust Fund or be subject to penalties unless the
holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund
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information as to themselves and their ownership of Certificates. A clearing
agency registered under Section 17A of the Exchange Act is not required to
furnish any such information statement to the Trust Fund. The information
referred to above for any calendar year must be furnished to the Trust Fund on
or before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Trust Fund with the information described above may be
subject to penalties.
The Depositor will be designated as the tax matters partner in the related
Agreement and, as such, will be responsible for representing the holders of
Certificates in any dispute with the IRS. The Code provides for administrative
examination of a partnership as if the partnership were a separate and distinct
taxpayer. Generally, the statute of limitations for partnership items does not
expire before three years after the date on which the partnership information
return is filed. Any adverse determination following an audit of the return of
the Trust Fund by the appropriate taxing authorities could result in an
adjustment of the returns of the holders of Certificates, and, under certain
circumstances, a holder of a Certificate may be precluded from separately
litigating a proposed adjustment to the items of the Trust Fund. An adjustment
could also result in an audit of a holder's returns and adjustments of items not
related to the income and losses of the Trust Fund.
TAX CONSEQUENCES TO FOREIGN HOLDERS OF CERTIFICATES. It is not clear
whether the Trust Fund would be considered to be engaged in a trade or business
in the United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is not
expected that the Trust Fund would be engaged in a trade or business in the
United States for such purposes, the Trust Fund will withhold as if it were so
engaged in order to protect the Trust Fund from possible adverse consequences of
a failure to withhold. The Trust Fund expects to withhold on the portion of its
taxable income that is allocable to foreign holders of Certificates pursuant to
Section 1446 of the Code, as if such income were effectively connected to a U.S.
trade or business, at a rate of 35% for foreign holders that are taxable as
corporations and 39.6% for all other foreign holders. Subsequent adoption of
Treasury regulations or the issuance of other administrative pronouncements may
require the Trust Fund to change its withholding procedures. In determining a
holder's withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form
W-9 or the holder's certification of nonforeign status signed under penalties of
perjury.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate
whose income is subject to U.S. federal income tax regardless of its source of
income, or a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust.
Each foreign holder might be required to file a U.S. individual or corporate
income tax return (including, in the case of a corporation, the branch profits
tax) on its share of the Trust Fund's income. Each foreign holder must obtain a
taxpayer identification number from the IRS and submit that number to the Trust
Fund on Form W-8 in order to assure appropriate crediting of the taxes withheld.
A foreign holder generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the Trust Fund taking the position that
no taxes were due because the Trust Fund was not engaged in a U.S. trade or
business. However, interest payments made (or accrued) to a holder of a
Certificate who is a foreign person generally will be considered guaranteed
payments to the extent such payments are determined without regard to the income
of the Trust Fund. If these interest payments are properly characterized as
guaranteed payments, then the interest will not be considered "portfolio
interest." As a result, holders of Certificates will be subject to United States
federal income tax and withholding tax at a rate of 30 percent, unless reduced
or eliminated pursuant to an applicable treaty. In such case, a foreign holder
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
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BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition of
the Securities. State and local income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the Code impose certain requirements on employee benefit plans and certain
other retirement plans and arrangements (including, but not limited to,
individual retirement accounts and annuities), as well as on collective
investment funds and certain separate and general accounts in which such plans
or arrangements are invested (all of which are hereinafter referred to as a
"Plan"). Generally, ERISA applies to investments made by Plans. Among other
things, ERISA requires that the assets of Plans be held in trust and that the
trustee, or other duly authorized fiduciary, have exclusive authority and
discretion to manage and control the assets of such Plans. ERISA also imposes
certain duties on persons who are fiduciaries of Plans. Under ERISA, any person
who exercises any authority or control respecting the management or disposition
of the assets of a Plan is considered to be a fiduciary of such Plan (subject to
certain exceptions not here relevant).
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Securities should determine whether such an investment is permitted under the
governing Plan instruments and is prudent and appropriate for the Plan in view
of its overall investment policy and the composition and diversification of its
portfolio. More generally, any Plan fiduciary which proposes to cause a Plan to
acquire any of the Securities or any other person proposing to use the assets of
a Plan to acquire any of the Securities should consult with its counsel with
respect to the potential consequences under ERISA and the Code (including under
the prohibited transactions rules described below) of the acquisition and
ownership of such Securities.
Certain employee benefit plans, such as governmental plans and church plans
(if no election has been made under section 410(d) of the Code), are not subject
to the restrictions of ERISA, and assets of such plans may be invested in the
Securities without regard to the ERISA considerations described below, subject
to other applicable federal and state law. However, any such governmental or
church plan which is qualified under section 401(a) of the Code and exempt from
taxation under section 501(a) of the Code is subject to the prohibited
transaction rules set forth in section 503 of the Code.
PROHIBITED TRANSACTIONS
GENERAL
Sections 406 and 407 of ERISA and section 4975 of the Code prohibit certain
transactions involving the assets of a Plan and "disqualified persons" (within
the meaning of the Code) and "parties in interest" (within the meaning of ERISA,
collectively "Parties in Interest") who have certain specified relationships to
the Plan, unless an exemption applies (see below). Therefore, a Plan fiduciary
or any other person using
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the assets of a Plan considering an investment in the Securities should also
consider whether such an investment might constitute or give rise to a
prohibited transaction under ERISA or the Code, or whether there is an
applicable exemption.
PLAN ASSET REGULATION
The United States Department of Labor ("DOL") has issued final regulations
defining the "assets" of a Plan for purposes of ERISA and the prohibited
transaction provisions of the Code (29 C.F.R. Section 2510.3-101, the "Plan
Asset Regulation"). The Plan Asset Regulation describes the circumstances under
which the assets of an entity in which a Plan invests will be considered to be
"plan assets" such that any person who exercises control over such assets would
be subject to ERISA's fiduciary standards. Under the Plan Asset Regulation,
generally when a Plan invests in another entity, the Plan's assets do not
include, solely by reason of such investment, any of the underlying assets of
the entity. However, the Plan Asset Regulation provides that, if a Plan acquires
an "equity interest" in an entity that is neither a "publicly-offered security"
(defined as a security which is widely held, freely transferable and registered
under the Securities Exchange Act of 1934, as amended) nor a security issued by
an investment company registered under the Investment Company Act of 1940, as
amended, the assets of the entity will be treated as assets of the Plan unless
certain exceptions apply. If the Securities were deemed to be equity interests
and no statutory, regulatory or administrative exemption applies, the Trust Fund
could be considered to hold plan assets by reason of a Plan's investment in the
Securities. Such plan assets would include an undivided interest in any assets
held by the Trust Fund. In such an event, the Trustee and other persons, in
providing services with respect to the Trust Fund's assets, may be Parties in
Interest with respect to such Plans, subject to the fiduciary responsibility
provisions of ERISA, including the prohibited transaction provisions with
respect to transactions involving the Trust Fund's assets.
Under the Plan Asset Regulation, the term "equity interest" is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." Although the Plan Assets Regulation is silent with respect to the
question of which law constitutes "applicable local law" for this purpose, the
DOL has stated that these determinations should be made under the state law
governing interpretation of the instrument in question. In the preamble to the
Plan Assets Regulation, the DOL declined to provide a precise definition of what
features are equity features or the circumstances under which such features
would be considered "substantial," noting that the question of whether a plan's
interest has substantial equity features is an inherently factual one, but that
in making a determination it would be appropriate to take into account whether
the equity features are such that a Plan's investment would be a practical
vehicle for the indirect provision of investment management services.
EXEMPTION 83-1
In Prohibited Transaction Class Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Class Exemption 81-7, the DOL exempted from ERISA's
prohibited transaction rules certain transactions relating to the operation of
residential mortgage pool investment trusts and the purchase, sale and holding
of "mortgage pool pass-through certificates" in the initial issuance of such
certificates. PTE 83-1 permits, subject to certain conditions, transactions
which might otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans related to the origination, maintenance and termination
of mortgage pools consisting of mortgage loans secured by first or second
mortgages or deeds of trust on single-family residential property, and the
acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by Plans. If the general
conditions (discussed below) of PTE 83-1 are satisfied, investments by a Plan in
Securities that represent interests in a Pool consisting of Loans ("Single
Family Securities") will be exempt from the prohibitions of ERISA Sections
406(a) and 407 (relating generally to transactions with Parties in Interest who
are not fiduciaries) if the Plan purchases the Single Family Securities at no
more than fair market value and will be exempt
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from the prohibitions of ERISA Sections 406(b)(1) and (2) (relating generally to
transactions with fiduciaries) if, in addition, the purchase is approved by an
independent fiduciary, no sales commission is paid to the pool sponsor, the Plan
does not purchase more than 25% of all Single Family Securities, and at least
50% of all Single Family Securities are purchased by persons independent of the
pool sponsor or pool trustee. PTE 83-1 does not provide an exemption for
transactions involving Subordinate Securities. Accordingly, unless otherwise
provided in the related Prospectus Supplement, no transfer of a Subordinate
Security or a Security which is not a Single Family Security may be made to a
Plan pursuant to this exemption.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The Depositor believes that, for purposes of PTE 83-1,
the term "mortgage pool pass-through certificate" would include Securities
issued in a Series consisting of only a single class of Securities provided that
the Securities evidence the beneficial ownership of both a specified percentage
of future interest payments (greater than 0%) and a specified percentage of
future principal payments (greater than 0%) on the Loans. It is not clear
whether a class of Securities that evidences the beneficial ownership in a Trust
Fund divided into Loan groups, beneficial ownership of a specified percentage of
interest payments only or principal payments only, or a notional amount of
either principal or interest payments, or a class of Securities entitled to
receive payments of interest and principal on the Loans only after payments to
other classes or after the occurrence of certain specified events would be a
"mortgage pass-through certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for any
transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Securityholders against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payment retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor to
the Pool.
The Depositor believes that the first general condition referred to above
will be satisfied with respect to the Securities in a Series if any Reserve
Account, subordination by shifting of interests, pool insurance or other form of
credit enhancement described under "Credit Enhancement" herein (such reserve
account, subordination, pool insurance or other form of credit enhancement being
the system of insurance or other protection referred to above) with respect to
such Securities is maintained in an amount not less than the greater of one
percent of the aggregate principal balance of the Loans or the principal balance
of the largest Loan. See "Description of the Securities" herein. In the absence
of a ruling that the system of insurance or other protection with respect to a
Series of Securities satisfies the first general condition referred to above,
there can be no assurance that these features will be so viewed by the DOL. The
Trustee will not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Securities
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraph, of PTE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions.
THE UNDERWRITER'S EXEMPTION
The DOL has granted to Morgan Stanley & Co. Incorporated an administrative
exemption (Prohibited Transaction Exemption 90-24, 55 Fed. Reg. 20,548 (1990)
(the "Exemption") from certain of the
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prohibited transaction rules of ERISA and the related excise tax provisions of
Section 4975 of the Code with respect to the initial purchase, the holding and
the subsequent resale by Plans of certificates in pass-through trusts that
consist of certain receivables, loans, and other obligations that meet the
conditions and requirements of the Exemption.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the Securities by a Plan is on terms (including
the price for such Securities) 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 Securities acquired by the
Plan are not subordinated to the rights and interests evidenced by other
certificates of the Trust Fund;
(3) the Securities 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 one of Standard & Poor's Ratings Group ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Inc. ("Duff & Phelps") or
Fitch Investors Service, L.P. ("Fitch");
(4) the Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the underwriter in
connection with the distribution of the Securities represents not more than
reasonable compensation for underwriting such Securities; the sum of all
payments made to and retained by the Depositor pursuant to the assignment of
the Trust Fund Assets to the Trust Fund represents not more than the fair
market value of such Trust Fund Assets; the sum of all payments made to and
retained by the Master Servicer and any other servicer represents not more
than reasonable compensation for such person's services under the related
Agreement and reimbursements of such person's reasonable expenses in
connection therewith; and
(6) the Plan investing in the Securities is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933, as amended.
The Trust Fund must also meet the following requirements:
(i) the corpus of the Trust Fund must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates evidencing interests in such other investment pools
must have been rated in one of the three highest rating categories of S&P,
Moody's, Fitch or Duff & Phelps for at least one year prior to the Plan's
acquisition of the Securities; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one year
prior to any Plan's acquisition of the Securities.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when any person who has
discretionary authority or renders investment advice with respect to the
investment of plan assets causes a Plan to acquire certificates in a trust,
provided that, among other requirements: (i) such person (or its affiliate) is
an obligor with respect to five percent or less of the fair market value of the
obligations or receivables contained in the trust; (ii) the Plan is not a plan
with respect to which any member of the Restricted Group (as defined below) is
the "plan sponsor" (as defined in Section 3(16)(B) of ERISA); (iii) in the case
of an acquisition in connection with the initial issuance of certificates, at
least fifty percent of each class of certificates in which Plans have invested
is acquired by persons independent of the Restricted Group (as defined below)
and at least fifty percent of the aggregate interest in the trust fund is
acquired by persons independent of the Restricted Group;
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(iv) 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 (v) immediately after the acquisition, no more than
twenty-five percent of the assets of the Plan with respect to which such person
has discretionary authority or renders investment advice are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Exemption does not apply to Plans
sponsored by the Seller, the Depositor, Morgan Stanley and the other
underwriters set forth in the related Prospectus Supplement, the Trustee, the
Master Servicer, the Pool Insurer, any obligor with respect to the Trust Fund
Asset included in the Trust Fund constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Fund, or any
affiliate of any of such parties (the "Restricted Group").
The Exemption may apply to the acquisition, holding and transfer of the
Securities by Plans if all of the conditions of the Exemption are met, including
those within the control of the investor. Notwithstanding any of the foregoing,
the Exemption will not apply with respect to any Securities until such time as
the balance of the related Pre-Funding Account, if any, is reduced to zero.
Accordingly, until such time, the Securities may not be purchased by Plans
pursuant to the Exemption. As of the date hereof, there is no single Trust Fund
Asset included in the Trust Fund that constitutes more than five percent of the
aggregate unamortized principal balance of the assets of the Trust Fund.
INSURANCE COMPANY PURCHASERS
Purchasers that are insurance companies should consult with their legal
advisors with respect to the applicability of Prohibited Transaction Class
Exemption ("PTE") 95-60, regarding transactions by insurance company general
accounts. In addition to any exemption that may be available under PTE 95-60 for
the purchase and holding of Securities by an insurance company general account,
the Small Business Job Protection Act of 1996 added a new Section 401(c) to
ERISA, which provides certain exemptive relief from the provisions of Part 4 of
Title I of ERISA and Section 4975 of the Code, including the prohibited
transaction restrictions imposed by ERISA and the Code, for transactions
involving an insurance company general account. Pursuant to Section 401(c) of
ERISA, the DOL is required to issue final regulations ("401(c) Regulations") no
later than December 31, 1997 which are to provide guidance for the purpose of
determining, in cases where insurance policies supported by an insurer's general
account are issued to or for the benefit of a Plan on or before December 31,
1998, which general account assets constitute plan assets. Section 401(c) of
ERISA generally provides that, until the date which is 18 months after the
401(c) Regulations become final, no person shall be subject to liability under
Part 4 of Title I of ERISA and Section 4975 of the Code on the basis of a claim
that the assets of an insurance company general account constitute plan assets,
unless (i) as otherwise provided by the Secretary of Labor in the 401(c)
Regulations to prevent avoidance of the regulations or (ii) an action is brought
by the Secretary of Labor for certain breaches of fiduciary duty which would
also constitute a violation of federal or state criminal law. Any assets of an
insurance company general account which support insurance policies issued to a
Plan after December 31, 1998 or issued to Plans on or before December 31, 1998
for which the insurance company does not comply with the 401(c) Regulations may
be treated as plan assets. In addition, because Section 401(c) does not relate
to insurance company separate accounts, separate account assets are still
treated as plan assets of any Plan invested in such separate account. Insurance
companies contemplating the investment of general account assets in the
Securities should consult with their legal counsel with respect to the
applicability of Section 401(c) of ERISA, including the general account's
ability to continue to hold the Securities after the date which is 18 months
after the date the 401(c) Regulations become final.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify which,
if any, of the classes of Securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of Securities that qualify as "mortgage
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related securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts, and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities,"
securities will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991 deadline. SMMEA provides,
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in
securities, or require the sale or other disposition of securities, so long as
such contractual commitment was made or such securities were acquired prior to
the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration ("NCUA") Letter to Credit Unions No.
96, as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage related
securities and the NCUA's regulation "Investment and Deposit Activities" (12
C.F.R. Part 703), which sets forth certain restrictions on investment by federal
credit unions in mortgage related securities (in each case whether or not the
class of Securities under consideration for purchase constituted a "mortgage
related security").
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities," which are
"high-risk mortgage securities" as defined in the Policy Statement. According to
the Policy Statement, such "high-risk mortgage securities" include securities
such as Securities not entitled to distributions allocated to principal or
interest, or Subordinated Securities. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security," and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the Securities constitute legal investments for such
investors.
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METHOD OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplement will
be offered in Series. The distribution of the Securities may be effected from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Securities will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by Morgan Stanley & Co. Incorporated ("Morgan Stanley") acting as underwriter
with other underwriters, if any, named therein. In such event, the Prospectus
Supplement may also specify that the underwriters will not be obligated to pay
for any Securities agreed to be purchased by purchasers pursuant to purchase
agreements acceptable to the Depositor. In connection with the sale of
Securities, underwriters may receive compensation from the Depositor or from
purchasers of Securities in the form of discounts, concessions or commissions.
The Prospectus Supplement will describe any such compensation paid by the
Depositor.
Alternatively, the Prospectus Supplement may specify that Securities will be
distributed by Morgan Stanley acting as agent or in some cases as principal with
respect to Securities that it has previously purchased or agreed to purchase. If
Morgan Stanley acts agent in the sale of Securities, Morgan Stanley will receive
a selling commission with respect to such Securities, depending on market
conditions, expressed as a percentage of the aggregate principal balance or
notional amount of such Securities as of the Cut-off Date. The exact percentage
for each Series of Securities will be disclosed in the related Prospectus
Supplement. To the extent that Morgan Stanley elects to purchase Securities as
principal, Morgan Stanley may realize losses or profits based upon the
difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any Series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Depositor and purchasers of Securities
of such Series.
The Depositor will indemnify Morgan Stanley and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Morgan Stanley and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Morgan Stanley and the Depositor may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's mortgage loans
pending the sale of such mortgage loans or interests therein, including the
Securities.
Securities will be sold primarily to institutional investors. Purchaser 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 in connection with reoffers and sales by them of
Securities. Certificateholders should consult with their legal advisors in this
regard prior to any such reoffer or sale.
As to each Series of Securities, only those classes rated in an investment
grade rating category by any Rating Agency will be offered hereby. Any
non-investment grade class may be initially retained by the Depositor, and may
be sold by the Depositor at any time in private transactions.
LEGAL MATTERS
The validity of the Securities of each Series, including certain federal
income tax consequences with respect thereto, will be passed upon for the
Depositor by Latham & Watkins.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
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RATING
It is a condition to the issuance of the Securities of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies (each, a "Rating Agency") specified in the related
Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Trust Fund Assets and any credit enhancement with respect to such
class and will reflect such Rating Agency's assessment solely of the likelihood
that holders of a class of Securities of such class will receive payments to
which such Securityholders are entitled under the related Agreement. Such rating
will not constitute an assessment of the likelihood that principal prepayments
on the related Loans will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood of
early optional termination of the Series of Securities. Such rating should not
be deemed a recommendation to purchase, hold or sell Securities, inasmuch as it
does not address market price or suitability for a particular investor. Each
security rating should be evaluated independently of any other security rating.
Such rating will not address the possibility that prepayment at higher or lower
rates than anticipated by an investor may cause such investor to experience a
lower than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn among other
reasons, because of an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency rating classes of such Series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of mortgage loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required with respect to each
such class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of mortgage loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Loans. No assurance can be given that values of any Properties have remained
or will remain at their levels on the respective dates of origination of the
related Loans. If the residential real estate markets should experience an
overall decline in property values such that the outstanding principal balances
of the Loans in a particular Trust Fund and any secondary financing on the
related Properties become equal to or greater than the value of the Properties,
the rates of delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry. In additional,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by mortgagors of scheduled payments of principal
and interest on the Loans and, accordingly, the rates of delinquencies,
foreclosures and losses with respect to any Trust Fund. To the extent that such
losses are not covered by credit enhancement, such losses will be borne, at
least in part, by the holders of one or more classes of the Securities of the
related Series.
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INDEX OF DEFINED TERMS
<TABLE>
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401(c) Regulations.................................................................................... 123
Accretion Directed.................................................................................... 51
Accrual............................................................................................... 53
Accrual Securities.................................................................................... 47
Advance............................................................................................... 13
Agency Securities..................................................................................... 1
Agreement............................................................................................. 29
Amortizable Bond Premium Regulations.................................................................. 102
APR................................................................................................... 33
Auction Rate.......................................................................................... 52
Available Funds....................................................................................... 47
Balloon payment....................................................................................... 31
Belgian Cooperative................................................................................... 58
beneficial owner...................................................................................... 57
BIF................................................................................................... 70
Book-Entry Securities................................................................................. 57
borrower.............................................................................................. 92
Buydown Fund.......................................................................................... 31
Buydown Loans......................................................................................... 31
Calculation Agent..................................................................................... 53
Capitalized Interest Account.......................................................................... 72
Cash Flow Bond Method................................................................................. 110
CEDEL Participants.................................................................................... 58
CERCLA................................................................................................ 23, 85
Certificates.......................................................................................... 1, 5
Charter Act........................................................................................... 37
Claimable Amount...................................................................................... 97
Class Security Balance................................................................................ 47
Closed-End Loans...................................................................................... 6, 30
CMO................................................................................................... 7, 40
Code.................................................................................................. 15, 97
COFI Securities....................................................................................... 55
Collateral Value...................................................................................... 33
Combined Loan-to-Value Ratio.......................................................................... 33
Commission............................................................................................ 3
Commodity Indexed Securities.......................................................................... 46
companion classes..................................................................................... 52
Component Securities.................................................................................. 51
Components............................................................................................ 51
Contingent Regulations................................................................................ 100
contracts............................................................................................. 89
Contracts............................................................................................. 1, 6, 32
Cooperative Loans..................................................................................... 30
Cooperatives.......................................................................................... 30
Currency Indexed Securities........................................................................... 46
Cut-off Date Principal Balance........................................................................ 45
Cut-off Date.......................................................................................... 5, 28
Debt Securities....................................................................................... 98
debt-to-income ratio.................................................................................. 34
Definitive Security................................................................................... 57
Depositor............................................................................................. 1, 5
Detailed Description.................................................................................. 30
Disqualified Organization............................................................................. 107
Distribution Date..................................................................................... 9
DOL................................................................................................... 120
DTC................................................................................................... 26, 57
Duff & Phelps......................................................................................... 122
</TABLE>
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<TABLE>
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Eleventh District..................................................................................... 54
EPA................................................................................................... 86
ERISA................................................................................................. 16, 119
Euroclear Operator.................................................................................... 58
Euroclear Participants................................................................................ 58
European Depositaries................................................................................. 57
excess servicing...................................................................................... 110
Exchange Act.......................................................................................... 3
Exemption............................................................................................. 121
Face Amount........................................................................................... 47
FASIT................................................................................................. 103
FHA Loans............................................................................................. 35
FHA................................................................................................... 12
FHLBSF................................................................................................ 54
FHLMC................................................................................................. 1
FHLMC Certificates.................................................................................... 7
FHLMC Act............................................................................................. 38
FHLMC Certificate Group............................................................................... 38
FHLMC Project Certificates............................................................................ 40
Financial Intermediary................................................................................ 57
Fitch................................................................................................. 122
Fixed Rate............................................................................................ 52
Floating Rate......................................................................................... 52
FNMA Certificates..................................................................................... 7
FNMA SMBS............................................................................................. 37
FNMA MBS.............................................................................................. 37
FNMA Project Issuers.................................................................................. 37
FNMA.................................................................................................. 1
foreign person........................................................................................ 114
Funding Period........................................................................................ 26
Garn-St Germain Act................................................................................... 88
GNMA Certificates..................................................................................... 7
GNMA Project Certificates............................................................................. 37
GNMA.................................................................................................. 1
GNMA Issuer........................................................................................... 35
Guaranty Agreement.................................................................................... 35
Holder in Due Course Rules............................................................................ 25
Home Improvement Contracts............................................................................ 1, 6
Home Improvements..................................................................................... 1, 6
Home Equity Loans..................................................................................... 1, 6, 30
Housing Act........................................................................................... 35
HUD................................................................................................... 35, 41
Indenture............................................................................................. 44
Index................................................................................................. 46
Indexed Currency...................................................................................... 46
Indexed Principal Amount.............................................................................. 46
Indexed Securities.................................................................................... 46
Indexed Commodity..................................................................................... 46
Installment Contract.................................................................................. 91
Insurance Proceeds.................................................................................... 70
Insured Expenses...................................................................................... 70
Interest Only......................................................................................... 53
Interest Weighted Securities.......................................................................... 101
Inverse Floating Rate................................................................................. 52
IRS................................................................................................... 100
L/C Percentage........................................................................................ 11, 61
L/C Bank.............................................................................................. 11, 61
lender................................................................................................ 91
Liquidation Expenses.................................................................................. 70
Liquidation Proceeds.................................................................................. 70
</TABLE>
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Loan Rate............................................................................................. 9, 30
Loan-to-Value Ratio................................................................................... 33
Loans................................................................................................. 1
Lockout periods....................................................................................... 31
Manufactured Housing Contracts........................................................................ 1, 6, 32
Manufactured Homes.................................................................................... 32
Mark-to-Market Regulations............................................................................ 107
Master Servicer....................................................................................... 5
Master Servicing Fee.................................................................................. 77
Master Servicing Agreement............................................................................ 29
mixed used properties................................................................................. 31
Moody's............................................................................................... 62, 122
Morgan................................................................................................ 58
Morgan Stanley........................................................................................ 1, 125
Mortgage Loan......................................................................................... 6
Mortgage.............................................................................................. 68
Mortgaged Properties.................................................................................. 31
mortgage related securities........................................................................... 14, 124
National Cost of Funds Index.......................................................................... 55
NCUA.................................................................................................. 124
1986 Act.............................................................................................. 102
noneconomic residual interest......................................................................... 107
Nonresidents.......................................................................................... 111
Notes................................................................................................. 1, 5
Notional Amount Securities............................................................................ 51
OID Regulations....................................................................................... 98
OID................................................................................................... 15, 98
Originator............................................................................................ 2, 18
OTS................................................................................................... 55
PACs.................................................................................................. 51
Partial Accrual....................................................................................... 53
Parties in Interest................................................................................... 120
Pass-Through Securities............................................................................... 108
Pass-Through Rate..................................................................................... 10
Pay-Through Security.................................................................................. 100
Percentage Interests.................................................................................. 78
Permitted Investments................................................................................. 62
Planned Principal Class............................................................................... 51
Plan.................................................................................................. 119
Plan Asset Regulation................................................................................. 120
PMBS Agreement........................................................................................ 41
PMBS.................................................................................................. 1
PMBS Issuer........................................................................................... 8, 40
PMBS Servicer......................................................................................... 8, 40
PMBS Trustee.......................................................................................... 8, 40
Policy Statement...................................................................................... 124
Pool Insurance Policy................................................................................. 63
Pool Insurer.......................................................................................... 63
Pool.................................................................................................. 5, 29
Pooling and Servicing Agreement....................................................................... 44
Principal Only........................................................................................ 53
Purchase Price........................................................................................ 43
Pre-Funded Amount..................................................................................... 26
Pre-Funding Account................................................................................... 6, 26
Prepayment Assumption................................................................................. 100
Primary Mortgage Insurance Policy..................................................................... 31
Prime Rate............................................................................................ 56
Principal Prepayments................................................................................. 48
Private Mortgage-Backed Securities.................................................................... 1
Properties............................................................................................ 6, 31
</TABLE>
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<TABLE>
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<S> <C>
Property Improvement Loans............................................................................ 94
PTE................................................................................................... 123
PTE 83-1.............................................................................................. 120
publicly offered security............................................................................. 120
Purchase Price........................................................................................ 43
Rating Agency......................................................................................... 126
Ratio Strip Securities................................................................................ 109
RCRA.................................................................................................. 86
Record Date........................................................................................... 45
Reference Banks....................................................................................... 53
Refinance Loan........................................................................................ 33
Regular Interest Securities........................................................................... 98
Relevant Depositary................................................................................... 57
Relief Act............................................................................................ 92
REMIC................................................................................................. 2, 46, 97
REMIC Regulations..................................................................................... 103
Reserve Account....................................................................................... 11, 47
Reserve Interest Rate................................................................................. 54
Residual Interest Security............................................................................ 105
Restricted Group...................................................................................... 123
Retained Interest..................................................................................... 45
Revolving Credit Line Loans........................................................................... 6
Riegle Act............................................................................................ 24
Rules................................................................................................. 57
S&P................................................................................................... 122
SAIF.................................................................................................. 70
Scheduled Principal Class............................................................................. 51
secured creditor exclusion............................................................................ 86
Securities............................................................................................ 1, 5
Securityholders....................................................................................... 2
Security Account...................................................................................... 70
Security Owners....................................................................................... 57
Security Account...................................................................................... 70
Security Register..................................................................................... 45
Seller................................................................................................ 1, 29
Senior Securities..................................................................................... 8, 60
Sequential Pay Class.................................................................................. 51
Series................................................................................................ 1
Servicing Fee......................................................................................... 108
Short-Term Note....................................................................................... 113
Single Family Properties.............................................................................. 31
Single Family Securities.............................................................................. 120
SMMEA................................................................................................. 14, 123
Startup Day........................................................................................... 104
Stock Indexed Securities.............................................................................. 46
Stock Index........................................................................................... 46
Strip................................................................................................. 52
Stripped Securities................................................................................... 108
Sub-Servicing Agreement............................................................................... 73
Sub-Servicer.......................................................................................... 13, 29
Subordinated Securities............................................................................... 8, 60
Subsequent Loans...................................................................................... 26
Support Class......................................................................................... 52
TACs.................................................................................................. 52
Targeted Principal Class.............................................................................. 52
Terms and Conditions.................................................................................. 59
TIN................................................................................................... 111
Title V............................................................................................... 89, 91
Title I Loans......................................................................................... 94
Title I Program....................................................................................... 94
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
Trust Fund Assets..................................................................................... 1, 5, 28
Trust Fund............................................................................................ 1
Trust Agreement....................................................................................... 29, 44
Trustee............................................................................................... 5, 44
U.S. Person........................................................................................... 118
UCC................................................................................................... 85
VA.................................................................................................... 12
VA Guaranty........................................................................................... 76
Variable Rate......................................................................................... 52
weighted average life................................................................................. 20
yield to maturity..................................................................................... 20
</TABLE>
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