<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 21, 1998
REGISTRATION NO. 333-64909
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MORGAN STANLEY ABS CAPITAL I INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-3939229
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
------------------------
1585 BROADWAY, 2ND FLOOR
NEW YORK, NEW YORK 10036
(212) 761-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CRAIG S. PHILLIPS
PRESIDENT
MORGAN STANLEY ABS CAPITAL I INC.
1585 BROADWAY, 2ND FLOOR
NEW YORK, NEW YORK 10036
(212) 761-4000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
With a copy to:
<TABLE>
<S> <C>
GREGORY D. WALKER, ESQ. JAMES A. BLALOCK III, ESQ.
MORGAN STANLEY & CO. INCORPORATED ANDREWS & KURTH L.L.P.
1221 SIXTH AVENUE, 27TH FLOOR 1701 PENNSYLVANIA AVENUE, N.W., SUITE 200
NEW YORK, NEW YORK 10020 WASHINGTON, D.C. 20006
212/762-6819 202/662-2730
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public: From time
to time on or after the effective date of the Registration Statement, as
determined by market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [X]
If this Form is filed to register securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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</TABLE>
<TABLE>
<CAPTION>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
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Asset Backed Notes and Asset
Backed Certificates.................. $1,495,155,000(3)(4) 100% $1,495,155,000 $278,017(5)
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</TABLE>
(1) The Registration Statement relates to the initial offering from time to time
of the Asset Backed Notes and Asset Backed Certificates and to any resales
thereof in market making transactions by Morgan Stanley & Co. Incorporated,
an affiliate of the Registrant, to the extent required.
(2) Estimated for the purpose of calculating the registration fee.
(3) Not specified as to each Class of Asset Backed Securities to be registered
pursuant to General Instruction II.D of Form S-3.
(4) Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus
included in this Registration Statement also relates to an aggregate of
$495,155,000 of unsold Asset Backed Notes and Asset Backed Certificates of
the Registrant previously registered pursuant to its Registration Statement
on Form S-3 (Registration No. 333-19779), for which a filing fee of
$150,046.97 has previously been paid at the time such Registration Statement
was originally filed.
(5) $295 of which has been previously paid. The registration fee specified in
the table has been computed on the basis of $1,000,000,000 principal amount
of securities covered hereby, prior to including the previously registered
and unsold securities referred to in footnote (4).
THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation, or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
VERSION #1
SUBJECT TO COMPLETION, DATED DECEMBER , 1998
PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED DECEMBER , 1998)
$
(Approximate)
HOME EQUITY LOAN TRUST 199 -
HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 199
MORGAN STANLEY ABS CAPITAL I INC.
Depositor
[ ]
Master Servicer
Each Home Equity Loan Asset Backed Certificate, Series 199 - (collectively,
the "Certificates") will represent an undivided interest in the Home Equity Loan
Trust 199 - (the "Trust Fund") to be formed pursuant to a Pooling and Servicing
Agreement among [ ], as Master Servicer, Morgan Stanley ABS Capital I
Inc., as Depositor, and [ ], as Trustee. The property of the Trust
Fund will include a pool of [adjustable rate] home equity revolving credit line
loans made or to be made in the future (the "Mortgage Loans") under certain home
equity revolving credit line loan agreements. The Mortgage Loans are secured by
first, second and third mortgages or deeds of trusts on one- to four-family
residential properties. See "Index of Defined Terms" on page S-59 of this
Prospectus Supplement and on page 120 of the Prospectus for the location of the
definitions of certain capitalized terms.
The aggregate undivided interest in the Trust Fund represented by the
Certificates will, as of , 199 (the "Cut-off Date"), represent
approximately % of the outstanding principal balances of the Mortgage Loans.
The remaining undivided interest in the Trust Fund not represented by the
Certificates (the "Transferor Interest") will initially be equal to $ ,
which as of the Cut-off Date is % of the outstanding principal balances of the
Mortgage Loans. Only the Certificates are offered hereby.
Distributions of principal and interest on the Certificates will be made on
the day of each month or, if such date is not a Business Day, then on the
succeeding Business Day (each, a "Distribution Date"), commencing ,199 .
On each Distribution Date, holders of the Certificates will be entitled to
receive, from and to the limited extent of funds available in the Collection
Account (as defined herein), distributions with respect to interest and
principal calculated as set forth under "Summary -- Interest" and "-- Principal
Payments from Principal Collections" and "Description of the Certificates --
Distributions on the Certificates" herein. The Certificates are not guaranteed
by the Depositor or any affiliate thereof. [However, the Certificates will be
unconditionally and irrevocably guaranteed as to the payment of the Guaranteed
Distributions (as defined herein) on each Distribution Date pursuant to the
terms of a financial guaranty insurance policy (the "Policy") to be issued by
[INSURER]
Morgan Stanley & Co. Incorporated ("Morgan Stanley" or the "Underwriter")
intends to make a secondary market in the Certificates but is under no
obligation to do so. There can be no assurance that a secondary market for the
Certificates will develop or, if it does develop, that it will continue. See
"Risk Factors" herein and in the Prospectus. (Continued on following page)
------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-15 HEREIN AND ON PAGE 17 IN THE ACCOMPANYING
PROSPECTUS.
------------------------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST FUND ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE MASTER SERVICER,
THE TRUSTEE, OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT TO THE EXTENT
PROVIDED HEREIN. NEITHER THE CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) THE DEPOSITOR(3)
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<S> <C> <C> <C>
Per Certificate....................... % % %
Total................................. $ $ $
</TABLE>
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(1) Plus accrued interest, if any, from , 199 .
(2) The Depositor has agreed to indemnify Morgan Stanley against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting expenses, estimated to be $ .
------------------------
The Certificates are offered subject to prior sale, when, as and if
delivered to and accepted by the Morgan Stanley and subject to Morgan Stanley's
right to reject orders in whole or in part. It is expected that delivery of the
Certificates will be made in book-entry form only through the facilities of The
Depository Trust Company, CEDEL S.A. and the Euroclear System on or about
, 199 (the "Closing Date").
------------------------
MORGAN STANLEY DEAN WITTER
, 199
<PAGE> 3
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Depositor or any Underwriter. This Prospectus Supplement and the Prospectus do
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that the information herein or therein
is correct at any time subsequent to the date hereof or that there has been no
change in the affairs of the Depositor since that date.
IN CONNECTION WITH THIS OFFERING, MORGAN STANLEY MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Until ninety days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Certificates, whether or not participating in this
distribution, may be required to deliver a Prospectus Supplement and Prospectus.
This is in addition to the obligation of dealers acting as underwriters to
deliver a Prospectus Supplement and Prospectus with respect to their unsold
allotments or subscriptions.
This Prospectus Supplement does not contain complete information about the
offering of the Certificates. Additional information is contained in the
Prospectus of the Depositor dated , 199 (the "Prospectus") and
purchasers are urged to read both this Prospectus Supplement and the Prospectus
in full. Sales of the Certificates may not be consummated unless the purchaser
has received both this Prospectus Supplement and the Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Trustee on behalf of any Trust Fund will provide without charge to each
person to whom this Prospectus Supplement is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to in the
Prospectus under "Incorporation of Certain Documents by Reference" that have
been or may be incorporated by reference in the Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
the Prospectus incorporates). Such requests should be directed to the Corporate
Trust Office of the Trustee at , telephone: , facsimile
number , attention: .
S-2
<PAGE> 4
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
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PAGE
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<S> <C>
Summary..................................................... S-4
Risk Factors................................................ S-15
The Certificate Insurer..................................... S-17
The Master Servicer......................................... S-17
The Home Equity Loan Program................................ S-18
Description of the Mortgage Loans........................... S-20
Maturity and Prepayment Considerations...................... S-28
Description of the Certificates............................. S-29
Description of the Purchase Agreement....................... S-49
Use of Proceeds............................................. S-50
Federal Income Tax Consequences............................. S-50
Erisa Considerations........................................ S-53
Legal Investment Considerations............................. S-56
Underwriting................................................ S-56
Legal Matters............................................... S-57
Experts..................................................... S-57
Ratings..................................................... S-57
Index of Defined Terms...................................... S-59
Global Clearance, Settlement and Tax Documentation
Procedure................................................. AI-1
PROSPECTUS
Summary of Terms............................................ 6
Risk Factors................................................ 17
The Trust Fund.............................................. 27
Use of Proceeds............................................. 41
The Depositor............................................... 41
Description of the Securities............................... 41
Credit Enhancement.......................................... 56
Yield and Prepayment Considerations......................... 61
The Agreements.............................................. 64
Certain Legal Aspects of the Loans.......................... 77
Federal Income Tax Consequences............................. 91
State Tax Consequences...................................... 111
Erisa Considerations........................................ 112
Legal Investment............................................ 116
Method of Distribution...................................... 117
Legal Matters............................................... 118
Financial Information....................................... 118
Rating...................................................... 118
Index of Defined Terms...................................... 120
</TABLE>
S-3
<PAGE> 5
SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and the accompanying Prospectus. Certain capitalized terms
used in the Summary are defined elsewhere in the Prospectus Supplement or in the
Prospectus. See "Index of Defined Terms" on page S-59 of this Prospectus
Supplement and on page 120 of the Prospectus for the location of the definitions
of certain capitalized terms.
Trust Fund................. Home Equity Loan Trust 199 (the "Trust Fund") will
be formed pursuant to a pooling and servicing
agreement (the "Agreement") to be dated as of
, 199 (the "Cut-off Date") among
, as master servicer (together with any
successor in such capacity, the "Master Servicer"),
Morgan Stanley ABS Capital I Inc., as depositor
(the "Depositor"), and , as trustee
(the "Trustee"). The property of the Trust Fund
will include: a pool of [adjustable rate] home
equity revolving credit line loans made or to be
made in the future (the "Mortgage Loans"), under
certain home equity revolving credit line loan
agreements (the "Credit Line Agreements") and
secured by first, second and third mortgages and
deeds of trust on residential properties that are
one- to four-family properties (the "Mortgaged
Properties"); the collections in respect of the
Mortgage Loans received after the Cut-off Date
(exclusive of payments in respect of accrued
interest due on or prior to the Cut-off Date or due
in the month of ); property that secured
a Mortgage Loan which has been acquired by
foreclosure or deed in lieu of foreclosure; an
irrevocable and unconditional limited financial
guaranty insurance policy (the "Policy"); an
assignment of the Depositor's rights under the
Purchase Agreement (as defined herein); rights
under certain hazard insurance policies covering
the Mortgaged Properties; and certain other
property, as described more fully under
"Description of the Certificates -- General"
herein. On the Closing Date, the Mortgage Loans
will be purchased by the Depositor from
(the "Seller"), [an affiliate of the
Depositor,] which either directly or through its
affiliates acquired the Mortgage Loans in the
ordinary course of business from , the
originator of the Mortgage Loans.
The Trust Fund property will include the unpaid
principal balance of each Mortgage Loan as of the
Cut-off Date (the "Cut-off Date Principal Balance")
plus any additions thereto as a result of new
advances made pursuant to the applicable Credit
Line Agreement (the "Additional Balances") during
the life of the Trust Fund. With respect to any
date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Mortgage
Loans as of such date. The aggregate Cut-off Date
Principal Balance of the Mortgage Loans is $
(the "Cut-off Date Pool Balance"). The "Principal
Balance" of a Mortgage Loan (other than a
Liquidated Mortgage Loan) on any day is equal to
its Cut-off Date Principal Balance, plus (i) any
Additional Balances in respect of such Mortgage
Loan, minus (ii) all collections credited against
the Principal Balance of such Mortgage Loan in
accordance with the related Credit Line Agreement
prior to such day. The Principal Balance of a
Liquidated Mortgage Loan (as defined herein) after
final recovery of related Liquidation Proceeds (as
defined herein) will be zero.
Securities Offered......... Each of the Home Equity Loan Asset Backed
Certificates, Series 199 offered hereby (the
"Certificates") represents an undivided interest in
S-4
<PAGE> 6
the Trust Fund. Each Certificate represents the
right to receive payments of interest at the
variable rate described below (the "Certificate
Rate"), payable monthly, and payments of principal
at such time and to the extent provided herein
under "Description of the
Certificates -- Distributions on the Certificates."
The aggregate undivided interest in the Trust Fund
represented by the Certificates as of the Closing
Date will equal $ (the "Original Invested
Amount"), which represents % of the Cut-off Date
Pool Balance. The "Original Certificate Principal
Balance" will equal $ . Following the
Closing Date, the "Invested Amount" with respect to
any date will be an amount equal to the Original
Invested Amount minus (i) the amount of Investor
Principal Collections (as defined herein)
previously distributed to Certificateholders, and
minus (ii) an amount equal to the product of the
Investor Floating Allocation Percentage and the
Liquidation Loss Amounts (each as defined herein).
The Transferor (as described below) will own the
remaining undivided interest (the "Transferor
Interest") in the Mortgage Loans, which is equal to
the Pool Balance minus the Invested Amount and will
initially equal approximately % of the Cut-off
Date Pool Balance. The Transferor (the
"Transferor") as of any date is the owner of the
Transferor Interest which initially will be
. The Certificates will be issued
pursuant to the Agreement. The principal amount of
the outstanding Certificates (the "Certificate
Principal Balance") on any date is equal to the
Original Certificate Principal Balance minus the
aggregate of amounts actually distributed as
principal to the Certificateholders. See
"Description of the Certificates" herein.
Removal of Certain
Mortgage Loans;
Additional Balances...... In order to permit the Transferor to remove
Mortgage Loans from the Trust Fund at such times,
if any, as the overcollateralization exceeds the
level required to maintain the ratings on the
Certificates, on any Distribution Date the
Transferor may, but shall not be obligated to,
remove from the Trust Fund certain Mortgage Loans
without notice to the Certificateholders. The
Transferor is permitted to designate the Mortgage
Loans to be removed. Mortgage Loans so designated
will only be removed upon satisfaction of the
following conditions: (i) No Rapid Amortization
Event (as defined herein) has occurred, (ii) the
Transferor Interest as of the Transfer Date (as
defined herein) (after giving effect to such
removal) exceeds the Minimum Transferor Interest
(as defined below); (iii) the transfer of any
Mortgage Loans on any Transfer Date during the
Managed Amortization Period (as defined herein)
shall not, in the reasonable belief of the
Transferor, cause a Rapid Amortization Event to
occur or an event which with notice or lapse of
time or both would constitute a Rapid Amortization
Event; (iv) the Transferor shall have delivered to
the Trustee a "Mortgage Loan Schedule" containing a
list of all Mortgage Loans remaining in the Trust
Fund after such removal; (v) the Transferor shall
represent and warrant that no selection procedures
which are adverse to the interests of the
Certificateholders or the Certificate Insurer were
used by the Transferor in selecting such Mortgage
Loans; (vi) in connection with the first such
retransfer of Mortgage Loans, the Rating Agencies
(as defined herein) shall have been notified of the
proposed transfer and prior to the Transfer Date
shall not have notified the Transferor in writing
that such transfer would result
S-5
<PAGE> 7
in a reduction or withdrawal of the ratings
assigned to the Certificates without regard to the
Policy; and (vii) the Transferor shall have
delivered to the Trustee and the Certificate
Insurer an officer's certificate confirming the
conditions set forth in clauses (i) through (vi)
above. See "Description of the
Certificates -- Optional Transfers of Mortgage
Loans to the Transferor" herein.
The "Minimum Transferor Interest" as of any date is
an amount equal to the lesser of (a) % of the
Pool Balance on such date and (b) the Transferor
Interest as of the Closing Date.
During the term of the Trust Fund, all Additional
Balances will be transferred to and become property
of the Trust. The Pool Balance at any time will
generally fluctuate from day to day because the
amount of Additional Balances and the amount of
principal payments with respect to the Mortgage
Loans will usually differ from day to day. Because
the Transferor Interest is equal to the Pool
Balance minus the Invested Amount, the amount of
the Transferor Interest will fluctuate from day to
day as draws are made with respect to the Mortgage
Loans and as Principal Collections are received.
The Mortgage Loans......... The Mortgage Loans are secured by first, second and
third mortgages on Mortgaged Properties located in
states. On the Closing Date, will
sell the Mortgage Loans to the Depositor, pursuant
to a purchase agreement (the "Purchase Agreement").
The percentage of the Cut-off Date Principal
Balance of the Mortgage Loans secured primarily by
Mortgaged Properties located in the states of
, , , ,
and is approximately %, %,
%, % and %, respectively. The "Combined
Loan-to-Value Ratio" of each Mortgage Loan is the
ratio of (A) the sum of (i) the maximum amount the
borrower was permitted to draw down under the
related Credit Line Agreement (the "Credit Limit")
and (ii) the amounts of any related senior mortgage
loans (computed as of the date of origination of
each such Mortgage Loans) to (B) the lesser of (i)
the appraised value of the Mortgaged Property or
(ii) [in the case of a Mortgaged Property purchased
within one year of the origination of the related
Mortgage Loan,] the purchase price of such
Mortgaged Property. As of the Cut-off Date the
Combined Loan-to-Value Ratios ranged from % to
% and, as of the Cut-off Date, the weighted
average Combined Loan-to-Value Ratio of the
Mortgage Loans was approximately %
Interest on each Mortgage Loan is payable monthly
and computed on the related daily outstanding
Principal Balance for each day in the billing cycle
at a variable rate per annum (the "Loan Rate")
equal at any time (subject to maximum rates, as
described herein under "Description of the Mortgage
Loans -- Mortgage Loan Terms," and further subject
to applicable usury limitations) to the sum of (i)
[the highest prime rate published in the "Money
Rates" section of The Wall Street Journal] and (ii)
a Margin within the range of % to %. As of the
Cut-off Date, the weighted average Margin was
approximately %. Loan Rates are adjusted [monthly
on the first business day of the calendar month
preceding the Due Date]. As to each Mortgage Loan,
the "Due Date" is the fifteenth day of each month.
The Cut-off Date Principal Balances
S-6
<PAGE> 8
ranged from zero to $ and averaged
approximately $ . Credit Limits under the
Mortgage Loans as of the Cut-off Date ranged from
$ to $ and averaged approximately
$ . Each Mortgage Loan was originated in
the period from , 199 to
, 199 . As of the Cut-off Date, the
maximum Credit Limit Utilization Rate (as defined
herein) was 100% and the weighted average Credit
Limit Utilization Rate was approximately %. As
of the Cut-off Date, approximately % by
Cut-off Date Principal Balance of the Mortgage
Loans represented first liens on the related
Mortgaged Properties, approximately % by
Cut-off Date Principal Balance of the Mortgage
Loans represented second liens on the related
Mortgaged Properties and approximately % of
the Mortgage Loans represented third liens. As of
the Cut-off Date, the Mortgage Loans had remaining
terms to scheduled maturity ranging from
months to months and had a weighted average of
approximately months. See "Description of the
Mortgage Loans" herein.
Denominations.............. The Certificates will be offered for purchase in
denominations of [$1,000] and multiples of [$1] in
excess thereof. The interest in the Trust Fund
evidenced by a Certificate (the "Percentage
Interest") will be equal to the percentage derived
by dividing the denomination of such Certificate by
the Original Certificate Principal Balance.
Registration of
Certificates............... The Certificates will initially be issued in
book-entry form. Persons acquiring beneficial
ownership interests in the Certificates
("Certificate Owners") may elect to hold their
Certificate interests through The Depository Trust
Company ("DTC"), in the United States, or Centrale
de Livraison de Valeurs Mobilieres S.A. ("CEDEL")
or the Euroclear System ("Euroclear"), in Europe.
Transfers within DTC, CEDEL or Euroclear, as the
case may be, will be in accordance with the usual
rules and operating procedures of the relevant
system. So long as the Certificates are Book-Entry
Certificates (as defined herein), 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 relevant
depositaries (collectively, 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 Certificates will
initially be registered in the name of Cede. The
interests of the Certificateholders 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 herein. All references in
this Prospectus Supplement to any 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
Certificates are held by DTC. See "Risk
Factors -- Consequences of Owning Book-Entry
Certificates," "Description of the
Certificates -- Book-Entry Certificates" herein and
"Annex I" hereto.
S-7
<PAGE> 9
Depositor.................. Morgan Stanley ABS Capital I Inc., a Delaware
corporation and a direct, wholly-owned subsidiary
of Morgan Stanley Group Inc. The principal
executive offices of the Depositor are located at
1585 Broadway, 37th Floor, New York, New York 10036
(Telephone: (212) 761-4000). See "The Depositor" in
the Prospectus.
Master Servicer of the
Mortgage Loans............. [ ] See "The Master Servicer" and
"The Home Equity Loan Program -- Servicing of the
Mortgage Loans" herein.
Collections................ All collections on the Mortgage Loans will
generally be allocated in accordance with the
Credit Line Agreements between amounts collected in
respect of interest and amounts collected in
respect of principal. As to any Distribution Date,
"Interest Collections" will be equal to the amounts
collected during the related Collection Period,
including the portion of Net Liquidation Proceeds
(as defined below) allocated to interest pursuant
to the terms of the Credit Line Agreements less
Servicing Fees for the related Collection Period.
As to any Distribution Date, "Principal
Collections" will be equal to the sum of (i) the
amounts collected during the related Collection
Period, including the portion of Net Liquidation
Proceeds allocated to principal pursuant to the
terms of the Credit Line Agreements and (ii) any
Transfer Deposit Amounts (as defined herein).
"Net Liquidation Proceeds" with respect to a
Mortgage Loan are the proceeds (excluding amounts
drawn on the Policy) received in connection with
the liquidation of any Mortgage Loan, whether
through trustee's sale, foreclosure sale or
otherwise, reduced by related expenses, but not
including the portion, if any, of such amount that
exceeds the Principal Balance of the Mortgage Loan
plus any accrued and unpaid interest thereon to the
end of the Collection Period during which such
Mortgage Loan became a Liquidated Mortgage Loan.
With respect to any Distribution Date, the portion
of Interest Collections allocable to the
Certificates ("Investor Interest Collections") will
equal the product of (a) Interest Collections for
such Distribution Date and (b) the Investor
Floating Allocation Percentage. With respect to any
Distribution Date, the "Investor Floating
Allocation Percentage" is the percentage equivalent
of a fraction determined by dividing the Invested
Amount at the close of business on the preceding
Distribution Date (or at the Closing Date in the
case of the first Distribution Date) by the Pool
Balance at the beginning of the related Collection
Period. The remaining amount of Interest
Collections will be allocated to the Transferor
Interest as more fully described under "Description
of the Certificates -- Allocations and Collections"
herein.
On each Distribution Date, the Investor Interest
Collections will be applied in the following order
of priority: (i) as payment to the Trustee for its
fee for services rendered pursuant to the
Agreement; (ii) as payment for the premium for the
Policy; (iii) as payment for the accrued interest
due and any overdue accrued interest (with interest
thereon) on the Certificate Principal Balance of
the Certificates; (iv) to pay any Investor Loss
Amount (as defined herein) for such Distribution
Date; (v) as payment for any Investor Loss Amount
for a previous Distribution Date that was not
previously (a) funded by Investor Interest
Collections
S-8
<PAGE> 10
allocable to the Certificateholders, (b) absorbed
by the Overcollateralization Amount, (c) funded by
amounts on deposit in the Spread Account or (d)
funded by draws on the Policy; (vi) to reimburse
prior draws made from the Policy (with interest
thereon); (vii) to pay principal on the
Certificates until the Invested Amount exceeds the
Certificate Principal Balance by the Required
Overcollateralization Amount, each as defined
herein (such amount, if any, paid pursuant to this
clause (vii) being referred to herein as the
"Accelerated Principal Distribution Amount");
(viii) any other amounts required to be deposited
in an account for the benefit of the Certificate
Insurer and Certificateholders pursuant to the
Agreement or amounts owed to the Certificate
Insurer pursuant to the Insurance Agreement; (ix)
certain amounts that may be required to be paid to
the Master Servicer pursuant to the Agreement; and
(x) to the Transferor to the extent permitted as
described under "Description of the
Certificates -- Distributions on the Certificates"
herein.
Investor Interest Collections available after the
payment of interest on the Certificates may be
insufficient to cover any Investor Loss Amount. If
such insufficiency results in the Certificate
Principal Balance exceeding the Invested Amount, a
draw in an amount equal to such difference will be
made on the Policy in accordance with the terms of
the Policy.
The "Overcollateralization Amount" on any date of
determination is the amount, if any, by which the
Invested Amount exceeds the Certificate Principal
Balance on such day. Payments to Certificateholders
pursuant to clause (iii) above will be interest
payments on the Certificates. Payments to
Certificateholders pursuant to clauses (iv), (v)
and (vii) will be principal payments on the
Certificates and will therefore reduce the
Certificate Principal Balance, however, payments
pursuant to clause (vii) will not reduce the
Invested Amount. The Accelerated Principal
Distribution Amount is not guaranteed by the
Policy.
"Liquidation Loss Amount" means with respect to any
Liquidated Mortgage Loan, the unrecovered Principal
Balance thereof at the end of the related
Collection Period in which such Mortgage Loan
became a Liquidated Mortgage Loan, after giving
effect to the Net Liquidation Proceeds in
connection therewith. The "Investor Loss Amount"
shall be the product of the Investor Floating
Allocation Percentage and the Liquidation Loss
Amount for such Distribution Date. See "Description
of the Certificates -- Distributions on the
Certificates" herein.
Principal Collections will be allocated between the
Certificateholders and the Transferor ("Investor
Principal Collections" and "Transferor Principal
Collections", respectively) in accordance with
their percentage interests in the Mortgage Loans of
% and %, respectively, as of the Cut-off
Date (the "Fixed Allocation Percentage"), but a
lesser amount of Principal Collections may be
distributed to Certificateholders during the
Managed Amortization Period, as described below.
The "Investor Fixed Allocation Percentage" shall be
%.
The Master Servicer will deposit Interest
Collections and Principal Collections in respect of
the Mortgage Loans in an account established for
such purpose under the Agreement (the "Collection
Account"). See
S-9
<PAGE> 11
"Description of the Certificates -- Payments on
Mortgage Loans; Deposits to Collection Account"
herein.
Collection Period.......... As to any Distribution Date other than the first
Distribution Date, the "Collection Period" is the
calendar month preceding the month of such
Distribution Date. As to the first Distribution
Date, the "Collection Period" is the period
beginning after the Cut-off Date and ending on the
last day of , 199 .
Interest................... Interest on the Certificates will be distributed
monthly on the fifteenth day of each month or, if
such day is not a Business Day, then the next
succeeding Business Day (each, a "Distribution
Date"), commencing on , 199 , at the
Certificate Rate for the related Interest Period
(as defined below). The "Certificate Rate" for an
Interest Period will generally equal the sum of
[(a) the London Interbank offered rate for
one-month Eurodollar deposits ("LIBOR") appearing
on the Telerate Screen Page 3750, as of the second
LIBOR Business Day (as defined herein) prior to the
first day of such Interest Period (or as of two
LIBOR Business Days prior to the Closing Date, in
the case of the first Interest Period) and (b)
%.] Notwithstanding the foregoing, in no event
will the amount of interest required to be
distributed in respect of the Certificates on any
Distribution Date exceed a rate equal to the
weighted average of the Loan Rates (net of the
Servicing Fee Rate, the fee payable to the Trustee
and the rate at which the premium payable to the
Certificate Insurer is calculated) weighted on the
basis of the daily balance of each Mortgage Loan
during the related billing cycle prior to the
Collection Period relating to such Distribution
Date. [Interest on the Certificates in respect of
any Distribution Date will accrue from the
preceding Distribution Date (or in the case of the
first Distribution Date, from the date of the
initial issuance of the Certificates (the "Closing
Date") through the day preceding such Distribution
Date (each such period, an "Interest Period") on
the basis of the actual number of days in the
Interest Period and a 360-day year.]
Interest payments on the Certificates will be
funded from Investor Interest Collections, any
funds on deposit in the Spread Account and from
draws on the Policy. See "Description of the
Certificates" herein.
Principal Collections...... For the period beginning on the first Distribution
Date and, unless a Rapid Amortization Event (as
defined herein) shall have earlier occurred, ending
on the Distribution Date in , 200
(the "Managed Amortization Period"), the amount of
Principal Collections payable to Certificateholders
as of each Distribution Date during the Managed
Amortization Period will equal, to the extent funds
are available therefor, the Scheduled Principal
Collections Distribution Amount for such
Distribution Date. On any Distribution Date during
the Managed Amortization Period, the "Scheduled
Principal Collections Distribution Amount" shall
equal the lesser of (i) the Maximum Principal
Payment (as defined herein) and (ii) the
Alternative Principal Payment (as defined herein).
With respect to any Distribution Date, the "Maximum
Principal Payment" will equal the product of the
Investor Fixed Allocation Percentage and Principal
Collections for such Distribution Date. With
respect to any Distribution Date, the "Alternative
Principal Payment" will equal the greater of (x) %
of the Certificate Principal Balance immediately
prior to such Distribution Date and
S-10
<PAGE> 12
(y) the amount, but not less than zero, of
Principal Collections for such Distribution Date
less the aggregate of Additional Balances created
during the related Collection Period.
Beginning with the first Distribution Date
following the end of the Managed Amortization
Period, the amount of Principal Collections payable
to Certificateholders on each Distribution Date
will be equal to the Maximum Principal Payment. See
"Description of the Certificates -- Distributions
on the Certificates" herein.
In addition, to the extent funds are available
therefor (including funds available under the
Policy), on the Distribution Date in
20 , Certificateholders will be
entitled to receive as payment of principal an
amount equal to the outstanding Certificate
Principal Balance.
Distributions of Principal Collections based upon
the Investor Fixed Allocation Percentage may result
in distributions of principal to Certificateholders
in amounts that are greater relative to the
declining Pool Balance than would be the case if
the Investor Floating Allocation Percentage were
used to determine the percentage of Principal
Collections distributed in respect of the Invested
Amount. The aggregate distributions of principal to
Certificateholders will not exceed the Original
Certificate Principal Balance.
The Certificate Insurer.... [Insurer] (the "Certificate Insurer") is a
insurance company engaged
exclusively in the business of writing financial
guaranty insurance, principally in respect of
securities offered in domestic and foreign markets.
The Certificate Insurer's claims-paying ability is
rated by and
by . See "The
Certificate Insurer" herein.
Policy..................... On or before the Closing Date, the Policy will be
issued by the Certificate Insurer pursuant to the
provisions of the Insurance and Indemnity Agreement
(the "Insurance Agreement") to be dated as of
, 199 , among the Seller, the
Depositor, the Master Servicer and the Certificate
Insurer.
The Policy will irrevocably and unconditionally
guarantee payment on each Distribution Date to the
Trustee for the benefit of the Certificateholders
the full and complete payment of (i) the Guaranteed
Principal Distribution Amount (as defined herein)
with respect to the Certificates for such
Distribution Date and (ii) accrued and unpaid
interest due on the Certificates (together, the
"Guaranteed Distributions"), with such Guaranteed
Distributions having been calculated in accordance
with the original terms of the Certificates or the
Agreement except for amendments or modifications to
which the Certificate Insurer has given its prior
written consent. The effect of the Policy is to
guarantee the timely payment of interest on, and
the ultimate payment of the principal amount of,
all of the Certificates.
The "Guaranteed Principal Distribution Amount" for
any Distribution Date shall be the amount by which
the Certificate Principal Balance (after giving
effect to all other amounts distributable and
allocable to principal on the Certificates on such
Distribution Date) exceeds the Invested Amount for
such Distribution Date. In addition, the Policy
will guarantee the payment of the outstanding
Certificate Principal Balance
S-11
<PAGE> 13
on the Distribution Date in , 20
(after giving effect to all other amounts
distributable and allocable to principal on such
Distribution Date).
In accordance with the Agreement, the Trustee will
be required to establish and maintain an account
(the "Spread Account") for the benefit of the
Certificate Insurer and the Certificateholders. The
Trustee shall deposit the amounts into the Spread
Account as required by the Agreement.
In the absence of payments under the Policy,
Certificateholders will directly bear the credit
and other risks associated with their undivided
interest in the Trust Fund. See "Description of the
Certificates -- The Policy" herein.
Overcollateralization
Amount..................... The distribution of Accelerated Principal
Distribution Amounts, if any, to Certificateholders
may result in the Invested Amount being greater
than the Certificate Principal Balance, thereby
creating the Overcollateralization Amount. The
Overcollateralization Amount, if any, will be
available to absorb any Investor Loss Amount not
covered by Investor Interest Collections. Payments
of Accelerated Principal Distribution Amounts are
not covered by the Policy. Any Investor Loss
Amounts not covered by such overcollateralization,
amounts on deposit in the Spread Account or
Investor Interest Collections will be covered by
draws on the Policy to the extent provided therein.
Record Date................ The last day preceding a Distribution Date or, if
the Certificates are no longer Book-Entry
Certificates, the last day of the month preceding a
Distribution Date.
Servicing.................. The Master Servicer will be responsible for
servicing, managing and making collections on the
Mortgage Loans. The Master Servicer will deposit
all collections in respect of the Mortgage Loans
into the Collection Account as described under
"Description of the Certificates -- Payments on
Mortgage Loans; Deposits to Collection Account"
herein. On the third Business Day prior to each
Distribution Date (the "Determination Date"), the
Master Servicer will calculate, and instruct the
Trustee regarding the amounts available to be paid,
as described under "Description of the
Certificates -- Payments on Mortgage Loans;
Deposits to Collection Account" herein, to the
Certificateholders on such Distribution Date. See
"Description of the Certificates -- Distributions
on the Certificates" herein. With respect to each
Collection Period, the Master Servicer will receive
from collections in respect of interest on the
Mortgage Loans, on behalf of itself, a portion of
such collections as a monthly servicing fee (the
"Servicing Fee") in the amount of approximately %
per annum (the "Servicing Fee Rate") on the
aggregate Principal Balances of the Mortgage Loans
as of the first day of each such Collection Period.
See "Description of the Certificates -- Servicing
Compensation and Payment of Expenses" herein. In
certain limited circumstances, the Master Servicer
may resign or be removed, in which event either the
Trustee or a third-party servicer will be appointed
as a successor Master Servicer. See "Description of
the Certificates -- Certain Matters Regarding the
Master Servicer and the Transferor" herein.
S-12
<PAGE> 14
Final Payment of Principal;
Termination.............. The Trust Fund will terminate on the Distribution
Date following the later of (A) payment in full of
all amounts owing to the Certificate Insurer and
(B) the earliest of (i) the Distribution Date on
which the Certificate Principal Balance has been
reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust
Fund, (iii) the optional retransfer to the
Transferor of the Certificates, as described below
and (iv) the Distribution Date in ,
20 . The Certificates will be subject to optional
retransfer to the Transferor on any Distribution
Date after the Certificate Principal Balance is
reduced to an amount less than or equal to $( % of
the Original Certificate Principal Balance) and all
amounts due and owing to the Certificate Insurer
and unreimbursed draws on the Policy, together with
interest thereon, as provided under the Insurance
Agreement, have been paid. The retransfer price
will be equal to the sum of the outstanding
Certificate Principal Balance and accrued and
unpaid interest thereon at the Certificate Rate
through the day preceding the final Distribution
Date. See "Description of the
Certificates -- Termination; Retirement of the
Certificates" herein and "The
Agreements -- Termination; Optional Termination" in
the Prospectus.
In addition, the Trust Fund may be liquidated as a
result of certain events of bankruptcy, insolvency
or receivership relating to the Transferor. See
"Description of the Certificates -- Rapid
Amortization Events" herein.
Trustee.................... [ ], a
(the "Trustee") will act as Trustee on behalf of
the Certificateholders.
Mandatory Retransfer of
Certain Mortgage Loans... The Seller will make certain representations and
warranties in the Agreement with respect to the
Mortgage Loans. If the Seller breaches certain of
its representations and warranties with respect to
any Mortgage Loan and such breach materially and
adversely affects the interests of the
Certificateholders or the Certificate Insurer and
is not cured within the specified period, the
Mortgage Loan will be removed from the Trust Fund
upon the expiration of a specified period from the
date on which the Seller becomes aware or receives
notice of such breach and will be reassigned to the
Seller. See "Description of the Certificates --
Assignment of Mortgage Loans" herein.
Federal Income Tax
Consequences............. Subject to the qualifications set forth in "Federal
Income Tax Consequences" herein, upon the issuance
of the Certificates, special tax counsel to the
Depositor will issue an opinion generally to the
effect that, under existing law, a Certificate will
be treated as a debt instrument for Federal income
tax purposes as of the Closing Date. Under the
Agreement, the Transferor, the Depositor and the
Certificateholders will agree to treat the
Certificates as indebtedness for federal income tax
purposes. Furthermore, ,
special tax counsel to the Depositor will issue an
opinion generally to the effect that the Trust Fund
will not be treated as either an association or a
publicly traded partnership taxable as a
corporation. See "Federal Income Tax Consequences"
herein and in the Prospectus for additional
information concerning the application of federal
income tax laws.
S-13
<PAGE> 15
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 ERISA and the Code,
transactions relating to the purchase, sale and
holding of pass-through certificates underwritten
by such Underwriter such as the Certificates and
the servicing and operation of asset pools,
provided that certain conditions are satisfied.]
Certain classes of Certificates 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."
Legal Investment
Considerations........... The Certificates will not constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"),
because not all of the Mortgages securing the
Mortgage Loans are first mortgages. Accordingly,
many institutions with legal authority to invest in
comparably rated securities based solely on first
mortgages may not be legally authorized to invest
in the Certificates. See "Legal Investment
Considerations" herein and "Legal Investment" in
the Prospectus.
Certificate Rating......... It is a condition to the issuance of the
Certificates that they be rated " " by
and " " by (each
a "Rating Agency"). In general, ratings address
credit risk and do not address the likelihood of
prepayments. See "Ratings" herein and "Risk
Factors -- Ratings are not Recommendations" in the
Prospectus.
Risk Factors............... For a discussion of certain risks associated with
an investment in the Certificates, see "Risk
Factors" on page S-15 herein and on page 17 in the
Prospectus.
S-14
<PAGE> 16
RISK FACTORS
[DESCRIPTION WILL DEPEND ON THE PARTICULARS OF THE MORTGAGE LOANS]
Investors should consider the following risks in connection with the
purchase of Certificates.
Consequences of Owning Book-Entry Certificates. Issuance of the
Certificates in book-entry form may reduce the liquidity of such Certificates in
the secondary trading market since investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates. See
"Description of the Certificates -- Book-Entry Certificates" herein and "Risk
Factors -- Book-Entry Registration May Reduce Liquidity" in the Prospectus.
Since transactions in the Certificates can be effected only through DTC,
CEDEL, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Certificate Owner to pledge a Certificate to persons or
entities that do not participate in the DTC, CEDEL or Euroclear system may be
limited due to lack of a physical certificate representing the Certificates. See
"Description of the Certificates -- Book-Entry Certificates" herein and "Risk
Factors -- Book-Entry Registration May Reduce Liquidity" in the Prospectus.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. Certificate Owners will not be
recognized as Certificateholders as such term is used in the Agreement, and
Certificate Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants. See
"Description of the Certificates -- Book-Entry Certificates" herein and "Risk
Factors -- Book-Entry Registration May Reduce Liquidity" in the Prospectus.
Cash Flow Considerations and Risks. Minimum monthly payments on the
Mortgage Loans will at least equal and may exceed accrued interest. Even
assuming that the Mortgaged Properties provide adequate security for the
Mortgage Loans, substantial delays could be encountered in connection with the
liquidation of Mortgage Loans that are delinquent and resulting shortfalls in
distributions to Certificateholders could occur if the Certificate Insurer were
unable to perform on its obligations under the Policy. Further, liquidation
expenses (such as legal fees, real estate taxes, and maintenance and
preservation expenses) will reduce the proceeds payable to Certificateholders
and thereby reduce the security for the Mortgage Loans. In the event any of the
Mortgaged Properties fail to provide adequate security for the related Mortgage
Loans, Certificateholders could experience a loss if the Certificate Insurer
were unable to perform its obligations under the Policy.
Prepayment Considerations and Risks. Substantially all of the Mortgage
Loans may be prepaid in whole or in part at any time without penalty. Home
equity loans, such as the Mortgage Loans, have been originated in significant
volume only during the past few years and neither the Depositor nor the Master
Servicer is aware of any publicly available studies or statistics on the rate of
prepayment of such loans. Generally, home equity loans are not viewed by
borrowers as permanent financing. Accordingly, the Mortgage Loans may experience
a higher rate of prepayment than traditional loans. The Trust Fund's prepayment
experience may be affected by a wide variety of factors, including general
economic conditions, interest rates, the availability of alternative financing
and homeowner mobility. In addition, substantially all of the Mortgage Loans
contain due-on-sale provisions and the Master Servicer intends to enforce such
provisions unless (i) such enforcement is not permitted by applicable law or
(ii) the Master Servicer, in a manner consistent with reasonable commercial
practice, permits the purchaser of the related Mortgaged Property to assume the
Mortgage Loan. To the extent permitted by applicable law, such assumption will
not release the original borrower from its obligation under any such Mortgage
Loan. See "Description of the Certificates" herein and "Certain Legal Aspects of
Loans -- Due-on-Sale Clauses" in the Prospectus for a description of certain
provisions of the Credit Line Agreements that may affect the prepayment
experience on the Mortgage Loans. The yield to maturity and weighted average
life of the Certificates will be affected primarily by the rate and timing of
prepayments on the Mortgage Loans. Any reinvestment risks resulting from a
faster or slower
S-15
<PAGE> 17
incidence of prepayment of Mortgage Loans will be borne entirely by the
Certificateholders. See "Maturity and Prepayment Considerations" herein and
"Yield and Prepayment Considerations" in the Prospectus.
Certificate Rating. The rating of the Certificates will depend primarily
on an assessment by the Rating Agencies of the Mortgage Loans and upon the
claims-paying ability of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
rating initially given to the Certificates may result in a reduction in the
rating of the Certificates. The rating by the Rating Agencies of the
Certificates is not a recommendation to purchase, hold or sell the Certificates,
inasmuch as such rating does not comment as to the market price or suitability
for a particular investor. There is no assurance that the ratings will remain in
place for any given period of time or that the ratings will not be lowered or
withdrawn by the Rating Agencies. In general, the ratings address credit risk
and do not address the likelihood of prepayments. The ratings of the
Certificates do not address the possibility of the imposition of United States
withholding tax with respect to non-U.S. persons.
Legal Considerations -- Lien Priority. The Mortgage Loans are secured by
mortgages or deeds of trust (which generally are first, second and third
mortgages). With respect to Mortgage Loans that are secured by first mortgages,
the Master Servicer has the power under certain circumstances to consent to a
new mortgage lien on the Mortgaged Property having priority over such Mortgage
Loan. Mortgage Loans secured by second and third mortgages are entitled to
proceeds that remain from the sale of the related Mortgaged Property after any
related senior mortgage loan and prior statutory liens have been satisfied. In
the event that such proceeds are insufficient to satisfy such loans and prior
liens in the aggregate and the Certificate Insurer is unable to perform its
obligations under the Policy, the Certificateholders will bear (i) the risk of
delay in distributions while a deficiency judgment against the borrower is
obtained and (ii) the risk of loss if the deficiency judgment cannot be obtained
or is not realized upon. See "Certain Legal Aspects of Loans" in the Prospectus.
Under the terms of the Agreement, so long as the long-term senior unsecured
debt of the Master Servicer is rated at least " " by and " "
by , the Master Servicer will be entitled to maintain possession of
the documentation relating to each Mortgage Loan sold by it, including the
Credit Line Agreements and the Related Documents or other evidence of
indebtedness signed by the borrower, and the assignments of the related
mortgages to the Trust Fund will not be required to be recorded. Failure to
deliver the Related Documents to the Trustee will have the result in most (if
not all) of the states in which the Related Documents will be held, and failure
to record the assignments of the related mortgages to the Trustee will have the
result in certain states in which the Mortgaged Properties are located, of
making the sale of the Cut-off Date Principal Balances, Additional Balances and
Related Documents potentially ineffective against (i) any creditors of the
[Master Servicer], who may have been fraudulently or inadvertently induced to
rely on the Mortgage Loans as assets of the Master Servicer, or (ii) any
purchaser of a Mortgage Loan who had no notice of the prior conveyance to the
Trust Fund if such purchaser perfects his interest in the Mortgage Loan by
taking possession of the Related Documents or other evidence of indebtedness or
otherwise. In such event, the Trust Fund will be an unsecured creditor of the
[Master Servicer].
BANKRUPTCY AND INSOLVENCY RISKS
The sale of the Mortgage Loans from the Seller to the Depositor pursuant to
the Purchase Agreement will be treated as a sale of the Mortgage Loans. The
Seller will warrant that such transfer is either a sale of its interest in the
Mortgage Loans or a grant of a first priority perfected security interest
therein. However, in the event of an insolvency of the Seller, the receiver of
the Seller may attempt to recharacterize the sale of the Mortgage Loans as a
borrowing by the Seller, secured by a pledge of the applicable Mortgage Loans.
If the receiver decided to challenge such transfer, (i) if the Mortgage Loans
have not been delivered to the Trustee, the interest of the Trust Fund in the
Mortgage Loans will be that of an unperfected security interest and (ii) even if
the Mortgage Loans have been delivered to the Trustee, delays in payments of the
Certificates and reductions in the amounts thereof could occur. The Depositor
will warrant in the Agreement that the transfer of the Mortgage Loans by it to
the Trust Fund is either a valid transfer and assignment of such Mortgage Loans
to the Trust Fund or the grant to the Trust Fund of a security interest in such
Mortgage Loans.
S-16
<PAGE> 18
If a conservator, receiver or trustee were appointed for the Transferor, or
if certain other events relating to the bankruptcy or insolvency of the
Transferor were to occur, Additional Balances would not be sold to the Trust
Fund. In such an event, the Rapid Amortization Period would commence and the
Trustee would attempt to sell the Mortgage Loans (unless Certificateholders
holding Certificates evidencing undivided interests aggregating at least 51% of
the Certificate Principal Balance instruct otherwise), thereby causing early
payment of the Certificate Principal Balance. The net proceeds of such sale will
first be paid to the Certificate Insurer to the extent of unreimbursed draws
under the Policy and other amounts owing to the Certificate Insurer pursuant to
the Insurance Agreement. The Investor Fixed Allocation Percentage of remaining
amounts will be distributed to the Certificateholders and the Policy will cover
any amount by which such remaining net proceeds are insufficient to pay the
Certificate Principal Balance in full.
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
Certificateholders from appointing a successor Master Servicer.
[Geographic Concentration. As of the Cut-off Date, approximately %
(by Cut-off Date Principal Balance) of the Mortgaged Properties are located in
the State of . An overall decline in the residential real
estate market could adversely affect the values of the Mortgaged Properties
securing such Mortgage Loans such that the Principal Balances of the related
Mortgage Loans, together with any primary financing on such Mortgaged
Properties, could equal or exceed the value of such Mortgaged Properties. As the
residential real estate market is influenced by many factors, including the
general condition of the economy and interest rates, no assurances may be given
that the residential real estate market will not weaken. If the
residential real estate market should experience an overall decline in
property values after the dates of origination of the Mortgage Loans, the rates
of losses on the Mortgage Loans would be expected to increase, and could
increase substantially.]
[Master Servicer's Ability to Change the Terms of the Mortgage Loans. The
Master Servicer may agree to changes in the terms of a Credit Line Agreement,
provided that such changes (i) do not adversely affect the interest of the
Certificateholders or the Certificate Insurer, and (ii) are consistent with
prudent business practice. There can be no assurance that changes in applicable
law or the marketplace for home equity loans or prudent business practice will
not result in changes in the terms of the Mortgage Loans. In addition, the
Agreement permits the Master Servicer, within certain limitations described
therein, to increase the Credit Limit of the related Mortgage Loan or reduce the
Margin for such Mortgage Loan. Any such increase in the Credit Line of a
Mortgage Loan would increase the Loan-to-Value Ratio of such Mortgage Loan and,
accordingly, would increase the risk of the Trust Fund's investment in such
Mortgage Loan. In addition, any reduction in the Margin of a Mortgage Loan would
reduce the excess cash flow available to absorb losses.]
Delinquent Mortgage Loans. The Trust Fund will include Mortgage Loans
which are or fewer days delinquent as of the Cut-off Date. The Cut-off Date
Principal Balance of such delinquent Mortgage Loan was $ .
For a discussion of additional risks pertaining to the Certificates, see
"Risk Factors" in the Prospectus.
THE CERTIFICATE INSURER
The following information set forth in this section has been provided by
the Certificate Insurer. Accordingly, neither the Depositor nor the Master
Servicer makes any representation as to the accuracy and completeness of such
information.
[Description of Certificate Insurer]
THE MASTER SERVICER
GENERAL
[The Master Servicer will service the Mortgage Loans in accordance with the
terms set forth in the Agreement. The Master Servicer may perform any of its
obligations under the Agreement through one or
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<PAGE> 19
more subservicers. Notwithstanding any such subservicing arrangement, the Master
Servicer will remain liable for its servicing duties and obligations under the
Agreement as if the Master Servicer alone were servicing the Mortgage Loans. As
of the Closing Date, the Master Servicer will service the Mortgage Loans without
subservicing arrangements.]
THE MASTER SERVICER
[ ] will act as Master Servicer for the Mortgage Loans pursuant to
the Agreement. [Description of Master Servicer]
At , 199 , provided servicing for approximately
$ [million] aggregate principal amount of first-lien mortgage loans,
substantially all of which are being serviced for unaffiliated persons. At
, 199 , provided servicing for approximately $ [million]
aggregate principal amount of first and second lien mortgage loans originated
under home equity lines of credit.
The principal executive offices of the Master Servicer are located at
(telephone ( ) .
THE HOME EQUITY LOAN PROGRAM
UNDERWRITING PROCEDURES RELATING TO HOME EQUITY LOANS
The following is a description of the underwriting procedures customarily
employed by the Seller with respect to home equity loans.
[Each revolving home equity line of credit is originated after a review by
the Seller in accordance with its established underwriting procedures, which are
intended to assess the applicant's ability to assume and repay such home equity
lines of credit and the adequacy of the real property which serves as collateral
for such home equity lines of credit. The maximum home equity line of credit
provided by the Seller is $ .
Each applicant for a home equity line of credit is required to complete an
application which lists the applicant's assets, liabilities, income, credit and
employment history and other demographic and personal information. If
information in the loan application demonstrates that there is sufficient income
and equity to justify making a home equity line of credit, the Seller will
conduct a further credit investigation of the applicant. This investigation
includes (i) obtaining and reviewing an independent credit bureau report on the
credit history of the borrower in order to evaluate the borrower's ability to
repay; (ii) obtaining a verification of employment from the applicant's
employer; (iii) obtaining and reviewing pay stubs, income tax returns and/or W-2
forms in order to verify the applicant's income; and (iv) in the case of all
home equity lines of credit originated with a Credit Limit in excess of
$ or with any Credit Limit, if originated after ,
obtaining a drive-by appraised value (a "Drive-By Appraised Value") of the
property to be mortgaged through an independent frontal exterior inspection and
neighborhood observation (a "Drive-By Appraisal") of the property or, in the
case of home equity lines of credit originated prior to in an
amount of $ or less, making an estimate of the value (the "Estimated
Value") of the property to be mortgaged through, (a) in the case of home equity
lines of credit originated for such properties located in the State of
, the use of a formula that assumed that the then current value
of the property was equal to the amount the applicant paid for the property
together with appreciation of % of the purchase price for each year since the
applicant purchased the property and (b) in the case of home equity lines of
credit originated for such properties located in , a property tax
bill which reflected a 100% assessment on the property.
Although no complete title search of the property to be mortgaged is
required, a bring-down to the date of origination of the home equity lines of
credit of the complete title search obtained by the borrower at the time of his
original purchase of the mortgaged property must be delivered.
The Seller calculates the maximum amount of the loan that the customer may
obtain by taking % (or, in the case of home equity lines of credit originated
prior to , %) of the Drive-By Appraised
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<PAGE> 20
Value or Estimated Value, as the case may be, of the property and subtracting
any outstanding senior mortgage balance. Financial insurance premiums and fees
are not considered in the loan amount when making such computation.
Applications for loans exceeding the maximum amount calculated in the
preceding paragraph require regional manager approval. Overrides of other
criteria may be authorized by branch managers up to their lending limits. Among
the reasons that the Seller grants overrides are the existence of compensating
balances of the borrower in accounts held by the Seller (which balances will not
necessarily be available in the event of a default or delinquency of any
Mortgage Loan in the Pool) and relationships between the borrower and the trust
department of the Seller.
No information is available with respect to the portion of the home equity
lines of credit in the Seller's portfolio as to which overrides of underwriting
criteria were granted.]
SERVICING OF THE MORTGAGE LOANS
[Centralized controls and standards have been established by the Master
Servicer for the servicing and collection of home equity lines of credit.
Servicing includes, but is not limited to, post-origination loan processing,
customer service, remittance processing, collections and liquidations.
The collection process is initiated ten days after the payment due date
with the computer generation of a late notice. To make payment arrangements, a
collector attempts to contact the borrower when the home equity line of credit
is 15 to 30 days past due.
During the period when an account is 45 to 60 days past due, a credit
bureau report is obtained, homeowner's insurance is verified, the status of
senior mortgages and property taxes is checked and a title search and "drive-by"
appraisal are ordered.
If arrangements have not been made to cure the delinquency within 60 days
of the line becoming past due, drawing privileges are cancelled. The line is
referred to outside counsel and is placed on a "non-accrual" status after 90
days of delinquency. All legal expenses are assessed to the account and become
the responsibility of the borrower. When it is determined by the Master Servicer
that there is no possibility of recovery from the mortgaged property or from
other leviable assets or wage attachments, the line is charged-off.
Reinstatement arrangements can be made up until the point of sale. Any
foreclosures initiated on a junior mortgage are subject to the senior mortgage
or mortgages and any outstanding property taxes. If the Servicer purchases the
property through the foreclosure action, the account is transferred to the
Master Servicer's REO Department which is maintained at . The REO
Department is responsible for maintaining and marketing the property.
The Master Servicer may not foreclose on the property securing a junior
mortgage loan unless the Master Servicer forecloses subject to any senior
mortgages, in which case the Master Servicer may pay the entire amount due on
the senior mortgage to the senior mortgagees at or prior to the foreclosure
sale. If a senior mortgage is in default after the Servicer has initiated its
foreclosure action, the Master Servicer may advance funds to keep senior
mortgages current until such time as the Master Servicer satisfies such senior
mortgages. In the event that foreclosure proceedings have been instituted on a
senior mortgage prior to the initiation of the Master Servicer's foreclosure
action, the Master Servicer may either satisfy the senior mortgage at the time
of the foreclosure sale or take other action to protect the Trust Fund's
interest in the related property.]
FORECLOSURE AND DELINQUENCY EXPERIENCE
The following tables set forth the delinquency and loss experience for each
of the periods shown for the Master Servicer's portfolio of home equity lines of
credit. The Master Servicer believes that there have been no material trends or
anomalies in the historical delinquency and loss experience as represented in
the following tables. The information in the tables below has not been adjusted
to eliminate the effect of the growth in the size of the Master Servicer's
portfolio during the periods shown. Accordingly, loss and
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<PAGE> 21
delinquency as percentages of aggregate principal balance of such loans for each
period may be higher than those shown if a group of such loans were artificially
isolated at a point in time and the information showed the activity only in that
isolated group. The data presented in the following tables are for illustrative
purposes only, and there is no assurance that the delinquency and loss
experience of the Mortgage Loans will be similar to that set forth below.
DELINQUENCY STATUS AS OF , 199 *
<TABLE>
<CAPTION>
DOLLARS PERCENT UNITS PERCENT
-------- ------- ------ -------
<S> <C> <C> <C> <C>
Current............................................ $ % %
30-59 days.........................................
60-89 days.........................................
90+ days...........................................
Total.................................... $ 100.00% 100.00%
</TABLE>
- ---------------
* Delinquencies are reported on a contractual basis.
As of , 199 , loans with an aggregate balance of
$ are in bankruptcy and loans with an aggregate balance of
$ are in foreclosure. Of the loans in foreclosure, there will be a
, 199 charge off of $ . [In addition to this charge
off, there is an anticipated charge off of approximately $ which may
also be realized in .]
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The Mortgage Loans were originated pursuant to loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, which are either first or second mortgages or deeds
of trust, on Mortgaged Properties located in states. The Mortgaged Properties
securing the Mortgage Loans consist of residential properties that are one- to
four-family properties. See "-- Mortgage Loan Terms" below.
The Cut-off Date Pool Balance is $ , which is equal to the
aggregate Principal Balances of the Mortgage Loans as of the Cut-off Date. As of
the Cut-off Date, the Mortgage Loans were not more than days delinquent. The
average Cut-off Date Principal Balance was approximately $ , the
minimum Cut-off Date Principal Balance was zero, the maximum Cut-off Date
Principal Balance was $ , the minimum Loan Rate and the maximum Loan
Rate as of the Cut-off Date were % and % per annum, respectively, and the
weighted average Loan Rate as of the Cut-off Date was approximately % per
annum. As of the Cut-off Date, the weighted average Credit Limit Utilization
Rate was approximately %, the minimum Credit Limit Utilization Rate was zero
and the maximum Credit Limit Utilization Rate was 100%. The "Credit Limit
Utilization Rate" is determined by dividing the Cut-off Date Principal Balance
of a Mortgage Loan by the Credit Limit of the related Credit Line Agreement. The
remaining term to scheduled maturity for the Mortgage Loans as of the Cut-off
Date ranged from months to months and the weighted average remaining
term to scheduled maturity was approximately months. As of the Cut-off
Date, the Combined Loan-to-Value Ratio of the Mortgage Loans ranged from % to
% and the weighted average Combined Loan-to-Value Ratio was approximately %.
The Combined Loan-to-Value Ratio for a Mortgage Loan is the ratio (expressed as
a percentage) of (A) the sum of (i) the Credit Limit of the Mortgage Loan and
(ii) any outstanding principal balances of mortgage loans senior to such
Mortgage Loan (calculated at the date of origination of the Mortgage Loan) to
(B) the lesser of (i) the appraised value of the related Mortgaged Property as
set forth in the loan files at such date of origination or (ii) [in the case of
a Mortgaged Property purchased within one year of the origination of the related
Mortgage Loan,] the purchase price of such Mortgaged Property. Credit Limits
under the Mortgage Loans as of the Cut-off Date ranged from $ to
$ and averaged approximately $ . The weighted average second
mortgage ratio (which is the Credit Limit for the related Mortgage Loan,
provided such Mortgage Loan was in the second lien position,
S-20
<PAGE> 22
divided by the sum of such Credit Limit and the outstanding principal balance of
any mortgage loan senior to the related Mortgage Loan) was approximately %.
The weighted average third mortgage ratio (which is the Credit Limit for the
related Mortgage Loan, provided such Mortgage Loan was in the third lien
position, divided by the sum of such Credit Limit and the outstanding principal
balance of any mortgage loan senior to the related Mortgage Loan) was
approximately %. As of the Cut-off Date, approximately % by Cut-off Date
Principal Balance of the Mortgage Loans represented first liens on the related
Mortgaged Properties, approximately % of the Mortgage Loans represented second
liens and approximately % of the Mortgage Loans represented third liens. As of
the Cut-off Date, approximately % of the Mortgage Loans are secured by
Mortgaged Properties which are single-family residences and % were
owner-occupied. As of the Cut-off Date, approximately %, %, %, %, %
and % by Cut-off Date Principal Balance are located in , ,
, , and ], respectively.
MORTGAGE LOAN TERMS
A borrower may access a Mortgage Loan by writing a check in a minimum
amount of [$250]. The Mortgage Loans bear interest at a variable rate which
changes monthly on the first business day of the related month with changes in
the applicable Index Rate. The Mortgage Loans are subject to a maximum per annum
interest rate (the "Maximum Rate") ranging from % to % per annum and subject
to applicable usury limitations. As of the Cut-off Date, the weighted average
Maximum Rate was approximately %. See "Certain Legal Aspects of the
Loans -- Applicability of Usury Laws" in the Prospectus. The daily periodic rate
on the Mortgage Loans (the "Loan Rate") is the sum of the Index Rate plus the
spread (the "Margin") which generally ranges between % and % and had a
weighted average, as of the Cut-off Date, of approximately %, divided by 365
days. The "Index Rate" is based on [the highest "prime rate" published in the
"Money Rates" table of The Wall Street Journal as of the first business day of
each calendar month] [other applicable index].
In general, the home equity loans may be drawn upon for a period (the "Draw
Period") of either five years (which may be extendible for an additional five
years, upon the approval of or three years. Home equity loans
with an initial Draw Period of five years, which constitute approximately % of
the Mortgage Loans by Cut-off Date Principal Balance, are subject to a fifteen
year repayment period (the "Repayment Period") following the end of the Draw
Period during which the outstanding principal balance of the loan will be repaid
in monthly installments equal to 1/180 of the outstanding principal balance as
of the end of the Draw Period. Mortgage Loans with a Draw Period of three years,
which constitute approximately % of the Mortgage Loans by Cut-off Date
Principal Balance, are subject to a ten year Repayment Period following the end
of the Draw Period during which the outstanding principal balance of the loan
will be paid in monthly installments equal to 1/120 of the outstanding principal
balance as of the end of the Draw Period.
The minimum payment due during the Draw Period will be equal to the finance
charges accrued on the outstanding principal balance of the home equity loan
during the related billing period. The minimum payment due during the repayment
period will be equal to the sum of the finance charges accrued on the
outstanding principal balance of the Mortgage Loan during the related billing
period and the principal payment described above.
S-21
<PAGE> 23
Set forth below is a description of certain characteristics of the Mortgage
Loans as of the Cut-off Date:
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
RANGE OF PRINCIPAL BALANCES LOANS BALANCE BALANCE
--------------------------- --------- ------------ ------------
<S> <C> <C> <C>
$ to $ ...................................... $ %
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ and over.........................................
------ ------ ------
Total $ 100.00%
====== ====== ======
</TABLE>
GEOGRAPHIC DISTRIBUTION(1)
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
STATE LOANS BALANCE BALANCE
----- --------- ------------ ------------
<S> <C> <C> <C>
$ %
------ ------ ------
Total.......................................... $ 100.00%
====== ====== ======
</TABLE>
- ---------------
(1) Geographic location is determined by the address of the Mortgaged Property
securing the related Mortgage Loan.
S-22
<PAGE> 24
COMBINED LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF COMBINED MORTGAGE PRINCIPAL PRINCIPAL
LOAN-TO-VALUE RATIOS LOANS BALANCE BALANCE
-------------------- --------- ------------ ------------
<S> <C> <C> <C>
$ to $ ...................................... $ %
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ to $ ......................................
$ and over.........................................
------ ------ ------
Total.......................................... $ 100.00%
====== ====== ======
</TABLE>
- ---------------
(1) The ratio (expressed as a percentage) of (A) the sum of (i) the Credit Limit
of the Mortgage Loans and (ii) any outstanding principal balances of
mortgage loans senior to the Mortgage Loans (calculated at the date of
origination of the Mortgage Loans) to (B) the lesser of (i) the appraised
value of the related Mortgaged Property as set forth in loan files at such
date of origination or (ii) in the case of a Mortgaged Property purchased
within one year of the origination of the related Mortgage Loan, the
purchase price of such Mortgaged Property.
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
PROPERTY TYPE LOANS BALANCE BALANCE
------------- --------- ------------ ------------
<S> <C> <C> <C>
Single Family.................................... $ %
Two- to Four-Family..............................
Condominium......................................
PUD..............................................
------ ------- ------
Total.................................. $ 100.00%
====== ======= ======
</TABLE>
S-23
<PAGE> 25
LIEN PRIORITY
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
LIEN PRIORITY LOANS BALANCE BALANCE
------------- --------- ------------ ------------
<S> <C> <C> <C>
First Lien....................................... $ %
Second Lien......................................
Third Lien.......................................
------ ------- ------
Total.................................. $ 100.00%
====== ======= ======
</TABLE>
LOAN RATES(1)
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
RANGE OF LOAN RATES LOANS BALANCE BALANCE
------------------- --------- ------------ ------------
<S> <C> <C> <C>
$ to $ ........................ $ %
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
------ ------- ------
Total.................................. $ 100.00%
====== ======= ======
</TABLE>
- ---------------
(1) Approximately % of the Mortgage Loans by Cut-Off Date Principal Balance are
subject to an introductory rate of % per annum.
S-24
<PAGE> 26
MARGIN
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
RANGE OF LOAN RATES LOANS BALANCE BALANCE
------------------- --------- ------------ ------------
<S> <C> <C> <C>
$ to $ ........................ $ %
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
------ ------- ------
Total.................................. $ 100.00%
====== ======= ======
</TABLE>
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF CREDIT LIMIT MORTGAGE PRINCIPAL PRINCIPAL
UTILIZATION RATES LOANS BALANCE BALANCE
--------------------- --------- ------------ ------------
<S> <C> <C> <C>
$ to $ ........................ $ %
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
------ ------- ------
Total.................................. $ 100.00%
====== ======= ======
</TABLE>
S-25
<PAGE> 27
CREDIT LIMITS
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
RANGE OF CREDIT LIMITS LOANS BALANCE BALANCE
---------------------- --------- ------------ ------------
<S> <C> <C> <C>
$ to $ ........................ $ %
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ and over..............................
------ ------- ------
Total.................................. $ 100.00%
====== ======= ======
</TABLE>
MAXIMUM RATES
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
MAXIMUM RATES LOANS BALANCE BALANCE
------------- --------- ------------ ------------
<S> <C> <C> <C>
$ ........................ $ %
$ ........................
$ ........................
$ ........................
------- ------- -------
Total.................................. $ 100.00%
======= ======= =======
</TABLE>
S-26
<PAGE> 28
MONTHS REMAINING TO SCHEDULED MATURITY(1)
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF MONTHS MORTGAGE PRINCIPAL PRINCIPAL
REMAINING TO SCHEDULED MATURITY LOANS BALANCE BALANCE
------------------------------- --------- ------------ ------------
<S> <C> <C> <C>
to ............................. $ %
to .............................
to .............................
to .............................
to .............................
to .............................
to .............................
to .............................
to .............................
to .............................
to .............................
------- ------ ------
Total.................................. $ 100.00%
======= ====== ======
</TABLE>
ORIGINATION YEAR
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
ORIGINATION YEAR LOANS BALANCE BALANCE
---------------- --------- ------------ ------------
<S> <C> <C> <C>
$ ........................ $ %
$ ........................
------- ------- -------
Total.................................. $ 100.00%
======= ======= =======
</TABLE>
DELINQUENCY STATUS
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
NUMBER OF DAYS DELINQUENT LOANS BALANCE BALANCE
------------------------- --------- ------------ ------------
<S> <C> <C> <C>
0 to 29......................................... $ %
30 to 59.........................................
60 to 89.........................................
------- ------- -------
Total.................................. $ 100.00%
======= ======= =======
</TABLE>
S-27
<PAGE> 29
MATURITY AND PREPAYMENT CONSIDERATIONS
The Agreement, except as otherwise described herein, provides that the
Certificateholders will be entitled to receive on each Distribution Date
distributions of principal, in the amounts described herein under "Description
of the Certificates -- Distributions on the Certificates," until the Certificate
Principal Balance is reduced to zero. During the Managed Amortization Period,
Certificateholders will receive amounts from Principal Collections based upon
their Fixed Allocation Percentage subject to reduction as described below.
During the Rapid Amortization Period, Certificateholders will receive amounts
from Principal Collections based solely upon their Fixed Allocation Percentage.
Because prior distributions of Principal Collections to Certificateholders serve
to reduce the Investor Floating Allocation Percentage but do not change their
Fixed Allocation Percentage, allocations of Principal Collections based on the
Fixed Allocation Percentage may result in distributions of principal to the
Certificateholders in amounts that are, in most cases, greater relative to the
declining balance of the Mortgage Loans than would be the case if the Investor
Floating Allocation Percentage were used to determine the percentage of
Principal Collections distributed to Certificateholders. This is especially true
during the Rapid Amortization Period when the Certificateholders are entitled to
receive Investor Principal Collections and not a lesser amount. In addition,
Investor Interest Collections may be distributed as principal to
Certificateholders in connection with the Accelerated Principal Distribution
Amount, if any. Moreover, to the extent of losses allocable to the
Certificateholders, Certificateholders may also receive as payment of principal
the amount of such losses either from Investor Interest Collections or, in some
instances, draws under the Policy. The level of losses may therefore affect the
rate of payment of principal on the Certificates.
To the extent obligors make more draws than principal payments, the
Transferor Interest may grow. Because during the Rapid Amortization Period the
Certificateholders share of Principal Collections is based upon its Fixed
Allocation Percentage (without reduction), an increase in the Transferor
Interest due to additional draws may also result in Certificateholders receiving
principal at a greater rate. The Agreement permits the Transferor, at its
option, but subject to the satisfaction of certain conditions specified in the
Agreement, including the conditions described below, to remove certain Mortgage
Loans from the Trust Fund at any time during the life of the Trust Fund, so long
as the Transferor Interest (after giving effect to such removal) is not less
than the Minimum Transferor Interest. Such removals may affect the rate at which
principal is distributed to Certificateholders by reducing the overall Pool
Balance and thus the amount of Principal Collections. See "Description of the
Certificates -- Optional Retransfers of Mortgage Loans to the Transferor"
herein.
All of the Mortgage Loans may be prepaid in full or in part at any time.
[However, Mortgage Loans secured by Mortgaged Properties in California are
subject to an account termination fee equal to the lesser of $350 and six months
interest on the amount prepaid, to the extent the prepaid amount exceeds 20% of
the unpaid principal balance, if the account is terminated on or before its
fifth year anniversary. In addition, Mortgage Loans secured by Mortgaged
Properties in other jurisdictions may be subject to account termination fees to
the extent permitted by law. In general, such account termination fees do not
exceed $350 and do not apply to accounts terminated subsequent to a date
designated in the related Mortgage Note which, depending on the jurisdiction,
ranges between [six months and five years] following origination.] The
prepayment experience with respect to the Mortgage Loans will affect the
weighted average life of the Certificates.
The rate of prepayment on the Mortgage Loans cannot be predicted. Neither
the Depositor nor the Master Servicer is aware of any publicly available studies
or statistics on the rate of prepayment of such Mortgage Loans. Generally, home
equity revolving credit lines are not viewed by borrowers as permanent
financing. Accordingly, the Mortgage Loans may experience a higher rate of
prepayment than traditional first mortgage loans. On the other hand, because the
Mortgage Loans amortize as described under "Description of the Mortgage
Loans -- Mortgage Loan Terms" herein, rates of principal payment on the Mortgage
Loans will generally be slower than those of traditional fully-amortizing first
mortgages in the absence of prepayments on such Mortgage Loans. The prepayment
experience of the Trust Fund with respect to the Mortgage Loans may be affected
by a wide variety of factors, including general economic conditions, prevailing
interest rate levels, the availability of alternative financing, homeowner
mobility, the frequency and amount of any future draws on the Credit Line
Agreements and changes affecting the deductibility for Federal income tax
purposes of
S-28
<PAGE> 30
interest payments on home equity credit lines. Substantially all of the Mortgage
Loans contain "due-on-sale" provisions, and, with respect to the Mortgage Loans,
the Master Servicer intends to enforce such provisions, unless such enforcement
is not permitted by applicable law. The enforcement of a "due-on-sale" provision
will have the same effect as a prepayment of the related Mortgage Loan. See
"Certain Legal Aspects of The Loans -- Due-on-Sale Clauses" in the Prospectus.
The yield to an investor who purchases the Certificates in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Mortgage Loans is actually different than the rate
anticipated by such investor at the time such Certificates were purchased.
Collections on the Mortgage Loans may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for such month or as high as the entire outstanding principal balance
plus accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make scheduled payments. Collections on the Mortgage Loans
may vary due to seasonal purchasing and payment habits of borrowers.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust Fund and it can be expected that a portion of borrowers
will not prepay their Mortgage Loans to any significant degree. See "Yield and
Prepayment Considerations" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The form of the
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus Supplement and the Prospectus is a part. The following is a
description of the material provisions of the Agreement. Wherever particular
sections or defined terms of the Agreement are referred to, such sections or
defined terms are hereby incorporated herein by reference.
GENERAL
The Certificates will be issued in denominations of [$1,000] and multiples
of [$1] in excess thereof and will evidence specified undivided interests in the
Trust Fund. The property of the Trust Fund will consist of, to the extent
provided in the Agreement: (i) each of the Mortgage Loans that from time to time
are subject to the Agreement; (ii) collections on the Mortgage Loans received
after the Cut-off Date (exclusive of payments in respect of accrued interest due
on or prior to the Cut-off Date or due in the month of ); (iii)
Mortgaged Properties relating to the Mortgage Loans that are acquired by
foreclosure or deed in lieu of foreclosure; (iv) the Collection Account and the
Security Account for the Certificates (excluding net earnings thereon); (v) the
Policy; (vi) the Spread Account (for the benefit of the Certificate Insurer and
the Certificateholders); and (vii) an assignment of the Depositor's rights under
the Purchase Agreement. Definitive Certificates (as defined below), if issued,
will be transferable and exchangeable at the corporate trust office of the
Trustee, which will initially maintain the Security Register for the
Certificates. See "-- Book-Entry Certificates" below. No service charge will be
made for any registration of exchange or transfer of Certificates, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
The aggregate undivided interest in the Trust Fund represented by the
Certificates as of the Closing Date will equal $ (the "Original
Invested Amount"), which represents % of the Cut-off Date Pool Balance. The
"Original Certificate Principal Balance" will equal $ . Following the
Closing Date, the "Invested Amount" with respect to any Distribution Date will
be an amount equal to the Original Invested Amount minus (i) the amount of
Investor Principal Collections previously distributed to Certificateholders, and
minus (ii) an amount equal to the product of the Investor Floating Allocation
Percentage and the Liquidation Loss Amounts (each as defined herein). The
principal amount of the outstanding Certificates (the "Certificate Principal
Balance") on any Distribution Date is equal to the Original Certificate
Principal Balance minus the aggregate of amounts actually distributed as
principal to the Certificateholders. See
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"-- Distributions on the Certificates" below. Each Certificate represents the
right to receive payments of interest at the Certificate Rate and payments of
principal as described below.
The Transferor will own the remaining undivided interest in the Mortgage
Loans (the "Transferor Interest"), which is equal to the Pool Balance less the
Invested Amount. The Transferor Interest will initially equal $ , which
represents % of the Cut-off Date Pool Balance. The Transferor as of any
date is the owner of the Transferor Interest which initially will be the Seller.
In general, the Pool Balance will vary each day as principal is paid on the
Mortgage Loans, liquidation losses are incurred, Additional Balances are drawn
down by borrowers and Mortgage Loans are transferred to the Trust Fund.
The Transferor has the right to sell or pledge the Transferor Interest at
any time, provided (i) the Rating Agencies (as defined herein) have notified the
Transferor and the Trustee in writing that such action will not result in the
reduction or withdrawal of the ratings assigned to the Certificates, and (ii)
certain other conditions specified in the Agreement are satisfied.
BOOK-ENTRY CERTIFICATES
The Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the
Certificates ("Certificate Owners") may elect to hold their 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 the Certificates and will initially be registered
in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in CEDEL's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depositary for CEDEL and 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 Certificate
Principal Balances of [$1,000] and in multiples of [$1] in excess thereof.
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 Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Certificates will be Cede & Co., as nominee of DTC.
Certificate Owners will not be Certificateholders as that term is used in the
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.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of CEDEL or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and DTC participants.
While the Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants and organizations that have indirect access
to the DTC system, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants") with whom Certificate Owners
have accounts with respect to Certificates are similarly required to make
book-entry transfers and
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receive and transmit such distributions on behalf of their respective
Certificate Owners. Accordingly, although Certificate Owners will not possess
certificates, the Rules provide a mechanism by which Certificate Owners will
receive distributions and will be able to transfer their interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below. Unless and until Definitive Certificates
are issued, Certificate Owners who are not Participants may transfer ownership
of Certificates only through Participants and Indirect Participants by
instructing such Participants and Indirect Participants to transfer
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Certificates, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Certificates will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and Indirect Participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Certificate Owners.
Because of time zone differences, credits of securities received in CEDEL,
or Euroclear as a result of a transaction with a Participant will be made
during, subsequent securities settlement processing and dated the business day
following, the DTC settlement date. Such credits or any transactions in such
securities, settled during such processing will be reported to the relevant
Euroclear or, CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as, a result of sales of securities by or through a CEDEL Participant
(as defined, below) or Euroclear Participant (as defined below) to a DTC
Participant will be, received with value on the DTC settlement date but will be
available in the, relevant CEDEL or Euroclear cash account only as of the
business day following, settlement in DTC. For information with respect to tax
documentation procedures, relating to the Certificates, see "Federal Income Tax
Consequences -- Foreign Investors" and "-- Backup Withholding" herein and
"Global, Clearance, Settlement And Tax Documentation Procedures -- Certain U.S.
Federal, Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
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
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and settlement of internationally traded securities and securities lending and
borrowing. CEDEL interfaces with domestic markets in several countries. As a
professional depository, CEDEL is subject to regulation by the Luxembourg
Monetary Institute. CEDEL participants are recognized financial institutions
around the world, including underwriters, securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Indirect
access to CEDEL is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 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 (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through CEDEL or Euroclear will be credited to the cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Federal Income Tax
Consequences -- Foreign Investors" and "-- Backup Withholding" herein. Because
DTC can only act on behalf of Financial Intermediaries, the ability of a
beneficial owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of
physical certificates for such Book-Entry Certificates. In addition, issuance
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of the Book-Entry Certificates in book-entry form may reduce the liquidity of
such Certificates in the secondary market since certain potential investors may
be unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust Fund provided by the Master
Servicer to CEDE, as nominee of DTC, may be made available to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such beneficial owners are credited.
DTC has advised the Transferor and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Certificates under the Agreement only at
the direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Certificateholder 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
Certificates which conflict with actions taken with respect to other
Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Transferor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Transferor or the
Trustee is unable to locate a qualified successor, (b) the Transferor, at its
sole option, elects to terminate a book-entry system through DTC or (c) after
the occurrence of an Event of Servicing Termination (as defined herein),
beneficial owners having Percentage Interests aggregating not less than 51% of
the Certificate Principal Balance of the Book-Entry Certificates advise the
Trustee and DTC through the Financial Intermediaries and the DTC 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
Certificateholders under the Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Depositor will transfer to
the Trust Fund all of its right, title and interest in and to each Mortgage Loan
(including any Additional Balances arising in the future), related Credit Line
Agreements, mortgages and other related documents (collectively, the "Related
Documents"), including all collections received on or with respect to each such
Mortgage Loan after the Cut-off Date (exclusive of payments in respect of
accrued interest due on or prior to the Cut-off Date or due in the month of
). The Trustee, concurrently with such transfer, will deliver the
Certificates to the Depositor and the Transferor Certificate (as defined in the
Agreement) to the Transferor. Each Mortgage Loan transferred to the Trust Fund
will be identified on a schedule (the "Mortgage Loan Schedule") delivered to the
Trustee pursuant to the Agreement. Such schedule will include information as to
the Cut-off Date Principal Balance of each Mortgage Loan, as well as information
with respect to the Loan Rate.
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The Agreement will permit the Seller to maintain possession of the Related
Documents and certain other documents relating to the Mortgage Loans (the
"Mortgage Files") and assignments of the Mortgage Loans to the Trustee will not
be required to be recorded for so long as the long-term senior unsecured debt of
is rated at least " " by and " " by . In the event
that the long-term senior unsecured debt rating of does not
satisfy the above-described standards (an "Assignment Event"),
will have 90 days to record assignments of the mortgages for each such Mortgage
Loan in favor of the Trustee and 60 days to deliver the Mortgage Files
pertaining to each such Mortgage Loan to the Trustee (unless opinions of counsel
satisfactory to the Rating Agencies and the Certificate Insurer to the effect
that recordation of such assignments or delivery of such documentation is not
required in the relevant jurisdiction to protect the interest of and the Trustee
in the Mortgage Loans).
Within [90] days of an Assignment Event, the Trustee will review the
Mortgage Loans and the Related Documents and if any Mortgage Loan or Related
Document is found to be defective in any material respect and such defect is not
cured within [90] days following notification thereof to the Seller and the
Depositor by the Trustee, the Seller will be obligated to accept the transfer of
such Mortgage Loan from the Trust Fund. Upon such transfer, the Principal
Balance of such Mortgage Loan will be deducted from the Pool Balance, thus
reducing the amount of the Transferor Interest. If the deduction would cause the
Transferor Interest to become less than the Minimum Transferor Interest at such
time (a "Transfer Deficiency"), the Seller will be obligated to either
substitute an Eligible Substitute Mortgage Loan or make a deposit into the
Collection Account in the amount (the "Transfer Deposit Amount") equal to the
amount by which the Transferor Interest would be reduced to less than the
Minimum Transferor Interest at such time. Any such deduction, substitution or
deposit, will be considered a payment in full of such Mortgage Loan. Any
Transfer Deposit Amount will be treated as a Principal Collection.
Notwithstanding the foregoing, however, prior to all required deposits to the
Collection Account being made no such transfer shall be considered to have
occurred unless such deposit is actually made. The obligation of the Seller to
accept a transfer of a Defective Mortgage Loan is the sole remedy regarding any
defects in the Mortgage Loans and Related Documents available to the Trustee or
the Certificateholders.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Depositor for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not % more or less than the Transfer Deficiency
relating to such Defective Mortgage Loan; (ii) have a Loan Rate not less than
the Loan Rate of the Defective Mortgage Loan and not more than % in excess of
the Loan Rate of such Defective Mortgage Loan; [(iii) have a Loan Rate based on
the same Index with adjustments to such Loan Rate made on the same Interest Rate
Adjustment Date as that of the Defective Mortgage Loan; (iv) have a Margin that
is not less than the Margin of the Defective Mortgage Loan and not more than
basis points higher than the Margin for the Defective Mortgage Loan;] (v) have a
mortgage of the same or higher level of priority as the mortgage relating to the
Defective Mortgage Loan; (vi) have a remaining term to maturity not more than
months earlier and not more than months later than the remaining term to
maturity of the Defective Mortgage Loan; (vii) comply with each representation
and warranty as to the Mortgage Loans set forth in the Agreement (deemed to be
made as of the date of substitution); (viii) in general, have an original
Combined Loan-to-Value Ratio not greater than that of the Defective Mortgage
Loan; and (ix) satisfy certain other conditions specified in the Agreement. To
the extent the Principal Balance of an Eligible Substitute Mortgage Loan is less
than the Principal Balance of the related Defective Mortgage Loan and to the
extent that the Transferor Interest would be reduced below the Minimum
Transferor Interest, the Seller will be required to make a deposit to the
Collection Account equal to such difference.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant on the
Closing Date that at the time of transfer to the Depositor, the Seller has
transferred or assigned all of its rights, title and interest in each Mortgage
Loan and the Related Documents, free of any lien (subject to certain
exceptions). Upon discovery of a breach of any such representation and warranty
which materially and adversely affects the interests of the
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Certificateholders or the Certificate Insurer in the related Mortgage Loan and
Related Documents, the Seller will have a period of [90] days after discovery or
notice of the breach to effect a cure. If the breach cannot be cured within the
[90-day] period, the Seller will be obligated to accept a transfer of the
Defective Mortgage Loan from the Trust Fund. The same procedure and limitations
that are set forth in the second preceding paragraph for the transfer of
Defective Mortgage Loans will apply to the transfer of a Mortgage Loan that is
required to be transferred because of such breach of a representation or
warranty in the Agreement that materially and adversely affects the interests of
the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
AMENDMENTS TO CREDIT LINE AGREEMENTS
Subject to applicable law, the Master Servicer may change the terms of the
Credit Line Agreements at any time provided that such changes (i) do not
adversely affect the interest of the Certificateholders or the Certificate
Insurer, and (ii) are consistent with prudent business practice. In addition,
the Agreement permits the Master Servicer, within certain limitations described
therein, to increase the Credit Limit of the related Mortgage Loan or reduce the
Margin for such Mortgage Loan.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
In order to permit the Transferor to remove Mortgage Loans from the Trust
Fund at such times, if any, as the overcollateralization exceeds the level
required to maintain the ratings on the Certificates, on any Distribution Date
the Transferor may, but shall not be obligated to, remove on such Distribution
Date (the "Transfer Date") from the Trust Fund, certain Mortgage Loans without
notice to the Certificateholders. The Transferor is permitted to designate the
Mortgage Loans to be removed. Mortgage Loans so designated will only be removed
upon satisfaction of the following conditions: (i) no Rapid Amortization Event
(as defined herein) has occurred; (ii) the Transferor Interest as of such
Transfer Date (after giving effect to such removal) exceeds the Minimum
Transferor Interest; (iii) the transfer of any Mortgage Loans on any Transfer
Date during the Managed Amortization Period (as defined herein) shall not, in
the reasonable belief of the Transferor, cause a Rapid Amortization Event to
occur or an event which with notice or lapse of time or both would constitute a
Rapid Amortization Event; (iv) the Transferor shall have delivered to the
Trustee a "Mortgage Loan Schedule" containing a list of all Mortgage Loans
remaining in the Trust Funds after such removal; (v) the Transferor shall
represent and warrant that no selection procedures which the Transferor
reasonably believes are adverse to the interests of the Certificateholders or
the Certificate Insurer were used by the Transferor in selecting such Mortgage
Loans; (vi) in connection with the first such retransfer of Mortgage Loans, the
Rating Agencies shall have been notified of the proposed transfer and prior to
the Transfer Date shall not have notified the Transferor in writing that such
transfer would result in a reduction or withdrawal of the ratings assigned to
the Certificates without regard to the Policy; and (vii) the Transferor shall
have delivered to the Trustee and the Certificate Insurer an officer's
certificate confirming the conditions set forth in clauses (i) through (vi)
above.
As of any date of determination, the "Minimum Transferor Interest" is an
amount equal to the lesser of (a) % of the Pool Balance on such date and (b)
the Transferor Interest as of the Closing Date.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT
The Trustee shall establish and maintain on behalf of the Master Servicer
an account (the "Collection Account") for the benefit of the Certificateholders
and the Transferor, as their interests may appear. The Collection Account will
be an Eligible Account (as defined herein). Subject to the investment provision
described in the following paragraphs, within two days of receipt by the Master
Servicer of amounts in respect of the Mortgage Loans (excluding amounts
representing administrative charges, annual fees, taxes, assessments, credit
insurance charges, insurance proceeds to be applied to the restoration or repair
of a Mortgaged Property or similar items), the Master Servicer will deposit such
amounts in the Collection Account. Amounts so deposited may be invested in
Eligible Investments (as described in the Agreement) maturing no later than
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one Business Day prior to the date on which the amount on deposit therein is
required to be deposited in the Collection Account or on such Distribution Date
if approved by the Rating Agencies and the Certificate Insurer. Not later than
the third Business Day prior to each Distribution Date (the "Determination
Date"), the Master Servicer will notify the Trustee of the amount of such
deposit to be included in funds available for the related Distribution Date.
An "Eligible Account" is (i) an account that is maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the highest short-term debt rating by the Rating Agencies, (ii) one or more
accounts with a depository institution having a minimum long-term unsecured debt
rating of " " by and " " by , 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
established by such fund, (iii) a segregated trust account maintained with the
Trustee or an Affiliate of the Trustee in its fiduciary capacity or (iv)
otherwise acceptable to each Rating Agency and the Certificate Insurer as
evidenced by a letter from each Rating Agency and the Certificate Insurer to the
Trustee, without reduction or withdrawal of their then current ratings of the
Certificates.
Eligible Investments are specified in the Agreement and are limited to (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 Certificates, or such lower rating as will not
result in the downgrading or withdrawal of the ratings then assigned to the
Certificates 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 the Certificates
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 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 the
Certificates 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 the Certificates 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 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 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 the rating then assigned to the Certificates by any such Rating
Agency, as evidenced by a signed writing delivered by each such Rating Agency;
and (viii) such other investments having a specified stated maturity and bearing
interest or sold at a discount acceptable to each Rating Agency as will not
result in the downgrading or withdrawal of the rating then assigned to the
Certificates by any such Rating Agency, as evidenced by a signed writing
delivered 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.
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ALLOCATIONS AND COLLECTIONS
All collections on the Mortgage Loans will generally be allocated in with
the Credit Line Agreements between amounts collected in respect of interest and
amounts collected in respect of principal. As to any Distribution Date,
"Interest Collections" will be equal to the amounts collected during the related
Collection Period, including such portion of Net Liquidation Proceeds allocated
to interest pursuant to the terms of the Credit Line Agreements less Servicing
Fees for the related Collection Period.
As to any Distribution Date, "Principal Collections" will be equal to the
sum of (i) the amounts collected during the related Collection Period, including
such portion of Net Liquidation Proceeds allocated to principal pursuant to the
terms of the Credit Line Agreements and (ii) any Transfer Deposit Amounts. "Net
Liquidation Proceeds" with respect to a Mortgage Loan are equal to the
Liquidation Proceeds, reduced by related expenses, but not including the
portion, if any, of such amount that exceeds the Principal Balance of the
Mortgage Loan plus accrued and unpaid interest thereon to the end of the
Collection Period during which such Mortgage Loan became a Liquidated Mortgage
Loan. "Liquidation Proceeds" are the proceeds (excluding any amounts drawn on
the Policy) received in connection with the liquidation of any Mortgage Loan,
whether through trustee's sale, foreclosure sale or otherwise.
With respect to any Distribution Date, the portion of Interest Collections
allocable to the Certificates ("Investor Interest Collections") will equal the
product of (a) Interest Collections for such Distribution Date and (b) the
Investor Floating Allocation Percentage. With respect to any Distribution Date,
the "Investor Floating Allocation Percentage" is the percentage equivalent of a
fraction determined by dividing the Invested Amount at the close of business on
the preceding Distribution Date (or the Closing Date in the case of the first
Distribution Date) by the Pool Balance at the beginning of the related
Collection Period. The remaining amount of Interest Collections will be
allocated to the Transferor Interest.
Principal Collections will be allocated between the Certificateholders and
the Transferor ("Investor Principal Collections" and "Transferor Principal
Collections", respectively) as described herein.
The Trustee will deposit any amounts drawn under the Policy into the
Collection Account.
With respect to any date, the "Pool Balance" will be equal to the aggregate
of the Principal Balances of all Mortgage Loans as of such date. The Principal
Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on any day is
equal to the Cut-off Date Principal Balance thereof, plus (i) any Additional
Balances in respect of such Mortgage Loan minus (ii) all collections credited
against the Principal Balance of such Mortgage Loan in accordance with the
related Credit Line Agreement prior to such day. The Principal Balance of a
Liquidated Mortgage Loan after final recovery of related Liquidation Proceeds
shall be zero.
DISTRIBUTIONS ON THE CERTIFICATES
Beginning with the first Distribution Date (which will occur on ,
199 ), distributions on the Certificates will be made by the Trustee or the
Paying Agent on each Distribution Date to the persons in whose names such
Certificates are registered at the close of business on the day prior to each
Distribution Date or, if the Certificates are no longer Book-Entry Certificates,
at the close of business on the last day of the month preceding such
Distribution Date (the "Record Date"). The term "Distribution Date" means the
fifteenth day of each month or, if such day is not a Business Day, then the next
succeeding Business Day. Distributions will be made by check or money order
mailed (or upon the request of a Certificateholder owning Certificates having
denominations aggregating at least $ , by wire transfer or otherwise)
to the address of the person entitled thereto (which, in the case of Book-Entry
Certificates, will be DTC or its nominee) as it appears on the Certificate
Register in amounts calculated as described herein on the Determination Date.
However, the final distribution in respect of the Certificates will be made only
upon presentation and surrender thereof at the office or the agency of the
Trustee specified in the notice to Certificateholders of such final
distribution. For purposes of the Agreement, a "Business Day" is any day other
than (i) a Saturday or Sunday or (ii) a day on which banking institutions in New
York State are required or authorized by law to be closed.
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Application of Interest Collections. On each Distribution Date, the
Trustee or the Paying Agent will apply the Investor Interest Collections in the
following manner and order of priority:
(i) as payment to the Trustee for its fee for services rendered
pursuant to the Agreement;
(ii) as payment for the premium for the Policy;
(iii) as payment for the accrued interest due and any overdue accrued
interest (with interest thereon to the extent permitted by law) on the
Certificate Principal Balance of the Certificates;
(iv) to pay Certificateholders the Investor Loss Amount for such
Distribution Date;
(v) as payment for any Investor Loss Amount for a previous
Distribution Date that was not previously (a) funded by Investor Interest
Collections, (b) absorbed by the Overcollateralization Amount, (c) funded
by amounts on deposit in the Spread Account or (d) funded by draws on the
Policy;
(vi) to reimburse prior draws made from the Policy (with interest
thereon);
(vii) to pay principal on the Certificates until the Invested Amount
exceeds the Certificate Principal Balance by the Required
Overcollateralization Amount (such amount so paid, the "Accelerated
Principal Distribution Amount");
(viii) to deposit any other amounts required to be deposited in an
account for the benefit of the Certificate Insurer and the
Certificateholders or owed to the Certificate Insurer pursuant to the
Insurance Agreement;
(ix) to pay certain amounts that may be required to be paid to the
Master Servicer pursuant to the Agreement; and
(x) to the Transferor to the extent permitted as described herein.
Payments to Certificateholders pursuant to clause (iii) will be interest
payments on the Certificates. Payments to Certificateholders pursuant to clauses
(iv), (v) and (vii) will be principal payments on the Certificates and will
therefore reduce the Certificate Principal Balance, however, payments pursuant
to clause (vii) will not reduce the Invested Amount. The Accelerated Principal
Distribution Amount is not guaranteed by the Policy.
To the extent that Investor Interest Collections are applied to pay the
interest on the Certificates, Investor Interest Collections may be insufficient
to cover Investor Loss Amounts. If such insufficiency results in the Certificate
Principal Balance exceeding the Invested Amount, a draw will be made on the
Policy in accordance with the terms of the Policy.
The "Required Overcollateralization Amount" shall be an amount set forth in
the Agreement. "Liquidation Loss Amount" means with respect to any Liquidated
Mortgage Loan, the unrecovered Principal Balance thereof during the Collection
Period in which such Mortgage Loan became a Liquidated Mortgage Loan, after
giving effect to the Net Liquidation Proceeds in connection therewith. The
"Investor Loss Amount" shall be the product of the Investor Floating Allocation
Percentage and the Liquidation Loss Amount for such Distribution Date.
A "Liquidated Mortgage Loan" means, as to any Distribution Date, any
Mortgage Loan in respect of which the Master Servicer has determined, based on
the servicing procedures specified in the Agreement, as of the end of the
preceding Collection Period that all Liquidation Proceeds which it expects to
recover with respect to the disposition of the related Mortgaged Property have
been recovered. The Investor Loss Amount will be allocated to the
Certificateholders.
As to any Distribution Date other than the first Distribution Date, the
"Collection Period" is the calendar month preceding each Distribution Date. As
to the first Distribution Date, the "Collection Period" is the period beginning
after the Cut-off Date and ending on the last day of 199 .
Interest will be distributed on each Distribution Date at the Certificate
Rate for the related Interest Period (as defined below). The "Certificate Rate"
for a Distribution Date will generally equal the sum of
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[(a) LIBOR, calculated as specified below, as of the second LIBOR Business Day
prior to the immediately preceding Distribution Date (or as of two LIBOR
Business Days prior to the Closing Date, in the case of the first Distribution
Date) plus (b) % per annum.] Notwithstanding the foregoing, in no event will
the amount of interest required to be distributed in respect of the Certificates
on any Distribution Date exceed a rate equal to the weighted average of the Loan
Rates (net of the Servicing Fee Rate, the fee payable to the Trustee and the
rate at which the premium payable to the Certificate Insurer is calculated)
weighted on the basis of the daily balance of each Mortgage Loan during the
related billing cycle prior to the Collection Period relating to such
Distribution Date.
[Interest on the Certificates in respect of any Distribution Date will
accrue on the Certificate Principal Balance from the preceding Distribution Date
(or in the case of the first Distribution Date, from the date of the initial
issuance of the Certificates (the "Closing Date")) through the day preceding
such Distribution Date (each such period, an "Interest Period") on the basis of
the actual number of days in the Interest Period and 360-day year.] Interest
payments on the Certificates will be funded from Investor Interest Collections
and, if necessary, from draws on the Policy.
[Calculation of the LIBOR Rate. On each Distribution Date, LIBOR shall be
established by the Trustee and as to any Interest Period, LIBOR will equal the
rate for United States dollar deposits for [one month] which appears on the
Telerate Screen Page 3750 as of 11:00 A.M., London time, on the second LIBOR
Business Day prior to the first day of such Interest Period. "Telerate Screen
Page 3750" means the display designated as page 3750 on the Telerate Service (or
such other page as may replace page 3750 on that service for the purpose of
displaying London interbank offered rates of major banks). If such rate does not
appear on such page (or such other page as may replace that page on that
service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be selected by the Depositor after
consultation with the Trustee), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
[three] major banks that are engaged in transactions in the London interbank
market, selected by the Depositor after consultation with the Trustee) as of
11:00 A.M., London time, on the day that is two LIBOR Business Days prior to the
immediately preceding Distribution Date to prime banks in the London interbank
market for a period of one month in amounts approximately equal to the principal
amount of the Certificates then outstanding. The Trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If at least two such quotations are provided, the rate will be the
arithmetic mean of the quotations. If on such date fewer than two quotations are
provided as requested, the rate will be the arithmetic mean of the rates quoted
by one or more major banks in New York City, selected by the Depositor after
consultation with the Trustee, as of 11:00 A.M., New York City time, on such
date for loans in U.S. Dollars to leading European banks for a period of one
month in amounts approximately equal to the principal amount of the Certificates
then outstanding. If no such quotations can be obtained, the rate will be LIBOR
for the prior Distribution Date. "LIBOR Business Day" means any day other than
(i) a Saturday or a Sunday or (ii) a day on which banking institutions in the
State of New York or in the city of London, England are required or authorized
by law to be closed.]
Transferor Collections. Collections allocable to the Transferor Interest
that are not distributed to Certificateholders will be distributed to the
Transferor only to the extent that such distribution will not reduce the amount
of the Transferor Interest as of the related Distribution Date below the Minimum
Transferor Interest. Amounts not distributed to the Transferor because of such
limitations will be retained in the Collection Account until the Transferor
Interest exceeds the Minimum Transferor Interest, at which time such excess
shall be released to the Transferor. If any such amounts are still retained in
the Collection Account upon the commencement of the Rapid Amortization Period,
such amounts will be paid to the Certificateholders as a reduction of the
Certificate Principal Balance.
Overcollateralization. The distribution of the aggregate Accelerated
Principal Distribution Amount, if any, to Certificateholders may result in the
Invested Amount being greater than the Certificate Principal Balance, thereby
creating overcollateralization. The Overcollateralization Amount, if any, will
be available to absorb any Investor Loss Amount that is not covered by Investor
Interest Collections.
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Distributions of Principal Collections. For the period beginning on the
first Distribution Date and, unless a Rapid Amortization Event shall have
earlier occurred, ending on the Distribution Date in 20 (the
"Managed Amortization Period"), the amount of Principal Collections payable to
Certificateholders as of each Distribution Date during the Managed Amortization
Period will equal, to the extent funds are available therefor, the Scheduled
Principal Collections Distribution Amount for such Distribution Date. On any
Distribution Date during the Managed Amortization Period, the "Scheduled
Principal Collections Distribution Amount" shall equal the lesser of (i) the
Maximum Principal Payment (as defined herein) and (ii) the Alternative Principal
Payment (as defined herein). With respect to any Distribution Date, the "Maximum
Principal Payment" will equal the product of the Investor Fixed Allocation
Percentage and Principal Collections for such Distribution Date. With respect to
any Distribution Date, the "Alternative Principal Payment" will equal the
greater of (x) % of the Certificate Principal Balance immediately prior to
such Distribution Date and (y) the amount, but not less than zero, of Principal
Collections for such Distribution Date less the aggregate of Additional Balances
created during the related Collection Period.
Beginning with the first Distribution Date following the end of the Managed
Amortization Period, the amount of Principal Collections payable to
Certificateholders on each Distribution Date will be equal to the Maximum
Principal Payment.
The amount of Principal Collections to be distributed to Certificateholders
on the first Distribution Date will reflect Principal Collections and Additional
Balances during the first Collection Period which is the period beginning after
the Cut-off Date through the last day of 199 .
Distributions of Principal Collections based upon the Investor Fixed
Allocation Percentage may result in distributions of principal to
Certificateholders in amounts that are greater relative to the declining Pool
Balance than would be the case if the Investor Floating Allocation Percentage
were used to determine the percentage of Principal Collections distributed in
respect of the Invested Amount. Principal Collections not allocated to the
Certificateholders will be allocated to the Transferor Interest. The aggregate
distributions of principal to the Certificateholders will not exceed the
Original Certificate Principal Balance.
In addition, to the extent of funds available therefor (including funds
available under the Policy), on the Distribution Date in 20 ,
Certificateholders will be entitled to receive as a payment of principal an
amount equal to the outstanding Certificate Principal Balance.
The Paying Agent. The Paying Agent shall initially be the Trustee,
together with any successor thereto in such capacity (the "Paying Agent"). The
Paying Agent shall have the revocable power to withdraw funds from the
Collection Account for the purpose of making distributions to the
Certificateholders.
RAPID AMORTIZATION EVENTS
As described above, the Managed Amortization Period will continue through
the Distribution Date in 20 , unless a Rapid Amortization Event
occurs prior to such date in which case the Rapid Amortization Period will
commence prior to such date. "Rapid Amortization Event" refers to any of the
following events:
(a) failure on the part of the Seller (i) to make a payment or deposit
required under the Agreement within three Business Days after the date such
payment or deposit is required to be made or (ii) to observe or perform in
any material respect any other covenants or agreements of the Seller set
forth in the Purchase Agreement, which failure continues unremedied for a
period of 60 days after written notice;
(b) any representation or warranty made by the Seller in the Purchase
Agreement proves to have been incorrect in any material respect when made
and continues to be incorrect in any material respect for a period of 60
days after written notice and as a result of which the interests of the
Certificate holders are materially and adversely affected; provided,
however, that a Rapid Amortization Event shall not be deemed to occur if
the Seller has purchased or made a substitution for the related Mortgage
Loan or Mortgage Loans if applicable during such period (or within an
additional 60 days with the consent of the Trustee) in accordance with the
provisions of the Agreement;
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(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the Transferor; or
(d) the Trust Fund becomes subject to regulation by the Securities and
Exchange Commission as an investment company within the meaning of the
Investment Company Act of 1940, as amended.
In the case of any event described in clause (a) or (b), a Rapid
Amortization Event will be deemed to have occurred only if, after the applicable
grace period, if any, described in such clauses, either the Trustee or
Certificateholders holding Certificates evidencing more than 51% of the
Percentage Interests or the Certificate Insurer (so long as there is no default
by the Certificate Insurer in the performance of its obligations under the
Policy), by written notice to the Depositor and the Master Servicer (and to the
Trustee, if given by the Certificateholders) declare that a Rapid Amortization
Event has occurred as of the date of such notice. In the case of any event
described in clause (c) or (d), a Rapid Amortization Event will be deemed to
have occurred without any notice or other action on the part of the Trustee or
the Certificateholders immediately upon the occurrence of such event.
In addition to the consequences of a Rapid Amortization Event discussed
above, if the Transferor voluntarily files a bankruptcy petition or goes into
liquidation or any person is appointed a receiver or bankruptcy trustee of the
Transferor, on the day of any such filing or appointment no further Additional
Balances will be transferred to the Trust, the Transferor will immediately cease
to transfer Additional Balances to the Trust Fund and the Transferor will
promptly give notice to the Trustee of any such filing or appointment. Within 15
days, the Trustee will publish a notice of the liquidation or the filing or
appointment stating that the Trustee intends to sell, dispose of or otherwise
liquidate the Mortgage Loans in a commercially reasonable manner and to the best
of its ability. Unless otherwise instructed within a specified period by
Certificateholders representing undivided interests aggregating more than 51% of
the aggregate principal amount of the Certificates, the Trustee will sell,
dispose of or otherwise liquidate the Mortgage Loans in a commercially
reasonable manner and on commercially reasonable terms. Any proceeds will be
treated as collections allocable to the Certificateholders and the Investor
Fixed Allocation Percentage of such remaining proceeds and will be distributed
to the Certificateholders on the date such proceeds are received (the
"Dissolution Distribution Date"). If the portion of such proceeds allocable to
the Certificateholders are not sufficient to pay in full the remaining amount
due on the Certificates, the Policy will cover such shortfall.
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Transferor and no Rapid Amortization
Event exists other than such conservatorship, receivership or insolvency of the
Transferor, the conservator, receiver or trustee-in-bankruptcy may have the
power to prevent the commencement of the Rapid Amortization Period or the sale
of Mortgage Loans described above.
THE POLICY
[On or before the Closing Date, the Policy will be issued by the
Certificate Insurer pursuant to the provisions of the Agreement and the
Insurance and Indemnity Agreement (the "Insurance Agreement") to be dated as of
, 199 , among the Seller, the Depositor, the Master Servicer and
the Certificate Insurer.
The Policy will irrevocably and unconditionally guarantee payment on each
Distribution Date to the Trustee for the benefit of the Certificateholders the
full and complete payment of (i) the Guaranteed Principal Distribution Amount
(as defined herein) with respect to the Certificates for such Distribution Date
and (ii) accrued and unpaid interest due on the Certificates (together, the
"Guaranteed Distributions"), with such Guaranteed Distributions having been
calculated in accordance with the original terms of the Certificates or the
Agreement except for amendments or modifications to which the Certificate
Insurer has given its prior written consent. The effect of the Policy is to
guarantee the timely payment of interest on, and the ultimate payment of the
principal amount of, all of the Certificates.
The "Guaranteed Principal Distribution Amount" shall be the amount, if any,
by which the Certificate Principal Balance (after giving effect to all other
amounts distributable and allocable to principal on the Certificates) exceeds
the Invested Amount as of such Distribution Date (after giving effect to all
other
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<PAGE> 43
amounts distributable and allocable to principal on the Certificates for such
Distribution Date). In addition, the Policy will guarantee the payment of the
outstanding Certificate Principal Balance on the Distribution Date in
20 (after giving effect to all other amounts distributable and
allocable to principal on such Distribution Date).
In accordance with the Agreement, the Trustee will be required to establish
and maintain an account (the "Spread Account") for the benefit of the
Certificate Insurer and the Certificateholders. The Trustee shall deposit the
amounts into the Spread Account as required by the Agreement.
Payment of claims on the Policy will be made by the Certificate Insurer
following Receipt by the Certificate Insurer of 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 relevant Distribution Date.
If payment of any amount guaranteed by the Certificate Insurer pursuant to
the Policy is avoided as a preference payment under applicable bankruptcy,
insolvency, receivership or similar law, the Certificate Insurer will pay such
amount out of the funds of the Certificate Insurer 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 Certificateholder is required to return the amount of any Guaranteed
Distributions distributed with respect to the Certificates during the term of
the related Policy because such distributions were avoidable preference payments
under applicable bankruptcy law, (B) a certificate of the Certificateholder that
the Order has been entered and is not subject to any stay and (C) an assignment
duly executed and delivered by the Certificateholder, in such form as is
reasonably required by the Certificate Insurer and provided to the
Certificateholder by the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of the Certificateholder relating to
or arising under the Certificates against the debtor which made such preference
payment 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 Certificateholder directly (unless a
Certificateholder 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
Certificateholder upon proof of such payment reasonably satisfactory to the
Certificate Insurer).
The terms "Receipt" and "Received", with respect to the Policy, mean actual
delivery to the Certificate Insurer and to its fiscal agent appointed by the
Certificate Insurer at its option, if any, prior to 12:00 noon, New York City
time, on a Business Day; delivery either on a day that is not a Business Day or
after 12:00 noon, New York City time, shall be deemed to be Receipt on the next
succeeding Business Day. If any notice or certificate given under the Policy by
the Trustee is not in proper form or is not properly completed, executed or
delivered it shall be deemed not to have been Received, and the Certificate
Insurer or the fiscal agent shall promptly so advise the Trustee and the Trustee
may submit an amended notice.
Under the Policy, "Business Day" means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in The City of New York, New
York are authorized or obligated by law or executive order to be closed.
The Certificate Insurer's obligations under the Policy in respect of
Guaranteed Distributions shall be discharged to the extent funds are transferred
to the Trustee as provided in the Policy, whether or not such funds are properly
applied by the Trustee.
The Certificate Insurer shall be subrogated to the rights of each
Certificateholder to receive payments of principal and interest, as applicable,
with respect to distributions on the Certificates to the extent of any payment
by the Certificate Insurer under the Policy. To the extent the Certificate
Insurer makes Guaranteed
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Distributions, either directly or indirectly (as by paying through the Trustee),
to the Certificateholders, the Certificate Insurer will be subrogated to the
rights of the Certificateholders, as applicable, with respect to such Guaranteed
Distributions, shall be deemed to the extent of the payments so made to be a
registered Certificateholder for purposes of payment and shall receive all
future Guaranteed Distributions until all such Guaranteed Distributions by the
Certificate Insurer have been fully reimbursed, provided that the
Certificateholders have received the full amount of the Guaranteed
Distributions.
The terms of the Policy cannot be modified, altered or affected by any
other agreement or instrument, or by the merger, consolidation or dissolution of
the Seller. The Policy by its terms may not be cancelled or revoked. The Policy
is governed by the laws of the State of .
The 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 covered
by the Florida Insurance Guaranty Association created under Part II of Chapter
631 of the Florida Insurance Code. In the event the Certificate Insurer were to
become insolvent, any claims arising under the Policy are excluded from coverage
by the California Insurance Guaranty Association, established pursuant to
Article 14.2 of Chapter 1 of part 2 of Division 1 of the California Insurance
Code.
Pursuant to the terms of the Agreement, unless a Certificate Insurer
default exists, the Certificate Insurer shall be deemed to be the Holder of the
Certificates for certain purposes (other than with respect to payment on the
Certificates), will be entitled to exercise all rights of the Certificateholders
thereunder, without the consent of such Holders and the Holders of the
Certificates may exercise such rights only with the prior written consent of the
Certificate Insurer. In addition, the Certificate Insurer will have certain
additional rights as third party beneficiary to the Agreement.
In the absence of payments under the Policy, Certificateholders will bear
directly the credit and other risks associated with their undivided interest in
the Trust.]
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the Master
Servicer will forward to the Trustee for mailing to such Certificateholder a
statement setting forth among other items:
(i) the Investor Floating Allocation Percentage for the preceding
Collection Period;
(ii) the amount being distributed to Certificateholders;
(iii) the amount of interest included in such distribution and the
related Certificate Rate;
(iv) the amount, if any, of overdue accrued interest included in such
distribution (and the amount of interest thereon);
(v) the amount, if any, of the remaining overdue accrued interest
after giving effect to such distribution;
(vi) the amount, if any, of principal included in such distribution;
(vii) the amount, if any, of the reimbursement of previous Liquidation
Loss Amounts included in such distribution;
(viii) the amount, if any, of the aggregate unreimbursed Liquidation
Loss Amounts after giving effect to such distribution;
(ix) the Servicing Fee for such Distribution Date;
(x) the Invested Amount and the Certificate Principal Balance, each
after giving effect to such distribution;
(xi) the Pool Balance as of the end of the preceding Collection
Period;
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<PAGE> 45
(xii) the number and aggregate Principal Balances of the Mortgage
Loans as to which the minimum monthly payment is delinquent for 30-59 days,
60-89 days and 90 or more days, respectively, as of the end of the
preceding Collection Period;
(xiii) the book value of any real estate which is acquired by the
Trust Fund through foreclosure or grant of deed in lieu of foreclosure; and
(xiv) the amount of any draws on the Policy.
In the case of information furnished pursuant to clauses (iii), (iv), (v),
(vi), (vii) and (viii) above, the amounts shall be expressed as a dollar amount
per Certificate with a $1,000 denomination.
Within 60 days after the end of each calendar year commencing in 1996, the
Master Servicer will be required to forward to the Trustee a statement
containing the information set forth in clauses (iii) and (vi) above aggregated
for such calendar year.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Master Servicer will make reasonable efforts to collect all payments
called for under the Mortgage Loans and will, consistent with the Agreement,
follow such collection procedures as it follows from time to time with respect
to the home equity loans in its servicing portfolio comparable to the Mortgage
Loans. Consistent with the above, the Master Servicer may in its discretion
waive any late payment charge or any assumption or other fee or charge that may
be collected in the ordinary course of servicing the Mortgage Loans.
With respect to the Mortgage Loans, the Master Servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the Master Servicer's
policies with respect to the home equity mortgage loans it owns or services. In
accordance with the terms of the Agreement, the Master Servicer may consent
under certain circumstances to the placing of a subsequent senior lien in
respect of a Mortgage Loan.
HAZARD INSURANCE
The Agreement provides that the Master Servicer maintain certain hazard
insurance on the Mortgaged Properties relating to the Mortgage Loans. While the
terms of the related Credit Line Agreements generally require borrowers to
maintain certain hazard insurance, the Master Servicer will not monitor the
maintenance of such insurance.
The Agreement requires the Master Servicer to maintain for any Mortgaged
Property relating to a Mortgage Loan acquired upon foreclosure of a Mortgage
Loan, or by deed in lieu of such foreclosure, hazard insurance with extended
coverage in an amount equal to the lesser of (a) the maximum insurable value of
such Mortgaged Property or (b) the outstanding balance of such Mortgage Loan
plus the outstanding balance on any mortgage loan senior to such Mortgage Loan
at the time of foreclosure or deed in lieu of foreclosure, plus accrued interest
and the Master Servicer's good faith estimate of the related liquidation
expenses to be incurred in connection therewith. The Agreement provides that the
Master Servicer may satisfy its obligation to cause hazard policies to be
maintained by maintaining a blanket policy insuring against losses on such
Mortgaged Properties. If such blanket policy contains a deductible clause, the
Master Servicer will be obligated to deposit in the Collection Account the sums
which would have been deposited therein but for such clause. The Master Servicer
will initially satisfy these requirements by maintaining a blanket policy. As
set forth above, all amounts collected by the Master Servicer (net of any
reimbursements to the Master Servicer) under any hazard policy (except for
amounts to be applied to the restoration or repair of the Mortgaged Property)
will ultimately be deposited in the Collection Account.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and the like, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers and therefore will not
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contain identical terms and conditions, the basic terms thereof are dictated by
state laws and most of such policies typically do not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive or an exact description of the insurance policies relating to the
Mortgaged Properties.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Master Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general subordinate mortgage servicing
activities, provided the Master Servicer will not be required to expend its own
funds in connection with foreclosure or other conversion, correction of default
on a related senior mortgage loan or restoration of any property unless, in its
sole judgment, such foreclosure, correction or restoration will increase Net
Liquidation Proceeds. The Master Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Certificateholders or the Transferor.
OPTIONAL PURCHASE OF DEFAULTED LOAN
The Master Servicer may, at its option, purchase from the Trust Fund any
Mortgage Loan which is delinquent in payment by 91 days or more. Any such
purchase shall be at a price equal to 100% of the Principal Balance of such
Mortgage Loan plus accrued interest thereon at the applicable Loan Rate from the
date through which interest was last paid by the related mortgagor to the first
day of the month in which such amount is to be distributed to
Certificateholders.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, the Master Servicer will receive
from interest collections in respect of the Mortgage Loans a portion of such
interest collections as a monthly Servicing Fee in the amount equal to
approximately % per annum ("Servicing Fee Rate") on the aggregate Principal
Balances of the Mortgage Loans as of the first day of the related Collection
Period (or at the Cut-off Date for the first Collection Period). All assumption
fees, late payment charges and other fees and charges, to the extent collected
from borrowers, will be retained by the Master Servicer as additional servicing
compensation.
The Master Servicer will pay certain ongoing expenses associated with the
Trust Fund and incurred by it in connection with its responsibilities under the
Agreement. In addition, the Master Servicer will be entitled to reimbursement
for certain expenses incurred by it in connection with defaulted Mortgage Loans
and in connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Certificateholders to receive any
related Net Liquidation Proceeds.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before in each
year, beginning in , 199 , to the Trustee of an annual
statement signed by an officer of the Master Servicer to the effect that the
Master Servicer has fulfilled its material obligations under the Agreement
throughout the preceding fiscal year, except as specified in such statement.
On or before of each year, beginning , 199
, the Master Servicer will furnish a report prepared by a firm of nationally
recognized independent public accountants (who may also render other services to
the Master Servicer or the Transferor) to the Trustee, the Certificate Insurer
and the Rating Agencies to the effect that such firm has examined certain
documents and the records relating to servicing of the Mortgage Loans under the
Agreement and that, on the basis of such examination, such firm
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believes that such servicing was conducted in compliance with the Agreement
except for (a) such exceptions as such firm believes to be immaterial and (b)
such other exceptions as shall be set forth in such report.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE TRANSFEROR
The Agreement provides that the Master Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or its affiliate or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor servicer to the
Trustee in writing and such proposed successor servicer is reasonably acceptable
to the Trustee; (b) the Rating Agencies have confirmed to the Trustee that the
appointment of such proposed successor servicer as the Master Servicer will not
result in the reduction or withdrawal of the then current rating of the
Certificates; and (c) such proposed successor servicer is reasonably acceptable
to the Certificate Insurer. 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.
The Master Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Master Servicer. Notwithstanding any such arrangement, the Master
Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Master Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if the
Master Servicer itself were performing such duties and obligations.
The Agreement provides that the Master Servicer will indemnify the Trust
Fund and the Trustee from and against any loss, liability, expense, damage or
injury suffered or sustained as a result of the Master Servicer's actions or
omissions in connection with the servicing and administration of the Mortgage
Loans which are not in accordance with the provisions of the Agreement. Under
the Agreement,the Transferor will indemnify an injured party for the entire
amount of any losses, claims, damages or liabilities arising out of or based on
the Agreement (other than losses resulting from defaults under the Mortgage
Loans). In the event of an Event of Servicing Termination (as defined below)
resulting in the assumption of servicing obligations by a successor Master
Servicer, the successor Master Servicer will indemnify the Transferor for any
losses, claims,damages and liabilities of the Transferor as described in this
paragraph arising from the successor Master Servicer's actions or omissions. The
Agreement provides that neither the Depositor, the Transferor nor the Master
Servicer nor their directors, officers, employees or agents will be under any
other liability to the Trust Fund, the Trustee, the Certificateholders or any
other person for any action taken or for refraining from taking any action
pursuant to the Agreement. However, neither the Depositor, the Transferor nor
the Master Servicer will be protected against any liability which would
otherwise be imposed by reason of willful misconduct, bad faith or gross
negligence of the Depositor, the Transferor or the Master Servicer in the
performance of its duties under the Agreement or by reason of reckless disregard
of its obligations thereunder. In addition, the Agreement provides that the
Master Servicer will not be under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its servicing
responsibilities under the Agreement and which in its opinion may expose it to
any expense or liability. The Master Servicer may, in its sole discretion,
undertake any such legal action which it may deem necessary or desirable with
respect to the Agreement and the rights and duties of the parties thereto and
the interest of the Certificateholders thereunder.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer shall be a party, or any corporation
succeeding to the business of the Master Servicer shall be the successor of the
Master Servicer hereunder, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything in the Agreement
to the contrary notwithstanding.
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EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i) any failure by the
Master Servicer to deposit in the Collection Account any deposit required to be
made under the Agreement, which failure continues unremedied for five business
days after the giving of written notice of such failure to the Master Servicer
by the Trustee, or to the Master Servicer and the Trustee by the Certificate
Insurer or Certificateholders evidencing an aggregate, undivided interest in the
Trust Fund of at least 25% of the Certificate Principal Balance; (ii) any
failure by the Master Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the Agreement which, in each
case, materially and adversely affects the interests of the Certificateholders
or the Certificate Insurer and continues unremedied for 60 days after the giving
of written notice of such failure to the Master Servicer by the Trustee, or to
the Master Servicer and the Trustee by the Certificate Insurer or
Certificateholders evidencing an aggregate, undivided interest in the Trust Fund
of at least 25% of the Certificate Principal Balance; or (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings relating to the Master Servicer and certain actions by the
Master Servicer indicating insolvency, reorganization or inability to pay its
obligations. Under certain other circumstances, the Certificate Insurer with the
consent of holders of Investor Certificates evidencing an aggregate, undivided
interest in the Trust Fund of at least 51% of the Certificate Principal Balance
may deliver written notice to the Master Servicer terminating all the rights and
obligations of the Master Servicer under the Agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of ten Business Days or referred
to under clause (ii) above for a period of 60 Business Days, shall not
constitute an Event of Servicing Termination if such delay or failure could not
be prevented by the exercise of reasonable diligence by the Master Servicer and
such delay or failure was caused by an act of God or other similar occurrence.
Upon the occurrence of any such event the Master Servicer shall not be relieved
from using its best efforts to perform its obligations in a timely manner in
accordance with the terms of the Agreement and the Master Servicer shall provide
the Trustee, the Depositor, the Transferor, the Certificate Insurer and the
Certificateholders prompt notice of such failure or delay by it, together with a
description of its efforts to so perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, either the
Trustee, or Certificateholders evidencing an aggregate, undivided interest in
the Trust Fund of at least 51% of the Certificate Principal Balance or the
Certificate Insurer, may terminate all of the rights and obligations of the
Master Servicer under the Agreement and in and to the Mortgage Loans, whereupon
the Trustee will succeed to all the responsibilities, duties and liabilities of
the Master Servicer under the Agreement and will be entitled to similar
compensation arrangements. In the event that the Trustee would be obligated to
succeed the Master Servicer but is unwilling or unable so to act, it may
appoint, or petition a court of competent jurisdiction for the appointment of, a
housing and home finance institution or other mortgage loan or home equity loan
servicer with all licenses and permits required to perform its obligations under
the Agreement and having a net worth of at least $ and acceptable to
the Certificate Insurer to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee will be obligated to act in
such capacity unless prohibited by law. Such successor will be entitled to
receive the same compensation that the Master Servicer would otherwise have
received (or such lesser compensation as the Trustee and such successor may
agree). A receiver or conservator for the Master Servicer may be empowered to
prevent the termination and replacement of the Master Servicer where the only
Event of Servicing Termination that has occurred is an Insolvency Event.
AMENDMENT
The Agreement may be amended from time to time by the Master Servicer, the
Depositor and the Trustee and with the consent of the Certificate Insurer, but
without the consent of the Certificateholders, to cure any ambiguity, to correct
or supplement any provisions therein which may be inconsistent with any other
provisions of the Agreement, to add to the duties of the Depositor, the
Transferor or the Master Servicer or to
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add or amend any provisions of the Agreement as required by the Rating Agencies
in order to maintain or improve any rating of the Certificates (it being
understood that, after obtaining the ratings in effect on the Closing Date,
neither the Transferor, the Trustee nor the Master Servicer is obligated to
obtain, maintain, or improve any such rating) or to add any other provisions
with respect to matters or questions arising under the Agreement which shall not
be inconsistent with the provisions of the Agreement, provided that such action
will not, as evidenced by an opinion of counsel, materially and adversely affect
the interests of any Certificateholder or the Certificate Insurer; provided,
that any such amendment will not be deemed to materially and adversely affect
the Certificateholders and no such opinion will be required to be delivered if
the person requesting such amendment obtains a letter from the Rating Agencies
stating that such amendment would not result in a downgrading of the then
current rating of the Certificates. The Agreement may also be amended from time
to time by the Master Servicer, the Depositor, and the Trustee, with the consent
of Certificateholders evidencing an aggregate, undivided interest in the Trust
Fund of at least 51% of the Certificate Principal Balance and the Certificate
Insurer for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or of modifying in any manner
the rights of the Certificateholders, provided that no such amendment will (i)
reduce in any manner the amount of, or delay the timing of, collections of
payments on the Certificates or distributions or payments under the Policy which
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.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust Fund will terminate on the Distribution Date following the later
of (A) payment in full of all amounts owing to the Certificate Insurer and (B)
the earliest of (i) the Distribution Date on which the Certificate Principal
Balance has been reduced to zero, (ii) the final payment or other liquidation of
the last Mortgage Loan in the Trust Fund, (iii) the optional transfer to the
Transferor of the Certificates, as described below and (iv) the Distribution
Date in 20 .
The Certificates will be subject to optional transfer to the Transferor on
any Distribution Date after the Certificate Principal Balance is reduced to an
amount less than or equal to % of the Original Certificate Principal Balance and
all amounts due and owing to the Certificate Insurer and unreimbursed draws on
the Policy, together with interest thereon, as provided under the Insurance
Agreement, have been paid. The transfer price will be equal to the sum of the
outstanding Certificate Principal Balance and accrued and unpaid interest
thereon at the Certificate Rate through the day preceding the final Distribution
Date. In no event, however, will the Trust Fund created by the Agreement
continue for more than 21 years after the death of certain individuals named in
the Agreement. Written notice of termination of the Agreement will be given to
each Certificateholder, and the final distribution will be made only upon
surrender and cancellation of the Certificates at an office or agency appointed
by the Trustee which will be specified in the notice of termination.
In addition, the Trust Fund may be liquidated as a result of certain events
of bankruptcy, insolvency or receivership relating to the Transferor. See
"-- Rapid Amortization Events" herein.
THE TRUSTEE
[ ], a with its principal place of business in
, has been named Trustee pursuant to the Agreement.
The commercial bank or trust company serving as Trustee may own
Certificates and have normal banking relationships with the Depositor, the
Master Servicer, the Seller and the Certificate Insurer and/or their affiliates.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Depositor may also remove the Trustee if the Trustee ceases to be
eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Depositor will be
obligated to appoint a successor Trustee, as
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approved by the Certificate Insurer. Any resignation or removal of the Trustee
and appointment of a successor Trustee will not become effective until
acceptance of the appointment by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing an aggregate, undivided interest in the Trust Fund
of at least 51% of the Certificate Principal Balance have made written requests
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. The
Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
Certificateholders, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred therein or thereby.
CERTAIN ACTIVITIES
The Trust Fund will not: (i) borrow money; (ii) make loans; (iii) invest in
securities for the purpose of exercising control; (iv) underwrite securities;
(v) except as provided in the Agreement, engage in the purchase and sale (or
turnover) of investments; (vi) offer securities in exchange for property (except
Certificates for the Mortgage Loans); or (vii) repurchase or otherwise reacquire
its securities. See "-- Evidence as to Compliance" above for information
regarding reports as to the compliance by the Master Servicer with the terms of
the Agreement.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust Fund by the Depositor
will be purchased by the Depositor from pursuant to the Purchase
Agreement to be entered into between the Depositor, as purchaser of the Mortgage
Loans, and , as Seller of the Mortgage Loans. Under the Purchase
Agreement, the Seller will agree to transfer the Mortgage Loans and related
Additional Balances to the Depositor. Pursuant to the Agreement, the Mortgage
Loans will be immediately transferred by the Depositor to the Trust Fund, and
the Depositor will assign its rights in, to and under the Purchase Agreement to
the Trust Fund. The following is a description of the material provisions of the
Purchase Agreement.
TRANSFERS OF MORTGAGE LOANS
Pursuant to the Purchase Agreement, the Seller will transfer and assign to
the Depositor, all of its right, title and interest in and to the Mortgage Loans
and all of the Additional Balances thereafter created. The purchase price of the
Mortgage Loans is a specified percentage of the face amount thereof as of the
time of transfer and is payable by the Depositor in cash. The purchase price of
each Additional Balance comprising the Principal Balance of a Mortgage Loan is
the amount of such Additional Balance.
REPRESENTATIONS AND WARRANTIES
The Seller will represent and warrant to the Depositor that, among other
things, as of the Closing Date, it is duly organized and in good standing and
that it has the authority to consummate the transactions contemplated by the
Purchase Agreement. The Seller will also represent and warrant to the Depositor
that, among other things, immediately prior to the sale of the Mortgage Loans to
the Depositor, the Seller was the sole owner and holder of the Mortgage Loans
free and clear of any and all liens and security interests. The Seller will make
similar representations and warranties in the Agreement. The Seller will also
represent and warrant to the Depositor that, among other things, as of the
Closing Date, (a) the Purchase Agreement constitutes a legal, valid and binding
obligation of the Seller and (b) the Purchase Agreement constitutes a valid sale
to the Depositor of all right, title and interest of the Seller in and to the
Mortgage Loans and the proceeds thereof.
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ASSIGNMENT TO TRUST FUND
The Seller expressly acknowledges and consents to the Depositor's transfer
of its rights relating to the Mortgage Loans under the Agreement to the Trust
Fund. The Seller also agrees to perform its obligations under the Purchase
Agreement for the benefit of the Trust Fund.
TERMINATION
The Purchase Agreement will terminate upon the termination of the Trust
Fund.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor towards the purchase of the Mortgage Loans.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes the material U.S. federal income
tax aspects of the purchase, ownership and disposition of the Certificates, is
based on the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Regulations thereunder, and published rulings and court
decisions in effect as of the date hereof, all of which are subject to change,
possibly retroactively. This discussion does not address every aspect of the
U.S. federal income tax laws which may be relevant to Certificate Owners in
light of their personal investment circumstances or to certain types of
Certificate Owners subject to special treatment under the U.S. federal income
tax laws (for example, banks and life insurance companies). Accordingly,
investors should consult their tax advisors regarding U.S. federal, state,
local, foreign and any other tax consequences to them of investing in the
Certificates.
CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in the
Agreement and other relevant documents and assuming compliance with the terms of
the Agreement as in effect on the date of issuance of the Certificates,
, special tax counsel to the Depositor ("Tax Counsel"),
will, upon the issuance of the Certificates, issue an opinion generally to the
effect that the Certificates will be treated as debt instruments for Federal
income tax purposes as of such date. Accordingly, upon issuance, the
Certificates will be treated as "Debt Securities" as described in the
Prospectus. See "Federal Income Tax Consequences" in the Prospectus. The
Transferor and the Certificateholders express in the Agreement their intent
that, for applicable tax purposes, the Certificates will be indebtedness secured
by the Mortgage Loans. The Transferor, the Depositor and the Certificateholders,
by accepting the Certificates, and each Certificate Owner by its acquisition of
a beneficial interest in a Certificate, have agreed to treat the Certificates as
indebtedness for U.S. federal income tax purposes. However, because different
criteria are used to determine the non-tax accounting characterization of the
transaction, the Transferor intends to treat this transaction as a sale of an
interest in the Asset Balances of the Mortgage Loans for financial accounting
and certain regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service (the "IRS") and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured loan,
the primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Tax Counsel has analyzed and
relied on several factors in reaching its opinion that the weight of the
benefits and burdens of ownership of the Mortgage Loans has been retained by the
Transferor and has not been transferred to the Certificate Owners.
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In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel has advised that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Certificates as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal income tax purposes, the Certificates generally will be taxable as
Debt Securities. See "Federal Income Tax Consequences" in the Prospectus.
While it is not anticipated that the Certificates will be issued at a
greater than de minimis discount, under Treasury regulations (the "OID
Regulations") it is possible that the Certificates could nevertheless be deemed
to have been issued with original issue discount ("OID") if the interest were
not treated as "unconditionally payable" under the OID Regulations. If such
regulations were to apply, all of the taxable income to be recognized with
respect to the Certificates would be includible in income of Certificate Owners
as OID, but would not be includible again when the interest is actually
received. See "Federal Income Tax Consequences -- Taxation of Debt Securities;
Interest and Acquisition Discount" in the Prospectus for a discussion of the
application of the OID rules if the Certificates are in fact issued at a greater
than de minimis discount or are treated as having been issued with OID under the
OID Regulations. For purposes of calculating OID, it is likely that the
Certificates will be treated as Pay-Through Securities.
POSSIBLE CLASSIFICATION OF THE CERTIFICATES AS A PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION
The opinion of Tax Counsel is not binding on the courts or the IRS. It is
possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus with respect to the Certificates
constitutes a sale of the Mortgage Loans (or an interest therein) to the
Certificate Owners and that the proper classification of the legal relationship
between the Transferor and the Certificate Owners resulting from this
transaction is that of a partnership, a publicly traded partnership treated as a
corporation, or an association taxable as a corporation. Since Tax Counsel has
advised that the Certificates will be treated as indebtedness in the hands of
the Certificateholders for U.S. federal income tax purposes, the Transferor will
not attempt to comply with U.S. federal income tax reporting requirements
applicable to partnerships or corporations, as such requirements would not apply
if the Certificates were treated as indebtedness.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the Trust Fund would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives from the Mortgage Loans,
which would reduce the amounts available for distribution to the Certificate
Owners. Cash distributions to the Certificate Owners generally would be treated
as dividends for tax purposes to the extent of such corporation's earnings and
profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Transferor
and each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness. Upon the issuance of the
Certificates, and assuming that all of the provisions of the Agreement as in
effect on the date of issuance, are complied with, Tax Counsel will issue an
opinion generally to the effect that the Trust Fund will not be treated as
either an association or publicly traded partnership taxable as a corporation.
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POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
a portion of an entity) that is a "taxable mortgage pool" will be classified as
a taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Subject to a grandfather
provision for existing entities, any entity (or a portion of any entity) will be
a taxable mortgage pool if (i) substantially all of its assets consist of debt
instruments, more than 50% of which are real estate mortgages, (ii) the entity
is the obligor under debt obligations with two or more maturities, and (iii)
under the terms of the entity's debt obligations (or an underlying arrangement),
payments on such debt obligations bear a relationship to the debt instruments
held by the entity.
Upon the issuance of the Certificates, and assuming that all of the
provisions of the Agreement as in effect on the date of issuance, are complied
with, Tax Counsel will issue an opinion generally to the effect that the
arrangement created by the Agreement will not be a taxable mortgage pool under
Section 7701(i) of the Code because only one class of indebtedness secured by
the Mortgage Loans is being issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the Agreement is a taxable mortgage pool, such
arrangement would be subject to U.S. federal corporate income tax on its taxable
income generated by ownership of the Mortgage Loans. Such a tax might reduce
amounts available for distributions to Certificate Owners. The amount of such a
tax would depend upon whether distributions to Certificate Owners would be
deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including OID) paid on
a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United States and the Certificate Owner provides the required
foreign person information certification. See "Federal Income Tax
Consequences -- Tax Treatment of Foreign Investors" in the Prospectus.
If the interests of the Certificate Owners were deemed to be partnership
interests, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch profits
tax. Each non-foreign partner would be required to certify to the partnership
that it is not a foreign person. The tax withheld from each foreign partner
would be credited against such foreign partner's U.S. income tax liability.
If the Trust Fund were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
BACKUP WITHHOLDING; INFORMATION REPORTING
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Certificates if the Certificate
Owners, upon issuance, fail to supply the Trustee or his broker with his
taxpayer identification number, furnish an incorrect taxpayer identification
number, fail to report interest, dividends, or other "reportable payments" (as
defined in the Code) properly, or, under certain circumstances, fail to provide
the Trustee or his broker with a certified statement, under penalty of perjury,
that he is not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their
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status as nonresidents). As long as the only "Certificateholder" of record is
Cede, as nominee for DTC, Certificate Owners and the IRS will receive tax and
other information including the amount of interest paid on the Certificates
owned from Participants and Indirect Participants rather than from the Trustee.
(The Trustee, however, will respond to requests for necessary information to
enable Participants, Indirect Participants and certain other persons to complete
their reports.) Each non-exempt Certificate Owner will be required to provide,
under penalty of perjury, a certificate on IRS Form W-9 containing his or her
name, address, correct Federal taxpayer identification number and a statement
that he or she is not subject to backup withholding. Should a nonexempt
Certificate Owner fail to provide the required certification, the Participants
or Indirect Participants (or the Paying Agent) will be required to withhold 31%
of the interest (and principal) otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Certificates under the tax laws of any
state. Investors considering an investment in the Certificates should consult
their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the Federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Certificates.
ERISA CONSIDERATIONS
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> 55
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. sec. 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 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.
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 the conditions and
requirements of the Exemption. Morgan Stanley believes that the Exemption will
[not] apply to the acquisition and holding of Certificates by Plans.
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<PAGE> 56
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the Plan as they would be in an arm's length transaction with an
unrelated party;
(2) the rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the Trust Fund;
(3) the Certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from 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 Certificates represents not more
than reasonable compensation for underwriting such 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
Agreement and reimbursements of such person's reasonable expenses in
connection therewith; and
(6) the Plan investing in the Certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
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 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 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 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, 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
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<PAGE> 57
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
Certificates 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 Certificates until
such time as the balance of the related Pre-Funding Account is reduced to zero.
Accordingly, until such time, the Certificates may not be purchased by Plans
pursuant to the Exemption.] 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 INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Certificates will be rated
in the [highest] rating category of the Rating Agencies, the Certificates will
not constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"), because not all of the
Mortgages securing the Mortgage Loans are first mortgages. Accordingly, many
institutions with legal authority to invest in comparably rated securities based
on first mortgage loans may not be legally authorized to invest in the
Certificates, which because they evidence interests in a pool that includes
junior mortgage loans are not "mortgage related securities" under SMMEA. See
"Legal Investment" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated , 199 , (the "Underwriting Agreement"), between the
Depositor and the Underwriter, an affiliate of the Depositor,
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<PAGE> 58
the Depositor has agreed to sell to the Underwriter, and the Underwriter has
agreed to purchase from the Depositor all the Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all the Certificates offered
hereby if any of the Certificates are purchased.
The Depositor has been advised by the Underwriter that it proposes
initially to offer the Certificates to the public in Europe and the United
States at the offering price set forth on the cover page hereof and to certain
dealers at such price less a discount not in excess of % of the Certificate
denominations. The Underwriter may allow and such dealers may reallow a discount
not in excess of % of the Certificate denominations to certain other
dealers. After the initial public offering, the public offering price, such
concessions and such discounts may be changed.
The distribution of the Certificates by the Underwriter will be effected
from time to time in one or more negotiated transactions or otherwise at varying
prices to be determined, in each case, at the time of sale. The Underwriter may
effect such transactions by selling the Certificates to or through dealers, and
such dealers may receive from the Underwriter compensation in the form of
underwriting discounts, concessions or commissions. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the
Certificates may be deemed to be underwriters, and any discounts, commissions or
concessions received by them, and any profit on the resale of the Certificates
purchased by them, may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "Act").
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Act.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed upon
for the Depositor by , and for the Underwriter by
.
EXPERTS
The consolidated balance sheets of [Insurer] and Subsidiaries as of
, 199 and 199 and the related consolidated statements of income,
changes in shareholder's equity, and cash flows for each of the three years in
the period ended , 199 , incorporated by reference in this
Prospectus Supplement, have been incorporated herein in reliance on the report
of , independent accountants, given on the authority of that
firm as experts in accounting and auditing.
RATINGS
It is a condition to the issuance of the Certificates that they be rated
by (" ") and, by (" "
and, together with , the "Rating Agencies").
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the Certificates. The ratings on the
Certificates do not, however, constitute statements regarding the likelihood or
frequency of prepayments on the Mortgage Loans or the possibility that
Certificateholders might realize a lower than anticipated yield.
The ratings assigned to the Certificates will depend primarily upon the
creditworthiness of the Certificate Insurer. Any reduction in a rating assigned
to the claims-paying ability of the Certificate Insurer below the ratings
initially assigned to the Certificates may result in a reduction of one or more
of the ratings assigned to the Certificates.
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<PAGE> 59
The ratings of the Rating Agencies do not address the possibility that, as
a result of principal prepayments, Certificateholders may receive a lower than
anticipated yield.
The security ratings assigned to the 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 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 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 Certificates could be lower than the respective
ratings assigned by the Rating Agencies.
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
401(c) Regulations.......................................... S-56
Act......................................................... S-57
Accelerated Principal Distribution Amount................... S-9, 38
Additional Balances......................................... S-4
Agreement................................................... S-4
Alternative Principal Payment............................... S-10, 40
Assignment Event............................................ S-34
BIF......................................................... S-36
Book-Entry Certificates..................................... S-30
Business Day................................................ S-42
Cede........................................................ S-7
CEDEL....................................................... S-7
CEDEL Participants.......................................... S-30
Certificate Insurer......................................... S-11
Certificate Owners.......................................... S-7, 30
Certificate Principal Balance............................... S-5, 29
Certificate Rate............................................ S-5, 10, 38
Certificates................................................ S-1, 4
Chase....................................................... S-7
Citibank.................................................... S-7
Closing Date................................................ S-1, 10, 39
Code........................................................ S-50
Collection Account.......................................... S-9, 35
Collection Period........................................... S-10, 38
Combined Loan-to-Value Ratio................................ S-6
Cooperative................................................. S-32
Credit Limit................................................ S-6
Credit Limit Utilization Rate............................... S-20
Credit Line Agreements...................................... S-4, 20
Cut-off Date................................................ S-1, 4
Cut-off Date Pool Balance................................... S-4
Cut-off Date Principal Balance.............................. S-4
Defective Mortgage Loans.................................... S-35
Definitive Certificate...................................... S-30
Depositor................................................... S-4
Determination Date.......................................... S-12, 36
Dissolution Distribution Date............................... S-41
Distribution Date........................................... S-1, 10, 37
DOL......................................................... S-54
Draw Period................................................. S-21
Drive-By Appraisal.......................................... S-18
Drive-By Appraisal Value.................................... S-18
DTC......................................................... S-7, 30
Due Date.................................................... S-6
Eligible Account............................................ S-36
Eligible Substitute Mortgage Loan........................... S-34
</TABLE>
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<PAGE> 61
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
ERISA....................................................... S-14, 53
Estimated Value............................................. S-18
Euroclear................................................... S-7
Euroclear Operator.......................................... S-32
Euroclear Participants...................................... S-32
European Depositaries....................................... S-7, 30
Events of Servicing Termination............................. S-47
Exemption................................................... S-54
Financial Intermediary...................................... S-30
Fixed Allocation Percentage................................. S-9
Guaranteed Distributions.................................... S-11, 41
Guaranteed Principal Distribution Amount.................... S-11, 41
Index Rate.................................................. S-21
Indirect Participants....................................... S-30
Insurance Agreement......................................... S-11, 41
Interest Collections........................................ S-37
Interest Period............................................. S-10, 39
Invested Amount............................................. S-29
Investor Fixed Allocation Percentage........................ S-9
Investor Floating Allocation Percentage..................... S-8, 37
Investor Interest Collections............................... S-37
Investor Loss Amount........................................ S-9, 38
Investor Principal Collections.............................. S-9, 37
IRS......................................................... S-50
LIBOR....................................................... S-10
LIBOR Business Day.......................................... S-39
Liquidated Mortgage Loan.................................... S-38
Liquidation Loss Amount..................................... S-9, 38
Liquidation Proceeds........................................ S-37
Loan Rate................................................... S-6, 21
Managed Amortization Period................................. S-10, 40
Margin...................................................... S-21
Maximum Principal Payment................................... S-10, 40
Maximum Rate................................................ S-21
Minimum Transferor Interest................................. S-35
Morgan Stanley.............................................. S-1, 54
Mortgage File............................................... S-34
Mortgage Loan Schedule...................................... S-5, 33
Mortgage Loans.............................................. S-1, 4
Mortgaged Properties........................................ S-4
Net Liquidation Proceeds.................................... S-8
OID......................................................... S-51
OID Regulations............................................. S-51
Order....................................................... S-42
Original Certificate Principal Balance...................... S-29
Original Invested Amount.................................... S-5, 29
Overcollateralization Amount................................ S-9
Participants................................................ S-30
</TABLE>
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<PAGE> 62
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Parties in Interest......................................... S-54
Paying Agent................................................ S-40
Percentage Interest......................................... S-7
Plan........................................................ S-53
Plan Asset Regulation....................................... S-54
Policy...................................................... S-1, 4
Pool Balance................................................ S-37
Principal Balance........................................... S-4
Principal Collections....................................... S-8, 37
Prospectus.................................................. S-2
PTE......................................................... S-56
Purchase Agreement.......................................... S-6
Rapid Amortization Event.................................... S-40
Rating Agency............................................... S-14
Receipt..................................................... S-42
Received.................................................... S-42
Record Date................................................. S-37
Reference Bank Rate......................................... S-39
Related Documents........................................... S-33
Relevant Depositary......................................... S-30
Repayment Period............................................ S-21
Required Overcollateralization Amount....................... S-38
Restricted Group............................................ S-56
Rules....................................................... S-30
SAIF........................................................ S-36
Scheduled Principal Collections Distribution Amount......... S-10, 40
Seller...................................................... S-4
Servicing Fee............................................... S-12
Servicing Fee Rate.......................................... S-12, 45
SMMEA....................................................... S-14, 56
Spread Account.............................................. S-12, 42
Tax Counsel................................................. S-50
Telerate Screen Page 3750................................... S-39
Terms and Conditions........................................ S-32
Transfer Date............................................... S-35
Transfer Deficiency......................................... S-34
Transfer Deposit Amount..................................... S-34
Transferor.................................................. S-5
Transferor Interest......................................... S-1, 5, 30
Transferor Principal Collections............................ S-9, 37
Trust Fund.................................................. S-1, 4
Trustee..................................................... S-4, 13
Underwriter................................................. S-1
Underwriting Agreement...................................... S-56
</TABLE>
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<PAGE> 63
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURE
Except in certain limited circumstances, the globally offered Home Equity
Loan Asset Backed Certificates, Series 199 - (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of DTC, CEDEL or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Equity Loan Asset Backed
Certificates issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Home Equity Loan Asset Backed
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset Backed Certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
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<PAGE> 64
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
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<PAGE> 65
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source. This summary does not deal with all aspects
of U.S. federal income tax withholding that may be relevant to foreign holders
of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
Global Securities.
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<PAGE> 66
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
VERSION #2
Subject to Completion, dated December , 1998
PROSPECTUS SUPPLEMENT (To Prospectus dated December , 1998)
$
(Approximate)
HOME EQUITY LOAN TRUST 199
$ Home Equity Loan Asset Backed Notes, Series 199 -
$ Home Equity Loan Asset Backed Certificates, Series 199 -
MORGAN STANLEY ABS CAPITAL I INC.
Depositor
[ ]
Master Servicer
The Home Equity Loan Trust 199 (the "Trust Fund") will be formed pursuant to
a trust agreement to be dated as of , 199 (the "Trust Agreement")
and entered into by Morgan Stanley ABS Capital I Inc. (the "Depositor"),
and , as owner trustee (the "Owner Trustee"). The Trust
Fund will issue $ aggregate principal amount of Home Equity Loan Asset
Backed Notes (the "Notes"). The Notes will be issued pursuant to an indenture to
be dated as of , 199 (the "Indenture"), between the Trust Fund and
, as indenture trustee (the "Indenture Trustee"). The Trust Fund
will also issue $ aggregate principal amount of Home Equity Loan Asset
Backed Certificates, Series 199 - (the "Certificates" and, together with the
Notes, the "Securities"). See "Index of Defined Terms" on Page S-42 of this
Prospectus Supplement and on Page 120 of the Prospectus for the location of the
definitions of certain capitalized terms.
The property of the Trust Fund will include a pool of [adjustable rate] home
equity revolving credit line loans made or to be made in the future (the
"Mortgage Loans") under certain home equity revolving credit line loan
agreements. The Mortgage Loans are secured by first, second and third mortgages
or deeds of trust on one-to four-family residential properties. [In addition,
the Securities will have the benefit of an irrevocable and unconditional limited
financial guaranty insurance policy (the "Policy") issued by
(the "Certificate Insurer") covering [describe].]
Distributions of principal and interest on the Notes will be made on the
day of each month or, if such date is not a Business Day, then on the
succeeding Business Day (each a "Distribution Date"), commencing on
, 199 to the extent described under "Summary of Terms -- Description
of the Securities" and "Description of the Securities" herein. Interest will
accrue on the Notes at a rate (the "Note Rate") equal to % per annum from the
Closing Date to the first Distribution Date and at [a floating rate equal to
[LIBOR] (as defined herein) plus % per annum] [ % per annum] thereafter.
The Certificates will represent fractional undivided interests in the Trust
Fund. Distribution of principal and interest on the Certificates will be made on
each Distribution Date to the extent described herein. Interest will accrue on
the Certificates at a rate (the "Pass-Through Rate") equal to % per annum from
the Closing Date to the first Distribution Date and at [a floating rate equal to
[LIBOR] plus % per annum] [ % per annum] thereafter.
Payments of interest and principal on the Notes will have equal priority
with payments of principal and interest (and will be made pro rata) on the
Certificates.
There is currently no market for the Securities offered hereby and there can
be no assurance that such a market will develop or if it does develop that it
will continue. See "Risk Factors" herein.
------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-11 HEREIN AND ON PAGE 17 IN THE ACCOMPANYING
PROSPECTUS.
------------------------
THE SECURITIES REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, OWNER TRUSTEE,
INDENTURE TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT PROVIDED
HEREIN. THE SECURITIES ARE NOT INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Securities offered hereby will be purchased by Morgan Stanley & Co.
Incorporated ("Morgan Stanley") from the Depositor and will, in each case, be
offered by Morgan Stanley from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The aggregate proceeds to the Depositor from the sale of the Notes are
expected to be $ and from the sale of the Certificates are expected to be
$ before deducting expenses payable by the Depositor of $ . The
Securities are offered subject to prior sale and subject to Morgan Stanley's
right to reject orders in whole or in part. It is expected that the Notes will
be delivered in book-entry form through the facilities of The Depository Trust
Company, [Cedel, S.A. and the Euroclear System] on or about , 199 .
------------------------
MORGAN STANLEY DEAN WITTER
, 199
<PAGE> 67
------------------------
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Depositor or any Underwriter. This Prospectus Supplement and the Prospectus do
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that the information herein or therein
is correct at any time subsequent to the date hereof or that there has been no
change in the affairs of the Depositor since that date.
Until ninety days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Securities, whether or not participating in this
distribution, may be required to deliver a Prospectus Supplement and Prospectus
to investors. This is in addition to the obligation of dealers acting as
underwriters to deliver a Prospectus Supplement and Prospectus with respect to
their unsold allotments or subscriptions.
This Prospectus Supplement does not contain complete information about the
offering of the Securities. Additional information is contained in the
Prospectus of the Depositor dated , 199 (the "Prospectus") and
purchaser are urged to read both this Prospectus Supplement and the Prospectus
in full. Sales of the Securities may not be consummated unless the purchaser has
received both this Prospectus Supplement and the Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Trustee on behalf of any Trust Fund will provide without charge to each
person to whom this Prospectus Supplement is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to in the
Prospectus under "Incorporation of Certain Documents by Reference" that have
been or may be incorporated by reference in the Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
the Prospectus incorporates). Such requests should be directed to the Corporate
Trust Office of the Trustee at , telephone: , facsimile
number: , attention: .
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<PAGE> 68
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
Summary of Terms............................................ S-4
Risk Factors................................................ S-11
The Trust Fund.............................................. S-13
The [Letter of Credit] [Surety Bond] Issuer................. S-14
The Master Servicer......................................... S-14
The Home Equity Loan Program................................ S-14
Maturity and Prepayment Considerations...................... S-25
Description of the Master Servicing Agreement............... S-26
Description of the Securities............................... S-29
The Depositor............................................... S-30
The Indenture............................................... S-30
The Trust Agreement......................................... S-33
Administration Agreement.................................... S-35
The Indenture Trustee....................................... S-35
The Owner Trustee........................................... S-35
Use of Proceeds............................................. S-35
Federal Income Tax Consequences............................. S-35
State Tax Consequences...................................... S-36
ERISA Considerations........................................ S-37
Legal Investment Considerations............................. S-40
Underwriting................................................ S-40
Legal Matters............................................... S-41
Ratings..................................................... S-41
Index of Defined Terms...................................... S-42
PROSPECTUS
Summary of Terms............................................ 6
Risk Factors................................................ 17
The Trust Fund.............................................. 27
Use of Proceeds............................................. 41
The Depositor............................................... 41
Description Of the Securities............................... 41
Credit Enhancement.......................................... 56
Yield and Prepayment Considerations......................... 61
The Agreements.............................................. 64
Certain Legal Aspects of the Loans.......................... 77
Federal Income Tax Consequences............................. 91
State Tax Consequences...................................... 111
Erisa Considerations........................................ 112
Legal Investment............................................ 116
Method of Distribution...................................... 117
Legal Matters............................................... 118
Financial Information....................................... 118
Rating...................................................... 118
Index of Defined Terms...................................... 120
</TABLE>
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<PAGE> 69
SUMMARY OF TERMS
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and in the accompanying Prospectus. Certain capitalized
terms used herein are defined elsewhere in the Prospectus Supplement or in the
Prospectus. See "Index of Defined Terms" on page S-42 of this Prospectus
Supplement and on page 120 of the Prospectus for the location of the definition
of certain capitalized terms.
Title of Securities........ Home Equity Loan Asset Backed Notes, Series 199 -
(the "Notes") and Home Equity Loan Asset Backed
Certificates, Series 199 - (the "Certificates"
and, together with the Notes, the "Securities").
Securities Offered......... All of the Securities, including the Class ,
Class and Class Notes and the Class , Class
and Class Certificates. Each Security
represents the right to receive payments of
interest at the variable rate described below,
payable monthly, and payments of principal at such
time and to the extent provided below.
Trust Fund................. Home Equity Loan Trust 199 - (the "Trust Fund"), a
Delaware business trust established pursuant to the
Trust Agreement (as defined herein), dated as of
, 199 (the "Cut-off Date"). The
property of the Trust Fund will include: a pool of
[adjustable rate] home equity revolving credit line
loans made or to be made in the future (the
"Mortgage Loans"), under certain home equity
revolving credit line loan agreements (the "Credit
Line Agreements") and secured by first, second and
third liens on one- to four-family residential
properties that are one-to four-family properties
(the "Mortgaged Properties"); the collections in
respect of the Mortgage Loans received after the
Cut-off Date (exclusive of payments in respect of
accrued interest due on or prior to the Cut-off
Date or due in the month of ); property
that secured a Mortgage Loan which has been
acquired by foreclosure or deed in lieu of
foreclosure; [an irrevocable and unconditional
limited financial guaranty insurance policy (the
"Policy")]; an assignment of the Depositor's rights
under the Purchase Agreement (as defined herein);
rights under certain hazard insurance policies
covering the Mortgaged Properties; and certain
other property, as described more fully under "The
Trust Fund" herein.
The Trust Fund will include the unpaid principal
balance of each Mortgage Loan as of the Cut-off
Date (the "Cut-off Date Principal Balance") plus
any additions thereto as a result of new advances
made pursuant to the applicable Credit Line
Agreement (the "Additional Balances") during the
life of the Trust Fund. With respect to any date,
the "Pool Balance" will be equal to the aggregate
of the Principal Balances of all Mortgage Loans as
of such date. The "Principal Balance" of a Loan
(other than a Liquidated Loan) on any day is equal
to its Cut-off Date Principal Balance, plus (i) any
Additional Balances in respect of such Mortgage
Loan minus (ii) all collections credited against
the Principal Balance of such Mortgage Loan in
accordance with the related Credit Line Agreement
prior to such day. The Principal Balance of a
Liquidated Loan after the final recovery of related
Liquidation Proceeds shall be zero.
Indenture.................. The Notes will be issued pursuant to an indenture
dated as of , 199 (the "Indenture")
between the Trust Fund and the Indenture Trustee.
The Indenture Trustee will allocate distributions
of
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<PAGE> 70
principal and interest to holders of the Notes (the
"Noteholders") in accordance with the Indenture.
Trust Agreement............ Pursuant to a trust agreement dated as of
, 199 (the "Trust Agreement"), among
the Depositor, and the Owner Trustee, the
Trust Fund will issue the Certificates in an
initial aggregate amount of $ . The
Certificates will represent fractional undivided
interests in the Trust Fund.
Depositor.................. Morgan Stanley ABS Capital I Inc., a Delaware
corporation and a direct wholly-owned subsidiary of
the Morgan Stanley Group Inc.
Master Servicer............ [ ]. The Master Servicer will
service the Mortgage Loans pursuant to a Master
Servicing Agreement dated , 199 between
the Issuer and the Master Servicer.
Indenture Trustee.......... (the "Indenture Trustee").
Owner Trustee.............. (the "Owner Trustee").
Cut-off Date............... , 199 .
Closing Date............... On or about , 199 .
Determination Date......... The business day, but no later than the
calendar day, of each month (the "Determination
Date").
The Mortgage Loans......... The Mortgage Loans are secured by first, second and
third liens on Mortgaged Properties. The Mortgage
Loans were originated or acquired in the normal
course of its business by [ ]
(in such capacity, the "Seller"). On the Closing
Date, [ ] will sell the Mortgage
Loans to the Depositor, pursuant to a purchase
agreement (the "Purchase Agreement"). The aggregate
Principal Balance of the Mortgage loans as of the
Cut-off Date is $ (the "Cut-off Date Pool
Principal Balance").
The percentage of the Cut-off Date Principal
Balance of the Mortgage Loans secured primarily by
Mortgaged Properties located in the states of
[ , , , ,
and ] is approximately %, %,
%, %, % and %, respectively.
The "Combined Loan-to-Value Ratio" of each Mortgage
Loan is the ratio of (A) the sum of (i) the maximum
amount the borrower was permitted to draw down
under the related Credit Line Agreement (the
"Credit Limit") and (ii) the amounts of any related
senior mortgage loans (computed as of the date of
origination of each such Mortgage Loans) to (B) the
lesser of (i) the appraised value of the Mortgaged
Property or (ii) [in the case of a Mortgaged
Property purchased within one year of the
origination of the related Mortgage Loan], the
purchase price of such Mortgaged Property. As of
the Cut-off Date the Combined Loan-to-Value Ratios
ranged from % to % and, as of the Cut-
off Date, the weighted average Combined
Loan-to-Value Ratio of the Mortgage Loans was
approximately %. Interest on each Mortgage
Loan is payable monthly and computed on the related
daily outstanding Principal Balance for each day in
the billing cycle at a variable rate per annum (the
"Loan Rate") equal at any time (subject to maximum
rates, as described herein under "Description of
the Mortgage Loans -- Mortgage Loan Terms," and
further subject to applicable usury limitations) to
the sum of [(i) the highest prime rate published in
the "Money Rates" section of The Wall Street
Journal] and (ii) a Margin within the range of
% to %. As of the Cut-off Date, the
weighted average
S-5
<PAGE> 71
Margin was approximately %. Loan Rates are
adjusted [monthly] on the [first business day of
the calendar month] preceding the Due Date. As to
each Mortgage Loan, the "Due Date" is the
day of each month. The Cut-off Date
Principal Balances ranged from zero to $
and averaged approximately $ . Credit
Limits under the Mortgage Loans as of the Cut-off
Date ranged from $ to $ and
averaged approximately $ . Each Mortgage
Loan was originated in the period from
, 19 to , 19 . As of the Cut-off
Date, the maximum Credit Limit Utilization Rate (as
defined herein) was [100%] and the weighted average
Credit Limit Utilization Rate was approximately
%. As of the Cut-off Date, approximately
% by Cut-off Date Principal Balance of the
Mortgage Loans represented first liens on the
related Mortgaged Properties, approximately %
of the Mortgage Loans represented second liens and
approximately % of the Mortgage Loans
represented third liens. As of the Cut-off Date,
the Mortgage Loans had remaining terms to scheduled
maturity ranging from months to months and had
a weighted average of approximately months. See
"The Home Equity Loan Program" and "Description of
the Mortgage Loans" herein.
Distribution Date.......... The day of each month or, if such day is not a
Business Day, the next succeeding Business Day,
commencing with , 199 . A "Business
Day" is any day other than a Saturday or Sunday or
another day on which banking institutions in New
York, New York [and ] are authorized or
obligated by law, regulations or executive order to
be closed.
Final Scheduled
Distribution Dates....... With respect to the Class Certificates,
. To the extent not previously
paid, the principal balance (the "Security
Principal Balance") of the Notes will be due on the
Distribution Date in , 199 . Failure to
pay the full principal balance of Notes on or
before the applicable final scheduled payment dates
constitutes an Event of Default under the
Indenture.
Record Date................ The last day preceding a Distribution Date or, if
the Securities are no longer Book-Entry Securities,
the last day of the month preceding a Distribution
Date.
Collections................ All collections on the Mortgage Loans will be
allocated by the Master Servicer in accordance with
the Loan Agreements between amounts collected in
respect of interest ("Interest Collections") and
amounts collected in respect of principal
("Principal Collections" and collectively with
Interest Collections, the "Collections"). The
Master Servicer will generally deposit Collections
distributable to the Holders in an account
established for such purpose under the Servicing
Agreement (the "Collection Account"). See
"Description of the Master Servicing
Agreement -- Allocations and Collections" herein
and "The Agreements -- Payments on Loans; Deposits
to Security Account" and "-- Collection Procedures"
in the Prospectus.
Description of the
Securities A.
Distributions............ On each Distribution Date, collections on the
Mortgage Loans will be applied in the following
order of priority:
(i) [to the Master Servicer, the Servicing Fee];
S-6
<PAGE> 72
(ii) as payment for the accrued interest due and
any overdue accrued interest (with interest
thereon) on the respective Security Principal of
the Notes and the Certificates;
(iii) as principal on the Securities, the excess of
Principal Collections over Additional Balances
created during the preceding Collection Period,
such amount to be allocated between the Notes and
Certificates, pro rata, based on their respective
Security Principal Balances;
(iv) as principal on the Securities, as payment for
any Liquidation Loss Amounts on the Mortgage Loans;
(v) as payment for the premium on the Policy;
(vi) to reimburse prior draws made on the Policy;
and
(vii) any remaining amounts to the Seller.
As to any Distribution Date, the "Collection
Period" is the calendar month preceding the month
of such Distribution Date. "Liquidation Loss
Amount" means with respect to any Liquidated
Mortgage Loan, the unrecovered Principal Balance
thereof at the end of the related Collection Period
in which such Mortgage Loan became a Liquidated
Mortgage Loan after giving effect to the Net
Liquidation Proceeds received in connection
therewith.
B. Note Rate............. Interest will accrue on the unpaid Security
Principal Balance of the Notes at the per annum
rate (the "Note Rate") equal to % per annum
from the Closing Date to the first Distribution
Date and thereafter interest will accrue on the
Notes from and including the preceding Distribution
Date to but excluding such current Distribution
Date (each, an "Interest Accrual Period") at [a
floating rate equal to LIBOR (as defined herein)
plus %] [ %]. [Interest will be
calculated on the basis of the actual number of
days in each Interest Accrual Period divided by
360.] A failure to pay interest on any Notes on any
Distribution Date that continues for [five] days
constitutes an Event of Default under the
Indenture.
C. Pass-Through Rate..... Interest will accrue on the unpaid Principal
Balance of the Certificates at the per annum rate
(the "Pass-Through Rate") equal to % per annum
from the Closing Date to the first Distribution
Date and thereafter interest will accrue on the
Certificates for each Interest Accrual Period at [a
floating rate equal to LIBOR (as defined herein)
plus %] [ %]. [Interest will be calculated
on the basis of the actual number of days in each
Interest Accrual Period divided by 360.] A failure
to pay interest on any Certificates on any
Distribution Date that continues for five days
constitutes an Event of Default under the Trust
Agreement.
D. Form and
Registration........... The Securities will initially be delivered in
book-entry form ("Book-Entry Securities"). Holders
of such Securities may elect to hold their
interests through The Depository Trust Company
("DTC"), [in the United States, or Centrale de
Livraison de Valeurs Mobilieres S.A. or the
Euroclear System ("Euroclear"), in Europe].
Transfers within DTC [, Cedel or Euroclear, as the
case may be,] will be in accordance with the usual
rules and operating procedures of the relevant
system. So long as the Securities are Book-Entry
Securities, such Securities will be evidenced by
one or more securities registered in the name of
Cede & Co. ("Cede"), as the nominee of DTC [or one
of the relevant deposita-
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<PAGE> 73
ries (collectively, 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 and
Euroclear, respectively, and each a participating
member of DTC. The Securities will initially be
registered in the name of Cede. The interests of
such Holders will be represented by book entries on
the records of DTC and participating members
thereof. No Holder of a Security will be entitled
to receive a definitive note representing such
person's interest, except in the event that
Securities in fully registered, certificated form
("Definitive Securities") are issued under the
limited circumstances described in "Description of
the Securities -- Book-Entry Registration of
Securities" in the Prospectus. All references in
this Prospectus Supplement to Securities reflect
the rights of Holders of such Notes only as such
rights may be exercised through DTC and its
participating organizations for so long as such
Securities are held by DTC. See "Risk
Factors -- Book-Entry Securities" herein and "Risk
Factors -- Book-Entry Registration May Reduce
Liquidity" in the Prospectus.
E. Denominations......... The Securities will be issued in minimum
denominations of $[1,000] and integral multiples of
$[1] in excess thereof.
[Final Payment of
Principal; Termination... The Trust Fund will terminate on the Distribution
Date following the earlier of (i)
and (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust
Fund. The Mortgage Loans will be subject to
optional repurchase by the Master Servicer on any
Distribution Date after the Principal Balance is
reduced to an amount less than or equal to
$ ( % of the initial Principal
Balance). The repurchase price will be equal to the
sum of the outstanding Principal Balance and
accrued and unpaid interest thereon at the weighted
average of the Loan Rates through the day preceding
the final Distribution Date. See "Description of
the Securities -- Optional Termination" herein and
"The Agreements -- Termination; Optional
Termination" in the Prospectus.
[Letter of Credit]
[Surety Bond] Issuer..... (the "[Letter of Credit] [Surety Bond]
Issuer"). See "The [Letter of Credit] [Surety Bond]
Issuer" herein.
[Letter of Credit]
[Surety Bond]............ On the Closing Date, the [Letter of Credit] [Surety
Bond] Issuer will issue a [letter of credit]
[surety bond] (the "[Letter of Credit] [Surety
Bond]") in favor of the Owner Trustee on behalf of
the Trust Fund. In the event that, on any
Distribution Date, available amounts on deposit in
the Collection Account with respect to the
preceding Collection Period are insufficient to
provide for the payment of the amount required to
be distributed to the Holders and the Master
Servicer on such Distribution Date, the Trustee
will draw on the [Letter of Credit] [Surety Bond],
to the extent of the [Letter of Credit] [Surety
Bond] Amount for such Distribution Date, in an
amount equal to such deficiency. See "Description
of the Securities -- Distributions" herein and
"Credit Enhancement" in the Prospectus.
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<PAGE> 74
[[Letter of Credit]
[Surety Bond] Amount..... The amount available under the [Letter of Credit]
[Surety Bond] (the "[Letter of Credit] [Surety
Bond] Amount") for the initial Distribution Date
will be $ . For each Distribution Date
thereafter, the [Letter of Credit] [Surety Bond]
Amount will equal the lesser of (i) % of the
Pool Balance as of the first day of the preceding
Collection Period (after giving effect to any
amounts distributed with respect to principal of
the Mortgage Loans on the Distribution Date
occurring in such preceding Collection Period) and
(ii) the [Letter of Credit] [Surety Bond] Amount as
of the first day of the preceding Collection
Period, minus any amounts drawn under the [Letter
of Credit] [Surety Bond] during such preceding
Collection Period, plus any amounts paid to the
[Letter of Credit] [Surety Bond] Issuer on the
Distribution Date occurring in such preceding
Collection Period up to the amount of any previous
draws on the [Letter of Credit] [Surety Bond].]
Federal Income Tax
Consequences............. Upon issuance of the Notes and Certificates,
, special counsel to the
Depositor ("Tax Counsel"), will issue an opinion
generally to the effect that the Trust Fund will
not be an association (or a publicly traded
partnership) taxable as a corporation for federal
income tax purposes. The Trust Fund will agree, and
the Noteholders will agree by their purchase of the
Notes, to treat the Notes as debt for federal
income tax purposes. Upon issuance of the Notes,
based on the application of existing law to the
facts as set forth in the Agreement and other
relevant documents and assuming compliance with the
terms of the Agreement as in effect on the date of
issuance of the Notes and Certificates, Tax Counsel
will issue an opinion generally to the effect that
the Notes will be treated as debt instruments for
federal income tax purposes as of such date.
It is not anticipated that the Notes will be issued
with original issue discount ("OID"). The stated
interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued
in accordance with such Noteholder's method of tax
accounting.
The Trust Fund and the Master Servicer will agree,
and the Certificateholders 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 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 Certificateholders, and the Notes being
debt of the partnership. However, the proper
characterization of the arrangement involving the
Trust Fund, the Certificates, the Notes and the
Master Servicer is not clear because there is no
authority on transactions closely comparable to
that contemplated herein. See "Federal Income Tax
Consequences" and "State Tax Consequences" herein
and "Federal Income Tax Consequences" and "State
Tax Considerations" in the Prospectus concerning
the application of federal, state and local tax
laws.
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 Notes and/or
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<PAGE> 75
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 Notes and/or Certificates. See
"ERISA Considerations." Generally, plans that are
subject to the requirements of ERISA and the Code
are permitted to purchase instruments that are
similar to the Notes that are debt under applicable
state law and have no "substantial equity features"
without reference to the prohibited transaction
rules. In the opinion of ERISA Counsel (as defined
herein), the Notes will be classified as
indebtedness without substantial equity features
for ERISA purposes. However, if the Notes are
deemed to be equity interests and no statutory,
regulatory or administrative exemption applies, the
Trust Fund will hold plan assets by reason of a
Plan's investment in the Notes. Accordingly, any
Plan fiduciary considering whether to purchase the
Notes on behalf of a Plan should consult with its
counsel regarding the applicability of the
provisions of ERISA and the Code and the
availability of any exemptions. [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 ERISA and the
Code, transactions relating to the purchase, sale
and holding of pass-through certificates
underwritten by such Underwriter such as the Notes
and/or Certificates and the servicing and operation
of asset pools, provided that certain conditions
are satisfied.] Certain classes of Notes and/or
Certificates 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."
Legal Investment........... The Securities will not constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"),
because some of the Mortgages securing the Mortgage
Loans are not first mortgages. Accordingly, many
institutions with legal authority to invest in
comparably rated securities based solely on first
mortgages may not be legally authorized to invest
in the Certificates. See "Legal Investment
Considerations" herein and "Legal Investment" in
the Prospectus.
Rating..................... It is a condition to the issuance of the Securities
that they be rated by at least
nationally recognized statistical rating
organizations (each a "Rating Agency"). In general,
ratings address credit risk and do not address the
likelihood of prepayments. A security rating is not
a recommendation to buy, sell or hold securities.
Risk Factors............... For a discussion of certain risks associated with
an investment in the Securities, see "Risk Factors"
on page S-11 herein and on page 17 in the
Prospectus.
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<PAGE> 76
RISK FACTORS
[DESCRIPTION WILL DEPEND ON THE PARTICULARS OF THE MORTGAGE LOANS]
Investors should consider the following risks in connection with the
purchase of the Securities.
BOOK-ENTRY SECURITIES
Consequences of Owning Book-Entry Securities. Issuance of the Securities
in book-entry form may reduce the liquidity of such Securities in the secondary
trading market since investors may be unwilling to purchase Securities for which
they cannot obtain physical securities.
Since transactions in the Securities can be effected only through DTC,
CEDEL, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Security Owner to pledge a Security to persons or
entities that do not participate in the DTC, CEDEL or Euroclear system may be
limited due to lack of a physical security representing the Securities.
Security Owners may experience some delay in their receipt of distributions
of interest and principal on the Securities since such distributions will be
forwarded by the Trustee to DTC and DTC will credit such distributions to the
accounts of its Participants (as defined herein) which will thereafter credit
them to the accounts of Security Owners either directly or indirectly through
indirect participants. Security Owners will not be recognized as Securityholders
as such term is used in the Agreement and Security Owners will be permitted to
exercise the rights of Securityholders only indirectly through DTC and its
Participants. See "Description of the Securities -- Book-Entry Securities"
herein and "Risk Factors -- Book-Entry Registration May Reduce Liquidity" in the
Prospectus.
CASH FLOW CONSIDERATIONS AND RISKS
Minimum monthly payments will at least equal and may exceed accrued
interest. Even assuming that the Mortgaged Properties provide adequate security
for the Mortgage Loans, substantial delay could be encountered in connection
with the liquidation of Mortgage Loans that are delinquent and corresponding
delays in the receipt of related proceeds by Holders could occur if the [Letter
of Credit] [Surety Bond] provider were unable to perform on its obligations
under the [Letter of Credit] [Surety Bond]. Further, liquidation expenses (such
as legal fees, real estate taxes, and maintenance and preservation expenses)
will reduce the proceeds payable to Holders and thereby reduce the security for
the Mortgage Loans. In the event any of the Mortgaged Properties fail to provide
adequate security for the related Mortgage Loans, Holders could experience a
loss if the [Letter of Credit] [Surety Bond] provider were unable to perform its
obligations under the [Letter of Credit] [Surety Bond].]
PREPAYMENT CONSIDERATIONS AND RISKS
Substantially all of the Mortgage Loans may be prepaid in whole or in part
at any time without penalty. Home equity loans, such as the Mortgage Loans, have
been originated in significant volume only during the past few years and neither
the Depositor nor the Master Servicer is aware of any publicly available studies
or statistics on the rate of prepayment of such loans. Generally, home equity
loans are not viewed by borrowers as permanent financing. Accordingly, the
Mortgage Loans may experience a higher rate of prepayment than traditional
loans. The Trust Fund's prepayment experience may be affected by a wide variety
of factors, including general economic conditions, interest rates, the
availability of alternative financing and homeowner mobility. In addition,
substantially all of the Mortgage Loans contain due-on-sale provisions and the
Master Servicer intends to enforce such provisions unless (i) such enforcement
is not permitted by applicable law or (ii) the Master Servicer, in a manner
consistent with reasonable commercial practice, permits the purchaser of the
related Mortgaged Property to assume the Mortgage Loan. To the extent permitted
by applicable law, such assumption will not release the original borrower from
its obligation under any such Mortgage Loan. See "Certain Legal Aspects of the
Loans -- Due-on-Sale Clauses" in the Prospectus for a description of certain
provisions of the Credit Line Agreements that may affect the prepayment
experience on the Mortgage Loans. The yield to maturity and weighted average
life of the Securities will be affected primarily by the rate and
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<PAGE> 77
timing of prepayments on the Mortgage Loans. Any reinvestment risks resulting
from a faster or slower incidence of prepayment of Mortgage Loans will be borne
entirely by the Securityholders.
Certificate Rating. The rating of the Securities will depend primarily on
an assessment by the Rating Agencies of the Loans and upon the claims-paying
ability [Letter of Credit] [Surety Bond] provider. Any reduction in a rating
assigned to the claims-paying ability of the [Letter of Credit][Surety Bond]
provider below the rating initially given to the Securities may result in a
reduction in the rating of the Securities. The rating by the Rating Agencies of
the Securities is not a recommendation to purchase, hold or sell the Securities,
inasmuch as such rating does not comment as to the market price or suitability
for a particular investor. There is no assurance that the ratings will remain in
place for any given period of time or that the ratings will not be lowered or
withdrawn by the Rating Agencies. In general, the ratings address credit risk
and do not address the likelihood of prepayments. The ratings of the Securities
do not address the possibility of the imposition of United States withholding
tax with respect to non-U.S. persons.
LEGAL CONSIDERATIONS -- LIEN PRIORITY
[The Mortgage Loans are secured by deeds of trust or mortgages (which
generally are second mortgages). With respect to Mortgage Loans that are secured
by first mortgages, the Master Servicer has the power under certain
circumstances to consent to a new mortgage lien on the Mortgaged Property having
priority over such Mortgage Loan.] Mortgage Loans secured by second mortgages
are entitled to proceeds that remain from the sale of the related Mortgage
Property after any related senior mortgage loan and prior statutory liens have
been satisfied. In the event that such proceeds are insufficient to satisfy such
loans and prior liens in the aggregate [and the [Letter of Credit] [Surety Bond]
provider is unable to perform its obligations under the [Letter of Credit]
[Surety Bond] or if the coverage under the [Letter of Credit] [Surety Bond] is
exhausted] the Trust Fund and, accordingly, the Holders, bear (i) the risk of
delay in distributions while a deficiency judgment against the borrower is
obtained and (ii) the risk of loss if the deficiency judgment cannot be obtained
or is not realized upon. See "Certain Legal Aspects of the Loans" in the
Prospectus.
LEGAL CONSIDERATIONS -- SECURITY INTEREST
Under the terms of the Purchase Agreement, so long as the long-term senior
unsecured debt of [the Master Servicer] is rated at least " " by
[and " " by ], the Master Servicer will be
entitled to maintain possession of the documentation relating to each Mortgage
Loan sold by it, including the Credit Line Agreements and the Related Documents
or other evidence of indebtedness signed by the borrower, and the assignments of
the related mortgages to the Trust Fund will not be required to be recorded.
Failure to deliver the Related Documents to the Owner Trustee will have the
result in most (if not all) of the states in which the Related Documents will be
held, and failure to record the assignments of the related mortgages to the
Owner Trustee will have the result in certain states in which the Mortgaged
Properties are located, of making the sale of the Cut-off Date Principal
Balances, Additional Balances and Related Documents potentially ineffective
against (i) any creditors of the Master Servicer, who may have been fraudulently
or inadvertently induced to rely on the Mortgage Loans as assets of the [Master
Servicer], or (ii) any purchaser of a Mortgage Loan who had no notice of the
prior conveyance to the Trust Fund if such purchaser perfects his interest in
the Mortgage Loan by taking possession of the Related Documents or other
evidence of indebtedness or otherwise. In such event, the Trust Fund would be an
unsecured creditor of the [Master Servicer].
BANKRUPTCY AND INSOLVENCY RISKS
The sale of the Mortgage Loans from the Seller to the Depositor pursuant to
the Purchase Agreement will be treated as a sale of the Mortgage Loans. The
Seller will warrant that such transfer is either a sale of its interest in the
Mortgage Loans or a grant of a first priority perfected security interest
therein. In the event of an insolvency of the Seller, the receiver of the Seller
may attempt to recharacterize the sale of the Mortgage Loans as a borrowing by
the Seller secured by a pledge of the Mortgage Loans. If the receiver decided to
challenge such transfer, delays in payments of the Securities and possible
reductions in the amount thereof
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<PAGE> 78
could occur. The Depositor will warrant in the Trust Agreement that the transfer
of its interest in the Mortgage Loans to the Trust Fund is a valid transfer and
assignment of such interest.
If a conservator, receiver or trustee were appointed for the Seller, or if
certain other events relating to the bankruptcy or insolvency of the Seller were
to occur, Additional Balances would not be transferred by the Seller to the
Trust Fund. In such an event, an Event of Default under the Pooling and
Servicing Agreement and Indenture would occur and the Owner Trustee would
attempt to sell the Mortgage Loans (unless Holders holding Securities evidencing
undivided interests aggregating at least 51% of each of the Security Principal
Balance of the Notes and the Certificates instruct otherwise), thereby causing
early payment of the Security Principal Balance of the Notes and the
Certificates.
In the event of a bankruptcy or insolvency of the Master Servicer, the
bankruptcy trustee or receiver may have the power to prevent the applicable
Trustee or the Holders from appointing a successor Master Servicer.
[Geographic Concentration. As of the Cut-off Date, approximately % (by
Cut-off Date Principal Balance) of the Mortgaged Properties are located in the
State of . An overall decline in the residential
real estate market could adversely affect the values of the Mortgaged Properties
securing such Mortgage Loans such that the Principal Balances of the related
Mortgage Loans, together with any primary financing on such Mortgaged
Properties, could equal or exceed the value of such Mortgaged Properties. As the
residential real estate market is influenced by many factors, including the
general condition of the economy and interest rates, no assurances may be given
that the residential real estate market will not weaken. If the
residential real estate market should experience an overall
decline in property values after the dates of origination of the Mortgage Loans,
the rates of losses on the Mortgage Loans would be expected to increase, and
could increase substantially.]
MASTER SERVICER'S ABILITY TO CHANGE THE TERMS OF THE MORTGAGE LOANS
[The Master Servicer may agree to changes in the terms of a Credit Line
Agreement, provided that such changes (i) do not adversely affect the interest
of the Holders or the [Letter of Credit] [Surety Bond] provider, and (ii) are
consistent with prudent business practice. There can be no assurance that
changes in applicable law or the marketplace for home equity loans or prudent
business practice will not result in changes in the terms of the Mortgage Loans.
In addition, the Master Servicing Agreement permits the Master Servicer, within
certain limitations described therein, to increase the Credit Limit of the
related Mortgage Loan or reduce the Margin for such Mortgage Loan.] Any such
increase in the Credit Limit of a Mortgage Loan would increase the Loan-to-Value
Ratio of such Mortgage Loan and, accordingly, would increase the risk of the
Trust Fund's investment in such Mortgage Loan. In addition, any reduction in the
Margin of a Mortgage Loan would reduce the excess cash flow available to absorb
losses.
DELINQUENT MORTGAGE LOANS
The Trust Fund will include Mortgage Loans which are or fewer days
delinquent. The Cut-off Date Principal Balance of such delinquent Mortgage Loans
was $ .]
For a discussion of additional risks pertaining to the Securities, see
"Risk Factors" in the Prospectus.
THE TRUST FUND
GENERAL
The Issuer, Home Equity Loan Trust 199 , is a business trust formed under
the laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described in this Prospectus Supplement. The Trust Agreement
constitutes the "governing instrument" under the laws of the State of Delaware
relating to business trusts. After its formation, the Issuer will not engage in
any activity other than (i) acquiring, holding and managing the Mortgage Loans
and the other assets of the Trust Fund and proceeds therefrom, (ii) issuing the
Notes and the Certificates, (iii) making payments on the Notes and the
Certificates and (iv) engaging in
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<PAGE> 79
other activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith.
The property of the Trust Fund will consist of: (i) each of the Mortgage
Loans that are secured by first, second and third mortgages or deeds of trust on
Mortgaged Properties; (ii) collections on the Mortgage Loans received after the
Cut-off Date; (iii) Mortgaged Properties relating to the Mortgage Loans that are
acquired by foreclosure or deed in lieu of foreclosure; (iv) the Collection
Account and the Distribution Account (excluding net earnings thereon); (v) the
[Letter of Credit] [Surety Bond]; and (vi) an assignment of the Depositor's
rights under the Purchase Agreement, including all rights of the Depositor to
purchase Additional Balances.
The Trust Fund's principal offices are in , Delaware, in
care of , as Owner Trustee, at .
THE [LETTER OF CREDIT] [SURETY BOND] ISSUER
The following information with respect to (" ") has been
furnished by . Accordingly, none of the Issuer, the Depositor or
the Master Servicer makes any representation as to the accuracy and completeness
of such information.
[DESCRIPTION OF LETTER OF CREDIT/SURETY ISSUER]
THE MASTER SERVICER
GENERAL
[The Master Servicer will service the Mortgage Loans in accordance with the
terms set forth in the Master Servicing Agreement. The Master Servicer may
perform any of its obligations under the Master Servicing Agreement through one
or more subservicers. Notwithstanding any such subservicing arrangement, 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 Mortgage Loans. As of the Closing Date, the Master Servicer will
service the Mortgage Loans without subservicing arrangements.]
THE MASTER SERVICER
(" ") will act as Master Servicer for the Mortgage Loans
pursuant to the Master Servicing Agreement.
At , 199 , provided servicing for
approximately $ [billion] aggregate principal amount of first-lien
mortgage loans, substantially all of which are being serviced for unaffiliated
persons. At , 199 , [ ] provided servicing for approximately
$ [million] aggregate principal amount of first and second lien
mortgage loans originated under home equity lines of credit.
The principal executive offices of are located at
. Its telephone number is ( ) - .
THE HOME EQUITY LOAN PROGRAM
UNDERWRITING PROCEDURES RELATING TO HOME EQUITY LOANS
The following is a description of the underwriting procedures customarily
employed by the Seller with respect to home equity loans. [Each revolving home
equity line of credit is originated after a review by the Seller in accordance
with its established underwriting procedures, which are intended to assess the
applicant's ability to assume and repay such home equity lines of credit and the
adequacy of the real property which
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<PAGE> 80
serves as collateral for such home equity lines of credit. The maximum home
equity line of credit provided by the Seller is $ ].
Each applicant for a home equity line of credit is required to complete an
application which lists the applicant's assets, liabilities, income, credit and
employment history and other demographic and personal information. If
information in the loan application demonstrates that there is sufficient income
and equity to justify making a home equity line of credit, the Seller will
conduct a further credit investigation of the applicant. This investigation
includes: [(i) obtaining and reviewing an independent credit bureau report on
the credit history of the borrower in order to evaluate the borrower's ability
to repay; (ii) obtaining a verification of employment from the applicant's
employer; (iii) obtaining and reviewing pay stubs, income tax returns and/or W-2
forms in order to verify the applicant's income; and (iv) in the case of all
home equity lines of credit originated with a Credit Limit in excess of
$ or with any Credit Limit, if originated after ,
obtaining a drive-by appraised value (a "Drive-By Appraised Value") of the
property to be mortgaged through an independent frontal exterior inspection and
neighborhood observation (a "Drive-By Appraisal") of the property or, in the
case of home equity lines of credit originated prior to in an
amount of $ or less, making an estimate of the value (the "Estimated
Value") of the property to be mortgaged through, (a) in the case of home equity
lines of credit originated for such properties located in the State of
, the use of a formula that assumed that the then current value of
the property was equal to the amount the applicant paid for the property
together with appreciation of % of the purchase price for each year since
the applicant purchased the property and (b) in the case of home equity lines of
credit originated for such properties located in , a
property tax bill which reflected a 100% assessment on the property].
Although no complete title search of the property to be mortgaged is
required, a bring-down to the date of origination of the home equity lines of
credit of the complete title search obtained by the borrower at the time of his
original purchase of the mortgaged property must be delivered.
The Seller calculates the maximum amount of the loan that the customer may
obtain by taking % (or, in the case of home equity lines of credit
originated prior to , %) of the Drive-By Appraised Value or
Estimated Value, as the case may be, of the property and subtracting any
outstanding senior mortgage balance. Financial insurance premiums and fees are
not considered in the loan amount when making such computation.
Applications for loans exceeding the maximum amount calculated in the
preceding paragraph require regional manager approval. Overrides of other
criteria may be authorized by branch managers up to their lending limits. Among
the reasons that the Seller grants overrides are the existence of compensating
balances of the borrower in accounts held by the Seller (which balances will not
necessarily be available in the event of a default or delinquency of any
Mortgage Loan in the Pool) and relationships between the borrower and the trust
department of the Seller.
No information is available with respect to the portion of the home equity
lines of credit in the Seller's portfolio as to which overrides of underwriting
criteria were granted.
SERVICING OF THE MORTGAGE LOANS
[Centralized controls and standards have been established by the Master
Servicer for the servicing and collection of home equity lines of credit.
Servicing includes, but is not limited to, post-origination loan processing,
customer service, remittance processing, collections and liquidations.
The collection process is initiated ten days after the payment due date
with the computer generation of a late notice. To make payment arrangements, a
collector attempts to contact the borrower when the home equity line of credit
is 15 to 30 days past due.
During the period when an account is 45 to 60 days past due, a credit
bureau report is obtained, homeowner's insurance is verified, the status of
senior mortgages and property taxes is checked and a title search and "drive-by"
appraisal are ordered.
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<PAGE> 81
If arrangements have not been made to cure the delinquency within 60 days
of the line becoming past due, drawing privileges are cancelled. The line is
referred to outside counsel and is placed on a "non-accrual" status after 90
days of delinquency. All legal expenses are assessed to the account and become
the responsibility of the borrower. When it is determined by the Master Servicer
that there is no possibility of recovery from the mortgaged property or from
other leviable assets or wage attachments, the line is charged-off.
Reinstatement arrangements can be made up until the point of sale. Any
foreclosures initiated on a junior mortgage are subject to the senior mortgage
or mortgages and any outstanding property taxes. If the Servicer purchases the
property through the foreclosure action, the account is transferred to the
Master Servicer's REO Department which is maintained at . The REO
Department is responsible for maintaining and marketing the property.
The Master Servicer may not foreclose on the property securing a junior
mortgage loan unless the Master Servicer forecloses subject to any senior
mortgages, in which case the Master Servicer may pay the entire amount due on
the senior mortgage to the senior mortgagees at or prior to the foreclosure
sale. If a senior mortgage is in default after the Servicer has initiated its
foreclosure action, the Master Servicer may advance funds to keep senior
mortgages current until such time as the Master Servicer satisfies such senior
mortgages. In the event that foreclosure proceedings have been instituted on a
senior mortgage prior to the initiation of the Master Servicer's foreclosure
action, the Master Servicer may either satisfy the senior mortgage at the time
of the foreclosure sale or take other action to protect the Trust Fund's
interest in the related property.]
FORECLOSURE AND DELINQUENCY EXPERIENCE
The following tables set forth the delinquency and loss experience for each
of the periods shown for the Master Servicer's portfolio of home equity lines of
credit. The Master Servicer believes that there have been no material trends or
anomalies in the historical delinquency and loss experience as represented in
the following tables. The information in the tables below has not been adjusted
to eliminate the effect of the growth in the size of the Master Servicer's
portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of such loans for each period may be
higher than those shown if a group of such loans were artificially isolated at a
point in time and the information showed the activity only in that isolated
group. The data presented in the following tables are for illustrative purposes
only, and there is no assurance that the delinquency and loss experience of the
Mortgage Loans will be similar to that set forth below.
DELINQUENCY STATUS AS OF , 199 *
<TABLE>
<CAPTION>
DOLLARS PERCENT UNITS PERCENT
------- ------- ----- -------
<S> <C> <C> <C> <C>
Current..................................................... $ % %
30-59 days..................................................
60-89 days..................................................
90+ days....................................................
Total............................................. $ 100.00% 100.00%
====== ======= ==== ======
</TABLE>
- ---------------
* Delinquencies are reported on a contractual basis.
As of , 199 , loans with an aggregate balance of
$ are in bankruptcy and loans with an aggregate balance of
$ are in foreclosure. Of the loans in foreclosure, there will be a
199 charge off of $ . [In addition to this charge off, there
is an anticipated charge off of approximately $ which may also be
realized in .]
S-16
<PAGE> 82
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The Mortgage Loans were originated pursuant to loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, which are first and more subordinate mortgages or
deeds of trust, on Mortgaged Properties located in [ ] states. The Mortgaged
Properties securing the Mortgage Loans consist of residential properties that
are one- to four-family properties. See "-- Mortgage Loan Terms" below.
The Cut-off Date Pool Balance is $ , which is equal to the
aggregate Principal Balances of the Mortgage Loans as of the Cut-off Date. As of
the Cut-off Date, the Mortgage Loans were not more than
days delinquent. The average Cut-off Date Principal Balance was approximately
$ , the minimum Cut-off Date Principal Balance was zero, the maximum
Cut-off Date Principal Balance was $ , the minimum Loan Rate and the
maximum Loan Rate as of the Cut-off Date were % and % per annum,
respectively, and the weighted average Loan Rate as of the Cut-off Date was
approximately % per annum. As of the Cut-off Date, the weighted average
Credit Limit Utilization Rate was approximately %, the minimum Credit Limit
Utilization Rate was zero and the maximum Credit Limit Utilization Rate was
100%. The "Credit Limit Utilization Rate" is determined by dividing the Cut-off
Date Principal Balance of a Mortgage Loan by the Credit Limit of the related
Credit Line Agreement. The remaining term to scheduled maturity for the Mortgage
Loans as of the Cut-off Date ranged from months to months and the
weighted average remaining term to scheduled maturity was approximately
months. As of the Cut-off Date, the Combined Loan-to-Value Ratio of the
Mortgage Loans ranged from % to % and the weighted average Combined
Loan-to-Value Ratio was %. The Combined Loan-to-Value Ratio for a Mortgage
Loan is the ratio (expressed as a percentage) of (A) the sum of (i) the Credit
Limit of the Mortgage Loan and (ii) any outstanding principal balances of
mortgage loans senior to such Mortgage Loan (calculated at the date of
origination of the Mortgage Loan) to (B) the lesser of (i) the appraised value
of the related Mortgaged Property as set forth in the loan files at such date of
origination or (ii) [in the case of a Mortgaged Property purchased within one
year of the origination of the related Mortgage Loan], the purchase price of
such Mortgaged Property. Credit Limits under the Mortgage Loans as of the
Cut-off Date ranged from $ to $ and averaged approximately
$ . The weighted average [second] [third] mortgage ratio (which is the
Credit Limit for the related Mortgage Loan, provided such Mortgage Loan was in
the [second] [third] lien position, divided by the sum of such Credit Limit and
the outstanding principal balance of any mortgage loan senior to the related
Mortgage Loan) was approximately %. As of the Cut-off Date, approximately
% by Cut-off Date Principal Balance of the Mortgage Loans represented first
liens on the related Mortgaged Properties, approximately % of the Mortgage
Loans represented second liens and approximately % of the Mortgage Loans
represented third liens. As of the Cut-off Date, approximately % of the
Mortgage Loans are secured by Mortgaged Properties which are single-family
residences and % were owner-occupied. As of the Cut-off Date, approximately
%, %, %, %, % and % by Cut-off Date Principal
Balance are located in [ , , , , and
], respectively.
MORTGAGE LOAN TERMS
A borrower may access a Mortgage Loan by writing a check in a minimum
amount of [$250]. The Mortgage Loans bear interest at a variable rate which
changes [monthly on the first business day of the related month] with changes in
the applicable Index Rate. The Mortgage Loans are subject to a maximum per annum
interest rate (the "Maximum Rate") ranging from % to % per annum and
subject to applicable usury limitations. As of the Cut-off Date, the weighted
average Maximum Rate was approximately %. See "Certain Legal Aspects of the
Loans -- Applicability of Usury Laws" in the Prospectus. The daily periodic rate
on the Mortgage Loans (the "Loan Rate") is the sum of the Index Rate plus the
spread (the "Margin") which generally ranges between % and % and had a
weighted average, as of the Cut-off Date, of approximately %, divided by
365 days. The "Index Rate" is based on [the highest "prime rate"
S-17
<PAGE> 83
published in the "Money Rates" table of The Wall Street Journal as of the first
business day of each calendar month].
[In general, the home equity loans may be drawn upon for a period (the
"Draw Period") of either five years (which may be extendible for an additional
five years, upon the approval of [ ]) or three years. Home equity loans
with an initial Draw Period of five years, which constitute approximately % of
the Mortgage Loans by Cut-off Date Principal Balance, are subject to a fifteen
year repayment period (the "Repayment Period") following the end of the Draw
Period during which the outstanding principal balance of the loan will be repaid
in monthly installments equal to [ 1/180] of the outstanding principal balance
as of the end of the Draw Period. Mortgage Loans with a Draw Period of three
years, which constitute approximately % of the Mortgage Loans by Cut-off
Date Principal Balance, are subject to a ten year Repayment Period following the
end of the Draw Period during which the outstanding principal balance of the
loan will be paid in monthly installments equal to [ 1/120] of the outstanding
principal balance as of the end of the Draw Period.]
[The minimum payment due during the Draw Period will be equal to the
finance charges accrued on the outstanding principal balance of the home equity
loan during the related billing period. The minimum payment due during the
repayment period will be equal to the sum of the finance charges accrued on the
outstanding principal balance of the Mortgage Loan during the related billing
period and the principal payment described above.]
Set forth below is a description of certain characteristics of the Mortgage
Loans as of the Cut-off Date:
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT OF
POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
RANGE OF PRINCIPAL BALANCES LOANS BALANCE BALANCE
- --------------------------- --------- ------------ ------------
<S> <C> <C> <C>
$ to $ ............................... $ %
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ and over.....................................
----- ---------- ------
Total......................................... $ 100.00%
===== ========== ======
</TABLE>
S-18
<PAGE> 84
GEOGRAPHIC DISTRIBUTION(1)
<TABLE>
<CAPTION>
PERCENT OF
POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
STATE LOANS LOANS BALANCE BALANCE
- ----------- --------- ------------ ------------
<S> <C> <C> <C>
....................................... $ %
----- ---------- -------
Total......................................... $ 100.00%
===== ========== =======
</TABLE>
- ---------------
(1) Geographic location is determined by the address of the Mortgaged Property
securing the related Mortgage Loan.
COMBINED LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
PERCENT OF
POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF COMBINED MORTGAGE PRINCIPAL PRINCIPAL
LOAN TO VALUE RATIOS LOANS BALANCE BALANCE
- -------------------- --------- ------------ ------------
<S> <C> <C> <C>
$ to $ ............................... $ %
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ and over.....................................
----- ---------- ------
Total......................................... $ 100.00%
===== ========== ======
</TABLE>
- ---------------
(1) The ratio (expressed as a percentage) of (A) the sum of (i) the Credit Limit
of the Mortgage Loans and (ii) any outstanding principal balances of
mortgage loans senior to the Mortgage Loans (calculated at the date of
origination of the Mortgage Loans) to (B) the lesser of (i) the appraised
value of the related Mortgaged Property as set forth in loan files at such
date of origination or (ii) [in the case of a Mortgaged Property purchased
within one year of the origination of the related Mortgage Loan, the
purchase price of such Mortgaged Property].
S-19
<PAGE> 85
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENT OF
POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
PROPERTY TYPE LOANS BALANCE BALANCE
- ------------- --------- ------------ ------------
<S> <C> <C> <C>
Single Family........................................... $ %
Two- to Four-Family.....................................
Condominium.............................................
PUD.....................................................
----- ---------- ------
Total......................................... $ 100.00%
===== ========== ======
</TABLE>
LIEN PRIORITY
<TABLE>
<CAPTION>
PERCENT OF
POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
LIEN PRIORITY LOANS BALANCE BALANCE
- ------------- --------- ------------ ------------
<S> <C> <C> <C>
First Lien.............................................. $ %
Second Lien.............................................
Third Lien..............................................
----- ---------- ------
Total......................................... $ 100.00%
===== ========== ======
</TABLE>
LOAN RATES(1)
<TABLE>
<CAPTION>
PERCENT OF
POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF MORTGAGE PRINCIPAL PRINCIPAL
LOAN RATES LOANS BALANCE BALANCE
- ---------- --------- ------------ ------------
<S> <C> <C> <C>
$ to $ ............................... $ %
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
$ to $ ...............................
----- ---------- ------
Total......................................... $ 100.00%
===== ========== ======
</TABLE>
- ---------------
(1) Approximately % of the Mortgage Loans by Cut-Off Date Principal Balance
are subject to an introductory rate of % per annum.
S-20
<PAGE> 86
MARGIN
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF MORTGAGE PRINCIPAL PRINCIPAL
LOAN RATES LOANS BALANCE BALANCE
- ---------- --------- ------------ ------------
<S> <C> <C> <C>
$ to $ ........................ $ %
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
------ ------- ------
Total.................................. $ 100.00%
====== ======= ======
</TABLE>
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF CREDIT LIMIT MORTGAGE PRINCIPAL PRINCIPAL
UTILIZATION RATES LOANS BALANCE BALANCE
- --------------------- --------- ------------ ------------
<S> <C> <C> <C>
$ to $ ........................ $ %
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
------ ------- ------
Total.................................. $ 100.00%
====== ======= ======
</TABLE>
S-21
<PAGE> 87
CREDIT LIMITS
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
RANGE OF CREDIT LIMITS LOANS BALANCE BALANCE
- ---------------------- --------- ------------ ------------
<S> <C> <C> <C>
$ to $ ........................ $ %
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ and over..............................
------ ------- ------
Total.................................. $ 100.00%
====== ======= ======
</TABLE>
MAXIMUM RATES
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
MAXIMUM RATES LOANS BALANCE BALANCE
- ------------- --------- ------------ ------------
<S> <C> <C> <C>
$ ....................... $ %
$ .......................
$ .......................
$ .......................
$ .......................
$ .......................
$ .......................
$ .......................
$ .......................
$ .......................
$ .......................
------ ------- ------
Total.................................. $ 100.00%
====== ======= ======
</TABLE>
S-22
<PAGE> 88
MONTHS REMAINING TO SCHEDULED MATURITY(1)
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF MONTHS MORTGAGE PRINCIPAL PRINCIPAL
REMAINING TO SCHEDULED MATURITY LOANS BALANCE BALANCE
- ------------------------------- --------- ------------ ------------
<S> <C> <C> <C>
$ to $ ........................ $ %
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
$ to $ ........................
------ ------- ------
Total.................................. $ 100.00%
====== ======= ======
</TABLE>
ORIGINATION YEAR
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
ORIGINATION YEAR LOANS BALANCE BALANCE
- ---------------- --------- ------------ ------------
<S> <C> <C> <C>
........................ $ %
------ ------- ------
Total.................................. $ 100.00%
====== ======= ======
</TABLE>
DELINQUENCY STATUS
<TABLE>
<CAPTION>
PERCENT
OF POOL BY
NUMBER OF CUT-OFF DATE CUT-OFF DATE
MORTGAGE PRINCIPAL PRINCIPAL
NUMBER OF DAYS DELINQUENT LOANS BALANCE BALANCE
- ------------------------- --------- ------------ ------------
<S> <C> <C> <C>
0 to 29.......................................... $ %
30 to 59.........................................
60 to 89.........................................
------ ------- ------
Total.................................. $ 100.00%
====== ======= ======
</TABLE>
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Securities, the Depositor will transfer to
the Trust Fund all of its right, title and interest in and to each Mortgage Loan
(including its right to purchase any Additional Balances arising in the future),
related Credit Line Agreements, mortgages and other related documents
(collectively, the "Related Documents"), without recourse, including all
collections received on or with respect to each such
S-23
<PAGE> 89
Mortgage Loan after the Cut-off Date (exclusive of payments in respect of
accrued interest due on or prior to the Cut-off Date or due in the month of
). The Owner Trustee, concurrently with such transfer, will
deliver the Securities. Each Mortgage Loan transferred to the Owner Trust will
be identified on a schedule delivered to the Owner Trustee pursuant to the
Purchase Agreement. Such schedule will include information as to the Cut-off
Date Principal Balance of each Mortgage Loan, as well as information with
respect to the Loan Rate.
[The Purchase Agreement will permit the Seller to maintain possession of
the Related Documents and certain other documents relating to the Mortgage Loans
(the "Mortgage Files") and assignments of the Mortgage Loans to the Owner
Trustee will not be required to be recorded for so long as the long-term senior
unsecured debt of [ ] is rated at least " " by
and " " by . In the event that the
long-term senior unsecured debt rating of [ ] does not satisfy the
above-described standards (an "Assignment Event"), [ ] will have 90
days to record assignments of the mortgages for each such Mortgage Loan in favor
of the Owner Trustee and 60 days to deliver the Mortgage Files pertaining to
each such Mortgage Loan to the Trustee (unless opinions of counsel satisfactory
to the Rating Agencies and the [Letter of Credit][Surety Bond] provider to the
effect that recordation of such assignments or delivery of such documentation is
not required in the relevant jurisdiction to protect the interest of
[ ] and the Owner Trustee in the Mortgage Loans).] In lieu of
delivery of original documentation, [ ] may deliver documents which
have been imaged optically upon delivery of an opinion of counsel that such
documents do not impair the enforceability of the transfer to the Trust Fund of
the Mortgage Loans.
Within [90] days of on Assignment Event, the Owner Trustee will review the
Mortgage Loans and the Related Documents and if any Mortgage Loan or Related
Document is found to be defective in any material respect and such defect is not
cured within [90] days following notification thereof to the Seller and the
Depositor by the Owner Trustee, the Seller will be obligated to repurchase the
Mortgage Loan and to deposit the Repurchase Price into the Collection Account.
Upon such retransfer, the Principal Balance of such Mortgage Loan will be
deducted from the Pool Balance. In lieu of any such repurchase, the Seller may
substitute an Eligible Substitute Mortgage Loan. Any such repurchase or
substitution will be considered a payment in full of such Mortgage Loan. The
obligation of the Seller to accept a transfer of a Defective Mortgage Loan is
the sole remedy regarding any defects in the Mortgage Loans and Related
Documents available to the Owner Trustee or the Holders.
With respect to any Mortgage Loan, the "Repurchase Price" is equal to the
Principal Balance of such Mortgage Loan at the time of any transfer described
above plus accrued and unpaid interest thereon to the date of repurchase.
[An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Depositor for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not % more or less than the Transfer Deficiency
relating to such Defective Mortgage Loan; (ii) have a Loan Rate not less than
the Loan Rate of the Defective Mortgage Loan and not more than 1% in excess of
the Loan Rate of such Defective Mortgage Loan; (iii) have a Loan Rate based on
the same Index with adjustments to such Loan Rate made on the same Interest Rate
Adjustment Date as that of the Defective Mortgage Loan; (iv) have a Margin that
is not less than the Margin of the Defective Mortgage Loan and not more than
basis points higher than the Margin for the Defective Mortgage Loan; (v) have a
mortgage of the same or higher level of priority as the mortgage relating to the
Defective Mortgage Loan; (vi) have a remaining term to maturity not more than
months earlier and not more than months later than the remaining term to
maturity of the Defective Mortgage Loan; (vii) comply with each representation
and warranty as to the Mortgage Loans set forth in the Purchase Agreement
(deemed to be made as of the date of substitution); (viii) in general, have an
original Combined Loan-to-Value Ratio not greater than that of the Defective
Mortgage Loans; and (ix) satisfy certain other conditions specified in the
Purchase Agreement. To the extent the Principal Balance of an Eligible
Substitute Mortgage Loan is less than the Principal Balance of the related
Defective Mortgage Loan, the Seller will be required to make a deposit to the
Collection Account equal to such difference.]
S-24
<PAGE> 90
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the Owner
Trustee with respect to each Mortgage Loan (e.g., Cut-off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant on the
Closing Date that at the time of transfer to the Depositor, the Seller has
transferred or assigned all of its right, title and interest in each Mortgage
Loan and the Related Documents, free of any lien (subject to certain
exceptions). Upon discovery of a breach of any such representation and warranty
which materially and adversely affects the interests of the Holders or the
[Letter of Credit][Surety Bond] provider in the Related Mortgage Loan and
Related Documents, the Seller will have a period of [90] days after discovery or
notice of the breach to effect a cure. If the breach cannot be cured within the
[90-day] period, the Seller will be obligated to repurchase or substitute the
Defective Mortgage Loan from the Trust Fund. The same procedure and limitations
that are set forth above for the repurchase or substitution of Defective
Mortgage Loans will apply to the transfer of a Mortgage Loan that is required to
be repurchased or substituted because of a breach of a representation or
warranty in the Purchase Agreement that materially and adversely affects the
interests of the Holders.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
MATURITY AND PREPAYMENT CONSIDERATIONS
All of the Mortgage Loans may be prepaid in full or in part at any time.
[However, Mortgage Loans secured by Mortgaged Properties in California are
subject to an account termination fee equal to the lesser of $350 and six months
interest on the amount prepaid, to the extent the prepaid amount exceeds 20% of
the unpaid principal balance, if the account is terminated on or before its
fifth year anniversary. In addition, Mortgage Loans secured by Mortgaged
Properties in other jurisdictions may be subject to account termination fees to
the extent permitted by law. In general, such account termination fees do not
exceed $350 and do not apply to accounts terminated subsequent to a date
designated in the related Mortgage Note which, depending on the jurisdiction,
ranges between six months and five years following origination.] The prepayment
experience with respect to the Mortgage Loans will affect the weighted average
life of the Securities.
The rate of prepayment on the Mortgage Loans cannot be predicted. Neither
the Depositor nor the Master Servicer is aware of any publicly available studies
or statistics on the rate of prepayment of such Mortgage Loans. Generally, home
equity revolving credit lines are not viewed by borrowers as permanent
financing. Accordingly, the Mortgage Loans may experience a higher rate of
prepayment than traditional first mortgage loans. On the other hand, because the
Mortgage Loans amortize as described under "Description of the Mortgage
Loans -- Mortgage Loan Terms" herein, rates of principal payment on the Mortgage
Loans will generally be slower than those of traditional fully-amortizing first
mortgages in the absence of prepayments on such Mortgage Loans. The prepayment
experience of the Trust Fund with respect to the Mortgage Loans may be affected
by a wide variety of factors, including general economic conditions, prevailing
interest rate levels, the availability of alternative financing, homeowner
mobility, the frequency and amount of any future draws on the Credit Line
Agreements and changes affecting the deductibility for Federal income tax
purposes of interest payments on home equity credit lines. Substantially all of
the Mortgage Loans contain "due-on-sale" provisions, and, with respect to the
Mortgage Loans, the Master Servicer intends to enforce such provisions, unless
such enforcement is not permitted by applicable law. The enforcement of a
"due-on-sale" provision will have the same effect as a prepayment of the related
Mortgage Loan. See "Certain Legal Aspects of the Loans -- Due-on-Sale Clauses"
in the Prospectus.
The yield to an investor who purchases the Securities in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Mortgage Loans is actually different than the rate
anticipated by such investor at the time such Securities were purchased.
Collections on the Mortgage Loans may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for such month or as high as the entire outstanding principal balance
plus accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make scheduled payments. Collections on the Mortgage Loans
may vary due to seasonal purchasing and payment habits of borrowers.
S-25
<PAGE> 91
No assurance can be given as to the level of prepayments that will be
experienced by the Trust Fund and it can be expected that a portion of borrowers
will not prepay their Mortgage Loans to any significant degree. See "Yield and
Prepayment Considerations" in the Prospectus.
DESCRIPTION OF THE MASTER SERVICING AGREEMENT
The Master Servicer shall establish and maintain on behalf of the Owner
Trustee an account (the "Collection Account") for the benefit of the Holders.
The Collection Account will be an Eligible Account (as defined herein). Subject
to the investment provision described in the following paragraphs, upon receipt
by the Master Servicer of amounts in respect of the Mortgage Loans (excluding
amounts representing administrative charges, annual fees, taxes, assessments,
credit insurance charges, insurance proceeds to be applied to the restoration or
repair of a Mortgaged Property or similar items), the Master Servicer will
deposit such amounts in the Collection Account. Amounts so deposited may be
invested in Eligible Investments (as described in the Servicing Agreement)
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 or on
such Distribution Date if approved by the Rating Agencies. Not later than the
Business Day prior to each Distribution Date (the "Determination Date"), the
Master Servicer will notify the Owner Trustee and the Indenture Trustee of the
amount of such deposit to be included in funds available for the related
Distribution Date.
The Owner Trustee and the Indenture Trustee will establish one or more
accounts (the "Security Account") into which will be deposited amounts withdrawn
from the Collection Account for distribution to Holders on a Distribution Date.
The Security Account will be an Eligible Account. Amounts on deposit therein
will be invested in Eligible Investments maturing on or before the Business Day
prior to the related Distribution Date.
An "Eligible Account" is (i) an account that is maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the highest short-term debt rating by the Rating Agencies, (ii) one or more
accounts with a depository institution having a minimum long-term unsecured debt
rating of " " by and " " by
, 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 established by such fund, (iii) a
segregated trust account maintained with the Owner Trustee or an Affiliate of
the Owner Trustee in its fiduciary capacity or (iv) otherwise acceptable to each
Rating Agency as evidenced by a letter from each Rating Agency to the Owner
Trustee, without reduction or withdrawal of their then current ratings of the
Securities.
Eligible Investments are specified in the Servicing Agreement and are
limited to (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 Securities, or such lower rating as will not
result in the downgrading or withdrawal of the ratings then assigned to the
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 the 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 or 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. is not a Rating Agency) are then rated 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 the 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,
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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 the 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 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 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 the rating then
assigned to the Securities by any such Rating Agency, as evidenced by a signed
writing delivered by each such Rating Agency; and (viii) such other investments
having a specified stated maturity and bearing interest or sold at a discount
acceptable to each Rating Agency as will not result in the downgrading or
withdrawal of the rating then assigned to the Securities by any such Rating
Agency, as evidenced by a signed writing delivered 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.
ALLOCATIONS AND COLLECTIONS
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements between amounts collected in respect
of interest and amounts collected in respect of principal. As to any
Distribution Date, "Interest Collections" will be equal to the aggregate of the
amounts collected during the related Collection Period, including Net
Liquidation Proceeds (as defined below), allocated to interest pursuant to the
terms of the Credit Line Agreements.
As to any Distribution Date, "Principal Collections" will be equal to the
sum of (i) the amounts collected during the related Collection Period, including
Net Liquidation Proceeds, and allocated to principal pursuant to the terms of
the Credit Line Agreements and (ii) any Substitution Adjustment Amounts. "Net
Liquidation Proceeds" with respect to a Mortgage Loan are equal to the aggregate
of all amounts received upon liquidation of such Mortgage Loan, including,
without limitation, insurance proceeds, reduced by related expenses, but not
including the portion, if any, of such amount that exceeds the Principal Balance
of the Mortgage Loan at the end of the Collection Period immediately preceding
the Collection Period in which such Mortgage Loan became a Liquidated Mortgage
Loan plus accrued and unpaid interest thereon through the date of liquidation.
With respect to any date, the "Pool Balance" will be equal to the aggregate
of the Principal Balances of all Mortgage Loans as of such date. The Principal
Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on any day is
equal to the Cut-off Date Principal Balance thereof, plus (i) any Additional
Balances in respect of such Mortgage Loan minus (ii) all collections credited
against the Principal Balance of such Mortgage Loan in accordance with the
related Credit Line Agreement prior to such day. The Principal Balance of a
Liquidated Mortgage Loan after final recovery of related Liquidation Proceeds
shall be zero.
HAZARD INSURANCE
[The Master Servicing Agreement provides that the Master Servicer maintain
certain hazard insurance on the Mortgaged Properties relating to the Mortgage
Loans. While the terms of the related Credit Line Agreements generally require
borrowers to maintain certain hazard insurance, the Master Servicer will not
monitor the maintenance of such insurance.
The Master Servicing Agreement requires the Master Servicer to maintain for
any Mortgaged Property relating to a Mortgage Loan acquired upon foreclosure of
a Mortgage Loan, or by deed in lieu of such foreclosure, hazard insurance with
extended coverage in an amount equal to the lesser of (a) the maximum insurable
value of such Mortgaged Property or (b) the outstanding balance of such Mortgage
Loan plus the outstanding balance on any mortgage loan senior to such Mortgage
Loan at the time of foreclosure or deed in lieu of foreclosure, plus accrued
interest and the Master Servicer's good faith estimate of the related
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liquidation expenses to be incurred in connection therewith. The Master
Servicing Agreement provides that the Master Servicer may satisfy its obligation
to cause hazard policies to be maintained by maintaining a blanket policy
insuring against losses on such Mortgaged Properties. If such blanket policy
contains a deductible clause, the Master Servicer will be obligated to deposit
in the Collection Account the sums which would have been deposited therein but
for such clause. The Master Servicer will initially satisfy these requirements
by maintaining a blanket policy. As set forth above, all amounts collected by
the Master Servicer (net of any reimbursements to the Master Servicer) under any
hazard policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property) will ultimately be deposited in the Collection Account.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and the like, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by state laws and most of such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive or an
exact description of the insurance policies relating to the Mortgaged
Properties.]
REALIZATION UPON DEFAULTED MORTGAGE LOANS
[The Master Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when in accordance with applicable servicing procedures under the Master
Servicing Agreement, no satisfactory arrangements can be made for the collection
of delinquent payments. In connection with such foreclosure or other conversion,
the Master Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general subordinate mortgage servicing
activities, provided the Master Servicer will not be required to expend its own
funds in connection with foreclosure or other conversion, correction of default
on a related senior mortgage loan or restoration of any property unless, in its
sole judgment, such foreclosure, correction or restoration will increase net
Liquidation Proceeds. The Master Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Holders or the [Transferor][Seller].
"Net Liquidation Proceeds" with respect to a Mortgage Loan is the amount
received upon liquidation of such Mortgage Loan reduced by related expenses,
which may include the amount advanced in respect of a senior mortgage, up to the
unpaid Principal Balance of the Mortgage Loan plus accrued and unpaid interest
thereon.]
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, other than the first Collection
Period, the Master Servicer will retain from interest collections in respect of
the Mortgage Loan a portion of such interest collections as a monthly Servicing
Fee in the amount equal to % per annum ("Servicing Fee Rate") on the
aggregate Principal Balances of the Mortgage Loans as of the first day of each
such Collection Period. All assumption fees, late payment charges and other fees
and charges, to the extent collected from borrowers, will be retained by the
Master Servicer as additional servicing compensation.
[The Master Servicer will pay certain ongoing expenses associated with the
Trust Fund and incurred by it in connection with its responsibilities under the
Servicing Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the entity
maintaining the Security Register relating to the Securities and any paying
agent. In addition, the Master Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with defaulted Mortgage Loans and
in connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Holders to receive any related Net
Liquidation Proceeds.]
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DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture dated as of
, 199 , between the Trust Fund and , as
Indenture Trustee. The Certificates will be issued pursuant to the Trust
Agreement dated as of , 199 , among the Depositor,
, and , as Owner Trustee. The following
is a description of the material provisions of the Securities, Indenture and
Trust Agreement. As used herein, "Agreement" shall mean either the Trust
Agreement or the Indenture, as the context requires.
The Securities will be issued in fully registered, certificated form only.
The Securities will be freely transferable and exchangeable at the corporate
trust office of the Owner Trustee, with respect to the Certificates, or the
Indenture Trustee, with respect to the Notes.
BOOK-ENTRY SECURITIES
The Senior Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the Senior
Certificates ("Certificate Owners") will hold their 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 the Certificates and will initially be registered
in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in CEDEL's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank N.A. 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 Certificate
Principal Balances of $1,000 and in integral multiples in excess thereof. 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 Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the 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.
DISTRIBUTIONS
On each Distribution Date, collections on the Mortgage Loans will be
applied in the following order of priority:
(i) [to the Master Servicer, the Servicing Fee];
(ii) as payment for the accrued interest due and any overdue accrued
interest on the respective Security Principal Balance of the Notes and the
Certificates;
(iii) as principal on the Securities, the excess of Principal
Collections over Additional Balances created during the preceding
Collection Period, such amount to be allocated between the Notes and
Certificates pro rata, based on their respective Security Principal
Balances;
(iv) as principal on the Securities, as payment for any Liquidation
Loss Amounts on the Mortgage Loans;
(v) as payment for the premium for the [Letter of Credit][Surety
Bond];
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(vi) to reimburse prior draws made on the [Letter of Credit][Surety
Bond]; and
(vii) any remaining amounts to the Seller.
As to any Distribution Date, the "Collection Period" is the calendar month
preceding the month of such Distribution Date. "Liquidation Loss Amount" means,
with respect to any Liquidated Mortgage Loan, the unrecovered Principal Balance
thereof at the end of the Collection Period in which such Mortgage Loan became a
Liquidated Mortgage Loan after giving effect to the Net Liquidation Proceeds in
connection therewith.
INTEREST
Note Rate. Interest will accrue on the unpaid Security Principal Balance
of the Notes at the per annum rate (the "Note Rate") equal to % per annum from
the Closing Date to the first Distribution Date and thereafter interest will
accrue on the Notes from and including the preceding Distribution Date to but
excluding such current Distribution Date (each, an "Interest Accrual Period") at
[a floating rate equal to LIBOR (as defined herein) plus %] [ %]. [Interest
will be calculated on the basis of the actual number of days in each Interest
Accrual Period divided by 360.] A failure to pay interest on any Notes on any
Distribution Date that continues for [five] days constitutes an Event of Default
under the Indenture.
Pass-Through Rate. Interest will accrue on the unpaid Security Principal
Balance of the Certificates at the per annum rate (the "Pass-Through Rate")
equal to % per annum from the Closing Date to the first Distribution Date and
thereafter interest will accrue on the Certificates for each Interest Accrual
Period at [a floating rate equal to LIBOR (as defined herein) plus %] [ %].
[Interest will be calculated on the basis of the actual number of days in each
Interest Accrual Period divided by 360.] A failure to pay interest on any
Certificates on any Distribution Date that continues for five days constitutes
an Event of Default under the Trust Agreement.
OPTIONAL TERMINATION
The Trust Fund will terminate on the Distribution Date following the
earlier of (i) and (ii) the final payment or other liquidation of
the last Mortgage Loan in the Trust Fund. The Mortgage Loans will be subject to
optional repurchase by the Master Servicer on any Distribution Date after the
Principal Balance is reduced to an amount less than or equal to $ ( %
of the initial Principal Balance). The repurchase price will be equal to the sum
of the outstanding Principal Balance and accrued and unpaid interest thereon at
the weighted average of the Loan Rates through the day preceding the final
Distribution Date.
THE DEPOSITOR
Morgan Stanley ABS Capital I Inc., the Depositor, is a Delaware corporation
and a direct, wholly-owned subsidiary of Morgan Stanley Group Inc. The Depositor
maintains its principal office at 1585 Broadway, 37th Floor, New York, New York
10036. Its telephone number is (212) 761-4000.
THE INDENTURE
The following is a description of the material terms of the Indenture.
Whenever particular sections or defined terms of the Indenture are referred to,
such sections or defined terms are thereby incorporated herein by reference. See
"Description of the Securities" herein for a summary of certain additional terms
of the Indenture.
REPORTS TO NOTEHOLDERS
The Indenture Trustee will mail to each Noteholder, at such Noteholder's
request, at its address listed on the Note Register maintained with the
Indenture Trustee a report setting forth certain amounts relating to the Notes.
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EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
With respect to the Notes, "Events of Default" under the Indenture will
consist of: (i) a default for [five] days or more in the payment of any interest
on any Note; (ii) a default in the payment of the principal of or any
installment of the principal of any Note when the same becomes due and payable;
(iii) a default in the observance or performance of any covenant or agreement of
the Trust Fund made in the Indenture and the continuation of any such default
for a period of 30 days after notice thereof is given to the Trust Fund by the
Indenture Trustee or to the Trust Fund and the Indenture Trustee by the holders
of at least 25% in principal amount of the Notes then outstanding; (iv) any
representation or warranty made by the Trust Fund in the Indenture or in any
certificate delivered pursuant thereto or in connection therewith having been
incorrect in a material respect as of the time made, and such breach not having
been cured within 30 days after notice thereof is given to the Trust Fund by the
Indenture Trustee or to the Trust Fund and the Indenture Trustee by the holders
of at least 25% in principal amount of Notes then outstanding; or (v) certain
events of bankruptcy, insolvency, receivership or liquidation of the Trust Fund.
[The amount of principal required to be paid to Noteholders under the Indenture
will generally be limited to amounts available to be deposited in the Collection
Account. Therefore, the failure to pay principal on the Notes generally will not
result in the occurrence of an Event of Default until the final scheduled
Distribution Date for such Notes.] If there is an Event of Default with respect
to a Note due to late payment or nonpayment of interest due on a Note,
additional interest will accrue on such unpaid interest at the interest rate on
the Note (to the extent lawful) until such interest is paid. Such additional
interest on unpaid interest shall be due at the time such interest is paid. If
there is an Event of Default due to late payment or nonpayment of principal on a
Note, interest will continue to accrue on such principal at the interest rate on
the Note until such principal is paid. If an Event of Default should occur and
be continuing with respect to the Notes, the Indenture Trustee or holders of a
majority in principal amount of Notes then outstanding may declare the principal
of such Notes to be immediately due and payable. Such declaration may, under
certain circumstances, be rescinded by the holders of a majority in principal
amount of the Notes then outstanding. If the Notes are due and payable following
an Event of Default with respect thereto, the Indenture Trustee may institute
proceedings to collect amounts due or foreclose on Trust Fund property or
exercise remedies as a secured party. If an Event of Default occurs and is
continuing with respect to the Notes, the Indenture Trustee will 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 the Notes, if the Indenture
Trustee reasonably believes it will not be adequately indemnified against the
costs, expenses and liabilities which might be incurred by it in complying with
such request. Subject to the provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority in principal
amount of the outstanding Notes will have the right to direct the time, method
and place of conducting any proceeding or any remedy available to the Indenture
Trustee, and the holders of a majority in principal amount of the Notes then
outstanding 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. No holder of a
Note will have the right to institute any proceeding with respect to the
Indenture, unless (i) such holder previously has given the Indenture Trustee
written notice of a continuing Event of Default, (ii) the holders of not less
than 25% in principal amount of the outstanding Notes have made written request
to the Indenture Trustee to institute such proceeding in its own name as
Indenture Trustee, (iii) such holder or holders have offered the Indenture
Trustee reasonable indemnity, (iv) the Indenture Trustee has for 60 days failed
to institute such proceeding and (v) no direction inconsistent with such written
request has been given to the Indenture Trustee during the 60-day period by the
holders of a majority in principal amount of the Notes. In addition, the
Indenture Trustee and the Noteholders, by accepting the Notes, will covenant
that they will not at any time institute against the Trust Fund any bankruptcy,
reorganization or other proceeding under any federal or state bankruptcy or
similar law. With respect to the Trust Fund, neither the Indenture Trustee nor
the Owner Trustee in its individual capacity, nor any holder of a Certificate
representing an ownership interest in the Trust Fund nor any of their respective
owners, beneficiaries, agents, officers, directors, employees, affiliates,
successors or assigns will, in the absence of an express agreement to the
contrary, be personally liable for the payment of the principal of or interest
on the Notes or for the agreements of the Trust Fund contained in the Indenture.
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CERTAIN COVENANTS
The Indenture will provide that the Trust Fund may not consolidate with or
merge into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the Trust
Fund's obligation to make due and punctual payments upon the Notes and the
performance or observance of any agreement and covenant of the Trust Fund under
the Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trust Fund has been
advised that the ratings of the Securities then in effect would not be reduced
or withdrawn by any Rating Agency as a result of such merger or consolidation
and (v) the Trust Fund has received an opinion of counsel to the effect that
such consolidation or merger would have no material adverse tax consequence to
the Trust Fund or to any Noteholder or Certificateholder. The Trust Fund will
not, among other things, (i) except as expressly permitted by the Indenture,
sell, transfer, exchange or otherwise dispose of any of the assets of the Trust
Fund, (ii) claim any credit on or make any deduction from the principal and
interest payable in respect of the Notes (other than amounts withheld under the
Code or applicable state law) or assert any claim against any present or former
holder of Notes because of the payment of taxes levied or assessed upon the
Trust Fund, (iii) dissolve or liquidate in whole or in part, (iv) permit the
validity or effectiveness of the Indenture to be impaired or permit any person
to be released from any covenants or obligations with respect to the Notes under
the Indenture except as may be expressly permitted thereby or (v) permit any
lien, charge excise, claim, security interest, mortgage or other encumbrance to
be created on or extend to or otherwise arise upon or burden the assets of the
Trust Fund or any part thereof, or any interest therein or the proceeds thereof.
The Trust Fund may not engage in any activity other than as specified under "The
Trust Fund" herein. The Trust Fund will not incur, assume or guarantee any
indebtedness other than indebtedness incurred pursuant to the Notes and the
Indenture.
ANNUAL COMPLIANCE STATEMENT
The Trust Fund will be required to file annually with the Indenture Trustee
a written statement as to the fulfillment of its obligations under the
Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
The Indenture Trustee will be required to mail each year to all Noteholders
a report relating to any change in its eligibility and qualification to continue
as Indenture Trustee under the Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of any indebtedness owing
by the Trust Fund to the Indenture Trustee in its individual capacity, any
change in the property and funds physically held by the Indenture Trustee as
such and any action taken by it that materially affects the Notes and that has
not been previously reported, but if no such changes have occurred, then no
report shall be required.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral securing
the Notes upon the delivery to the Indenture Trustee for cancellation of all the
Notes or, with certain limitations, upon deposit with the Indenture Trustee of
funds sufficient for the payment in full of all the Notes.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority in principal amount of the
Notes then outstanding, the Trust Fund and the Indenture Trustee may execute a
supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the Indenture, or modify (except as provided below) in any
manner the rights of the Noteholders. Without the consent of the holder of each
outstanding Note affected thereby, however, no supplemental indenture will: (i)
change the due date of any installment of principal of or interest on any Note
or reduce the principal amount thereof, the interest rate specified thereon or
the redemption price with respect thereto or change any place of payment where
or the coin or currency in which any Note or any
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interest thereon is payable; (ii) impair the right to institute suit for the
enforcement of certain provisions of the Indenture regarding payment; (iii)
reduce the percentage of the aggregate amount of the outstanding Notes, the
consent of the holders of which is required for any supplemental indenture or
the consent of the holders of which is required for any waiver of compliance
with certain provisions of the Indenture or of certain defaults thereunder and
their consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Trust
Fund, the Depositor or an affiliate of any of them; (v) decrease the percentage
of the aggregate principal amount of Notes required to amend the sections of the
Indenture which specify the applicable percentage of aggregate principal amount
of the Notes necessary to amend the Indenture or certain other related
agreements; or (vi) permit the creation of any lien ranking prior to or on a
parity with the lien of the Indenture with respect to any of the collateral for
the Notes or, except as otherwise permitted or contemplated in the Indenture,
terminate the lien of the Indenture on any such collateral or deprive the holder
of any Note of the security afforded by the lien of the Indenture. The Trust
Fund and the Indenture Trustee may also enter into supplemental indentures,
without obtaining the consent of the Noteholders, for the purpose of, among
other things, adding any provisions to or changing in any manner or eliminating
any of the provisions of the Indenture or of modifying in any manner the rights
of the Noteholders; provided that such action will not materially and adversely
affect the interest of any Noteholder.
VOTING RIGHTS
At all times, the voting rights of Noteholders under the Indenture will be
allocated among the Notes pro rata in accordance with their outstanding
principal balances.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Indenture Trustee nor any director, officer or
employee of the Depositor or the Indenture Trustee will be under any liability
to the Trust Fund or the related Noteholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the Indenture
or for errors in judgment; provided, however, that none of the Indenture
Trustee, the Depositor and any director, officer or employee thereof will be
protected against any liability which would otherwise be imposed by reason of
willful malfeasance, bad faith or gross negligence in the performance of duties
or by reason of reckless disregard of obligations and duties under the
Indenture. Subject to certain limitations set forth in the Indenture, the
Indenture Trustee and any director, officer, employee or agent of the Indenture
Trustee shall be indemnified by the Trust Fund and held harmless against any
loss, liability or expense incurred in connection with investigating, preparing
to defend or defending any legal action, commenced or threatened, relating to
the Indenture other than any loss, liability or expense incurred by reason of
willful malfeasance, bad faith or gross negligence in the performance of its
duties under such Indenture or by reason of reckless disregard of its
obligations and duties under the Indenture. Any such indemnification by the
Trust Fund will reduce the amount distributable to the Noteholders. All persons
into which the Indenture Trustee may be merged or with which it may be
consolidated or any person resulting from such merger or consolidation shall be
the successor of the Indenture Trustee under each Indenture.
THE TRUST AGREEMENT
The following is a description of the material terms of the Trust
Agreement. Whenever particular sections or defined terms of the Trust Agreement
are referred to, such sections or defined terms are thereby incorporated herein
by reference. See "Description of the Securities" herein for a summary of
certain additional terms of the Trust Agreement.
AMENDMENT
The Trust Agreement may be amended by the Depositor and the Owner Trustee,
without consent of the Holders, to cure any ambiguity, to correct or supplement
any provision or for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions thereof or of modifying in any
manner the rights of such Holders; provided, however, that such action will not,
as evidenced by an opinion of
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counsel satisfactory to the Owner Trustee, adversely affect in any material
respect the interests of any Holders. The Trust Agreement may also be amended by
the Depositor and the Owner Trustee with the consent of the holders of
Certificates evidencing at least a majority in principal amount of then
outstanding Certificates and Holders owning Voting Interests (as herein defined)
aggregating not less than a majority of the aggregate Voting Interests for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the Trust Agreement or modifying in any manner the rights
of the Holders.
TERMINATION
Upon termination of the Trust Fund, the Owner Trustee shall direct the
Indenture Trustee promptly to sell the assets of the Trust Fund (other than the
Collection Account) in a commercially reasonable manner and on commercially
reasonable terms. The proceeds from any such sale, disposition or liquidation of
the Mortgage Loans will be treated as collections on the Mortgage Loans and
deposited in the Collection Account. The Trust Agreement will provide that the
Owner Trustee does not have the power to commence a voluntary proceeding in
bankruptcy with respect to the Trust Fund without the unanimous prior approval
of all Holders (including the Depositor) of the Trust Fund and the delivery to
the Owner Trustee by each Holder (including the Depositor) of a certificate
certifying that the Holder reasonably believes that the Trust Fund is insolvent.
LIABILITY OF THE DEPOSITOR
Under the Trust Agreement, the Depositor will agree to be liable directly
to an injured party for the entire amount of any losses, claims, damages or
liabilities (other than those incurred by a Noteholder or a Holder in the
capacity of an investor with respect to the Trust Fund) arising out of or based
on the arrangement created by the Trust Agreement.
VOTING INTERESTS
As of any date, the aggregate principal balance of all Certificates
outstanding will constitute the voting interest of the Issuer (the "Voting
Interests"), except that, for purposes of determining Voting Interests,
Certificates owned by the Issuer or its affiliates (other than the Depositor)
will be disregarded and deemed not to be outstanding, and except that, in
determining whether the Owner Trustee is protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Certificates that the Owner Trustee knows to be so owned will be so disregarded.
Certificates so owned that have been pledged in good faith may be regarded as
outstanding if the pledgee establishes to the satisfaction of the Owner Trustee
the pledgor's right so to act with respect to such Certificates and that the
pledgee is not the Issuer or its affiliates.
CERTAIN MATTERS REGARDING THE OWNER TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Owner Trustee nor any director, officer or
employee of the Depositor or the Owner Trustee will be under any liability to
the Trust Fund or the related Holders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Trust Agreement or
for errors in judgment; provided, however, that none of the Owner Trustee, the
Depositor and any director, officer or employee thereof will be protected
against any liability which would otherwise be imposed by reason of willful
malfeasance, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties under the Trust
Agreement. Subject to certain limitations set forth in the Trust Agreement, the
Owner Trustee and any director, officer, employee or agent of the Owner Trustee
shall be indemnified by the Trust Fund and held harmless against any loss,
liability or expense incurred in connection with investigating, preparing to
defend or defending any legal action, commenced or threatened, relating to the
Trust Agreement other than any loss, liability or expense incurred by reason of
willful malfeasance, bad faith or gross negligence in the performance of its
duties under such Trust Agreement or by reason of reckless disregard of its
obligations and duties under the Trust Agreement. Any such indemnification by
the Trust Fund will reduce the amount distributable to the Holders. All persons
into which the Owner Trustee may be merged or with which it may be consolidated
or any person resulting from such merger or consolidation shall be the successor
of the Owner Trustee under each Trust Agreement.
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ADMINISTRATION AGREEMENT
The , in its capacity as Administrator, will enter into the
Administration Agreement with the Trust Fund and the Owner Trustee pursuant to
which the Administrator will agree, to the extent provided in such
Administration Agreement, to provide notices and perform other administrative
obligations required by the Indenture and the Trust Agreement.
THE INDENTURE TRUSTEE
[ ] is the Indenture Trustee under the Indenture. The mailing
address of the Indenture Trustee is [ ], Attention: Corporate
Trust Department.
THE OWNER TRUSTEE
[ ] is the Owner Trustee under the Trust Agreement. The mailing
address of the Owner Trustee is [ ], Attention: Corporate
Trust Administration.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be applied by the
Depositor towards the purchase price of the Mortgage Loans.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes the material U.S. federal income
tax aspects of the purchase, ownership and disposition of the Notes and
Certificates, is based on the provision of the Internal Revenue Code of 1985, as
amended (the "Code"), the Treasury Regulations thereunder, and published rulings
and court decisions in effect as of the date hereof, all of which are subject to
change, possibly retroactively. This discussion does not address every aspect of
the U.S. federal income tax laws which may be relevant to Noteholders and
Certificate owners in light of their personal investment circumstances or to
certain types of Certificate owners subject to special treatment under the U.S.
federal income tax laws (for example, tax exempt investors, banks and life
insurance companies). Accordingly, investors should consult their tax advisors
regarding U.S. federal, state, local, foreign and any other tax consequences to
them of investing in the Notes and Certificates.
TAX CHARACTERIZATION OF THE TRUST FUND AS A PARTNERSHIP
Upon the issuance of the Notes and Certificates , special
counsel to the Depositor ("Tax Counsel"), will issue an opinion generally to the
effect that the Trust Fund will not be an association (or a publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion is based on the assumption that the terms of the Trust Agreement and
related documents will be complied with, and on Tax Counsel's conclusions 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 exempts it from the rule that
certain publicly traded partnerships are taxable as corporations, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
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 Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
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<PAGE> 101
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
The Trust Fund will agree, and the Noteholders will agree by their purchase
of the Notes, to treat the Notes as debt for federal income tax purposes. Upon
issuance of the Notes, based on the application of existing law to the facts as
set forth in the Agreement and other relevant documents and assuming compliance
with the terms of the Agreement as in effect on the date of issuance of the
Notes and Certificates, Tax Counsel will issue an opinion generally to the
effect that the Notes will be treated as debt instruments for federal income tax
purposes as of such date. See "Federal Income Tax Consequences -- Tax
Consequences to Holders of the Notes" in the Prospectus.
It is not anticipated that the Notes will be issued with original issue
discount ("OID"). The stated interest thereon will be taxable to a Noteholders
as ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
The Trust Fund and the Master Servicer will agree, and the
Certificateholders will agree by their purchase of Certificates, to treat the
Trust Fund as 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 Certificateholders, and the Notes being debts of
the partnership. However, the proper characterization of the arrangement
involving 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. 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 Certificateholders as compared to the consequences from
treatment of the Certificates as equity in a partnership.
As a partnership, the Trust Fund will not be subject to federal income tax.
Rather, each Certificateholder will be required to separately take into account
such holder's allocated share of income, gains, losses, deductions and credits
of the Trust Fund. The Trust Fund's income will consist primarily of interest
and finance charges earned on the Mortgage 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. See
"Federal Income Tax Consequences -- Tax Consequences to Holders of the
Certificates" in the Prospectus.
The Trust Fund expects to withhold on the portion of its taxable income
that is allocable to foreign Certificateholders, pursuant to Section 1446 of the
Code, as if such income were effectively connected to a U.S. trade or business,
at a rate of 35% for foreign holders that are taxable as corporations and 39.6%
for all other foreign holders. Subsequent adoption of Treasury regulations or
the issuance of other administrative pronouncements may require the Trust Fund
to change its withholding procedures. See "Federal Income Tax
Consequences -- Tax Consequences to Holders of the Certificates -- Tax
Consequences to Foreign Certificateholders" in the Prospectus.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences" herein, potential investors should consider the state
income tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State income tax law may differ substantially from
the corresponding federal tax law, and this discussion does not purport to
describe any aspect of the income tax
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<PAGE> 102
laws of any state. Therefore, potential investors should consult their own tax
advisors with respect to the various tax consequences of investments in the
Securities offered hereunder.
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
Notes and/or 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 Notes and/or Certificates or any
other person proposing to use the assets of a Plan to acquire any of the Notes
and/or 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
Notes and/or 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 Notes
and/or 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.
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
Notes and/or 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. sec. 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
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<PAGE> 103
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, the assets of the entity will be treated as
assets of the Plan unless certain exceptions apply. If the Notes and/or
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 Notes and/or 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 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.
[ ] ("ERISA Counsel") has rendered its opinion that the Notes
will be classified as indebtedness without substantial equity features for ERISA
purposes. ERISA Counsel's opinion is based upon the terms of the Notes, the
opinion of Tax Counsel that the Notes will be classified as debt instruments for
federal income tax purposes and the ratings which have been assigned to the
Notes. However, if contrary to ERISA Counsel's opinion the Notes are deemed to
be equity interests in the Trust Fund 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 Notes.
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 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. Morgan Stanley believes that the Exemption will [not] apply to the
acquisition and holding of Notes and/or Certificates by Plans.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the Notes and/or Certificates by a Plan is on
terms (including the price for such Notes and/or 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 Notes and/or
Certificates acquired by the Plan are not subordinated to the rights and
interests evidenced by other certificates of the Trust Fund;
(3) the Notes and/or 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 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);
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<PAGE> 104
(5) the sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Notes and/or Certificates
represents not more than reasonable compensation for underwriting such
Notes and/or 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 Notes and/or 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.
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 Notes and/or 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 Notes and/or 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 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, 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
Notes and/or Certificates 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 Notes and/or
Certificates until such time as the balance of the related Pre-Funding Account
is reduced to zero. Accordingly, until such time, the Notes and/or Certificates
may not be purchased by Plans pursuant to the Exemption.] 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.
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<PAGE> 105
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 Notes and/or 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 Notes and/or 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 Notes and/or Certificates
after the date which is 18 months after the date the 401(c) Regulations become
final.
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the Securities under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Securities, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether, and
to what extent, the Securities will constitute legal investments for them. The
Depositor makes no representation as to the proper characterization of the
Securities for legal investment or financial institution regulatory purposes, or
as to the ability of particular investors to purchase Securities under
applicable legal investment restrictions. The uncertainties described above (and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Securities) may adversely affect
the liquidity of the Securities.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated , 199 (the "Underwriting Agreement"), between the
Depositor and the Underwriter, an affiliate of the Depositor, the Depositor has
agreed to sell to the Underwriter, and the Underwriter has agreed to purchase
from the Depositor all the [Notes/Certificates].
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all the [Notes/Certificates]
offered hereby if any of the [Notes/Certificates] are purchased.
The Depositor has been advised by the Underwriter that it proposes
initially to offer the [Notes/Certificates] to the public in Europe and the
United States at the offering price set forth on the cover page hereof and to
certain dealers at such price less a discount not in excess of % of the
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<PAGE> 106
[Note/Certificate] denominations. The Underwriter may allow and such dealers may
reallow a discount not in excess of % of the [Note/Certificate]
denominations to certain other dealers. After the initial public offering, the
public offering price, such concessions and such discounts may be changed.
The distribution of the [Notes/Certificates] by the Underwriter will be
effected from time to time in one or more negotiated transactions or otherwise
at varying prices to be determined, in each case, at the time of sale. The
Underwriter may effect such transactions by selling the [Notes/Certificates] to
or through dealers, and such dealers may receive from the Underwriter
compensation in the form of underwriting discounts, concessions or commissions.
The Underwriter and any dealers that participate with the Underwriter in the
distribution of the [Notes/Certificates] may be deemed to be underwriters, and
any discounts, commissions or concessions received by them, and any profit on
the resale of the [Notes/Certificates] purchased by them, may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended (the "Act").
LEGAL MATTERS
Certain legal matters with respect to the Securities will be passed upon
for the Depositor by and for the Underwriter by .
RATINGS
It is a condition to the issuance of the Certificates that they be rated
by (" ") and, by (" " and, together with
, the "Rating Agencies").
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the Certificates. The ratings on the
Certificates do not, however, constitute statements regarding the likelihood or
frequency of prepayments on the Mortgage Loans or the possibility that
Certificateholders might realize a lower than anticipated yield.
The ratings assigned to the Certificates will depend primarily upon the
creditworthiness of the Certificate Insurer. Any reduction in a rating assigned
to the claims-paying ability of the Certificate Insurer below the ratings
initially assigned to the Certificates may result in a reduction of one or more
of the ratings assigned to the Certificates.
The ratings of the Rating Agencies do not address the possibility that, as
a result of principal prepayments, Certificateholders may receive a lower than
anticipated yield.
The security ratings assigned to the 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 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 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 Certificates could be lower than the respective
ratings assigned by the Rating Agencies.
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INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
401(c) Regulations.......................................... S-40
Accredited Investor......................................... S-39
Act......................................................... S-41
Additional Balances......................................... S-4
Agreement................................................... S-29
Applicable Local Law........................................ S-38
Assignment Event............................................ S-24
Beneficial Owner............................................ S-29
Book-Entry Securities....................................... S-7, 29
BIF......................................................... S-26
Business Day................................................ S-6
Cede........................................................ S-2, 7
Certificate Insurer......................................... S-1
Certificate Owners.......................................... S-29
Certificateholder........................................... S-29
Certificates................................................ S-1, 4
Chase....................................................... S-8
Citibank.................................................... S-8
Code........................................................ S-35
Collection Account.......................................... S-6, 26
Collection Period........................................... S-7, 30
Collections................................................. S-6
Combined Loan-to-Value Ratio................................ S-5
Credit Limit................................................ S-5
Credit Limit Utilization Rate............................... S-17
Credit Line Agreement....................................... S-4, 17
Cut-off Date................................................ S-4
Cut-off Date Pool Principal Balance......................... S-5
Cut-off Date Principal Balance.............................. S-4
Defective Mortgage Loans.................................... S-25
Definitive Certificate...................................... S-29
Definitive Securities....................................... S-8
Depositor................................................... S-1
Determination Date.......................................... S-5, 26
Disqualified Persons........................................ S-37
Distribution Date........................................... S-1
DOL......................................................... S-37
Draw Period................................................. S-18
Drive-By Appraisal.......................................... S-15
Drive-By Appraisal Value.................................... S-15
DTC......................................................... S-7, 29
Due Date.................................................... S-6
Eligible Account............................................ S-26
Eligible Substitute Mortgage Loan........................... S-24
Equity Interest............................................. S-38
ERISA....................................................... S-9, 37
ERISA Counsel............................................... S-38
</TABLE>
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<PAGE> 108
<TABLE>
<S> <C>
Estimated Value............................................. S-15
Euroclear................................................... S-7
European Depositaries....................................... S-8, 29
Events of Default........................................... S-31
Exemption................................................... S-38
Indenture................................................... S-1, 4
Indenture Trustee........................................... S-1, 5
Index Rate.................................................. S-17
Interest Accrual Period..................................... S-7, 30
Interest Collections........................................ S-6, 27
Liquidation Loss Amount..................................... S-7, 30
Loan Rate................................................... S-5, 17
Margin...................................................... S-17
Maximum Rate................................................ S-17
Money Rates................................................. S-18
Mortgage Files.............................................. S-24
Mortgage Loans.............................................. S-1, 4
Mortgaged Properties........................................ S-4
Net Liquidation Proceeds.................................... S-27, 28
Note Rate................................................... S-1, 7, 30
Noteholders................................................. S-5
Notes....................................................... S-1, 4
OID......................................................... S-9, 36
Owner Trustee............................................... S-1, 5
Participants................................................ S-29
Parties in Interest......................................... S-37
Pass-Through Rate........................................... S-1, 7, 30
Plan........................................................ S-37
Plan Asset Regulation....................................... S-37
Plan Assets................................................. S-37
Plan Sponsor................................................ S-39
Policy...................................................... S-1, 4
Pool Balance................................................ S-4, 27
Prime Rate.................................................. S-17
Principal Balance........................................... S-4
Principal Collections....................................... S-6, 27
Prospectus.................................................. S-2
PTE......................................................... S-40
Publicly Offered Security................................... S-38
Purchase Agreement.......................................... S-5
Rating Agency............................................... S-10, 41
Related Documents........................................... S-23
Relevant Depositary......................................... S-29
Repayment Period............................................ S-18
Repurchase Price............................................ S-24
Restricted Group............................................ S-39
SAIF........................................................ S-26
Securities.................................................. S-1, 4
Security Account............................................ S-26
</TABLE>
S-43
<PAGE> 109
<TABLE>
<S> <C>
Security Principal Balance.................................. S-6
Seller...................................................... S-5
Servicing Fee Rate.......................................... S-28
SMMEA....................................................... S-10
Substantial Equity Features................................. S-38
Tax Counsel................................................. S-9, 35
Trust Agreement............................................. S-1, 5
Trust Fund.................................................. S-1, 4
Underwriting Agreement...................................... S-40
Voting Interests............................................ S-34
</TABLE>
S-44
<PAGE> 110
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation, or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
VERSION #3
SUBJECT TO COMPLETION, DATED DECEMBER , 1998
PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED DECEMBER , 1998)
$
(Approximate)
MORTGAGED LOAN ASSET-BACKED TRUST 199
MORTGAGE LOAN ASSET-BACKED PASS-THROUGH CERTIFICATES, SERIES 199 -
Distributions payable on the day of each month,
commencing in , 199
MORGAN STANLEY ABS CAPITAL I INC.
Depositor
[ ]
Master Servicer
------------------------
The Mortgage Loan Asset-Backed Pass-Through Certificates, Series 199 -
(collectively, the "Certificates") will represent the entire beneficial interest
in the Mortgage Loan Asset-Backed Trust 199 - (the "Trust Fund") consisting
primarily of a pool (the "Mortgage Pool") of [fixed-rate] [adjustable-rate]
Mortgage Loans secured primarily by first, second and third liens on one- to
four-family residential properties. Only the Classes of Certificates identified
in the table below (collectively, the "Offered Certificates") are offered
hereby. See "Index of Defined Terms" on page S-47 of this Prospectus Supplement
and on page 120 of the Prospectus for the location of the definitions of certain
capitalized terms.
------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-12 HEREIN AND ON PAGE 17 IN THE ACCOMPANYING
PROSPECTUS.
------------------------
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR,
THE SELLER, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL ENTITY, THE DEPOSITOR, THE SELLER, THE MASTER
SERVICER, THE TRUSTEE OR ANY OF THEIR AFFILIATES OR ANY OTHER PERSON.
DISTRIBUTIONS ON THE CERTIFICATES WILL BE PAYABLE SOLELY FROM THE ASSETS
TRANSFERRED TO THE TRUST FUND FOR THE BENEFIT OF CERTIFICATEHOLDERS.
------------------------
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.
------------------------
Initial Class Certificate
<TABLE>
<CAPTION>
BALANCE(1) PASS-THROUGH RATE
---------- -----------------
<S> <C> <C>
Class A- .................................................. $ %
Class ..................................................... $ %
Class PO.................................................... $ (2)
Class X..................................................... (3) (4)
Class A-R................................................... $ %
Class B- .................................................. $ %
Class ..................................................... $ %
Class ..................................................... $ %
</TABLE>
- ------------
(1) Subject to the permitted variance described under "Summary of
Terms -- Offered Certificates" herein.
(2) The Class PO Certificates will be Principal Only Certificates and will
not bear interest.
(3) The Class X Certificates will be Notional Amount Certificates, will have
no principal balance and will bear interest on their Notional Amount
(initially expected to be approximately $ ).
(4) The Pass-Through Rate for the Class X Certificates for any Distribution
Date will be equal to the excess of (a) the weighted average of the Net
Mortgage Rates of the Non-Discount Mortgage Loans over (b) % per
annum. The Pass-Through Rate for the Class X Certificates for the first
Distribution Date is expected to be approximately % per annum.
------------------------
The Senior Certificates, other than the Class PO and Class X Certificates
(the "Underwritten Senior Certificates"), will be purchased by and
the Class Certificates (together with the Underwritten Senior Certificates,
the "Underwritten Certificates") offered hereby will be purchased by Morgan
Stanley & Co. Incorporated and (each, an "Underwriter") from the
Depositor and will be offered by the Underwriters from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Underwritten
Certificates are expected to be approximately $ , plus accrued interest,
before deducting issuance expenses payable by the Depositor. The Class , Class
PO and Class X Certificates will be issued to the Depositor on or about
, 199 as partial consideration for the sale of the Mortgage Loans to
the Trust Fund.
The Underwritten Certificates are offered by the respective Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to their right to reject orders in whole or in part. It
is expected that delivery of the Underwritten Senior Certificates, other than
the Class A-R Certificates, will be made in book-entry form only through the
facilities of The Depository Trust Company, that the Class A-R Certificates will
be delivered at the offices of in New York, New York and that
the Class Certificates will be delivered at the offices of
in New York, New York, in each case on or about , 199 .
------------------------
MORGAN STANLEY DEAN WITTER
, 199
<PAGE> 111
(continued from cover page)
The Mortgage Loans will be sold to the Depositor by [ ] (the
"Seller").
An election will be made to treat the Trust Fund as a "real estate mortgage
investment conduit" (the "REMIC") for federal income tax purposes. As described
more fully herein and in the Prospectus, the Offered Certificates, other than
the Class A-R Certificates, will constitute "regular interests" in the REMIC.
The Class A-R Certificates will constitute the sole class of "residual interest"
in the REMIC. Prospective investors are cautioned that a Class A-R
Certificateholder's REMIC taxable income and the tax liability thereon will
exceed cash distributions in certain periods, in which event such holder must
have sufficient alternative sources of funds to pay such tax liability. See
"Federal Income Tax Consequences" herein and in the Prospectus.
The Class A-R Certificates will be subject to certain transfer
restrictions. See "Description of the Certificates -- Restrictions on Transfer
of the Class A-R Certificates" herein.
The yield to investors on each Class of Offered Certificates will be
sensitive in varying degrees to, among other things, the rate and timing of
principal payments (including prepayments) of the Mortgage Loans, which may vary
significantly over time. The yield to maturity of a Class of Offered
Certificates purchased at a discount or premium will be more sensitive to the
rate and timing of payments thereon. Holders of the Offered Certificates should
consider, in the case of any such Certificates purchased at a discount, and
particularly the Principal Only Certificates, the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans could result in an
actual yield that is lower than the anticipated yield and, in the case of any
Offered Certificates purchased at a premium and particularly the Interest Only
Certificates, the risk that a faster than anticipated rate of principal payments
on the Mortgage Loans could result in an actual yield that is lower than the
anticipated yield. Holders of the Interest Only Certificates should carefully
consider the risk that a rapid rate of principal payments on the Mortgage Loans
could result in the failure of such holders to recover their initial
investments. The yield to investors in the Offered Certificates, and
particularly the Class Certificates, also will be adversely affected
by Net Interest Shortfalls and by Realized Losses. No representation is made as
to the anticipated rate of prepayments on the Mortgage Loans, the amount and
timing of Net Interest Shortfalls or Realized Losses, or as to the resulting
yield to maturity of any Class of Certificates.
Each Underwriter intends to make a secondary market in the Classes of
Underwritten Certificates being purchased by it, but no Underwriter has an
obligation to do so. There is currently no secondary market for the Offered
Certificates and there can be no assurance that such a market will develop or,
if it does develop, that it will continue or that it will provide
Certificateholders with a sufficient level of liquidity of investment.
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Depositor or any Underwriter. This Prospectus Supplement and the Prospectus do
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that the information herein or therein
is correct at any time subsequent to the date hereof or that there has been no
change in the affairs of the Depositor since that date.
Until ninety days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates, whether or not participating
in this distribution, may be required to deliver a Prospectus Supplement and the
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and the Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
S-2
<PAGE> 112
This Prospectus Supplement does not contain complete information about the
offering of the Offered Certificates. Additional information is contained in the
Prospectus of the Depositor dated , 199 (the "Prospectus") and
purchasers are urged to read both this Prospectus Supplement and the Prospectus
in full. Sales of the Offered Certificates may not be consummated unless the
purchaser has received both this Prospectus Supplement and the Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Trustee on behalf of any Trust Fund will provide without charge to each
person to whom this Prospectus Supplement is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to in the
Prospectus under "Incorporation of Certain Documents by Reference" that have
been or may be incorporated by reference in the Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
the Prospectus incorporates). Such requests should be directed to the Corporate
Trust Office of the Trustee at telephone: , facsimile number:
, attention: .
S-3
<PAGE> 113
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
Summary of Terms............................................ S-5
Risk Factors................................................ S-12
The Mortgage Pool........................................... S-14
Servicing of Mortgage Loans................................. S-20
Description of the Certificates............................. S-23
Yield, Prepayment and Maturity Considerations............... S-34
Credit Enhancement.......................................... S-39
Use of Proceeds............................................. S-41
Federal Income Tax Consequences............................. S-41
ERISA Considerations........................................ S-42
Underwriting................................................ S-45
Legal Matters............................................... S-46
Ratings..................................................... S-46
Index of Defined Terms...................................... S-47
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Summary of Terms............................................ 6
Risk Factors................................................ 17
The Trust Fund.............................................. 27
Use of Proceeds............................................. 41
The Depositor............................................... 41
Description of the Securities............................... 41
Credit Enhancement.......................................... 56
Yield and Prepayment Considerations......................... 61
The Agreements.............................................. 64
Certain Legal Aspects of the Loans.......................... 77
Federal Income Tax Consequences............................. 91
State Tax Considerations.................................... 111
ERISA Considerations........................................ 112
Legal Investment............................................ 116
Method of Distribution...................................... 117
Legal Matters............................................... 118
Financial Information....................................... 118
Rating...................................................... 118
Index of Defined Terms...................................... 120
</TABLE>
S-4
<PAGE> 114
SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary of
Terms are defined elsewhere in this Prospectus Supplement or in the Prospectus.
See "Index of Defined Terms" on page S-47 of this Prospectus Supplement and on
page 120 of the Prospectus for the location of the definitions of certain
capitalized terms.
Title of Certificates...... Mortgage Loan Asset-Backed Pass-Through
Certificates, Series 199 - (the "Certificates").
Offered Certificates....... Class A- , Class , Class PO, Class X, Class A-R,
Class B- and Class Certificates. Only the
Offered Certificates are offered hereby. The
aggregate initial Class Certificate Balances of the
Certificates will be subject to a permitted
variance in the aggregate of plus or minus %.
Variances in the Class Certificate Balances may
result in variances in the Notional Amount of the
Class of Notional Amount Certificates. The Notional
Amount of the Class X Certificates for any
Distribution Date will be equal to the aggregate of
the Stated Principal Balances of the Non-Discount
Mortgage Loans with respect to such Distribution
Date. The initial Notional Amount of the Class X
Certificates will be equal to the aggregate of the
Stated Principal Balances of the Non-Discount
Mortgage Loans as of the Cut-off Date.
Certificates other than the
Offered Certificates..... In addition to the Offered Certificates, the
following Classes of Certificates will be issued in
the indicated approximate initial Class Certificate
Balances and will bear interest at the indicated
Pass-Through Rates, but are not offered hereby:
<TABLE>
<CAPTION>
INITIAL CLASS
CERTIFICATE PASS-THROUGH
BALANCE RATE
------------- ------------
<S> <C> <C> <C>
Class (1)........................... $ %
Class (1)........................... $ %
Class (1)........................... $ %
</TABLE>
---------------------------------------------
(1) The Class , Class and Class Certificates
will provide limited credit support to the
Senior Certificates and the other Subordinated
Certificates, as described under "Description
of the Certificates --
Principal -- Subordinated Principal
Distribution Amount" and "Credit
Enhancement -- Subordination of Certain
Classes" herein.
Any information contained herein with respect to
the Class , Class and Class Certificates is
provided only to permit a better understanding of
the Offered Certificates.
Designations
Regular Certificates..... All Classes of Certificates other than the Class
A-R Certificates.
Residual Certificates.... Class A-R Certificates.
Senior Certificates...... Class A- , Class , Class PO, Class X and Class
A-R Certificates.
Subordinated
Certificates............... Class B- , Class , and Class Certificates.
Principal Only
Certificates............... Class PO Certificates.
Interest Only
Certificates............... Class X Certificates.
S-5
<PAGE> 115
Notional Amount
Certificates............... Class X Certificates.
Fixed Rate
Certificates............... All Classes of Certificates other than the Class PO
and Class X Certificates.
Variable Rate
Certificates............... Class X Certificates.
Physical Certificates.... Class PO, Class X and Class A-R Certificates and
the Subordinated Certificates.
Book-Entry
Certificates............... All Classes of Certificates other than the Physical
Certificates.
Trust Fund................. The Certificates will represent the entire
beneficial ownership interest in the Mortgage Loan
Asset-Backed Trust 199 (the "Trust Fund"), which
will consist primarily of the Mortgage Pool.
Pooling and Servicing
Agreement................ The Certificates will be issued pursuant to a
Pooling and Servicing Agreement, dated as of
, 199 (the "Agreement"), among the
Depositor, the Master Servicer and the Trustee.
Depositor.................. Morgan Stanley ABS Capital I Inc. (the
"Depositor"), a Delaware corporation and a direct,
wholly-owned subsidiary of Morgan Stanley Group
Inc. See "The Depositor" in the Prospectus.
Master Servicer............ [ ] (in its capacity as master servicer of
the Mortgage Loans, the "Master Servicer"). See
"Servicing of Mortgage Loans -- The Master
Servicer" herein. The Master Servicer will be
responsible for the servicing of the Mortgage Loans
and will receive the Master Servicing Fee from
interest collected on the Mortgage Loans. See
"Servicing of Mortgage Loans -- Servicing
Compensation and Payment of Expenses" herein.
Seller..................... [ ] (in its capacity as seller of the
Mortgage Loans, the "Seller"). The Mortgage Loans
were originated or acquired in the normal course of
its business by the Seller and will be acquired by
the Depositor in a privately negotiated
transaction.
Trustee.................... , a organized under
the laws of (the "Trustee").
Cut-off Date............... , 199 .
Closing Date............... On or about , 199 .
Determination Date......... The day of each month or, if such day is not a
business day, the preceding business day; provided
that the Determination Date in each month will be
at least two business days prior to the related
Distribution Date.
Mortgage Loans............. The Mortgage Pool will consist primarily of
[fixed-rate] [adjustable-rate] mortgage loans
secured primarily by first, second and third liens
on one-to four-family residential properties.
Distributions of principal and interest on the
Certificates will be based solely on payments
received on the Mortgage Loans, as described under
"Description of the Certificates" herein. See "The
Mortgage Pool" herein.
Distribution Date.......... The day of each month or, if such day is not a
business day, on the first business day thereafter,
commencing in 199 (each, a
"Distribution Date"). Distributions on each
Distribution Date will be
S-6
<PAGE> 116
made to Certificateholders of record as of the
related Record Date, except that the final
distribution on the Certificates will be made only
upon presentment and surrender of the Certificates
at the Corporate Trust Office of the Trustee.
Record Date................ The Record Date for each Distribution Date will be
the last business day of the month preceding the
month of such Distribution Date.
Priority of
Distributions.............. Distributions will be made on each Distribution
Date from Available Funds in the following order of
priority: [(i) to interest on each interest bearing
Class of Senior Certificates; (ii) to principal on
the Classes of Senior Certificates then entitled to
receive distributions of principal, in the order
and subject to the priorities set forth herein
under "Description of the
Certificates -- Principal," in each case in an
aggregate amount up to the maximum amount of
principal to be distributed on such Classes on such
Distribution Date; (iii) to any Class PO Deferred
Amounts with respect to the Class PO Certificates,
but only from amounts that would be distributable
on such Distribution Date as principal of the
Subordinated Certificates; and (iv) to interest on
and then principal of each Class of Subordinated
Certificates, in the order of their numerical Class
designations, beginning with the Class
Certificates, in each case subject to the
limitations set forth herein under "Description of
the Certificates -- Principal." Under certain
circumstances described herein, distributions from
Available Funds for a Distribution Date that would
otherwise be made on the Subordinated Certificates
may be distributed instead on the Senior
Certificates.] See "Description of the
Certificates -- Allocation of Losses" herein.
Distributions of
Interest................... To the extent funds are available therefor, each
interest bearing Class of Certificates will be
entitled to receive interest in the amount of the
Interest Distribution Amount for such Class. The
Class PO Certificates are Principal Only
Certificates and will not bear interest. See
"Description of the Certificates -- Interest"
herein.
A. Interest Distribution
Amount................ For each interest bearing Class of Certificates,
the amount of interest accrued during the related
Interest Accrual Period at the applicable
Pass-Through Rate on the related Class Certificate
Balance or Notional Amount, as the case may be.
B. Pass-Through Rate....... The Pass-Through Rate for each interest bearing
Class of Offered Certificates for each Distribution
Date will be as set forth or described on the cover
page hereof.
The Pass-Through Rate for the Class X Certificates
for any Distribution Date will be equal to the
excess of (a) the weighted average of the Net
Mortgage Rates of the Non-Discount Mortgage Loans
over (b) % per annum. The Pass-Through Rate
for the Class X Certificates for the first
Distribution Date is expected to be approximately
% per annum.
With respect to each Distribution Date, the
"Interest Accrual Period" for each interest bearing
Class of Certificates will be [the calendar month
preceding the month of such Distribution Date.]
Distributions of
Principal.................. On each Distribution Date, to the extent funds are
available therefor, principal distributions in
reduction of the Class Certificate Balances of
S-7
<PAGE> 117
each Class of Certificates (other than the Notional
Amount Certificates) will be made in the order and
subject to the priorities set forth herein under
"Description of the Certificates -- Principal" in
an aggregate amount equal to such Class' allocable
portion of the Senior Principal Distribution
Amount, the Class PO Principal Distribution Amount
or the Subordinated Principal Distribution Amount,
as applicable. The Notional Amount Certificates do
not have principal balances and are not entitled to
any distributions in respect of principal of the
Mortgage Loans. See "Description of the
Certificates -- Principal" herein.
Credit Enhancement......... Credit enhancement for the Senior Certificates will
be provided by the Subordinated Certificates and
credit enhancement for each Class of Subordinated
Certificates will be provided by the Class or
Classes of Subordinated Certificates with higher
numerical Class designations, as described below.
The aggregate of the initial Class Certificate
Balances of the Class , Class and Class
Certificates, which are the only Certificates
supporting the Class Certificates, is expected to
be approximately $ .
Subordination.............. The rights of holders of the Subordinated
Certificates to receive distributions with respect
to the Mortgage Loans in the Trust Fund will be
subordinated to such rights of holders of the
Senior Certificates, and the rights of the holders
of each Class of Subordinated Certificates (other
than the Class Certificates) to receive such
distributions will be further subordinated to such
rights of the Class or Classes of Subordinated
Certificates with lower numerical Class
designations, in each case only to the extent
described under "Credit
Enhancement -- Subordination of Certain Classes"
herein.
The subordination of the Subordinated Certificates
to the Senior Certificates, and the further
subordination within the Subordinated Certificates,
is intended to increase the likelihood of timely
receipt by the holders of Certificates with higher
relative payment priority of the maximum amount to
which they are entitled on any Distribution Date
and to provide such holders protection against
losses on the Mortgage Loans to the extent
described under "Description of the
Certificates -- Allocation of Losses" herein. The
Subordinated Certificates also provide protection,
to a lesser extent, against Special Hazard Losses,
Bankruptcy Losses and Fraud Losses. However, in
certain circumstances the amount of available
subordination (including the limited subordination
provided for certain types of losses) may be
exhausted and shortfalls in distributions on the
Certificates could result. Holders of the Senior
Certificates will bear their proportionate share of
any losses realized on the Mortgage Loans in excess
of the available subordination amount. See
"Description of the Certificates -- Priority of
Distributions Among Certificates," "-- Allocation
of Losses," and "Credit
Enhancement -- Subordination of Certain Classes"
herein.]
In addition, Realized Losses on the Mortgage Loans
will reduce the Class Certificate Balances of the
applicable Class of Subordinated Certificates to
the extent of any losses allocated thereto (as
described under "Description of the
Certificates -- Allocation of Losses" herein),
without the receipt of cash attributable to such
reduction. As a result of such reductions, less
interest will accrue on such Class of Subordinated
Certificates than otherwise would be the case. The
yield to maturity of
S-8
<PAGE> 118
the Subordinated Certificates will also be affected
by the disproportionate allocation of principal
prepayments to the Senior Certificates, Net
Interest Shortfalls, other cash shortfalls in
Available Funds and distribution of funds to Class
PO Certificateholders otherwise available for
distribution on the Subordinated Certificates to
the extent of reimbursement for Class PO Deferred
Amounts. See "Description of the
Certificates -- Allocation of Losses" herein.
Advances................... The Master Servicer is obligated to make cash
advances ("Advances") with respect to delinquent
payments of principal of and interest on any
Mortgage Loan to the extent described under
"Servicing of the Mortgage Loans -- Advances"
herein. The Trustee will be obligated to make any
such Advance if the Master Servicer fails in its
obligation to do so, to the extent provided in the
Agreement. See "Servicing of Mortgage
Loans -- Advances" herein.
Prepayment Considerations
and Risks; Reinvestment
Risk..................... The rate of principal payments on the Offered
Certificates, the aggregate amount of distributions
on the Offered Certificates and the yield to
maturity of the Offered Certificates will be
related to the rate and timing of payments of
principal on the Mortgage Loans.
Since the rate of payment of principal on the
Mortgage Loans will depend on future events and a
variety of factors, no assurance can be given as to
such rate or the rate of principal prepayments. The
extent to which the yield to maturity of a Class of
Offered Certificates may vary from the anticipated
yield may depend upon the degree to which it is
purchased at a discount or premium, and the degree
to which the timing of payments thereon is
sensitive to prepayments, liquidations and
purchases of the Mortgage Loans. Further, an
investor should consider the risk that, in the case
of the Principal Only Certificates and any other
Offered Certificate purchased at a discount, a
slower than anticipated rate of principal payments
(including prepayments) on the Mortgage Loans could
result in an actual yield to such investor that is
lower than the anticipated yield and, in the case
of the Interest Only Certificates and any other
Offered Certificate purchased at a premium, a
faster than anticipated rate of principal payments
could result in an actual yield to such investor
that is lower than the anticipated yield. Investors
in the Interest Only Certificates should carefully
consider the risk that a rapid rate of principal
payments on the Mortgage Loans could result in the
failure of such investors to recover their initial
investments.
Because the Mortgage Loans may be prepaid at any
time, it is not possible to predict the rate at
which distributions of principal of the Offered
Certificates will be received. Since prevailing
interest rates are subject to fluctuation, there
can be no assurance that investors in the Offered
Certificates will be able to reinvest the
distributions thereon at yields equaling or
exceeding the yields on such Offered Certificates.
It is possible that yields on any such
reinvestments will be lower, and may be
significantly lower, than the yields on the Offered
Certificates. See "Risk Factors -- Prepayment
Considerations and Risks" and "Yield, Prepayment
and Maturity Considerations" herein.
Optional Termination....... On any Distribution Date on which the Pool
Principal Balance is less than [10]% of the Cut-off
Date Pool Principal Balance, the Master
S-9
<PAGE> 119
Servicer will have the option to purchase, in
whole, the Mortgage Loans and the REO Property, if
any, remaining in the Trust Fund. See "Description
of the Certificates -- Optional Termination"
herein.
Federal Income Tax
Consequences............. An election will be made to treat the Trust Fund as
a "real estate mortgage investment conduit"
("REMIC") for federal income tax purposes. Upon
issuance of the Certificates, ,
special counsel to the Depositor, will issue an
opinion generally to the effect that, assuming
compliance with all provisions of the Agreement,
for federal income tax purposes, the Trust Fund
will qualify as a REMIC under Sections 860A through
860G of the Internal Revenue Code of 1986 (the
"Code").
For federal income tax purposes, the Regular
Certificates will constitute "regular interests" in
the REMIC and the Residual Certificates will
constitute the sole class of "residual interest" in
the REMIC. The Class , Class PO and Class X
Certificates will, and depending on their
respective issue prices, certain other Classes of
Offered Certificates may, be issued with original
issue discount ("OID") for federal income tax
purposes. See "Federal Income Tax Consequences"
herein and in the Prospectus.
The holders of the Class A-R Certificates will be
subject to special federal income tax rules that
may significantly reduce the after-tax yield of
such Certificates. Further, significant
restrictions apply to the transfer of the Class A-R
Certificates. See "Description of the
Certificates -- Restrictions on Transfer of the
Class A-R Certificates" herein.
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 the Offered 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
Offered 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. [Certain classes of the Offered
Certificates 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."
Legal Investment........... The Senior Certificates and the Class
Certificates [will] [will not] constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA")
so long as
S-10
<PAGE> 120
they are rated in one of the two highest rating
categories by at least one nationally recognized
statistical rating organization and, as such, are
legal investments for certain entities to the
extent provided for in SMMEA.
It is anticipated that the Class and Class
Certificates will not be rated in one of the two
highest rating categories by a nationally
recognized statistical rating organization and,
therefore, will not constitute "mortgage related
securities" for purposes of SMMEA.
Institutions whose investment activities are
subject to review by federal or state regulatory
authorities should consult with their counsel or
the applicable authorities to determine whether an
investment in the Offered Certificates complies
with applicable guidelines, policy statements or
restrictions. See "Legal Investment" in the
Prospectus.
Ratings.................... It is a condition to the issuance of the Senior
Certificates that they be rated by (" ")
and by (" " and, together with , the
"Rating Agencies"). See "Ratings" herein. It is a
condition to the issuance of the Class , Class
and Class Certificates that they be rated
at least , and , respectively, by
. The ratings of the Offered Certificates of
any Class should be evaluated independently from
similar ratings on other types of securities. A
rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by either of the Rating
Agencies. See "Risk Factors -- Certificate Rating"
and "Ratings" herein.
Risk Factors............... For a discussion of certain risks associated with
an investment in the Certificates, see "Risk
Factors" on page S-12 herein and on page 17 in the
Prospectus.
S-11
<PAGE> 121
RISK FACTORS
[DESCRIPTION WILL DEPEND ON THE PARTICULARS OF THE MORTGAGE LOANS]
Investors should consider the following risks in connection with the
purchase of the Certificates.
Consequences of Owning Book-Entry Certificates. Issuance of the
Certificates in book-entry form may reduce the liquidity of such Certificates in
the secondary trading market since investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates. See
"Description of the Certificates -- Book-Entry Certificates" herein and "Risk
Factors -- Book-Entry Registration May Reduce Liquidity" in the Prospectus.
Since transactions in the Certificates can be effected only through DTC,
CEDEL, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Certificate Owner to pledge a Certificate to persons or
entities that do not participate in the DTC, CEDEL or Euroclear system may be
limited due to lack of a physical certificate representing the Certificates. See
"Description of the Certificates -- Book-Entry Certificates" herein and "Risk
Factors -- Book-Entry Registration May Reduce Liquidity" in the Prospectus.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. Certificate Owners will not be
recognized as Certificateholders as such term is used in the Agreement, and
Certificate Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants. See
"Description of the Certificates -- Book-Entry Certificates" herein and "Risk
Factors -- Book-Entry Registration May Reduce Liquidity" in the Prospectus.
Cash Flow Considerations. Minimum monthly payments on the Mortgage Loans
will at least equal and may exceed accrued interest. Even assuming that the
Mortgaged Properties provide adequate security for the Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
Mortgage Loans that are delinquent and resulting shortfalls in distributions to
Certificateholders could occur. Further, liquidation expenses (such as legal
fees, real estate taxes, and maintenance and preservation expenses) will reduce
the proceeds payable to Certificateholders and thereby reduce the security for
the Mortgage Loans. In the event any of the Mortgaged Properties fail to provide
adequate security for the related Mortgage Loans, Certificateholders could
experience a loss.
Prepayment Considerations and Risks. Substantially all of the Mortgage
Loans may be prepaid in whole or in part at any time without penalty. Home
equity loans, such as the Mortgage Loans, have been originated in significant
volume only during the past few years and neither the Depositor nor the Master
Servicer is aware of any publicly available studies or statistics on the rate of
prepayment of such loans. Generally, home equity loans are not viewed by
borrowers as permanent financing. Accordingly, the Mortgage Loans may experience
a higher rate of prepayment than traditional loans. The Trust's prepayment
experience may be affected by a wide variety of factors, including general
economic conditions, interest rates, the availability of alternative financing
and homeowner mobility. In addition, substantially all of the Mortgage Loans
contain due-on-sale provisions and the Master Servicer intends to enforce such
provisions unless (i) such enforcement is not permitted by applicable law or
(ii) the Master Servicer, in a manner consistent with reasonable commercial
practice, permits the purchaser of the related Mortgaged Property to assume the
Mortgage Loan. To the extent permitted by applicable law, such assumption will
not release the original borrower from its obligation under any such Mortgage
Loan. See "Yield, Prepayment and Maturity Considerations -- Prepayment
Considerations and Risks" herein and "Certain Legal Aspects of Loans --
Due-on-Sale Clauses" in the Prospectus for a description of certain provisions
of the Mortgage Loans that may affect the prepayment experience thereof. The
yield to maturity and weighted average life of the Certificates will be affected
primarily by the rate and timing of prepayments on the Mortgage Loans. Any
reinvestment risks resulting from a faster or slower incidence of prepayment of
Mortgage Loans will be borne entirely by the Certificateholders. See "Yield,
Prepayment and Maturity Considerations" herein and "Yield and Prepayment
Considerations" in the Prospectus.
S-12
<PAGE> 122
Certificate Rating. The rating of the Certificates will depend primarily
on an assessment by the Rating Agencies of the Mortgage Loans. The rating by the
Rating Agencies of the Certificates is not a recommendation to purchase, hold or
sell the Certificates, inasmuch as such rating does not comment as to the market
price or suitability for a particular investor. There is no assurance that the
ratings will remain in place for any given period of time or that the ratings
will not be lowered or withdrawn by the Rating Agencies. In general, the ratings
address credit risk and do not address the likelihood of prepayments. The
ratings of the Certificates do not address the possibility of the imposition of
United States withholding tax with respect to non-U.S. persons.
Bankruptcy and Insolvency Risks. The sale of the Mortgage Loans from the
Seller to the Depositor will be treated as a sale of the Mortgage Loans.
However, in the event of an insolvency of the Seller, the receiver of the Seller
may attempt to recharacterize the sale of the Mortgage Loans as a borrowing by
the Seller, secured by a pledge of the applicable Mortgage Loans. If the
receiver decided to challenge such transfer, delays in payments of the
Certificates and reductions in the amounts thereof could occur. The Depositor
will warrant in the Agreement that the transfer of the Mortgage Loans by it to
the Trust Fund is either a valid transfer and assignment of such Mortgage Loans
to the Trust Fund or the grant to the Trust Fund of a security interest in such
Mortgage Loans.
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
Certificateholders from appointing a successor Master Servicer.
Geographic Concentration. As of the Cut-off Date, approximately %
(by Cut-off Date Pool Principal Balance) of the Mortgaged Properties are located
in the State of . An overall decline in the residential
real estate market could adversely affect the values of the Mortgaged Properties
securing such Mortgage Loans such that the Principal Balances of the related
Mortgage Loans could equal or exceed the value of such Mortgaged Properties. As
the residential real estate market is influenced by many factors, including the
general condition of the economy and interest rates, no assurances may be given
that the residential real estate market will not weaken. If the
residential real estate market should experience an overall decline
in property values after the dates of origination of the Mortgage Loans, the
rates of losses on the Mortgage Loans would be expected to increase, and could
increase substantially.
Delinquent Mortgage Loans. The Trust Fund will include Mortgage Loans
which are 89 or fewer days delinquent as of the Cut-off Date. The Cut-off Date
Pool Principal Balance of Mortgage Loans which are between 30 days and 89 days
delinquent as of the Cut-off Date was $ . If there are not sufficient
Available Funds on any Distribution Dates, the aggregate amount of principal
returned to the Certificateholders may be less than the respective Class
Certificate Principal Balances on the day the Certificates were issued.
Risks of Holding Subordinated Certificates. The subordination of the
Subordinated Certificates to the Senior Certificates, and the further
subordination within the Subordinated Certificates, is intended to increase the
likelihood of timely receipt by the holders of Certificates with higher relative
payment priority of the maximum amount to which they are entitled on any
Distribution Date and to provide such holders protection against losses on the
Mortgage Loans to the extent described herein under "Description of the
Certificates -- Allocation of Losses" and "Credit Enhancement -- Subordination
of Certain Classes." However, in certain circumstances the amount of available
subordination (including the limited subordination provided for certain types of
losses) may be exhausted and shortfalls in distributions on the Certificates
could result. Holders of the Senior Certificates will bear their proportionate
share of any losses realized on the Mortgage Loans in excess of the available
subordination amount.
In addition, the weighted average life of, and the yield to maturity on,
the Subordinated Certificates, in increasing order of their numerical Class
designation, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the Mortgage Loans. If
the actual rate and severity of losses on the Mortgage Loans is higher than
those assumed by a holder of a Subordinated Certificate, the actual yield to
maturity of such Certificate may be lower than the yield expected by such holder
based on such assumption. The timing of losses on Mortgage Loans will also
affect an investor's actual yield to maturity, even if the rate of defaults and
severity of losses over the life of the Mortgage Pool are
S-13
<PAGE> 123
consistent with an investor's expectations. Realized Losses on the Mortgage
Loans will reduce the Class Certificate Balances of the applicable Class of
Subordinated Certificates to the extent of any losses allocated thereto (as
described under "Description of the Certificates -- Allocation of Losses"
herein), without the receipt of cash attributable to such reduction. As a result
of such reductions, less interest will accrue on such Class of Subordinated
Certificates than otherwise would be the case. The yield to maturity of the
Subordinated Certificates will also be affected by the disproportionate
allocation of principal prepayments to the Senior Certificates, Net Interest
Shortfalls, other cash shortfalls in Available Funds and distribution of funds
to Class PO Certificateholders otherwise available for distribution on the
Subordinated Certificates to the extent of reimbursement for Class PO Deferred
Amounts. See "Description of the Certificates -- Allocation of Losses" and
"Yield, Prepayment and Maturity Considerations -- The Subordinated Certificates"
herein.
For a discussion of additional risks pertaining to the Offered
Certificates, see "Risk Factors" in the Prospectus.
THE MORTGAGE POOL
GENERAL
The Depositor will purchase the Mortgage Loans from the Seller pursuant to
the Purchase Agreement, dated , 199 (the "Purchase Agreement").
Pursuant to the Pooling and Servicing Agreement dated as of the Cut-off Date
among the Master Servicer, the Depositor and the Trustee (the "Agreement"), the
Depositor will cause the Mortgage Loans to be assigned to the Trustee for the
benefit of the holders of the Certificates (the "Certificateholders").
Under the Purchase Agreement, the Seller will make certain representations,
warranties and covenants to the Depositor relating to, among other things, the
due execution and enforceability of the Agreement and certain characteristics of
the Mortgage Loans and, subject to the limitations described below under
"-- Assignment of the Mortgage Loans," will be obligated to repurchase or
substitute a similar mortgage loan for any Mortgage Loan as to which there
exists deficient documentation or an uncured material breach of any such
representation, warranty or covenant. The Seller will represent and warrant to
the Depositor in the Agreement that the Mortgage Loans were selected from among
the outstanding one- to four-family mortgage loans in the Seller's portfolio as
to which the representations and warranties set forth in the Agreement can be
made and that such selection was not made in a manner that would adversely
affect the interests of the Certificateholders. See "The Trust
Fund -- Representations by Sellers; Repurchases" in the Prospectus. Under the
Agreement, the Depositor will assign all its right, title and interest in and to
such representations, warranties and covenants (including the Seller's
repurchase obligation) under the Purchase Agreement to the Trustee for the
benefit of Certificateholders. The Depositor will make no representations or
warranties with respect to the Mortgage Loans and will have no obligation to
repurchase or substitute Mortgage Loans with deficient documentation or which
are otherwise defective. The Seller is selling the Mortgage Loans without
recourse and will have no obligation with respect to the Certificates in its
capacity as Seller other than the repurchase obligation described above. The
obligations of , as Master Servicer, with respect to the
Certificates are limited to the Master Servicer's contractual servicing
obligations under the Agreement.
Certain information with respect to the Mortgage Loans expected to be
included in the Mortgage Pool is set forth below. Prior to the Closing Date,
Mortgage Loans may be removed from the Mortgage Pool and other Mortgage Loans
may be substituted therefor. The Depositor believes that the information set
forth herein under "The Mortgage Pool" with respect to the Mortgage Pool as
presently constituted is representative of the characteristics of the Mortgage
Pool as it will be constituted at the Closing Date, although certain
characteristics of the Mortgage Loans in the Mortgage Pool may vary. Unless
otherwise indicated, information presented herein under "The Mortgage Pool"
expressed as a percentage (other than rates of interest) are approximate
percentages based on the Stated Principal Balances of the Mortgage Loans as of
the Cut-off Date.
S-14
<PAGE> 124
As of the Cut-off Date, the aggregate of the Stated Principal Balances of
the Mortgage Loans is expected to be approximately $ (the "Cut-off Date
Pool Principal Balance"). The Mortgage Loans provide for the amortization of the
amount financed over a series of substantially equal monthly payments. All the
Mortgage Loans provide for payments due as of the first day of each month (the
"Due Date"). At origination, substantially all of the Mortgage Loans had stated
terms to maturity of [30 years]. The Mortgage Loans to be included in the
Mortgage Pool were originated or purchased by [the Seller] and were originated
substantially in accordance with [the Seller's] underwriting criteria described
below under "-- Underwriting Standards."
Scheduled monthly payments made by the Mortgagors on the Mortgage Loans
("Scheduled Payments") either earlier or later than the scheduled Due Dates
thereof will not affect the amortization schedule or the relative application of
such payments to principal and interest. [All of the Mortgage Notes provide for
a ( ) day grace period for monthly payments. Any Mortgage Loan may
be prepaid in full or in part at any time; however, approximately % of the
Mortgage Loans provide for the payment by the borrower of a prepayment charge in
limited circumstances on full prepayments made within years from the date
of execution of the related Mortgage Note. In general, the Mortgage Note
provides that a prepayment charge will apply if, during the first years
from the date of origination of such Mortgage Loan, the borrower prepays such
Mortgage Loan in full. The amount of the prepayment charge will generally be
equal to months' advance interest calculated on the basis of the rate in
effect at the time of such prepayment on the amount prepaid in excess of %
of the original balance of such Mortgage Loan.]
Each Mortgage Loan was originated after .
The latest stated maturity date of any Mortgage Loan is .
The earliest stated maturity date of any Mortgage Loan is .
As of the Cut-off Date, no Mortgage Loan was delinquent more than [89]
days.
[No] Mortgage Loan will be subject to a buydown agreement. [No] Mortgage
Loan provides for deferred interest or negative amortization.
[No] Mortgage Loan had a Loan-to-Value Ratio at origination of more than
[95]%. Each Mortgage Loan with a Loan-to-Value Ratio at origination of greater
than 80% may be covered by a primary mortgage guaranty insurance policy issued
by a mortgage insurance company acceptable to FNMA or FHLMC, which policy
provides coverage in an amount equal to the excess of the original principal
balance of the related Mortgage Loan over % of the value of the related
Mortgaged Property, plus accrued interest thereon and related foreclosure
expenses.
The Loan-to-Value Ratio of a Mortgage Loan is equal to (i) the principal
balance of such Mortgage Loan at the date of origination, divided by (ii) the
Collateral Value of the related Mortgaged Property. The Collateral Value of a
Mortgaged Property is the lesser of (x) the appraised value based on an
appraisal made for [the Seller] by an independent fee appraiser at the time of
the origination of the related Mortgage Loan, and (y) the sales price of such
Mortgaged Property at such time of origination. With respect to a Mortgage Loan
the proceeds of which were used to refinance an existing mortgage loan, the
Collateral Value is the appraised value of the Mortgaged Property based upon the
appraisal obtained at the time of refinancing. No assurance can be given that
the values of the Mortgaged Properties have remained or will remain at their
levels as of the dates of origination of the related Mortgage Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of the Mortgage Loans become equal to
or greater than the value of the Mortgaged Properties, actual losses on the
Mortgage Loans could be higher than losses now generally experienced in the
mortgage lending industry.
The following information sets forth in tabular format certain information,
as of the Cut-off Date, as to the Mortgage Loans. Other than with respect to
rates of interest, percentages (approximate) are stated by Stated Principal
Balance of the Mortgage Loans as of the Cut-off Date and have been rounded in
order to total 100%.
S-15
<PAGE> 125
MORTGAGE RATES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF
MORTGAGE RATES (%) MORTGAGE LOANS BALANCE OUTSTANDING MORTGAGE POOL
------------------ -------------- ------------------- -------------
<S> <C> <C> <C>
............................... $ %
...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................
...............................
Totals................................ $ %
======== ======
</TABLE>
<TABLE>
<S> <C> <C>
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
...........................................
Totals............................................ 100.00%
====== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans (as so adjusted) is expected to be approximately %. Without such
adjustment, the weighted average Mortgage Rate of the Mortgage Loans is
expected to be approximately % per annum.
ORIGINAL LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF
ORIGINAL LOAN-TO-VALUE RATES (%) MORTGAGE LOANS BALANCE OUTSTANDING MORTGAGE POOL
-------------------------------- -------------- ------------------- -------------
<S> <C> <C> <C>
$ %
- ------ and below................................
- ------ to ------................................
- ------ to ------................................
- ------ to ------................................
- ------ to ------................................
- ------ to ------................................
- ------ to ------................................
- ------ to ------................................
- ------ to ------................................
- ------ to ------................................
Totals................................ $ 100.0%
--- -------- ------
</TABLE>
- ---------------
(1) The weighted average original Loan-to-Value Ratio of the Mortgage Loans is
expected to be approximately %.
S-16
<PAGE> 126
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES(1)
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL
NUMBER OF BALANCE PERCENT OF
CURRENT MORTGAGE LOAN AMOUNTS MORTGAGE LOANS OUTSTANDING MORTGAGE POOL
----------------------------- -------------- ----------- -------------
<S> <C> <C> <C>
$ 0-$ ................................. $ %
$ -$ .................................
$ -$ .................................
$ -$ .................................
$ -$ .................................
$ -$ .................................
$ -$ .................................
$ -$ .................................
$ -$ .................................
$ -$ .................................
$ -$ .................................
$ -$ .................................
$ -$ .................................
$ -$ .................................
$ -$ .................................
------- ----------- ------
Totals..................................
======= =========== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the average current Mortgage Loan principal balance
is expected to be approximately $ .
DOCUMENTATION PROGRAM FOR MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL
NUMBER OF BALANCE PERCENT OF
TYPE OF PROGRAM MORTGAGE LOANS OUTSTANDING MORTGAGE POOL
--------------- -------------- ----------- -------------
<S> <C> <C> <C>
Full.............................................. $ %
Alternative.......................................
Reduced...........................................
Streamlined.......................................
------- ----------- ------
Totals.................................. $ 100.00%
======= =========== ======
</TABLE>
TYPE OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL
PRINCIPAL NUMBER OF BALANCE PERCENT OF
PROPERTY TYPE MORTGAGE LOANS OUTSTANDING MORTGAGE POOL
------------- -------------- ----------- -------------
<S> <C> <C> <C>
Single Family..................................... $ %
Condominium.......................................
Two- to Four-Family...............................
Planned Unit Development..........................
------- ----------- ------
Totals.................................. $ 100.00%
======= =========== ======
</TABLE>
S-17
<PAGE> 127
OCCUPANCY TYPES(1)
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL
NUMBER OF BALANCE PERCENT OF
OCCUPANCY TYPE MORTGAGE LOANS OUTSTANDING MORTGAGE POOL
-------------- -------------- ----------- -------------
<S> <C> <C> <C>
Primary Residence................................. $ %
Investor Residence................................
Second Residence..................................
------- ----------- ------
Totals.................................. $ 100.00%
======= =========== ======
</TABLE>
- ---------------
(1) Based upon representations of the related mortgagors at the time of
origination.
STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1)
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL
NUMBER OF BALANCE PERCENT OF
STATE MORTGAGE LOANS OUTSTANDING MORTGAGE POOL
----- -------------- ----------- -------------
<S> <C> <C> <C>
Other (less than [2]%)............................ -- $ %
........................................
------- ----------- ------
Totals.................................. $ 100.00%
======= =========== ======
</TABLE>
- ---------------
(1) Other includes other states with under [2]% concentrations individually. No
more than approximately % of the Mortgage Loans will be secured by Mortgaged
Properties located in any one postal zip code area.
PURPOSE OF MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL
NUMBER OF BALANCE PERCENT OF
LOAN PURPOSE MORTGAGE LOANS OUTSTANDING MORTGAGE POOL
------------ -------------- ----------- -------------
<S> <C> <C> <C>
Purchase.......................................... $ %
Refinance (rate/term).............................
Refinance (cash out)..............................
------- ----------- ------
Totals.................................. $ 100.00%
======= =========== ======
</TABLE>
S-18
<PAGE> 128
REMAINING TERMS TO MATURITY(1)
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL
NUMBER OF BALANCE PERCENT OF
REMAINING TERMS TO MATURITY (MONTHS) MORTGAGE LOANS OUTSTANDING MORTGAGE POOL
------------------------------------ -------------- ----------- -------------
<S> <C> <C> <C>
- --......... $ %
- --.........
- --.........
- --.........
- --.........
- --.........
- --.........
- --.........
- --.........
- --.........
- --.........
------- ----------- ------
Totals.................................. $ 100.00%
======= =========== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Mortgage Loans is expected to be approximately months.
ASSIGNMENT OF THE MORTGAGE LOANS
Pursuant to the Agreement, the Depositor on the Closing Date will sell,
transfer, assign, set over and otherwise convey without recourse to the Trustee
in trust for the benefit of the Certificateholders all right, title and interest
of the Depositor in and to each Mortgage Loan and all right, title and interest
in and to the Purchase Agreement and all other assets included in the Trust Fund
described under "Credit Enhancement" herein, including all principal and
interest received on or with respect to the Mortgage Loans, exclusive of
principal and interest due on or prior to the Cut-off Date.
In connection with such transfer and assignment, the Depositor will deliver
or cause to be delivered to the Trustee, or a custodian for the Trustee, among
other things, the original promissory note (the "Mortgage Note") (and any
modification or amendment thereto) endorsed in blank without recourse, the
original instrument creating a first lien on the related Mortgaged Property (the
"Mortgage") with evidence of recording indicated thereon, an assignment in
recordable form of the Mortgage, the title policy with respect to the related
Mortgaged Property and, if applicable, all recorded intervening assignments of
the Mortgage and any riders or modifications to such Mortgage Note and Mortgage
(except for any such documents not returned from the public recording office,
which will be delivered to the Trustee as soon as the same is available to the
Depositor) (collectively, the "Mortgage File"). Assignments of the Mortgage
Loans to the Trustee (or its nominee) will be recorded in the appropriate public
office for real property records, except in states such as California where in
the opinion of counsel such recording is not required to protect the Trustee's
interests in the Mortgage Loan against the claim of any subsequent transferee or
any successor to or creditor of the Depositor or the Seller.
The Trustee will review each Mortgage File within 90 days of the Closing
Date (or promptly after the Trustee's receipt of any document permitted to be
delivered after the Closing Date) and if any document in a Mortgage File is
found to be missing or defective in a material respect and the Seller does not
cure such defect within 90 days of notice thereof from the Trustee (or within
such longer period not to exceed days after the Closing Date as provided in
the Agreement in the case of missing documents not returned from the public
recording office), the Seller will be obligated to repurchase the related
Mortgage Loan from the Trust Fund. Rather than repurchase the Mortgage Loan as
provided above, the Seller may remove such Mortgage Loan (a "Deleted Mortgage
Loan") from the Trust Fund and substitute in its place another mortgage loan (a
"Replacement Mortgage Loan"); however, such substitution is permitted only
within two years of the
S-19
<PAGE> 129
Closing Date and may not be made unless an opinion of counsel is provided to the
Trustee to the effect that such substitution will not disqualify the REMIC or
result in a prohibited transaction tax under the Code. Any Replacement Mortgage
Loan generally will, on the date of substitution, among other characteristics
set forth in the Agreement, (i) have a principal balance, after deduction of all
Scheduled Payments due in the month of substitution, not in excess of, and not
more than 10% less than, the Stated Principal Balance of the Deleted Mortgage
Loan (the amount of any shortfall to be deposited by the Seller in the
Certificate Account and held for distribution to the Certificateholders on the
related Distribution Date (a "Substitution Adjustment Amount")), (ii) have a
Mortgage Rate not lower than, and not more than 1% per annum higher than, that
of the Deleted Mortgage Loan, (iii) have a Loan-to-Value Ratio not higher than
that of the Deleted Mortgage Loan, (iv) have a remaining term to maturity not
greater than (and not more than one year less than) that of the Deleted Mortgage
Loan, and (v) comply with all of the representations and warranties set forth in
the Agreement as of the date of substitution. This cure, repurchase or
substitution obligation constitutes the sole remedy available to
Certificateholders or the Trustee for omission of, or a material defect in, a
Mortgage Loan document.
UNDERWRITING STANDARDS
The following is a description of the underwriting procedures customarily
employed by [the Seller] with respect to mortgage loans such as the Mortgage
Loans: .
SERVICING OF MORTGAGE LOANS
GENERAL
The Master Servicer will service the Mortgage Loans in accordance with the
terms set forth in the Pooling and Servicing Agreement. The Master Servicer may
perform any of its obligations under the Pooling and Servicing Agreement through
one or more subservicers. Notwithstanding any such subservicing arrangement, the
Master Servicer will remain liable for its servicing duties and obligations
under the Pooling and Servicing Agreement as if the Master Servicer alone were
servicing the Mortgage Loans. [As of the Closing Date, the Master Servicer will
service the Mortgage Loans without subservicing arrangements.]
The information set forth in the following section through and including
the section captioned "Delinquency Status as of , 199 " has been
provided by [the Master Servicer]. No representation is made by the Depositor or
any of its affiliates as to the accuracy or completeness of any such
information.
THE MASTER SERVICER
[ ] will act as the Master Servicer of the Mortgage Loans pursuant to the
Pooling and Servicing Agreement.
As of , 199 , [the Master Servicer] provided servicing for
approximately $ [million] in mortgage loans.
The principal executive offices of the Master Servicer are located at
. Its telephone number is ( ) .
LOAN SERVICING
[The Master Servicer services substantially all of the mortgage loans it
originates or acquires. Servicing includes, but is not limited to, collecting
and remitting mortgage loan payments, accounting for principal and interest,
holding escrow (impound) funds for payment of taxes and insurance, making
inspections as required of the mortgaged properties, preparation of tax related
information in connection with the mortgage loans, supervision of delinquent
mortgage loans, loss mitigation efforts, foreclosure proceedings and, if
applicable, the disposition of mortgaged properties, and generally administering
the mortgage loans, for which it receives servicing fees.]
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COLLECTION PROCEDURES
When a mortgagor fails to make a payment on a mortgage loan, the Master
Servicer attempts to cause the deficiency to be cured by corresponding with the
mortgagor. In most cases, deficiencies are cured promptly. Pursuant to the
Master Servicer's servicing procedures, the Master Servicer generally mails to
the mortgagor a notice of intent to foreclose after the loan becomes 31 days
past due (two payments due but not received) and, within 60 days thereafter, if
the loan remains delinquent, institutes appropriate legal action to foreclose on
the mortgaged property. Foreclosure proceedings may be terminated if the
delinquency is cured. Mortgage loans to borrowers in bankruptcy proceedings may
be restructured in accordance with law and with a view to maximizing recovery of
such loans, including any deficiencies.
Once foreclosure is initiated by the Master Servicer, a foreclosure
tracking system is used to monitor the progress of the proceedings. The system
includes state specific parameters to monitor whether proceedings are
progressing within the time frame typical for the state in which the mortgaged
property is located. During the foreclosure proceeding, the Master Servicer
determines the amount of the foreclosure bid and whether to liquidate the
mortgage loan.
After foreclosure, the Master Servicer may liquidate the mortgaged property
and charge-off the loan balance which was not recovered through liquidation
proceeds. If foreclosed, the mortgaged property is sold at a public or private
sale and may be purchased by the Master Servicer.
Servicing and charge-off policies and collection practices may change over
time in accordance with, among other things, the Master Servicer's business
judgment, changes in the servicing portfolio and applicable laws and
regulations.
FORECLOSURE AND DELINQUENCY EXPERIENCE
The following table summarizes the delinquency experience of mortgage loans
serviced by the Master Servicer as of , 199 . A mortgage loan is
characterized as delinquent if the borrower has not paid the minimum payment due
by the due date. The table below excludes mortgage loans where the mortgage loan
is in foreclosure or the borrower has filed for bankruptcy. The delinquency
percentages may be affected by the size and relative lack of seasoning of the
servicing portfolio because many of such loans were not outstanding long enough
to give rise to some or all of the periods of delinquency indicated in the chart
below. Accordingly, the information should not be considered as a basis for
assessing the likelihood, amount, or severity of delinquency or losses on the
Mortgage Loans, and no assurances can be given that the foreclosure experience
presented in the second paragraph below the table will be indicative of such
experience on the Mortgage Loans.
DELINQUENCY STATUS AS OF , 199
<TABLE>
<CAPTION>
DOLLARS PERCENT UNITS PERCENT
------- ------- ------- -------
<S> <C> <C> <C> <C>
Current.............................................. $ % %
30-59 Days........................................... $ % %
60-89 Days........................................... $ % %
90+ Days............................................. $ % %
Total...................................... $ % %
</TABLE>
This table does not include mortgage loans with principal balances
aggregating $ that were sold, but were being serviced on an interim
basis pending transfer of servicing, as of , 199 . As of the date
hereof, servicing with respect to such mortgage loans has been transferred.
Delinquencies are reported on a contractual basis. As of ,
199 , mortgage loans with an aggregate principal balance of $ were
in foreclosure and, there were loans in bankruptcy with a combined loan
balance of $ .
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Over the last several years, there has been a general deterioration of the
real estate market and weakening economy in many regions of the country,
including . The general deterioration of the real estate market has
been reflected in increases in delinquencies of loans secured by real estate,
slower absorption rates of real estate into the market and lower sales prices
for real estate. The general weakening of the economy has been reflected in
decreases in the financial strength of borrowers and decreases in the value of
collateral serving as security for loans. If the real estate market and economy
continue to decline, the Master Servicer may experience an increase in
delinquencies on the loans it services and higher net losses on liquidated
mortgage loans.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
[The Master Servicer will be paid a monthly fee from interest collected
with respect to each Mortgage Loan (as well as from any liquidation proceeds
from a Liquidated Mortgage Loan that are applied to accrued and unpaid interest)
equal to one-twelfth of the Stated Principal Balance thereof multiplied by the
Servicing Fee Rate (such product, the "Servicing Fee"). The Servicing Fee Rate
for each Mortgage Loan will equal % per annum. The amount of the monthly
Servicing Fee is subject to adjustment with respect to prepaid Mortgage Loans,
as described herein under "-- Adjustment to Master Servicing Fee in Connection
with Certain Prepaid Mortgage Loans." The Master Servicer is also entitled to
receive, as additional servicing compensation, amounts in respect of interest
paid on Principal Prepayments (as defined below) received from the 2nd day
through the 15th day of a month ("Prepayment Interest Excess"), all late payment
fees, assumption fees, prepayment penalties and other similar charges and all
reinvestment income earned on amounts on deposit in the Certificate Account and
Distribution Account. The Master Servicer is obligated to pay certain ongoing
expenses associated with the Mortgage Loans and incurred by the Trustee in
connection with its responsibilities under the Pooling and Servicing Agreement.]
ADJUSTMENT TO MASTER SERVICING FEE IN CONNECTION WITH CERTAIN PREPAID MORTGAGE
LOANS
When a borrower prepays a Mortgage Loan between Due Dates, the borrower is
required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Except with respect to the month of the Cut-off Date,
principal prepayments by borrowers received by the Master Servicer from the
first day through the fifteenth day of a calendar month will be distributed to
Certificateholders on the Distribution Date in the same month in which such
prepayments are received and, accordingly, no shortfall in the amount of
interest to be distributed to Certificateholders with respect to the prepaid
Mortgage Loans results. Conversely, principal prepayments by borrowers received
by the Master Servicer from the sixteenth day (or, in the case of the first
Distribution Date, from the Cut-off Date) through the last day of a calendar
month will be distributed to Certificateholders on the Distribution Date in the
month following the month of receipt and, accordingly, a shortfall in the amount
of interest to be distributed to Certificateholders with respect to such prepaid
Mortgage Loans would result. Pursuant to the Agreement, the Master Servicing Fee
for any month will be reduced, [but not by more than one-half of such Master
Servicing Fee,] by an amount sufficient to pass through to Certificateholders
the full amount of interest to which they would be entitled in respect of each
such prepaid Mortgage Loan on the related Distribution Date. If shortfalls in
interest as a result of prepayments in any Prepayment Period exceed an amount
equal to [one-half of] the Master Servicing Fee otherwise payable on the related
Distribution Date, the amount of interest available to be distributed to
Certificateholders will be reduced by the amount of such excess. See
"Description of the Certificates -- Interest" herein.
ADVANCES
Subject to the following limitations, the Master Servicer will be required
to advance prior to each Distribution Date, from its own funds or funds in the
Certificate Account that do not constitute Available Funds for such Distribution
Date, an amount equal to the aggregate of payments of principal and interest on
the Mortgage Loans (net of the Master Servicing Fee with respect to the related
Mortgage Loans) which were due on the related Due Date and which were delinquent
on the related Determination Date, together with an amount equivalent to
interest on each Mortgage Loan as to which the related Mortgaged Property has
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been acquired by the Trust Fund through foreclosure or deed-in-lieu of
foreclosure ("REO Property") (any such advance, an "Advance").
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Certificates rather than to guarantee or insure
against losses. The Master Servicer is obligated to make Advances with respect
to delinquent payments of principal of or interest on each Mortgage Loan to the
extent that such Advances are, in its reasonable judgment, recoverable from
future payments and collections or insurance payments or proceeds of liquidation
of the related Mortgage Loan. If the Master Servicer determines on any
Determination Date to make an Advance, such Advance will be included with the
distribution to Certificateholders on the related Distribution Date. Any failure
by the Master Servicer to make an Advance as required under the Agreement with
respect to the Certificates will constitute an Event of Default thereunder, in
which case the Trustee or the successor master servicer will be obligated to
make any such Advance, in accordance with the terms of the Agreement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Agreement. Set forth below
are descriptions of the material terms and provisions pursuant to which the
Certificates will be issued. When particular provisions or terms used in the
Agreement are referred to, the actual provisions (including definitions of
terms) are incorporated by reference.
The Mortgage Loan Asset-Backed Pass-Through Certificates, Series 199 -
will consist of the Class A- , Class , Class PO, Class X and Class A-R
Certificates (collectively, the "Senior Certificates") and the Class B- , Class
and Class Certificates (collectively, the "Subordinated Certificates"). The
Senior Certificates and Subordinated Certificates are collectively referred to
herein as the "Certificates." Only the Classes of Certificates listed on the
cover page hereof (collectively, the "Offered Certificates") are offered hereby.
The Classes of Offered Certificates will have the respective initial Class
Certificate Balances or initial Notional Amounts (subject to the permitted
variance) and Pass-Through Rates set forth or described on the cover hereof.
The Class Certificate Balance of any Class of Certificates as of any
Distribution Date is the initial Class Certificate Balance thereof (A) reduced
by the sum of (i) all amounts previously distributed to holders of Certificates
of such Class as payments of principal, (ii) the amount of Realized Losses
(including Excess Losses) allocated to such Class and (iii) in the case of any
Class of Subordinated Certificates, any amounts allocated to such Class in
reduction of its Class Certificate Balance in respect of payments of Class PO
Deferred Amounts, as described below under "-- Allocation of Losses." In
addition, the Class Certificate Balance of the Class of Subordinated
Certificates then outstanding with the highest numerical Class designation will
be reduced if and to the extent that the aggregate of the Class Certificate
Balances of all Classes of Certificates, following all distributions and the
allocation of Realized Losses on a Distribution Date, exceeds the Pool Principal
Balance as of the Due Date occurring in the month of such Distribution Date. The
Notional Amount Certificates do not have principal balances and are not entitled
to any distributions in respect of principal of the Mortgage Loans.
The Notional Amount of the Class X Certificates for any Distribution Date
will be equal to the aggregate of the Stated Principal Balances of the
Non-Discount Mortgage Loans with respect to such Distribution Date. A
"Non-Discount Mortgage Loan" is a Mortgage Loan with a Net Mortgage Rate equal
to or greater than %. The initial Notional Amount of the Class X Certificates
will be equal to the aggregate of the Stated Principal Balance of the
Non-Discount Mortgage Loans as of the Cut-off Date.
The Senior Certificates will have an initial aggregate principal balance of
approximately $ and will evidence in the aggregate an initial
beneficial ownership interest of approximately % in the Trust Fund. The Class
B- and Class B- Certificates will each evidence in the aggregate an initial
beneficial ownership interest of approximately % and %, respectively, in the
Trust Fund.
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The Book-Entry Certificates will be issuable in book-entry form only. The
Physical Certificates will be issued in fully registered certificated form. The
Physical Certificates (other than Class A-R Certificates) offered hereby will be
issued in minimum dollar denominations of [$1,000] and integral multiples of
[$1] in excess thereof. A single Certificate of each such Class may be issued in
an amount different than described above. The Class A-R Certificates will be
issued as a single Certificate in a denomination of [$1,000].
BOOK-ENTRY CERTIFICATES
Each Class of Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate initial Class Certificate Balance of each
such Class of Certificates and which will be held by a nominee of The Depository
Trust Company (together with any successor depository selected by the Depositor,
the "Depository"). Beneficial interests in the Book-Entry Certificates will be
held indirectly by investors through the book-entry facilities of the
Depository, as described herein. Investors may hold such beneficial interests in
the Book-Entry Certificates in minimum denominations representing an original
principal amount of [$1,000] and integral multiples of [$1] in excess thereof.
[One investor of each Class of Book-Entry Certificates may hold a beneficial
interest therein that is not an integral multiple of $1,000.] The Depositor has
been informed by the Depository that its nominee will be CEDE & Co. ("CEDE").
Accordingly, CEDE is expected to be the holder of record of the Book-Entry
Certificates. Except as described in the Prospectus under "Description of the
Securities -- Book-Entry Registration of Securities," no person acquiring a
Book-Entry Certificate (each, a "beneficial owner") will be entitled to receive
a physical certificate representing such Certificate (a "Definitive
Certificate").
Unless and until Definitive Certificates are issued, it is anticipated that
the only "Certificateholder" of the Book-Entry Certificates will be CEDE, as
nominee of the Depository. Beneficial owners of the Book-Entry Certificates will
not be Certificateholders, as that term is used in the Agreement. Beneficial
owners are only permitted to exercise the rights of Certificateholders
indirectly through Financial Intermediaries and the Depository. Monthly and
annual reports on the Trust Fund provided to CEDE, as nominee of the Depository,
may be made available to beneficial owners upon request, in accordance with the
rules, regulations and procedures creating and affecting the Depository, and to
the Financial Intermediaries to whose Depository accounts the Book-Entry
Certificates of such beneficial owners are credited.
For a description of the procedures generally applicable to the Book-Entry
Certificates, see "Description of the Securities -- Book-Entry Registration of
Securities" in the Prospectus.
PAYMENTS ON MORTGAGE LOANS; ACCOUNTS
On or prior to the Closing Date, the Master Servicer will establish an
account (the "Certificate Account"), which will be maintained in trust for the
benefit of the Certificateholders. Funds credited to the Certificate Account may
be invested for the benefit and at the risk of the Master Servicer in Permitted
Investments, that are scheduled to mature on or prior to the business day
preceding the next Distribution Date. On or prior to the business day
immediately preceding each Distribution Date, the Master Servicer will withdraw
from the Certificate Account the amount of Available Funds and will deposit such
Available Funds in an account established and maintained with the Trustee on
behalf of the Certificateholders (the "Distribution Account").
"Permitted Investments" will be specified in the Agreement and will be
limited to (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 Certificates, or such lower rating as will not
result in the downgrading or withdrawal of the ratings then assigned to the
Certificates 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 the Certificates
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
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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 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 the
Certificates 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 the Certificates 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 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 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 the rating then assigned to the Certificates by any such Rating
Agency, as evidenced by a signed writing delivered by each such Rating Agency;
and (viii) such other investments having a specified stated maturity and bearing
interest or sold at a discount acceptable to each Rating Agency as will not
result in the downgrading or withdrawal of the rating then assigned to the
Certificates by any such Rating Agency, as evidenced by a signed writing
delivered 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.
DISTRIBUTIONS
Distributions on the Certificates will be made by the Trustee on the day
of each month, or if such day is not a business day, on the first business day
thereafter, commencing in 199 (each, a "Distribution Date"), to the
persons in whose names such Certificates are registered at the close of business
on the last business day of the month preceding the month of such Distribution
Date (the "Record Date").
Distributions on each Distribution Date will be made by check mailed to the
address of the person entitled thereto as it appears on the applicable
certificate register or, in the case of a Certificateholder who holds [100%] of
a Class of Certificates or who holds Certificates with an aggregate initial
Certificate Balance of [$1,000,000] or more or who holds an Interest Only
Certificate and who has so notified the Trustee in writing in accordance with
the Agreement, by wire transfer in immediately available funds to the account of
such Certificateholder at a bank or other depository institution having
appropriate wire transfer facilities; provided, however, that the final
distribution in retirement of the Certificates will be made only upon
presentment and surrender of such Certificates at the Corporate Trust Office of
the Trustee.
PRIORITY OF DISTRIBUTIONS AMONG CERTIFICATES
As more fully described below under "-- Interest," "-- Principal" and
"-- Allocation of Losses," distributions will be made on each Distribution Date
from Available Funds in the following order of priority: (i) to interest on each
interest bearing Class of Senior Certificates; (ii) to principal on the Classes
of Senior Certificates then entitled to receive distributions of principal, in
the order and subject to the priorities set forth below under "-- Principal," in
each case in an aggregate amount up to the maximum amount of principal to be
distributed on such Classes on such Distribution Date; (iii) to any Class PO
Deferred Amounts with respect to the Class PO Certificates, but only from
amounts that would otherwise be distributed on such Distribution Date as
principal of the Subordinated Certificates; and (iv) to interest on and then
principal of
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each Class of Subordinated Certificates, in the order of their numerical Class
designations, beginning with the Class Certificates, in each case subject
to the limitations set forth below under "-- Principal."
"Available Funds" with respect to any Distribution Date will be equal to
the sum of (i) all scheduled installments of interest (net of the related
Expense Fees) and principal due on the Due Date in the month in which such
Distribution Date occurs and received prior to the related Determination Date,
together with any Advances in respect thereof; (ii) all proceeds of any primary
mortgage guaranty insurance policies and any other insurance policies with
respect to the Mortgage Loans, to the extent such proceeds are not applied to
the restoration of the related Mortgaged Property or released to the Mortgagor
in accordance with the Master Servicer's normal servicing procedures
(collectively, "Insurance Proceeds") and all other cash amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans, by
foreclosure or otherwise ("Liquidation Proceeds") during the calendar month
preceding the month of such Distribution Date (in each case, net of unreimbursed
expenses incurred in connection with a liquidation or foreclosure and
unreimbursed Advances, if any); (iii) all partial or full prepayments received
during the month preceding the month of such Distribution Date; and (iv) amounts
received with respect to such Distribution Date as the Substitution Adjustment
Amount or purchase price in respect of a Deleted Mortgage Loan or a Mortgage
Loan repurchased by the Seller or the Master Servicer as of such Distribution
Date, reduced by amounts in reimbursement for Advances previously made and other
amounts as to which the Master Servicer is entitled to be reimbursed from the
Certificate Account pursuant to the Agreement.
With respect to any Distribution Date, the Class PO Deferred Amount is the
aggregate of the applicable PO Percentage of each Realized Loss, other than any
Excess Loss, to be allocated to the Class PO Certificates on such Distribution
Date on or prior to the Senior Credit Support Depletion Date or previously
allocated to the Class PO Certificates and not yet paid to the holders of the
Class PO Certificates.
INTEREST
The Classes of Offered Certificates will have the respective Pass-Through
Rates set forth or described on the cover hereof.
The Pass-Through Rate for the Class X Certificates for any Distribution
Date will be equal to the excess of (a) the average of the Net Mortgage Rates of
the Non-Discount Mortgage Loans, weighted on the basis of the Stated Principal
Balances thereof, over (b) % per annum. The Pass-Through Rate for the Class X
Certificates for the first Distribution Date is expected to be approximately %
per annum. The Net Mortgage Rate for each Mortgage Loan is the interest rate
thereon (the "Mortgage Rate") less the Servicing Fee Rate for such Mortgage
Loan.
On each Distribution Date, to the extent of funds available therefor, each
interest bearing Class of Certificates will be entitled to receive an amount
allocable to interest (as to each such Class, the "Interest Distribution
Amount") with respect to the related Interest Accrual Period. The Interest
Distribution Amount for any interest bearing Class will be equal to the sum of
(i) interest at the applicable Pass-Through Rate on the related Class
Certificate Balance or Notional Amount, as the case may be, and (ii) the sum of
the amounts, if any, by which the amount described in clause (i) above on each
prior Distribution Date exceeded the amount actually distributed as interest on
such prior Distribution Dates and not subsequently distributed ("Unpaid Interest
Amounts"). The Class PO Certificates are Principal Only Certificates and will
not bear interest.
[With respect to each Distribution Date, the "Interest Accrual Period" for
each interest bearing Class of Certificates will be the calendar month preceding
the month of such Distribution Date.]
The interest entitlement described above for each Class of Certificates for
any Distribution Date will be reduced by the amount of "Net Interest Shortfalls"
for such Distribution Date. With respect to any Distribution Date, the "Net
Interest Shortfall" is equal to (i) the amount of interest that would otherwise
have been received with respect to any Mortgage Loan that was the subject of (x)
a Relief Act Reduction or (y) a Special Hazard Loss, Fraud Loss, Debt Service
Reduction or Deficient Valuation, after the exhaustion of the respective amounts
of coverage provided by the Subordinated Certificates for such types of losses
and
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(ii) any Net Prepayment Interest Shortfalls with respect to such Distribution
Date. A "Relief Act Reduction" is a reduction in the amount of monthly interest
payment on a Mortgage Loan pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940. See "Certain Legal Aspects of the Loans -- Soldiers' and Sailors'
Civil Relief Act" in the Prospectus. With respect to any Distribution Date, a
"Net Prepayment Interest Shortfall" is the amount by which the aggregate of
Prepayment Interest Shortfalls during the calendar month preceding the month of
such Distribution Date exceeds the aggregate amount payable on such Distribution
Date by the Master Servicer as described under "Servicing of Mortgage
Loans -- Adjustment to Master Servicing Fee in Connection with Certain Prepaid
Mortgage Loans." A "Prepayment Interest Shortfall" is the amount by which
interest paid by a borrower in connection with a prepayment of principal on a
Mortgage Loan is less than one month's interest at the related Mortgage Rate on
the Stated Principal Balance of such Mortgage Loan. Each Class' pro rata share
of such Net Interest Shortfalls will be based on the amount of interest such
Class otherwise would have been entitled to receive on such Distribution Date.
Accrued interest to be distributed on any Distribution Date will be
calculated, in the case of each interest bearing Class of Certificates, on the
basis of the related Class Certificate Balance or Notional Amount, as
applicable, immediately prior to such Distribution Date. [Interest will be
calculated and payable on the basis of a 360-day year divided into twelve 30-day
months.]
In the event that, on a particular Distribution Date, Available Funds in
the Certificate Account applied in the order described above under "-- Priority
of Distributions Among Certificates" are not sufficient to make a full
distribution of the interest entitlement on the Certificates, interest will be
distributed on each Class of Certificates of equal priority based on the amount
of interest each such Class would otherwise have been entitled to receive in the
absence of such shortfall. Any Unpaid Interest Amount will be carried forward
and added to the amount holders of each such Class of Certificates will be
entitled to receive on the next Distribution Date. Such a shortfall could occur,
for example, if losses realized on the Mortgage Loans were exceptionally high or
were concentrated in a particular month. Any Unpaid Interest Amount so carried
forward will not bear interest.
PRINCIPAL
General. All payments and other amounts received in respect of principal
of the Mortgage Loans will be allocated between (i) the Senior Certificates
(other than the Notional Amount Certificates and the Class PO Certificates) and
the Subordinated Certificates and (ii) the Class PO Certificates, in each case
based on the applicable Non-PO Percentage and the applicable PO Percentage,
respectively, of such amounts.
The Non-PO Percentage with respect to any Mortgage Loan with a Net Mortgage
Rate ("NMR") less than % (each such Mortgage Loan, a "Discount Mortgage Loan")
will be equal to NMR/ %. The Non-PO Percentage with respect to any Mortgage
Loan with a Net Mortgage Rate equal to or greater than % (each such Mortgage
Loan, a "Non-Discount Mortgage Loan") will be 100%. The PO Percentage with
respect to any Discount Mortgage Loan will be equal to ( % -- NMR)/ %. The PO
Percentage with respect to any Non-Discount Mortgage Loan will be 0%.
Non-PO Formula Principal Amount. On each Distribution Date, the Non-PO
Formula Principal Amount will be distributed as principal of the Senior
Certificates (other than the Notional Amount Certificates and the Class PO
Certificates) and the Subordinated Certificates, to the extent of the amount
available from Available Funds for the distribution of principal on such
respective Classes, as described below.
The Non-PO Formula Principal Amount for any Distribution Date will equal
the sum of the applicable Non-PO Percentage of (a) all monthly payments of
principal due on each Mortgage Loan on the related Due Date, (b) the principal
portion of the purchase price of each Mortgage Loan that was repurchased by the
Seller or another person pursuant to the Agreement as of such Distribution Date,
(c) the Substitution Adjustment Amount in connection with any Deleted Mortgage
Loan received with respect to such Distribution Date, (d) any Insurance Proceeds
or Liquidation Proceeds allocable to recoveries of principal of Mortgage Loans
that are not yet Liquidated Mortgage Loans received during the calendar month
preceding the month of such Distribution Date, (e) with respect to each Mortgage
Loan that became a Liquidated Mortgage Loan during the calendar month preceding
the month of such Distribution Date, the amount of the
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Liquidation Proceeds allocable to principal received with respect to such
Mortgage Loan and (f) all partial and full principal prepayments by borrowers
received during the related Prepayment Period.
Senior Principal Distribution Amount. On each Distribution Date prior to
the Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount,
up to the amount of the Senior Principal Distribution Amount for such
Distribution Date, will be distributed as principal of the following Classes of
Senior Certificates in the following order of priority:
(i) to the Class A-R Certificates until the Class Certificate Balance
thereof has been reduced to zero;
(ii) concurrently, to the Class and Class Certificates, pro rata
based on their respective Class Certificate Balances, until the Class
Certificate Balances thereof have been reduced to zero;
(iii) sequentially, to the Class and Class Certificates, in that
order, until the respective Class Certificate Balances thereof have been
reduced to zero;
(iv) sequentially, to the Class and Class Certificates, in that
order, until the respective Class Certificate Balances thereof have been
reduced to zero; and
(v) to the Class Certificates until the Class Certificate Balance
thereof has been reduced to zero.
Notwithstanding the foregoing, on each Distribution Date on and after the
Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount will
be distributed, concurrently as principal of the Classes of Senior Certificates
(other than the Notional Amount Certificates and the Class PO Certificates), pro
rata, in accordance with their respective Class Certificate Balances immediately
prior to such Distribution Date.
The Senior Credit Support Depletion Date is the date on which the Class
Certificate Balance of each Class of Subordinated Certificates has been reduced
to zero.
The Senior Principal Distribution Amount for any Distribution Date will
equal the sum of (i) the Senior Percentage of the applicable Non-PO Percentage
of all amounts described in clauses (a) through (d) of the definition of "Non-PO
Formula Principal Amount" for such Distribution Date, (ii) with respect to each
Mortgage Loan that became a Liquidated Mortgage Loan during the calendar month
preceding the month of such Distribution Date, the lesser of (x) the Senior
Percentage of the applicable Non-PO Percentage of the Stated Principal Balance
of such Mortgage Loan and (y) either (A) the Senior Prepayment Percentage or (B)
if an Excess Loss was sustained with respect to such Liquidated Mortgage Loan
during such preceding calendar month, the Senior Percentage of the applicable
Non-PO Percentage of the amount of the Liquidation Proceeds allocable to
principal received with respect to such Mortgage Loan, and (iii) the Senior
Prepayment Percentage of the applicable Non-PO Percentage of amounts described
in clause (f) of the definition of "Non-PO Formula Principal Amount" for such
Distribution Date; provided, however, that if a Bankruptcy Loss that is an
Excess Loss is sustained with respect to a Mortgage Loan that is not a
Liquidated Mortgage Loan, the Senior Principal Distribution Amount will be
reduced on the related Distribution Date by the Senior Percentage of the
applicable Non-PO Percentage of the principal portion of such Bankruptcy Loss.
"Stated Principal Balance" means as to any Mortgage Loan and Due Date, the
unpaid principal balance of such Mortgage Loan as of such Due Date, as specified
in the amortization schedule at the time relating thereto (before any adjustment
to such amortization schedule by reason of any moratorium or similar waiver or
grace period), after giving effect to any previous partial prepayments and
Liquidation Proceeds received and to the payment of principal due on such Due
Date and irrespective of any delinquency in payment by the related Mortgagor.
The Pool Principal Balance with respect to any Distribution Date equals the
aggregate of the Stated Principal Balances of the Mortgage Loans outstanding on
the Due Date in the month preceding the month of such Distribution Date.
The Senior Percentage for any Distribution Date is the percentage
equivalent of a fraction the numerator of which is the aggregate of the Class
Certificate Balances of each Class of Senior Certificates (other than the Class
PO Certificates) immediately prior to such date and the denominator of which is
the aggregate of the
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<PAGE> 138
Class Certificate Balances of all Classes of Certificates, other than the Class
PO Certificates, immediately prior to such date.
The Senior Prepayment Percentage for any Distribution Date occurring during
the years beginning on the first Distribution Date will equal 100%.
Thereafter, the Senior Prepayment Percentage will, except as described below, be
subject to gradual reduction as described in the following paragraph. This
disproportionate allocation of certain unscheduled payments in respect of
principal will have the effect of accelerating the amortization of the Senior
Certificates which receive these unscheduled payments of principal (other than
the Class PO Certificates) while, in the absence of Realized Losses, increasing
the interest in the Pool Principal Balance evidenced by the Subordinated
Certificates. Increasing the respective interest of the Subordinated
Certificates relative to that of the Senior Certificates is intended to preserve
the availability of the subordination provided by the Subordinated Certificates.
The Senior Prepayment Percentage for any Distribution Date occurring on or
after the anniversary of the first Distribution Date will be as follows: for
any Distribution Date in the year thereafter, the Senior Percentage plus %
of the Subordinated Percentage for such Distribution Date; for any Distribution
Date in the year thereafter, the Senior Percentage plus % of the
Subordinated Percentage for such Distribution Date; for any Distribution Date in
the year thereafter, the Senior Percentage plus % of the Subordinated
Percentage for such Distribution Date; for any Distribution Date in the year
thereafter, the Senior Percentage plus % of the Subordinated Percentage for
such Distribution Date; and for any Distribution Date thereafter, the Senior
Percentage for such Distribution Date (unless on any of the foregoing
Distribution Dates the Senior Percentage exceeds the initial Senior Percentage,
in which case the Senior Prepayment Percentage for such Distribution Date will
once again equal 100%). Notwithstanding the foregoing, no decrease in the Senior
Prepayment Percentage will occur if (i) the outstanding principal balance of all
Mortgage Loans delinquent days or more (averaged over the preceding
period), as a percentage of the aggregate principal balance of the Subordinated
Certificates (averaged over the preceding period), is equal to or
greater than %, or (ii) cumulative Realized Losses with respect to the
Mortgage Loans exceed (a) with respect to the Distribution Date on the
anniversary of the first Distribution Date, % of the aggregate of
the principal balances of the Subordinated Certificates as of the Cut-off Date
(the "Original Subordinated Principal Balance"), (b) with respect to the
Distribution Date on the anniversary of the first Distribution Date, % of
the Original Subordinated Principal Balance, (c) with respect to the
Distribution Date on the anniversary of the first Distribution Date, % of
the Original Subordinated Principal Balance, (d) with respect to the
Distribution Date on the anniversary of the first Distribution Date, % of
the Original Subordinated Principal Balance, and (e) with respect to the
Distribution Date on the anniversary of the first Distribution Date, % of
the Original Subordinated Principal Balance. The Subordinated Prepayment
Percentage as of any Distribution Date will be calculated as the difference
between 100% and the Senior Prepayment Percentage for such date.
If on any Distribution Date the allocation to the Class of Senior
Certificates then entitled to distributions of principal of full and partial
principal prepayments and other amounts in the percentage required above would
reduce the outstanding Class Certificate Balance of such Class below zero, the
distribution to such Class of Certificates of the Senior Prepayment Percentage
of such amounts for such Distribution Date will be limited to the percentage
necessary to reduce the related Class Certificate Balance to zero.
Subordinated Principal Distribution Amount. On each Distribution Date, to
the extent of Available Funds therefor, the Non-PO Formula Principal Amount, up
to the amount of the Subordinated Principal Distribution Amount for such
Distribution Date, will be distributed as principal of the Subordinated
Certificates. Except as provided in the next paragraph, each Class of
Subordinated Certificates will be entitled to receive its pro rata share of the
Subordinated Principal Distribution Amount (based on its respective Class
Certificate Balance), in each case to the extent of the amount available from
Available Funds for distribution of principal. Distributions of principal of the
Subordinated Certificates will be made sequentially to the Classes of
Subordinated Certificates in the order of their numerical Class designations,
beginning with the Class Certificates, until the respective Class Certificate
Balances thereof are reduced to zero. The Subordinated Percentage for any
Distribution Date will be calculated as the difference between 100% and the
Senior Percentage.
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With respect to each Class of Subordinated Certificates, if on any
Distribution Date the sum of the related Class Subordination Percentages of such
Class and all Classes of Subordinated Certificates which have higher numerical
Class designations than such Class (the "Applicable Credit Support Percentage")
is less than the Applicable Credit Support Percentage for such Class on the date
of issuance of the Certificates (the "Original Applicable Credit Support
Percentage"), no distribution of partial principal prepayments and principal
prepayments in full will be made to any such Classes (the "Restricted Classes")
and the amount of partial principal prepayments and principal prepayments in
full otherwise distributable to the Restricted Classes will be allocated among
the remaining Classes of Subordinated Certificates, pro rata, based upon their
respective Class Certificate Balances, and distributed in the sequential order
described above.
The Class Subordination Percentage with respect to any Distribution Date
and each Class of Subordinated Certificates, will equal the fraction (expressed
as a percentage) the numerator of which is the Class Certificate Balance of such
Class of Subordinated Certificates immediately prior to such Distribution Date
and the denominator of which is the aggregate of the Class Certificate Balances
of all Classes of Certificates immediately prior to such Distribution Date.
The approximate Original Applicable Credit Support Percentages for the
Subordinated Certificates on the date of issuance of the Certificates are
expected to be as follows:
<TABLE>
<S> <C>
Class....................................................... %
Class .................................................... %
Class .................................................... %
Class .................................................... %
Class .................................................... %
Class .................................................... %
</TABLE>
The Subordinated Principal Distribution Amount for any Distribution Date
will equal (A) the sum of (i) the Subordinated Percentage of the applicable
Non-PO Percentage of all amounts described in clauses (a) through (d) of the
definition of "Non-PO Formula Principal Amount" for such Distribution Date, (ii)
with respect to each Mortgage Loan that became a Liquidated Mortgage Loan during
the calendar month preceding the month of such Distribution Date, the applicable
Non-PO Percentage of the Liquidation Proceeds allocable to principal received
with respect to such Mortgage Loan, after application of such amounts pursuant
to clause (ii) of the definition of Senior Principal Distribution Amount, up to
the Subordinated Percentage of the applicable Non-PO Percentage of the Stated
Principal Balance of such Mortgage Loan and (iii) the Subordinated Prepayment
Percentage of the applicable Non-PO Percentage of the amounts described in
clause (f) of the definition of "Non-PO Formula Principal Amount" for such
Distribution Date reduced by (B) the amount of any payments in respect of Class
PO Deferred Amounts on the related Distribution Date.
Residual Certificates. The Class A-R Certificates will remain outstanding
for so long as the Trust Fund shall exist, whether or not they are receiving
current distributions of principal or interest. In addition to distributions of
interest and principal as described above, on each Distribution Date, the
holders of the Class A-R Certificates will be entitled to receive any Available
Funds remaining after payment of interest and principal on the Senior
Certificates and Class PO Deferred Amounts on the Class PO Certificates and
interest and principal on the Subordinated Certificates, as described above. It
is not anticipated that there will be any significant amounts remaining for any
such distribution.
Class PO Principal Distribution Amount. On each Distribution Date,
distributions of principal of the Class PO Certificates will be made in an
amount (the "Class PO Principal Distribution Amount") equal to the lesser of (x)
the PO Formula Principal Amount for such Distribution Date and (y) the product
of (i) Available Funds remaining after distribution of interest on the Senior
Certificates and (ii) a fraction, the numerator of which is the PO Formula
Principal Amount and the denominator of which is the sum of the PO Formula
Principal Amount and the Senior Principal Distribution Amount.
If the Class PO Principal Distribution Amount on a Distribution Date is
calculated as provided in clause (y) above, principal distributions to holders
of the Senior Certificates (other than the Class PO
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<PAGE> 140
Certificates) will be in an amount equal to the product of (i) Available Funds
remaining after distribution of interest on the Senior Certificates and (ii) a
fraction, the numerator of which is the Senior Principal Distribution Amount and
the denominator of which is the sum of the Senior Principal Distribution Amount
and the PO Formula Principal Amount.
The PO Formula Principal Amount for any Distribution Date will equal the
sum of the applicable PO Percentage of (a) all monthly payments of principal due
on each Mortgage Loan on the related Due Date, (b) the principal portion of the
purchase price of each Mortgage Loan that was repurchased by the Seller or
another person pursuant to the Agreement as of such Distribution Date, (c) the
Substitution Adjustment Amount in connection with any Deleted Mortgage Loan
received with respect to such Distribution Date, (d) any Insurance Proceeds or
Liquidation Proceeds allocable to recoveries of principal of Mortgage Loans that
are not yet Liquidated Mortgage Loans received during the calendar month
preceding the month of such Distribution Date, (e) with respect to each Mortgage
Loan that became a Liquidated Mortgage Loan during the calendar month preceding
the month of such Distribution Date, the amount of Liquidation Proceeds
allocable to principal received with respect to such Mortgage Loan and (f) all
partial and full principal prepayments by borrowers received during the related
Prepayment Period; provided, however, that if a Bankruptcy Loss that is an
Excess Loss is sustained with respect to a Discount Mortgage Loan that is not a
Liquidated Mortgage Loan, the PO Formula Principal Amount will be reduced on the
related Distribution Date by the applicable PO Percentage of the principal
portion of such Bankruptcy Loss.
ALLOCATION OF LOSSES
On each Distribution Date, the applicable PO Percentage of any Realized
Loss, including any Excess Loss, on a Discount Mortgage Loan will be allocated
to the Class PO Certificates until the Class Certificate Balance thereof is
reduced to zero. The amount of any such Realized Loss, other than an Excess
Loss, allocated on or prior to the Senior Credit Support Depletion Date will be
treated as a Class PO Deferred Amount. To the extent funds are available on such
Distribution Date or on any future Distribution Date from amounts that would
otherwise be allocable to the Subordinated Principal Distribution Amount, Class
PO Deferred Amounts will be paid on the Class PO Certificates prior to
distributions of principal on the Subordinated Certificates. Any distribution of
Available Funds in respect of unpaid Class PO Deferred Amounts will not further
reduce the Class Certificate Balance of the Class PO Certificates. The Class PO
Deferred Amounts will not bear interest. The Class Certificate Balance of the
Class of Subordinated Certificates then outstanding with the highest numerical
Class designation will be reduced by the amount of any payments in respect of
Class PO Deferred Amounts. After the Senior Credit Support Depletion Date, no
new Class PO Deferred Amounts will be created.
On each Distribution Date, the applicable Non-PO Percentage of any Realized
Loss, other than any Excess Loss, will be allocated first to the Subordinated
Certificates, in the reverse order of their numerical Class designations
(beginning with the Class of Subordinated Certificates then outstanding with the
highest numerical Class designation), in each case until the Class Certificate
Balance of the respective Class of Certificates has been reduced to zero, and
then to the Senior Certificates (other than the Notional Amount Certificates and
the Class PO Certificates) pro rata, based upon their respective Class
Certificate Balances.
On each Distribution Date, the applicable Non-PO Percentage of Excess
Losses will be allocated pro rata among the Classes of Senior Certificates
(other than the Notional Amount Certificates and the Class PO Certificates) and
the Subordinated Certificates based upon their respective Class Certificate
Balances.
Because principal distributions are paid to certain Classes of Certificates
(other than the Class PO Certificates) before other Classes of Certificates,
holders of such Certificates that are entitled to receive principal later bear a
greater risk of being allocated Realized Losses on the Mortgage Loans than
holders of Classes that are entitled to receive principal earlier.
[Realized Losses allocated to a Class of Certificates comprised of multiple
payment Components will be allocated pro rata among the Components of such Class
of Certificates based on their respective Component Balances.]
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<PAGE> 141
In general, a "Realized Loss" means, with respect to a Liquidated Mortgage
Loan, the amount by which the remaining unpaid principal balance of the Mortgage
Loan exceeds the amount of Liquidation Proceeds applied to the principal balance
of the related Mortgage Loan. "Excess Losses" are (i) Special Hazard Losses in
excess of the Special Hazard Loss Coverage Amount, (ii) Bankruptcy Losses in
excess of the Bankruptcy Loss Coverage Amount and (iii) Fraud Losses in excess
of the Fraud Loss Coverage Amount. "Bankruptcy Losses" are losses that are
incurred as a result of Debt Service Reductions and Deficient Valuations.
"Special Hazard Losses" are Realized Losses in respect of Special Hazard
Mortgage Loans. "Fraud Losses" are losses sustained on a Liquidated Mortgage
Loan by reason of a default arising from fraud, dishonesty or misrepresentation.
See "Credit Enhancement -- Subordination of Certain Classes" herein.
A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which the
Master Servicer has determined that all recoverable liquidation and insurance
proceeds have been received. A "Special Hazard Mortgage Loan" is a Liquidated
Mortgage Loan as to which the ability to recover the full amount due thereunder
was substantially impaired by a hazard not insured against under a standard
hazard insurance policy of the type described in the Prospectus under "Credit
Enhancement." See "Credit Enhancement -- Subordination of Certain Classes"
herein.
STRUCTURING ASSUMPTIONS
Unless otherwise specified, the information in the tables in this
Prospectus Supplement has been prepared on the basis of the following assumed
characteristics of the Mortgage Loans and the following additional assumptions
(collectively, the "Structuring Assumptions"): (i) the Mortgage Pool consists of
Mortgage Loans with the following characteristics:
<TABLE>
<CAPTION>
ORIGINAL TERM REMAINING TERM
PRINCIPAL MORTGAGE NET MORTGAGE TO MATURITY TO MATURITY
BALANCE RATE RATE (IN MONTHS) (IN MONTHS) LOAN AGE
--------- -------- ------------ ------------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ %; %;
$ %; %;
</TABLE>
(ii) the Mortgage Loans prepay at the specified constant percentages of SPA,
(iii) no defaults in the payment by Mortgagors of principal of and interest on
the Mortgage Loans are experienced, (iv) scheduled payments on the Mortgage
Loans are received on the first day of each month commencing in the calendar
month following the Closing Date and are computed prior to giving effect to
prepayments received on the last day of the prior month, (v) prepayments are
allocated as described herein without giving effect to loss and delinquency
tests, (vi) there are no Net Interest Shortfalls and prepayments represent
prepayments in full of individual Mortgage Loans and are received on the last
day of each month, commencing in the calendar month of the Closing Date, (vii)
the scheduled monthly payment for each Mortgage Loan has been calculated such
that each Mortgage Loan will amortize in amounts sufficient to repay the current
balance of such Mortgage Loan by its respective remaining term to maturity,
(viii) the initial Class Certificate Balance or Notional Amount, as applicable,
of each Class of Certificates is as set forth on the cover page hereof and under
"Summary of Terms -- Certificates other than the Offered Certificates," (ix)
interest accrues on each interest bearing Class of Certificates at the
applicable interest rate set forth or described on the cover hereof and as
described herein, (x) distributions in respect of the Certificates are received
in cash on the day of each month commencing in the calendar month following
the Closing Date, (xi) the closing date of the sale of the Offered Certificates
is the date set forth under "Summary of Terms -- Closing Date," (xii) the Seller
is not required to repurchase or substitute for any Mortgage Loan, (xiii) the
Master Servicer does not exercise the option to repurchase the Mortgage Loans
described herein under "-- Optional Purchase of Defaulted Loans" and
"-- Optional Termination" and (xiv) no Class of Certificates becomes a
Restricted Class. While it is assumed that each of the Mortgage Loans prepays at
the specified constant percentages of SPA, this is not likely to be the case.
Moreover, discrepancies may exist between the characteristics of the actual
Mortgage Loans which will be delivered to the Trustee and characteristics of the
Mortgage Loans used in preparing the tables herein.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the Standard Prepayment Assumption ("SPA"), which
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<PAGE> 142
represents an assumed rate of prepayment each month of the then outstanding
principal balance of a pool of new mortgage loans. SPA does not purport to be
either a historical description of the prepayment experience of any pool of
mortgage loans or a prediction of the anticipated rate of prepayment of any pool
of mortgage loans, including the Mortgage Loans. 100% SPA assumes prepayment
rates of 0.2% per annum of the then unpaid principal balance of such pool of
mortgage loans in the first month of the life of such mortgage loans and an
additional 0.2% per annum in each month thereafter (for example, 0.4% per annum
in the second month) until the 30th month. Beginning in the 30th month and in
each month thereafter during the life of such mortgage loans, 100% SPA assumes a
constant prepayment rate of 6% per annum. Multiples may be calculated from this
prepayment rate sequence. For example, % SPA assumes prepayment rates will be
% per annum in month one, % per annum in month two, and increasing by % in
each succeeding month until reaching a rate of % per annum in month 30 and
remaining constant at % per annum thereafter. 0% SPA assumes no prepayments.
There is no assurance that prepayments will occur at any SPA rate or at any
other constant rate.
OPTIONAL PURCHASE OF DEFAULTED LOANS
The Master Servicer may, at its option, purchase from the Trust Fund any
Mortgage Loan which is delinquent in payment by 91 days or more. Any such
purchase shall be at a price equal to 100% of the Stated Principal Balance of
such Mortgage Loan plus accrued interest thereon at the applicable Mortgage Rate
from the date through which interest was last paid by the related mortgagor or
advanced (and not reimbursed) to the first day of the month in which such amount
is to be distributed.
OPTIONAL TERMINATION
The Master Servicer will have the right to repurchase all remaining
Mortgage Loans and REO Properties in the Mortgage Pool and thereby effect early
retirement of the Certificates, subject to the Pool Principal Balance of such
Mortgage Loans and REO Properties at the time of repurchase being less than or
equal to 10% of the Cut-off Date Pool Principal Balance. In the event the Master
Servicer exercises such option, the purchase price distributed with respect to
each Certificate will be 100% of its then outstanding principal balance plus any
Class PO Deferred Amounts in the case of the Class PO Certificates and, in the
case of an interest bearing Certificate, any unpaid accrued interest thereon at
the applicable Pass-Through Rate (in each case subject to reduction as provided
in the Agreement if the purchase price is based in part on the appraised value
of any REO Properties and such appraised value is less than the Stated Principal
Balance of the related Mortgage Loans). Distributions on the Certificates in
respect of any such optional termination will first be paid to the Senior
Certificates and then to the Subordinated Certificates. The proceeds from any
such distribution may not be sufficient to distribute the full amount to which
each Class of Certificates is entitled if the purchase price is based in part on
the appraised value of any REO Property and such appraised value is less than
the Stated Principal Balance of the related Mortgage Loan.
THE TRUSTEE
will be the Trustee under the Agreement. The Depositor and the
Master Servicer may maintain other banking relationships in the ordinary course
of business with . Offered Certificates may be surrendered at the
Corporate Trust Office of the Trustee located at , Attention:
or at such other addresses as the Trustee may designate from time
to time.
RESTRICTIONS ON TRANSFER OF THE CLASS A-R CERTIFICATES
The Class A-R Certificates will be subject to the restrictions on transfer
described in the Prospectus under "Federal Income Tax Consequences." The
Agreement provides that the Class A-R Certificates (in addition to certain other
Classes of Certificates) may not be acquired by an ERISA Plan. See "ERISA
Considerations" herein. Each Class A-R Certificate will contain a legend
describing the foregoing restrictions.
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<PAGE> 143
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
GENERAL
[The effective yield to the holders of the interest bearing Certificates
will be lower than the yield otherwise produced by the applicable rate at which
interest is passed through to such holders and the purchase price of such
Certificates because monthly distributions will not be payable to such holders
until the day (or, if such day is not a business day, the following
business day) of the month following the month in which interest accrues on the
Mortgage Loans (without any additional distribution of interest or earnings
thereon in respect of such delay).]
Delinquencies on the Mortgage Loans which are not advanced by or on behalf
of the Master Servicer (because amounts, if advanced, would be nonrecoverable),
will adversely affect the yield on the Certificates. Because of the priority of
distributions, shortfalls resulting from delinquencies not so advanced will be
borne first by the Subordinated Certificates, in the reverse order of their
numerical Class designations, and then by the Senior Certificates. If, as a
result of such shortfalls, the aggregate of the Class Certificate Balances of
all Classes of Certificates exceeds the Pool Principal Balance, the Class
Certificate Balance of the Class of Subordinated Certificates then outstanding
with the highest numerical Class designation will be reduced by the amount of
such excess.
Net Interest Shortfalls will adversely affect the yields on the Offered
Certificates. In addition, although all losses initially will be borne by the
Subordinated Certificates, in the reverse order of their numerical Class
designations (either directly or through distributions in respect of Class PO
Deferred Amounts on the Class PO Certificates), Excess Losses will be borne by
all Classes of Certificates (other than the Notional Amount Certificates) on a
pro rata basis. Moreover, since the Subordinated Principal Distribution Amount
for each Distribution Date will be reduced by the amount of any distributions on
such Distribution Date in respect of Class PO Deferred Amounts, the amount
distributable as principal on each such Distribution Date to each Class of
Subordinated Certificates then entitled to a distribution of principal will be
less than it otherwise would be in the absence of such Class PO Deferred
Amounts. As a result, the yields on the Offered Certificates will depend on the
rate and timing of Realized Losses, including Excess Losses. Excess Losses could
occur at a time when one or more Classes of Subordinated Certificates are still
outstanding and otherwise available to absorb other types of Realized Losses.
PREPAYMENT CONSIDERATIONS AND RISKS
The rate of principal payments on the Offered Certificates, the aggregate
amount of distributions on the Offered Certificates and the yield to maturity of
the Offered Certificates will be related to the rate and timing of payments of
principal on the Mortgage Loans. The rate of principal payments on the Mortgage
Loans will in turn be affected by the amortization schedules of the Mortgage
Loans and by the rate of principal prepayments (including for this purpose
prepayments resulting from refinancing, liquidations of the Mortgage Loans due
to defaults, casualties, condemnations and repurchases by the Seller or Master
Servicer). The Mortgage Loans may be prepaid by the Mortgagors at any time
without a prepayment penalty. The Mortgage Loans are subject to the
"due-on-sale" provisions included therein. See "The Mortgage Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans (including
any optional purchase by the Master Servicer of a defaulted Mortgage Loan and
any optional repurchase of the remaining Mortgage Loans in connection with the
termination of the Trust Fund, in each case as described under "Description of
the Certificates -- Optional Purchase of Defaulting Loans" and "-- Optional
Termination" herein) will result in distributions on the Offered Certificates of
principal amounts which would otherwise be distributed over the remaining terms
of the Mortgage Loans. Since the rate of payment of principal of the Mortgage
Loans will depend on future events and a variety of factors, no assurance can be
given as to such rate or the rate of principal prepayments. The extent to which
the yield to maturity of a Class of Offered Certificates may vary from the
anticipated yield will depend upon the degree to which such Offered Certificate
is purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations and purchases of the
Mortgage Loans. Further, an investor should consider the risk that, in the
S-34
<PAGE> 144
case of the Principal Only Certificates and any other Offered Certificate
purchased at a discount, a slower than anticipated rate of principal payments
(including prepayments) on the Mortgage Loans could result in an actual yield to
such investor that is lower than the anticipated yield and, in the case of the
Interest Only Certificates and any other Offered Certificate purchased at a
premium, a faster than anticipated rate of principal payments could result in an
actual yield to such investor that is lower than the anticipated yield.
Investors in the Interest Only Certificates should carefully consider the risk
that a rapid rate of principal payments on the Mortgage Loans could result in
the failure of such investors to recover their initial investments.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. In general, if prevailing interest
rates were to fall significantly below the Mortgage Rates on the Mortgage Loans,
the Mortgage Loans could be subject to higher prepayment rates than if
prevailing interest rates were to remain at or above the Mortgage Rates on the
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on the Mortgage Loans would generally be
expected to decrease. No assurances can be given as to the rate of prepayments
on the Mortgage Loans in stable or changing interest rate environments.
As described herein under "Description of the Certificates -- Principal,"
the Senior Prepayment Percentage of the applicable Non-PO Percentage of all
principal prepayments will be initially distributed to the Classes of Senior
Certificates (other than the Class PO Certificates) then entitled to receive
principal prepayment distributions. This may result in all (or a
disproportionate percentage) of such principal prepayments being distributed to
holders of such Classes of Senior Certificates and none (or less than their pro
rata share) of such principal prepayments being distributed to holders of the
Subordinated Certificates during the periods of time described in the definition
of "Senior Prepayment Percentage."
The timing of changes in the rate of prepayments on the Mortgage Loans may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the Mortgage Loans, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield as a result of principal payments occurring at a rate higher
(or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Offered Certificates may not be offset
by a subsequent like decrease (or increase) in the rate of principal payments.
The tables below indicate the sensitivity of the pre-tax corporate bond
equivalent yields to maturity of certain Classes of Certificates to various
constant percentages of SPA. The yields set forth in the tables were calculated
by determining the monthly discount rates that, when applied to the assumed
streams of cash flows to be paid on the applicable Classes of Certificates,
would cause the discounted present value of such assumed streams of cash flows
to equal the assumed aggregate purchase prices of such Classes and converting
such monthly rates to corporate bond equivalent rates. Such calculations do not
take into account variations that may occur in the interest rates at which
investors may be able to reinvest funds received by them as distributions on
such Certificates and consequently do not purport to reflect the return on any
investment in any such Class of Certificate when such reinvestment rates are
considered.
SENSITIVITY OF THE INTEREST ONLY CERTIFICATES
As indicated in the table below, the yield to investors in the Class X
Certificates will be sensitive to the rate of principal payments (including
prepayments) of the Non-Discount Mortgage Loans (particularly those with high
Net Mortgage Rates), which generally can be prepaid at any time. On the basis of
the assumptions described below, the yield to maturity on the Class X
Certificates would be approximately 0% if prepayments were to occur at a
constant rate of approximately % SPA. If the actual prepayment rate of the
Non-Discount Mortgage Loans were to exceed the foregoing level for as little as
one month while equaling such level for the remaining months, the investors in
the Class X Certificates would not fully recoup their initial investments.
S-35
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As described above under "Description of the Certificates -- General," the
Pass-Through Rate of the Class X Certificates in effect from time to time is
calculated by reference to the Net Mortgage Rates of the Non-Discount Mortgage
Loans. The Non-Discount Mortgage Loans will have higher Net Mortgage Rates (and
higher Mortgage Rates) than the other Mortgage Loans. In general, mortgage loans
with higher mortgage rates tend to prepay at higher rates than mortgage loans
with relatively lower mortgage rates in response to a given change in market
interest rates. As a result, the Non-Discount Mortgage Loans may prepay at
higher rates, thereby reducing the Pass-Through Rate and Notional Amount of the
Class X Certificates.
The information set forth in the following table has been prepared on the
basis of the Structuring Assumptions and on the assumption that the purchase
price of the Class X Certificates (expressed as a percentage of initial Notional
Amount) is as follows:
<TABLE>
<CAPTION>
CLASS PRICE*
----- ------
<S> <C>
Class X.............................................. %
</TABLE>
- ---------------
* The price does not include accrued interest. Accrued interest has been added
to such price in calculating the yields set forth in the table below.
SENSITIVITY OF THE INTEREST ONLY CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
SPA PREPAYMENT/ASSUMPTION
<TABLE>
<CAPTION>
CLASS 0% % % % % %
----- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Class X............................................. % % % % % %
</TABLE>
It is unlikely that the Non-Discount Mortgage Loans will have the precise
characteristics described herein or that the Non-Discount Mortgage Loans will
all prepay at the same rate until maturity or that all of the Non-Discount
Mortgage Loans will prepay at the same rate or time. As a result of these
factors, the pre-tax yields on the Class X Certificates are likely to differ
from those shown in the table above, even if all of the Mortgage Loans prepay at
the indicated percentages of SPA. No representation is made as to the actual
rate of principal payments on the Mortgage Loans for any period or over the
lives of the Class X Certificates or as to the yield on the Class X
Certificates. Investors must make their own decisions as to the appropriate
prepayment assumptions to be used in deciding whether to purchase the Class X
Certificates.
SENSITIVITY OF THE PRINCIPAL ONLY CERTIFICATES
The Class PO Certificates will be "principal only" certificates and will
not bear interest. As indicated in the table below, a lower than anticipated
rate of principal payments (including prepayments) on the Discount Mortgage
Loans will have a negative effect on the yield to investors in the Principal
Only Certificates.
As described above under "Description of the Certificates -- Principal,"
the Class PO Principal Distribution Amount is calculated by reference to the
principal payments (including prepayments) on the Discount Mortgage Loans. The
Discount Mortgage Loans will have lower Net Mortgage Rates (and lower Mortgage
Rates) than the other Mortgage Loans. In general, mortgage loans with higher
mortgage rates tend to prepay at higher rates than mortgage loans with
relatively lower mortgage rates in response to a given change in market interest
rates. As a result, the Discount Mortgage Loans may prepay at lower rates,
thereby reducing the rate of payment of principal and the resulting yield of the
Class PO Certificates.
The information set forth in the following table has been prepared on the
basis of the Structuring Assumptions and on the assumption that the aggregate
purchase price of the Principal Only Certificates (expressed as a percentage of
initial Class Certificate Balance) is as follows:
<TABLE>
<CAPTION>
CLASS PRICE
----- -----
<S> <C>
Class PO.............................................. %
</TABLE>
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<PAGE> 146
SENSITIVITY OF THE PRINCIPAL ONLY CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
SFA PREPAYMENT/ASSUMPTION
<TABLE>
<CAPTION>
CLASS 0% % % % % %
----- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Class X............................................. % % % % % %
</TABLE>
It is unlikely that the Discount Mortgage Loans will have the precise
characteristics described herein or that the Discount Mortgage Loans will all
prepay at the same rate until maturity or that all of such Discount Mortgage
Loans will prepay at the same rate or time. As a result of these factors, the
pre-tax yield on the Principal Only Certificates is likely to differ from those
shown in the table above, even if all of the Mortgage Loans prepay at the
indicated percentages of SPA. No representation is made as to the actual rate of
principal payments on the Mortgage Loans for any period or over the life of the
Principal Only Certificates or as to the yield on the Principal Only
Certificates. Investors must make their own decisions as to the appropriate
prepayment assumptions to be used in deciding whether to purchase the Principal
Only Certificates.
ADDITIONAL INFORMATION
The Depositor intends to file certain additional yield tables and other
computational materials with respect to one or more Classes of Underwritten
Certificates with the Commission in a report on Form 8-K to be dated
, 199 . Such tables and materials were prepared by each Underwriter at the
request of certain prospective investors, based on assumptions provided by, and
satisfying the special requirements of, such prospective investors. Such tables
and assumptions may be based on assumptions that differ from the Structuring
Assumptions. Accordingly, such tables and other materials may not be relevant to
or appropriate for investors other than those specifically requesting them.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
The weighted average life of an Offered Certificate is determined by (a)
multiplying the amount of the net reduction, if any, of the Class Certificate
Balance of such Certificate on each Distribution Date by the number of years
from the date of issuance to such Distribution Date, (b) summing the results and
(c) dividing the sum by the aggregate amount of the net reductions in Class
Certificate Balance of such Certificate referred to in clause (a).
For a discussion of the factors which may influence the rate of payments
(including prepayments) of the Mortgage Loans, see "-- Prepayment Considerations
and Risks" herein and "Yield and Prepayment Considerations" in the Prospectus.
In general, the weighted average lives of the Offered Certificates will be
shortened if the level of prepayments of principal of the Mortgage Loans
increases. However, the weighted average lives of the Offered Certificates will
depend upon a variety of other factors, including the timing of changes in such
rate of principal payments and the priority sequence of distributions of
principal of the Classes of Certificates.
The interaction of the foregoing factors may have different effects on
various Classes of Offered Certificates and the effects on any Class may vary at
different times during the life of such Class. Accordingly, no assurance can be
given as to the weighted average life of any Class of Offered Certificates.
Further, to the extent the prices of the Offered Certificates represent
discounts or premiums to their respective original Class Certificate Balances,
variability in the weighted average lives of such Classes of Offered
Certificates will result in variability in the related yields to maturity. For
an example of how the weighted average lives of the Classes of Offered
Certificates may be affected at various constant percentages of SPA, see the
Decrement Tables below.
DECREMENT TABLES
The following tables indicate the percentages of the initial Class
Certificate Balances of the Classes of Offered Certificates (other than the
Notional Amount Certificates) that would be outstanding after each of
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<PAGE> 147
the dates shown at various constant percentages of SPA and the corresponding
weighted average lives of such Classes. The tables have been prepared on the
basis of the Structuring Assumptions. It is not likely that (i) the Mortgage
Loans will have the precise characteristics described herein or (ii) all of the
Mortgage Loans will prepay at a constant percentage of SPA. Moreover, the
diverse remaining terms to maturity of the Mortgage Loans could produce slower
or faster principal distributions than indicated in the tables, which have been
prepared using the specified constant percentages of SPA, even if the remaining
term to maturity of the Mortgage Loans is consistent with the remaining terms to
maturity of the Mortgage Loans specified in the Structuring Assumptions.
PERCENT OF INITIAL CLASS CERTIFICATE BALANCES OUTSTANDING*
CLASS A-
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% % % % % % % %
----------------- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial........................................... % % % % % % % %
19................................................
19................................................
20................................................
20................................................
20................................................
20................................................
20................................................
20................................................
20................................................
20................................................
20................................................
20................................................
-- -- -- -- -- --
Weighted Average Life (in years)**................
</TABLE>
CLASS A-
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% % % % % % % %
----------------- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial........................................... % % % % % % % %
19................................................
19................................................
20................................................
20................................................
20................................................
20................................................
20................................................
20................................................
20................................................
20................................................
20................................................
20................................................
-- -- -- -- -- --
Weighted Average Life (in years)**................
</TABLE>
- ---------------
* Rounded to the nearest whole percentage.
** Determined as specified under "-- Weighted Average Lives of the Offered
Certificates" herein.
LAST SCHEDULED DISTRIBUTION DATE
The Last Scheduled Distribution Date for each Class of Offered Certificates
is the Distribution Date in , 20 , which is the Distribution
Date in the month following the latest scheduled maturity date for any of
the Mortgage Loans. Since the rate of distributions in reduction of the Class
Certificate Balance or Notional Amount of each Class of Offered Certificates
will depend on the rate of payment (including prepayments) of the Mortgage
Loans, the Class Certificate Balance or Notional Amount of any such Class could
be reduced to zero significantly earlier or later than the Last Scheduled
Distribution Date. The rate of payments on the Mortgage Loans will depend on
their particular characteristics, as well as on
S-38
<PAGE> 148
prevailing interest rates from time to time and other economic factors, and no
assurance can be given as to the actual payment experience of the Mortgage
Loans. See "Yield, Prepayment and Maturity Considerations -- Prepayment
Considerations and Risks" and "-- Weighted Average Lives of the Offered
Certificates" herein and "Yield and Prepayment Considerations" in the
Prospectus.
THE SUBORDINATED CERTIFICATES
The weighted average life of, and the yield to maturity on, the
Subordinated Certificates, in increasing order of their numerical Class
designation, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the Mortgage Loans. If
the actual rate and severity of losses on the Mortgage Loans is higher than
those assumed by a holder of a Subordinated Certificate, the actual yield to
maturity of such Certificate may be lower than the yield expected by such holder
based on such assumption. The timing of losses on Mortgage Loans will also
affect an investor's actual yield to maturity, even if the rate of defaults and
severity of losses over the life of the Mortgage Pool are consistent with an
investor's expectations. In general, the earlier a loss occurs, the greater the
effect on an investor's yield to maturity. Realized Losses on the Mortgage Loans
will reduce the Class Certificate Balances of the applicable Class of
Subordinated Certificates to the extent of any losses allocated thereto (as
described under "Description of the Certificates -- Allocation of Losses"
herein), without the receipt of cash attributable to such reduction. In
addition, shortfalls in cash available for distributions on the Subordinated
Certificates will result in a reduction in the Class Certificate Balance of the
Class of Subordinated Certificates then outstanding with the highest numerical
Class designation if and to the extent that the aggregate of the Class
Certificate Balances of all Classes of Certificates, following all distributions
and the allocation of Realized Losses on a Distribution Date, exceeds the Pool
Principal Balance as of the Due Date occurring in the month of such Distribution
Date. As a result of such reductions, less interest will accrue on such Class of
Subordinated Certificates than otherwise would be the case. The yield to
maturity of the Subordinated Certificates will also be affected by the
disproportionate allocation of principal prepayments to the Senior Certificates,
Net Interest Shortfalls, other cash shortfalls in Available Funds and
distribution of funds to Class PO Certificateholders otherwise available for
distribution on the Subordinated Certificates to the extent of reimbursement for
Class PO Deferred Amounts. See "Description of the Certificates -- Allocation of
Losses" herein.
If on any Distribution Date, the Applicable Credit Support Percentage for
any Class of Subordinated Certificates is less than its Original Applicable
Credit Support Percentage, all partial principal prepayments and principal
prepayments in full available for distribution on the Subordinated Certificates
will be allocated solely to such Class and all other Classes of Subordinated
Certificates with lower numerical Class designations, thereby accelerating the
amortization thereof relative to that of the Restricted Classes and reducing the
weighted average lives of such Classes of Subordinated Certificates receiving
such distributions. Accelerating the amortization of the Classes of Subordinated
Certificates with lower numerical Class designations relative to the other
Classes of Subordinated Certificates is intended to preserve the availability of
the subordination provided by such other Classes.
CREDIT ENHANCEMENT
SUBORDINATION OF CERTAIN CLASSES
The rights of the holders of the Subordinated Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the holders of the Senior Certificates and the rights of the holders
of each Class of Subordinated Certificates (other than the Class B-1
Certificates) to receive such distributions will be further subordinated to such
rights of the Class or Classes of Subordinated Certificates with lower numerical
Class designations, in each case only to the extent described herein. The
subordination of the Subordinated Certificates to the Senior Certificates and
the subordination of the Classes of Subordinated Certificates with higher
numerical Class designations to those with lower numerical Class designations is
intended to increase the likelihood of receipt, respectively, by the Senior
Certificateholders and the holders of Subordinated Certificates with lower
numerical Class designations of the maximum amount to which they are entitled on
any Distribution Date and to provide such holders protection against Realized
S-39
<PAGE> 149
Losses, other than Excess Losses. In addition, the Subordinated Certificates
will provide limited protection against Special Hazard Losses, Bankruptcy Losses
and Fraud Losses up to the Special Hazard Loss Coverage Amount, Bankruptcy Loss
Coverage Amount and Fraud Loss Coverage Amount, respectively, as described
below. The applicable Non-PO Percentage of Realized Losses, other than Excess
Losses, will be allocated to the Class of Subordinated Certificates then
outstanding with the highest numerical Class designation. In addition, the Class
Certificate Balance of such Class of Subordinated Certificates will be reduced
by the amount of distributions on the Class PO Certificates in reimbursement for
Class PO Deferred Amounts.
The Subordinated Certificates will provide limited protection to the
Classes of Certificates of higher relative priority against (i) Special Hazard
Losses in an initial amount expected to be up to approximately $ (the
"Special Hazard Loss Coverage Amount"), (ii) Bankruptcy Losses in an initial
amount expected to be up to approximately $ (the "Bankruptcy Loss
Coverage Amount") and (iii) Fraud Losses in an initial amount expected to be up
to approximately $ (the "Fraud Loss Coverage Amount").
[The Special Hazard Loss Coverage Amount will be reduced, from time to
time, to be an amount equal on any Distribution Date to the lesser of (a) the
greatest of (i) % of the aggregate of the principal balances of the Mortgage
Loans, (ii) the principal balance of the largest Mortgage Loan and (iii)
the aggregate principal balances of the Mortgage Loans secured by Mortgaged
Properties located in the single California postal zip code area having the
highest aggregate principal balance of any such zip code area and (b) the
Special Hazard Loss Coverage Amount as of the Closing Date less the amount, if
any, of losses attributable to Special Hazard Mortgage Loans incurred since the
Closing Date. All principal balances for the purpose of this definition will be
calculated as of the first day of the month preceding such Distribution Date
after giving effect to scheduled installments of principal and interest on the
Mortgage Loans then due, whether or not paid.
The Fraud Loss Coverage Amount will be reduced, from time to time, by the
amount of Fraud Losses allocated to the Certificates. In addition, on each
anniversary of the Cut-off Date, the Fraud Loss Coverage Amount will be reduced
as follows: (a) on the , , and anniversaries of the Cut-off
Date, to an amount equal to the lesser of (i) % of the then current Pool
Principal Balance and (ii) the excess of the Fraud Loss Coverage Amount as of
the preceding anniversary of the Cut-off Date over the cumulative amount of
Fraud Losses allocated to the Certificates since such preceding anniversary and
(b) on the anniversary of the Cut-off Date, to zero.
The Bankruptcy Loss Coverage Amount will be reduced, from time to time, by
the amount of Bankruptcy Losses allocated to the Certificates.]
The amount of coverage provided by the Subordinated Certificates for
Special Hazard Losses, Bankruptcy Losses and Fraud Losses may be cancelled or
reduced from time to time for each of the risks covered, provided that the then
current ratings of the Certificates assigned by the Rating Agencies are not
adversely affected thereby without regard to the guaranty provided by the
Policy. In addition, a reserve fund or other form of credit enhancement may be
substituted for the protection provided by the Subordinated Certificates for
Special Hazard Losses, Bankruptcy Losses and Fraud Losses.
As used herein, a "Deficient Valuation" is a bankruptcy proceeding whereby
the bankruptcy court may establish the value of the Mortgaged Property at an
amount less than the then outstanding principal balance of the Mortgage Loan
secured by such Mortgaged Property or may reduce the outstanding principal
balance of a Mortgage Loan. In the case of a reduction in the value of the
related Mortgaged Property, the amount of the secured debt could be reduced to
such value, and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value so assigned to the Mortgaged Property by the bankruptcy court.
In addition, certain other modifications of the terms of a Mortgage Loan can
result from a bankruptcy proceeding, including the reduction (a "Debt Service
Reduction") of the amount of the monthly payment on the related Mortgage Loan.
Notwithstanding the foregoing, no such occurrence shall be considered a Debt
Service Reduction or Deficient Valuation so long as the Master Servicer is
pursuing any other remedies that may be available with respect to the related
Mortgage Loan and (i) such Mortgage Loan is not in default with respect to
payment due thereunder or (ii) scheduled
S-40
<PAGE> 150
monthly payments of principal and interest are being advanced by the Master
Servicer without giving effect to any Debt Service Reduction or Deficient
Valuation.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Certificates
against the purchase price of the Mortgage Loans.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, an election will be made to treat the
Trust Fund as a REMIC. Assuming such an election is timely made and the terms of
the Pooling and Servicing Agreement are complied with, , special
tax counsel to the Depositor ("Tax Counsel"), is of the opinion that the Trust
Fund will qualify as a REMIC within the meaning of the Code. The Regular
Certificates will constitute the regular interests in the REMIC. The Residual
Certificates will constitute the sole class of "residual interest" in the REMIC.
See "Federal Income Tax Consequences" in the Prospectus.
The Regular Certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on the Regular
Certificates must be reported under an accrual method of accounting.
In the opinion of Tax Counsel, the Principal Only Certificates will be
treated for federal income tax purposes as having been issued with an amount of
Original Issue Discount ("OID") equal to the difference between their principal
balance and their issue price. Although the tax treatment is not entirely
certain, Notional Amount Certificates will be treated as having been issued with
OID for federal income tax purposes equal to the excess of all expected payments
of interest on such Certificates over their issue price. Although unclear, a
holder of a Notional Amount Certificate may be entitled to deduct a loss to the
extent that its remaining basis exceeds the maximum amount of future payments to
which such Certificateholder would be entitled if there were no further
prepayments of the Mortgage Loans. The remaining Classes of Regular
Certificates, depending on their respective issue prices (as described in the
Prospectus under "Federal Income Tax Consequences"), may be treated as having
been issued with OID for federal income tax purposes. For purposes of
determining the amount and rate of accrual of OID and market discount, the Trust
Fund intends to assume that there will be prepayments on the Mortgage Loans at a
rate equal to % SPA (the "Prepayment Assumption"). No representation is made
as to whether the Mortgage Loans will prepay at the foregoing rate or any other
rate. See "Yield, Prepayment and Maturity Considerations" herein and "Federal
Income Tax Consequences" in the Prospectus. Computing accruals of OID in the
manner described in the Prospectus may (depending on the actual rate of
prepayments during the accrual period) result in the accrual of negative amounts
of OID on the Certificates issued with OID in an accrual period. Holders will be
entitled to offset negative accruals of OID only against future OID accrual on
such Certificates.
If the holders of any Regular Certificates are treated as holding such
Certificates at a premium, such holders should consult their tax advisors
regarding the election to amortize bond premium and the method to be employed.
As is described more fully under "Federal Income Tax Consequences" in the
Prospectus, the Offered Certificates will represent qualifying assets under
Sections 856(c)(5)(A) and 7701(a)(19)(C) of the Code, and net interest income
attributable to the Offered Certificates will be "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code, to the extent the assets of the Trust Fund are assets
described in such sections. The Regular Certificates will represent qualifying
assets under Section 860G(a)(3) if acquired by a REMIC within the prescribed
time periods of the Code.
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.
S-41
<PAGE> 151
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 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.
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
Offered 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 Offered Certificates or any other person proposing to
use the assets of a Plan to acquire any of the Offered 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 Offered 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
Offered 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.
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
Offered 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.
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<PAGE> 152
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. sec. 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 Offered 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 Offered 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 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.
THE UNDERWRITER'S EXEMPTION
The DOL has granted to 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 the conditions and requirements of the Exemption. Morgan
Stanley believes that the Exemption will [not] 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 Ratings Group
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Inc.
("Duff & Phelps") or Fitch Investors Service, L.P. ("Fitch");
S-43
<PAGE> 153
(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.
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 [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 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, 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. [Notwithstanding any of
the foregoing, the Exemption will not apply with respect to any [Class A
Certificates] until such time as the balance of the related Pre-Funding Account
is reduced to zero. Accordingly, until such time, the [Class A Certificates] may
not be purchased by Plans pursuant to the Exemption.] 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.
S-44
<PAGE> 154
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 Offered 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 Offered 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 Offered Certificates after
the date which is 18 months after the date the 401(c) Regulations become final.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated , 199 (the "Underwriting Agreement"), between the
Depositor and the Underwriter, an affiliate of the Depositor, the Depositor has
agreed to sell to the Underwriter, and the Underwriter has agreed to purchase
from the Depositor all the Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all the Certificates offered
hereby if any of the Certificates are purchased.
The Depositor has been advised by the Underwriter that it proposes
initially to offer the Certificates to the public in Europe and the United
States at the offering price set forth on the cover page hereof and to certain
dealers at such price less a discount not in excess of % of the Certificate
denominations. The Underwriter may allow and such dealers may reallow a discount
not in excess of % of the Certificate denominations to certain other dealers.
After the initial public offering, the public offering price, such concessions
and such discounts may be changed.
The distribution of the Certificates by the Underwriter will be effected
from time to time in one or more negotiated transactions or otherwise at varying
prices to be determined, in each case, at the time of sale. The Underwriter may
effect such transactions by selling the Certificates to or through dealers, and
such dealers may receive from the Underwriter compensation in the form of
underwriting discounts, concessions or commissions. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the
Certificates may be deemed to be underwriters, and any discounts, commissions or
concessions received by them, and any profit on the resale of the Certificates
purchased by them, may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "Act").
S-45
<PAGE> 155
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Act.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Depositor by
. [ ] will pass upon certain legal matters on behalf of
the Underwriters.
RATINGS
It is a condition to the issuance of the Senior Certificates that they be
rated by (" ") and, by (" " and, together with , the "Rating
Agencies"). It is a condition to the issuance of the Class B- , Class B- and
Class B- Certificates that they be rated at least , and
, respectively, by .
The ratings assigned by 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 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. 's ratings on such certificates do not, however, constitute
a statement regarding frequency of payments of the mortgage loans.
The ratings assigned by 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 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 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 the possibility that, as
a result of principal prepayments, Certificateholders may receive a lower than
anticipated yield.
The security ratings assigned to the Offered 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 Offered 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 Offered
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 Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
S-46
<PAGE> 156
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Act......................................................... S-45
Accredited Investor......................................... S-44
401(c) Regulations.......................................... S-45
Advance..................................................... S-9, 23
Agreement................................................... S-6, 14
Applicable Credit Support Percentage........................ S-30
Available Funds............................................. S-26
Bankruptcy Losses........................................... S-32
Bankruptcy Loss Coverage Amount............................. S-40
Beneficial Owner............................................ S-24
CEDE........................................................ S-24
Certificate Account......................................... S-24
Certificateholder........................................... S-14, 24
Certificates................................................ S-1, 5
Class PO Principal Distribution Amount...................... S-30
Code........................................................ S-10
Cut-off Date Pool Principal Balance......................... S-15
Debt Service Reduction...................................... S-40
Deficient Valuation......................................... S-40
Definitive Certificate...................................... S-24
Deleted Mortgage Loan....................................... S-19
Depositor................................................... S-6
Depository.................................................. S-24
Discount Mortgage Loan...................................... S-27
Distribution Account........................................ S-24
Distribution Date........................................... S-6, 25
DOL......................................................... S-43
Due Date.................................................... S-15
Equity Interest............................................. S-43
ERISA....................................................... S-10, 42
Excess Losses............................................... S-32
Exemption................................................... S-43
Fraud Loss Coverage Amount.................................. S-40
Fraud Losses................................................ S-32
Insurance Proceeds.......................................... S-26
Interest Distribution Amount................................ S-26
Interest Accrual Period..................................... S-7, 26
Liquidated Mortgage Loan.................................... S-32
Liquidation Proceeds........................................ S-26
Master Servicer............................................. S-6
Mortgage.................................................... S-19
Mortgage File............................................... S-19
Mortgage Note............................................... S-19
Mortgage Pool............................................... S-1
Mortgage Rate............................................... S-26
Net Prepayment Interest Shortfall........................... S-27
Net Interest Shortfall...................................... S-26
NMR......................................................... S-27
Non-Discount Mortgage Loan.................................. S-23, 27
Non-PO Formula Principal Amount............................. S-28, 30
</TABLE>
S-47
<PAGE> 157
<TABLE>
<S> <C>
Offered Certificates........................................ S-1, 23
OID......................................................... S-10, 41
Original Subordinated Principal Balance..................... S-29
Original Applicable Credit Support Percentage............... S-30
Parties in Interest......................................... S-42
Permitted Investments....................................... S-24
Plan........................................................ S-42
Plan Assets................................................. S-43
Plan Asset Regulation....................................... S-43
Plan Sponsor................................................ S-44
Publicly Offered Security................................... S-43
Prepayment Assumption....................................... S-41
Prepayment Interest Excess.................................. S-22
Prepayment Interest Shortfall............................... S-27
Principal Only Certificates................................. S-36
Prospectus.................................................. S-3
PTE......................................................... S-45
Purchase Agreement.......................................... S-14
Rating Agencies............................................. S-11, 46
Realized Loss............................................... S-32
Record Date................................................. S-25
Regular Interests........................................... S-2, 10
Relief Act Reduction........................................ S-27
REMIC....................................................... S-2, 10
REO Property................................................ S-23
Replacement Mortgage Loan................................... S-19
Residual Interest........................................... S-2, 10
Restricted Classes.......................................... S-30
Restricted Group............................................ S-44
Scheduled Payments.......................................... S-15
Seller...................................................... S-2, 6
Senior Prepayment Percentage................................ S-35
Senior Certificates......................................... S-23
Servicing Fee............................................... S-22
SMMEA....................................................... S-10
SPA......................................................... S-32
Special Hazard Mortgage Loan................................ S-32
Special Hazard Losses....................................... S-32
Special Hazard Loss Coverage Amount......................... S-40
Stated Principal Balance.................................... S-28
Structuring Assumptions..................................... S-32
Subordinated Certificates................................... S-23
Substitution Adjustment Amount.............................. S-20
Tax Counsel................................................. S-41
Trustee..................................................... S-6
Trust Fund.................................................. S-1, 6
Underwriter................................................. S-1
Underwriting Agreement...................................... S-45
Underwritten Senior Certificates............................ S-1
Underwritten Certificates................................... S-1
Unpaid Interest Amounts..................................... S-26
</TABLE>
S-48
<PAGE> 158
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation, or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
VERSION #4
Subject to Completion, Dated December , 1998
PROSPECTUS SUPPLEMENT (To Prospectus dated December , 1998)
$
(Approximate)
MORTGAGED LOAN ASSET-BACKED TRUST 199
MORTGAGE LOAN ASSET-BACKED PASS-THROUGH CERTIFICATES, SERIES 199 -
$ [Adjustable Rate] Class A-1 Certificates
$ % Class A-2 Certificates
Distributions payable on the day of each month,
commencing in , 199
MORGAN STANLEY ABS CAPITAL I INC.
Depositor
[ ]
Master Servicer
------------------------
The Mortgage Loan Asset-Backed Pass-Through Certificates, Series 199 - (the
"Certificates") will include the following two senior classes (the "Class A
Certificates"): (i) Class A-1 Certificates and (ii) Class A-2 Certificates. In
addition to the Class A Certificates, the Mortgage Loan Asset-Backed
Pass-Through Certificates Series 199 - will include the Class I S Certificates
(the "Group I Subordinate Certificates"), the Class II S Certificates (the
"Group II Subordinate Certificates"; and, together with the Group I Subordinate
Certificates, the "Subordinate Certificates") and the Class R Certificates (the
"Residual Certificates"). Only the Class A Certificates are offered hereby. The
Pass-Through Rate (as defined herein) on the Class A-1 Certificates is
adjustable and is calculated as described herein. The Pass-Through Rate on the
Class A-2 Certificates will be the rate set forth above, subject to increase as
described herein. Interest distributions on the Class A Certificates will be
payable monthly at one-twelfth the annual rate.
The Depositor has caused (the "Certificate Insurer") to issue two
certificate guaranty insurance policies (the "Certificate Insurance Policies")
for the benefit of the Class A Certificateholders pursuant to which it will
guarantee certain payments to the Class A Certificateholders as described
herein.
[INSURER]
------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-18 HEREIN AND ON PAGE 17 IN THE ACCOMPANYING
PROSPECTUS.
------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE CERTIFICATE
INSURANCE POLICIES 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 CERTIFICATE INSURER, THE MASTER SERVICER, 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 MASTER SERVICER 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.
------------------------
There is currently no secondary market for the Class A Certificates. Morgan
Stanley & Co. Incorporated (the "Underwriter") intends to make a secondary
market in the Class A Certificates, but is not obligated 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. The Class A Certificates will not
be listed on any securities exchange.
The Class A Certificates will be purchased from the Depositor by the
Underwriters and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the Depositor from the sale of
the Class A Certificates, before deducting expenses payable by the Depositor,
will be equal to approximately % of the aggregate initial principal balance
of the Class A Certificates, plus accrued interest on the Class A-2 Certificates
from , 199 .
The Class A Certificates are offered by the Underwriter subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to certain other conditions. The Underwriter reserves the right to withdraw,
cancel or modify such offer and to reject any order in whole or in part. It is
expected that delivery of the Class A Certificates will be made only in
book-entry form through the facilities of The Depository Trust Company, Cedel
Bank, societe anonyme, and the Euroclear System as further discussed herein, on
or about , 199 , against payment therefor in immediately available
funds. The Class A Certificates will be offered in Europe and the United States
of America.
------------------------
MORGAN STANLEY DEAN WITTER
, 199
<PAGE> 159
(Continued from cover page)
The Certificates will each evidence a beneficial ownership interest in one
of two loan groups (each, a "Loan Group") comprising Mortgage Loan Asset-Backed
Trust 199 (the "Trust Fund") consisting primarily of first, second and third
lien mortgage loans on one-to-four-family residential properties (the "Mortgage
Loans"), to be deposited by Morgan Stanley ABS Capital I Inc. (the "Depositor")
into the Trust Fund and any funds on deposit in the Interest Coverage Accounts
and the Pre-Funding Accounts (each as defined herein). The Mortgage Loans will
be purchased by the Depositor from (the "Seller"). The separate Loan
Groups are referred to as the "Group I Loans" and "Group II Loans." The Group I
Loans are adjustable-rate Mortgage Loans. The Group II Loans are fixed-rate
Mortgage Loans. Additional Group I Loans and Group II Loans are intended to be
purchased by the Trust Fund from the Depositor on or before , 199 from
funds on deposit in the Pre-Funding Accounts. On the Delivery Date (as defined
herein), the Depositor will pay to the Trustee approximately $ and
$ for deposit in the Group I and Group II Pre-Funding Account,
respectively. On the Delivery Date, the Depositor will also pay to the Trustee
for deposit in the Interest Coverage Accounts an amount as required by the
Certificate Insurer and specified in the Pooling and Servicing Agreement. The
interest rate (the "Mortgage Rate") on each Group I Loan [(i) with an Index of
Six-Month LIBOR (each as defined herein) will be subject to semi-annual
adjustment (in the case of certain of the Group I Loans, after an initial period
of two years or three years from origination), and (ii) with an Index of
One-Year CMT (as defined herein) will be subject to annual adjustment, in each
case based on the sum of the related Index and the related Gross Margin (as
defined herein), subject to certain periodic and lifetime rate limitations (as
described herein)]. The Mortgage Rate on each Group II Loan will be fixed. The
Index for the Group I Loans will be based on [either (i) six-month London
interbank offered rates for United States dollar deposits ("Six-Month LIBOR") or
(ii) the weekly average yield on U.S. Treasury securities adjusted to a constant
maturity of one year ("One-Year CMT"), each as described herein.] Certain
characteristics of the Mortgage Loans are described herein under "The Mortgage
Pool." All distributions (other than Cross-Collateralization Payments as
described herein) and losses with respect to a Loan Group will be allocated
solely among the Certificates related to such Loan Group. The rights of the
holders of the Group I Subordinate Certificates to receive distributions with
respect to the Group I Loans will be subordinate to the rights of the holders of
the Class A-1 Certificates to the extent described herein and in the Prospectus.
The rights of the holders of the Group II Subordinate Certificates to receive
distributions with respect to the Group II Loans will be subordinate to the
rights of the holders of the Class A-2 Certificates to the extent described
herein and in the Prospectus.
It is a condition of the issuance of the Class A Certificates that they be
rated " " by (" "), " " by (" ")
and " " by (" ").
The Class A Certificates initially will be represented by certificates
registered in the name of Cede & Co., as nominee of The Depository Trust Company
("DTC"), as further described herein. The interests of beneficial owners of the
Class A Certificates will be represented by book entries on the records of DTC
and the participating members of DTC. Persons acquiring beneficial ownership
interests in the Class A Certificates may elect to hold such interests through
DTC in the United States, or Cedel or Euroclear (each as defined herein) in
Europe. Definitive certificates will be available for the Class A Certificates
only under the limited circumstances described herein. See "Description of the
Certificates -- Book-Entry Registration" herein.
As described herein, a "real estate mortgage investment conduit" ("REMIC")
election will be made in connection with the Trust Fund (exclusive of the
Interest Coverage Accounts and the Pre-Funding Accounts) for federal income tax
purposes. The Class A Certificates and the Subordinate Certificates will
represent ownership of "regular interests" in the REMIC and the Class R
Certificates will constitute the sole class of "residual interests" in the
REMIC. See "Federal Income Tax Consequences" herein and in the Prospectus.
Distributions on the Class A Certificates, will be made on the 25th day of
each month or, if such day is not a business day, then on the next business day,
commencing in 199 (each, a "Distribution Date"). As described herein,
interest payable with respect to each Distribution Date (i) on the Class A-1
Certificates, will accrue on the basis of a 360-day year and the actual number
of days elapsed during the period
S-2
<PAGE> 160
commencing on the Distribution Date immediately preceding the month on which
such Distribution Date occurs and ending on the calendar day immediately
preceding such Distribution Date, except with respect to the first Distribution
Date, which has an accrual period from , 199 to , 199 and
(ii) on the Class A-2 Certificates will accrue on the basis of a 30-day month,
and will be based on the Certificate Principal Balance thereof and the
then-applicable Pass-Through Rate thereof, as reduced by certain interest
shortfalls. Distributions in respect of principal of the Class A Certificates
will be made as described herein under "Description of the Certificates -- Class
A Principal Distribution Amount."
If purchased at a price other than par, the yield to maturity on the Class
A Certificates will be sensitive to the rate and timing of principal payments
(including prepayments, defaults and liquidations) on the Mortgage Loans. The
Mortgage Loans generally may be prepaid in full or in part at any time; however,
a prepayment may subject the related Mortgagor to a prepayment charge with
respect to the majority of the Mortgage Loans in each Loan Group. The yield to
investors on the Class A Certificates will be adversely affected by any
shortfalls in interest collected on the Mortgage Loans due to prepayments,
liquidations or otherwise, to the extent not otherwise covered as described
herein. See "Summary -- Special Prepayment Considerations" and "-- Special Yield
Considerations" herein, "Yield and Prepayment Considerations" herein and in the
Prospectus.
S-3
<PAGE> 161
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 , 199 , 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.
Until ninety days after the date of this Prospectus supplement, 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 the
Prospectus to which it relates. This delivery requirement is in addition to the
obligation of dealers to deliver a Prospectus supplement and Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
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 or by the Underwriter. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Trustee on behalf of any Trust Fund will provide without charge to each
person to whom this Prospectus Supplement is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to in the
Prospectus under "Incorporation of Certain Documents by Reference" that have
been or may be incorporated by reference in the Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
the Prospectus incorporates). Such requests should be directed to the Corporate
Trust Office of the Trustee at telephone: , facsimile number:
, attention: .
S-4
<PAGE> 162
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... S-6
Risk Factors................................................ S-18
The Mortgage Pool........................................... S-21
Description of the Certificates............................. S-33
[Name of Insurer]........................................... S-43
Yield and Prepayment Considerations......................... S-44
Servicing of Mortgage Loans................................. S-48
Federal Income Tax Consequences............................. S-51
Underwriting................................................ S-53
Legal Matters............................................... S-53
Ratings..................................................... S-53
Legal Investment............................................ S-54
ERISA Considerations........................................ S-54
Experts..................................................... S-57
Index of Defined Terms...................................... S-58
Underwriting Guidelines Applicable to the Mortgage Loans.... A-1
PROSPECTUS
Summary of Terms............................................ 6
Risk Factors................................................ 17
The Trust Fund.............................................. 27
Use of Proceeds............................................. 41
The Depositor............................................... 41
Description of the Securities............................... 41
Credit Enhancement.......................................... 56
Yield and Prepayment Considerations......................... 61
The Agreements.............................................. 64
Certain Legal Aspects of the Loans.......................... 77
Federal Income Tax Consequences............................. 91
State Tax Considerations.................................... 111
ERISA Considerations........................................ 112
Legal Investment............................................ 116
Method of Distribution...................................... 117
Legal Matters............................................... 118
Financial Information....................................... 118
Rating...................................................... 118
Index of Defined Terms...................................... 120
</TABLE>
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SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
Title of Securities........ Mortgage Loan Asset-Backed Pass-Through
Certificates, Series 199 - .
Depositor.................. Morgan Stanley ABS Capital I Inc. (the
"Depositor"). See "The Depositor" in the
Prospectus.
Master Servicer............ (the "Master Servicer"). See
"Servicing of Mortgage Loans -- The Master
Servicer" herein.
Seller..................... , (the "Seller"). See "The Mortgage
Pool" herein.
Trustee.................... (the "Trustee").
Statistical Reference
Date....................... , 199 . The statistical information
contained herein concerning the Initial Mortgage
Loans (unless otherwise stated) is based on the
principal balance of the Initial Mortgage Loans as
of the Statistical Reference Date. The Depositor
does not expect that such information would be
materially different as of the Cut-off Date.
Cut-off Date............... , 199 .
Delivery Date.............. On or about , 199 .
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 (as defined in the Prospectus). The
Class A Certificates will be issued in minimum
denominations of $[25,000] and integral multiples
of $[1] in excess thereof.
Certificate Registration... The Class A Certificates will be represented by one
or more certificates registered in the name of Cede
& Co., as nominee of DTC (Class A Certificates so
registered, "Book-Entry Certificates"). No person
acquiring an interest in the Book-Entry
Certificates (a "Certificate Owner") will be
entitled to receive a Class A Certificate in fully
registered, certificated form (a "Definitive
Certificate"), except under the limited
circumstances described herein. The interests of
Certificate Owners of the Book-Entry Certificates
will be represented by book entries on the records
of DTC and participating members of DTC.
Certificate Owners may elect to hold their
interests in the Class A Certificates through DTC
in the United States, or Cedel Bank, societe
anonyme ("Cedel"), or the Euroclear System
("Euroclear") in Europe. Transfers within DTC,
Cedel or Euroclear, as the case may be, will be in
accordance with the usual rules and operating
procedures of the relevant system. Cross-market
transfers between persons holding directly or
indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly
through Cedel or Euroclear, on the other, will be
effected in DTC through Citibank N.A. ("Citibank")
or Morgan Guaranty Trust Company of New York
("Morgan Guaranty" the relevant depositories of
Cedel and Euroclear, respectively, and each a
participating member of DTC. All references herein
to Class A Certificates and Class A
Certificateholders reflect the rights of
Certificate Owners only as such rights may be
exercised through DTC and its participating
organizations, for so long as such Certificates
remain Book-Entry Certificates. See "Risk
S-6
<PAGE> 164
Factors -- Book-Entry Certificates " and
"Description of the Certificates -- Book-Entry
Registration."
The Mortgage Pool.......... The Mortgage Pool will consist of two groups (each
a "Loan Group") of mortgage loans (the "Mortgage
Loans"). The separate Loan Groups are referred to
herein as the "Group I Loans" and "Group II Loans."
The Group I Loans are adjustable-rate, one- to
four-family mortgage loans. The Group II Loans are
fixed-rate, one- to four-family mortgage loans. The
Initial Group I Loans (as defined herein) have an
initial aggregate principal balance as of the
Statistical Reference Date of $ . The
Initial Group II Loans (as defined herein) have an
initial aggregate principal balance as of the
Statistical Reference Date of $ .
The Group I Loans and the Group II Loans are
secured by first liens, on fee simple interests in
one- to four-family residential real properties
(each, a "Mortgaged Property"). The Initial Group I
Loans had approximate individual principal balances
at origination of at least $ but not more
than $ with an average principal balance
at origination of approximately $ . The
Initial Group II Loans had approximate individual
principal balances at origination of at least
$ but not more than $ with an
average principal balance at origination of
approximately $ . Approximately % of the
Initial Group I Mortgage Loans have terms to
maturity from the date of origination or
modification of years and approximately % of
the Initial Group I Mortgage Loans have terms to
maturity from the date of origination or
modification of years or less. Approximately %
of the Initial Group II Mortgage Loans have terms
to maturity from the date of origination or
modification of years and % of the Initial
Group II Mortgage Loans have terms to maturity from
the date of origination or modification of years
or less. The Initial Group I Loans have a weighted
average remaining term to stated maturity of
approximately months as of the Statistical
Reference Date. Approximately % of the Initial
Group I Loans (by aggregate principal balance as of
the Statistical Reference Date) are refinance
mortgage loans. The Initial Group II Loans have a
weighted average remaining term to stated maturity
of approximately [years] [months] as of the
Statistical Reference Date. Approximately % of
the Initial Group II Loans (by aggregate principal
balance as of the Statistical Reference Date) are
refinance mortgage loans. None of the Initial Group
I Loans or Initial Group II Loans were thirty or
more days delinquent in their Monthly Payments
(such Mortgage Loans, "Delinquent Mortgage Loans")
as of the Cut-off Date. Prospective investors in
the Class A Certificates should be aware, however,
that only approximately % and % of the Initial
Group I Loans and Initial Group II Loans,
respectively (by aggregate principal balance as of
the Statistical Reference Date), had a first
Monthly Payment due on or before , 199 ,
and therefore, the remaining Initial Group I Loans
and Initial Group II Loans could not have been
Delinquent Mortgage Loans as of the Cut-off Date.
Approximately % of the Initial Group II Loans (by
aggregate principal balance as of the Statistical
Reference Date) will be secured by second liens on
the related Mortgaged Property. Approximately %
of the Initial Group II Loans (by aggregate
principal balance as of the Statistical Reference
Date) will be secured by third liens on the related
Mortgaged Property. Each of the Mortgage Loans will
have been
S-7
<PAGE> 165
originated by the Seller or acquired by the Seller
as described herein. For a further description of
the Mortgage Loans, see "The Mortgage Pool" herein.
The Mortgage Rate (as defined herein) on each Group
I Loan will be subject to adjustment, commencing
(i) with respect to approximately % of the
Initial Group I Loans, approximately months after
the date of origination, (ii) with respect to
approximately % of the Initial Group I Loans,
approximately years after origination (each such
Group I Loan, a " Loan") and (iii) with
respect to approximately % of the Initial Group I
Loans, approximately years after origination
(each such Group I Loan, a " Loan"), on
the date (the "Adjustment Date") specified in the
related Mortgage Note to a rate equal to the sum
(rounded as described herein) of the related Index
as described below and the Gross Margin (as defined
herein) set forth in the related Mortgage Note,
subject to the limitations described herein. The
amount of the monthly payment on each Group I Loan
[(i) with an Index of Six-Month LIBOR, will be
adjusted semi-annually (except with respect to
approximately % of the Initial Group I Loans,
which will adjust every ) or (ii) with an Index of
One-Year CMT, will be adjusted annually,] in each
case on the first day of the month following the
month in which the Adjustment Date occurs to the
amount necessary to pay interest at the then
applicable Mortgage Rate and to fully amortize the
outstanding principal balance of such Mortgage Loan
over its remaining term to stated maturity. As of
the Statistical Reference Date, the Initial Group I
Loans will bear interest at Mortgage Rates of at
least % per annum, but no more than % per
annum, with a weighted average Mortgage Rate of
approximately % per annum as of the Statistical
Reference Date. The Group I Loans will have
different Adjustment Dates, Gross Margins, Periodic
Rate Caps, Lifetime Rate Caps and Lifetime Rate
Floors, each as described herein.
The Mortgage Rate on each Group II Loan is fixed.
As of the Statistical Reference Date, the Initial
Group II Loans will bear interest at Mortgage Rates
of at least % per annum but no more than % per
annum, with a weighted average Mortgage Rate of
approximately % per annum as of the Statistical
Reference Date.
Pursuant to the Pooling and Servicing Agreement,
the Trust Fund will be obligated to purchase from
the Depositor on or before , 199 ,
additional Group I Loans and Group II Loans (the
"Group I Subsequent Mortgage Loans" and "Group II
Subsequent Mortgage Loans," respectively), subject
to certain conditions described herein. See "The
Mortgage Pool" herein.
The Mortgage Loans were underwritten in accordance
with the underwriting standards described in "The
Mortgage Pool -- Underwriting Standards" and
Appendix A to this Prospectus Supplement. See also
"Risk Factors -- Underwriting Standards" in this
Prospectus Supplement.
For a further description of the Mortgage Loans,
see "The Mortgage Pool" herein.
Pre-Funding Accounts....... On the Delivery Date, the Depositor will pay to the
Trustee approximately $ (the "Group I
Original Pre-Funded Amount") and $ (the
"Group II Original Pre-Funded Amount"; and together
S-8
<PAGE> 166
with the Group I Original Pre-Funded Amount, the
"Original Pre-Funded Amounts") for deposit in the
Pre-Funding Accounts to provide the Trust Fund with
sufficient funds to purchase Subsequent Mortgage
Loans for the Group I Loans and Group II Loans.
Each Original Pre-Funded Amount will be reduced
during the related Funding Period (as defined
herein) by the amount thereof used to purchase
Subsequent Mortgage Loans for the Group I Loans and
Group II Loans in accordance with the Pooling and
Servicing Agreement (on any date of determination,
the related Original Pre-Funded Amount as so
reduced, the related "Pre-Funded Amount"). See "The
Mortgage Pool -- Conveyance of Subsequent Mortgage
Loans and the Pre-Funding Accounts" herein.
Interest Coverage
Accounts................... On the Delivery Date, the Depositor will pay to the
Trustee for deposit in the Interest Coverage
Accounts an amount as required by the Certificate
Insurer and specified in the Pooling and Servicing
Agreement. Funds on deposit in the Interest
Coverage Accounts will be applied by the Trustee to
cover shortfalls in the Group I and Group II Class
A Interest Distribution Amount (each as defined
herein) attributable to the pre-funding feature
during the related Funding Period. See "Description
of the Certificates -- Interest Coverage Account"
herein.
The Index.................. The Index applicable with respect to the Group I
Loans shall be based upon either [(i) 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 as of the
first business day forty-five, thirty or five days
prior to the Adjustment Date, as specified in the
related Mortgage Note or (ii) the weekly average
yield on U.S. Treasury securities adjusted to a
constant maturity of one year ("One-Year CMT") as
published by the Federal Reserve Board in
Statistical Release H.15(519) and most recently
available as of the first business day forty-five
days prior to the Adjustment Date, as specified in
the related Mortgage Note.]
In the event that the Index specified in a Mortgage
Note is no longer available, an index reasonably
acceptable to the Trustee that is based on
comparable information will be selected by the
Master Servicer. See "The Mortgage Pool" herein.
The Class A Certificates... The Class A Certificates will each evidence a
beneficial ownership interest in a trust fund (the
"Trust Fund") consisting primarily of the Mortgage
Pool and any amounts on deposit in the Interest
Coverage Accounts and the Pre-Funding Accounts. The
Class A Certificates will be issued pursuant to a
Pooling and Servicing Agreement, to be dated as of
the Cut-off Date, among the Depositor, the Master
Servicer and the Trustee (the "Pooling and
Servicing Agreement"). The Class A Certificates
will have the following approximate Certificate
Principal Balances as of the Delivery Date:
$ Class A-1 Certificates
$ Class A-2 Certificates
For a description of the allocation of interest and
principal distributions to the Class A
Certificates, see "Summary-Interest Distributions"
and "-- Principal Distributions" below, and
"Description of the Certifi-
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<PAGE> 167
cates -- Class A Interest Distribution Amount" and
"-- Class A Principal Distribution Amount" herein.
The Class A Certificates will be entitled to the
benefit of two certificate guaranty insurance
policies (the "Certificate Insurance Policies") to
be issued by (the "Certificate
Insurer"), which will insure the payment of (i) on
each Distribution Date, an amount equal to (a) the
related Class A Interest Distribution Amount (as
defined herein) minus the related Available Funds
(as defined herein) and (b) the related
Subordination Deficit (as defined herein) (to the
extent not covered, with respect to the Class A-2
Certificates, by Cross-Collateralization Payments)
and (ii) the unpaid related Preference Amount (as
defined herein).
The Certificate Insurance Policies do not insure
the payment of the Group I Class A Available Funds
Cap Carry-Forward Amount (as defined herein). See
"Description of the Certificates."
Pass-Through Rate on the
Class A Certificates..... The Pass-Through Rate on the Class A-1 Certificates
is adjustable and is calculated as follows:
beginning on the Distribution Date in
199 , and on each Distribution Date
thereafter, the Pass-Through Rate applicable to the
Class A-1 Certificates will be adjusted to equal
the lesser of (i) (a) with respect to any
Distribution Date which occurs on or prior to the
date on which the aggregate Principal Balance of
the Mortgage Loans is less than % of the sum of
the aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date and the Original
Pre-Funded Amounts, One-Month LIBOR (as defined
herein) plus %, or (b) with respect to any
Distribution Date thereafter, One-Month LIBOR plus
% and (ii) the Group I Class A Available Funds
Pass-Through Rate.
The "Group I Class A Available Funds Pass-Through
Rate," as of any Distribution Date, is equal to (i)
the weighted average of the Mortgage Rates of the
Group I Loans, minus (ii) the sum of the Servicing
Fee Rate and the rates per annum at which the
Trustee's Fee and Premium Amount (each as defined
herein) accrue and minus (iii) commencing on the
seventh Distribution Date, % per annum.
The "Class A-1 Formula Pass-Through Rate" for a
Distribution Date is the lesser of (x) the rate
determined by clause (i) of the definition of
Pass-Through Rate for the Class A-1 Certificates on
such Distribution Date and (y) the weighted average
of Net Lifetime Rate Caps of the Group I Loans. The
Net Lifetime Rate Cap on each Group I Loan is equal
to the related Lifetime Rate Cap minus the sum of
the Servicing Fee Rate and the rates per annum, at
which the Trustee's Fee and the Premium Amount
accrue.
The Pooling and Servicing Agreement provides that
if the Pass-Through Rate on the Class A-1
Certificates is less than the Class A-1 Formula
Pass-Through Rate and any resulting shortfall in
interest is not paid on such Distribution Date from
any available Net Monthly Excess Cashflow, as
defined herein, then the amount of any such
shortfall will be carried forward and paid to the
extent of available funds, as described herein, to
the Holders of the Class A-1 Certificates on future
Distribution Dates and shall accrue interest at the
applicable Class A-1 Formula
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<PAGE> 168
Pass-Through Rate, until paid (such shortfall,
together with such accrued interest, the "Group I
Class A Available Funds Cap Carry-Forward Amount").
The Certificate Insurance Policies do not cover the
Group I Class A Available Funds Cap Carry-Forward
Amount, nor do the ratings assigned to the Class
A-1 Certificates address the payment of the Group I
Class A Available Funds Cap Carry-Forward Amount.
The Pass-Through Rate with respect to the Class A-2
Certificates is equal to (i) with respect to any
Distribution Date which occurs on or prior to the
date on which the aggregate Principal Balance of
the Mortgage Loans is less than % of the sum of
the aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date and the Original
Pre-Funded Amounts, % per annum, and (ii) with
respect to any Distribution Date thereafter, %
per annum. See "Description of the
Certificates -- Class A Interest Distribution
Amounts" herein.
See "Description of the Certificates-Class A
Interest Distribution Amount" and "-- Calculation
of One-Month LIBOR" herein.
Interest Distributions..... On each Distribution Date, the holders of the Class
A Certificates will be entitled to receive, to the
extent of amounts available for distribution as
described herein, interest distributions in an
amount equal to the sum of (i) interest accrued for
the related Accrual Period (as defined herein) on
the Certificate Principal Balance thereof
immediately prior to such Distribution Date at the
then-applicable Pass-Through Rate (based on a
360-day year and the actual number of days elapsed,
with respect to the Class A-1 Certificates, and a
30-day month, with respect to the Class A-2
Certificates), subject to reduction only in the
event of shortfalls caused by the Relief Act (as
defined in the Prospectus and allocated as
described herein) or the failure of the Master
Servicer to cover Prepayment Interest Shortfalls to
the extent described herein and (ii) the Group I
Class A Carry-Forward Amount or Group II Class A
Carry-Forward Amount (each as defined herein), as
applicable, allocable to interest. The aggregate
amount of interest allocable to the Class A-1
Certificates and Class A-2 Certificates (the
related "Class A Interest Distribution Amount")
will be allocable to the related Class A
Certificates on a pro rata basis. See "Description
of the Certificates -- Priority of Payment" and
"-- Class A Interest Distribution Amount" herein.
Any Prepayment Interest Shortfalls (as defined
herein) resulting from full or partial prepayments
in any calendar month will be offset by the Master
Servicer on the Distribution Date in the following
calendar month to the extent such Prepayment
Interest Shortfalls do not exceed the Servicing Fee
payable to the Master Servicer with respect to such
Distribution Date. An amount equal to the Class A
Certificates' pro rata share, based on the amount
of interest payable on each such class, of any
Prepayment Interest Shortfalls not so covered by
the Master Servicer will be made available by the
Certificate Insurer for distribution to the Class A
Certificateholders. See "Servicing the Mortgage
Loans -- Servicing Compensation and Payment of
Expenses" and "Description of the
Certificates -- Class A Interest Distribution
Amount" herein.
Principal Distributions.... Holders of the Class A-1 Certificates and Class A-2
Certificates will be entitled to receive on each
Distribution Date, to the extent of amounts
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<PAGE> 169
available for distribution as described herein
remaining after interest on the Class A-1
Certificates and Class A-2 Certificates,
respectively, is distributed, an amount (the
related "Class A Principal Distribution Amount")
equal to the sum of (i) the portion of any Group I
Class A Carry-Forward Amount or Group II Class A
Carry-Forward Amount, as applicable, which relates
to a shortfall in a distribution of a related
Subordination Deficit, (ii) all scheduled
installments of principal in respect of the
Mortgage Loans in the related Loan Group received
or advanced during the related Due Period, together
with all unscheduled recoveries of principal on
such Mortgage Loans received by the Master Servicer
during the prior calendar month, (iii) the
Principal Balance of each Mortgage Loan in the
related Loan Group that was repurchased by either
the Seller or by the Depositor, (iv) any amounts
delivered by the Depositor on the Master Servicer
Remittance Date (as defined herein) in connection
with a substitution of a Mortgage Loan in the
related Loan Group, (v) the net Liquidation
Proceeds (as defined in the Prospectus) collected
by the Master Servicer of all Mortgage Loans in the
related Loan Group during the prior calendar month
(to the extent such net Liquidation Proceeds are
related to principal), (vi) the amount of any
related Subordination Deficit for such Distribution
Date, (vii) the proceeds received by the Trustee of
any termination of the related Loan Group (to the
extent such proceeds are related to principal),
(viii) the amount of any related Subordination
Increase Amount (as defined herein) for such
Distribution Date and (ix) with respect to the
Class A-1 Certificates and Class A-2 Certificates,
with respect to the Distribution Date occurring in
, 199 , any amounts in the related Pre-
Funding Account after giving effect to any purchase
of related Subsequent Mortgage Loans; minus (x) the
amount of any related Subordination Reduction
Amount (as defined herein) for such Distribution
Date. In no event will any Class A Principal
Distribution Amount with respect to any
Distribution Date be less than zero or greater than
the Certificate Principal Balance of the related
Class A Certificates. See "Description of the
Certificates -- Priority of Payment" and "-- Class
A Principal Distribution Amount" herein.
Credit Enhancement......... The credit enhancement provided for the benefit of
the Class A Certificateholders consists solely of
(a) the overcollateralization mechanics which
utilize the internal cash flows of the Mortgage
Loans in the related Loan Group (and, to the extent
of Cross-Collateralization Payments payable to the
Class A-2 Certificates as described herein, cash
flows on the Mortgage Loans in Loan Group I) and
(b) the related Certificate Insurance Policy.
Overcollateralization. The subordination
provisions of the Trust Fund result in a limited
acceleration of the Class A Certificates relative
to the amortization of the Mortgage Loans in the
related Loan Group, generally in the early months
of the transaction. The accelerated amortization is
achieved by the application of certain excess
interest to the payment of the Certificate
Principal Balance of the related Class A
Certificates. This acceleration feature creates
overcollateralization which equals the excess of
the aggregate Principal Balances of the Mortgage
Loans in the related Loan Group and the related
Pre-Funded Amount over the Certificate Principal
Balance of the related Class A Certificates. Once
the required level of overcollateralization is
reached, and subject to the provisions
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<PAGE> 170
described in the next paragraph, the acceleration
feature will cease, unless necessary to maintain
the required level of overcollateralization.
The Pooling and Servicing Agreement provides that,
subject to certain trigger tests, the required
level of overcollateralization with respect to each
Loan Group may increase or decrease over time. An
increase would result in a temporary period of
accelerated amortization of the related Class A
Certificates to increase the actual level of
overcollateralization to its required level; a
decrease would result in a temporary period of
decelerated amortization to reduce the actual level
of overcollateralization to its required level. See
"Description of the
Certificates -- Overcollateralization Provisions."
The Certificate Insurance Policies. The Class A
Certificateholders will have the benefit of the
related Certificate Insurance Policy, as discussed
more fully below. See "Description of the
Certificates -- The Certificate Guaranty Insurance
Policies" herein.
Certificate Insurer........ (the "Certificate Insurer").
See " " herein.
Certificate Guaranty
Insurance Policies......... The Certificate Insurer will issue the Certificate
Insurance Policies as a means of providing
additional credit enhancement to the Class A
Certificates. Under the Certificate Insurance
Policies, the Certificate Insurer will pay the
Trustee, for the benefit of the holders of the
related Class A Certificates, as further described
herein, an amount that will insure the payment of
(i) on each Distribution Date, an amount equal to
(a) the related Class A Interest Distribution
Amount minus the related Available Funds and (b)
the related Subordination Deficit (to the extent
not covered, with respect to the Class A-2
Certificates, by Cross-Collateralization Payments)
and (ii) the related unpaid Preference Amount. The
Certificate Insurance Policies do not insure the
payment of the Group I Class A Available Funds Cap
Carry-Forward Amount. A payment by the Certificate
Insurer under a Certificate Insurance Policy is
referred to herein as an "Insured Payment." See
"Description of the Certificates -- The Certificate
Guaranty Insurance Policies" herein.
Cross-Collateralization.... In the event that on any Distribution Date after
giving effect to distributions pertaining to a
particular Loan Group and its related Certificates
(except for any payment to be made as principal
from proceeds of the related Certificate Insurance
Policy), either a Reimbursement Amount with respect
to either Loan Group exists or a Subordination
Deficit exists with respect to Loan Group II or the
Subordinated Amount with respect to Loan Group II
would be less than the related Required
Subordinated Amount (such difference, a "Cross-
Collateralized Subordination Shortfall"), the Class
A-2 Certificates or the Certificate Insurer, as the
case may be, will be entitled to receive an
additional payment (a "Cross-Collateralization
Payment") in respect of principal to the extent of
such Subordination Deficit or Cross-Collateralized
Subordination Shortfall or as reimbursement of the
Reimbursement Amount, as the case may be, out of
funds then on deposit in the Certificate Account
for the other Loan Group that is otherwise payable
on such Distribution Date to the Subordinate
Certificates related to such other Loan Group.
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<PAGE> 171
Mandatory Prepayments on
the Group I and Group II
Class A Certificates..... The Class A-1 Certificates and Class A-2
Certificates will be prepaid in part on the
, 199 Distribution Date in the event that
any amount remains on deposit in the related
Pre-Funding Account on such Distribution Date after
the purchase by the Trust Fund of the related
Subsequent Mortgage Loans, if any. Although no
assurance can be given, it is anticipated by the
Depositor that the principal amount of the related
Subsequent Mortgage Loans purchased by the Trust
Fund will require the application of substantially
all of the related Original Pre-Funded Amount (as
defined herein) and that there should be no
material amount of principal prepaid to the Class
A-1 Certificateholders and Class A-2
Certificateholders from the related Pre-Funding
Account. However, it is unlikely that the Depositor
will be able to deliver Subsequent Mortgage Loans
with an aggregate principal balance identical to
the related Original Pre-Funded Amount. See
"Description of the Certificates -- Mandatory
Prepayments on Class A-1 Certificates and Class A-2
Certificates" herein.
Advances................... The Master Servicer is required to make advances
("Advances") in respect of delinquent payments of
principal and interest on the Mortgage Loans,
subject to the limitations described herein. See
"Description of the Certificates -- Advances"
herein and in the Prospectus.
Optional Termination....... At its option, on any Distribution Date when the
aggregate Principal Balance of the Mortgage Loans
is less than % of the sum of the aggregate
principal balance of the Mortgage Loans as of the
Cut-off Date and the aggregate principal balance of
the Subsequent Mortgage Loans as of the related
Subsequent Cut-off Date (as defined herein), the
holder of a majority percentage interest of the
Class R Certificates (or the Master Servicer (or
the Certificate Insurer, if is removed as
Master Servicer) if the Principal Balance of the
Mortgage Loans is less than % of such sum) may
purchase from the Trust Fund all remaining Mortgage
Loans and other assets thereof at the price
described herein, and thereby effect early
retirement of the related Certificates. See
"Servicing of Mortgage Loans -- Termination" herein
and "The Agreements -- Termination; Optional
Termination" in the Prospectus.
Special Prepayment
Considerations........... The rate and timing of principal payments on the
Class A Certificates will depend, among other
things, on the rate and timing of principal
payments (including prepayments, defaults,
liquidations and purchases of the Mortgage Loans in
the related Loan Group due to a breach of a
representation or warranty) on the related Mortgage
Loans. As is the case with mortgage-backed
securities generally, the Class A Certificates are
subject to substantial inherent cash-flow
uncertainties because the Mortgage Loans in the
related Loan Group may be prepaid at any time;
[however, a prepayment may subject the related
Mortgagor to a prepayment charge with respect to
the majority of the Mortgage Loans in each Loan
Group.] Generally, when prevailing interest rates
increase, prepayment rates on mortgage loans tend
to decrease, resulting in a slower return of
principal to investors at a time when reinvestment
at such higher prevailing rates would be desirable.
Conversely, when prevailing
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<PAGE> 172
interest rates decline, prepayment rates on
mortgage loans tend to increase, resulting in a
faster return of principal to investors at a time
when reinvestment at comparable yields may not be
possible.
See "Description of the Certificates -- Class A
Principal Distribution Amount" and "Yield and
Prepayment Considerations" herein and in the
Prospectus.
Special Yield
Considerations............. The yield to maturity on the Class A Certificates
will depend on, among other things, the rate and
timing of principal payments (including
prepayments, defaults, liquidations and purchases
of the Mortgage Loans in the related Loan Group due
to a breach of a representation or warranty) on the
Mortgage Loans in the related Loan Group and the
allocation thereof to reduce the Certificate
Principal Balance thereof. The yield to maturity on
the Class A Certificates will also depend on the
related Pass-Through Rate and the purchase price
for such Certificates.
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
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 assumed at the time of purchase.
The Class A-1 Certificates were structured
assuming, among other things, a prepayment rate
equal to CPR (as defined herein) and
corresponding weighted average life as described
herein. The Class A-2 Certificates were structured
assuming, among other things, a prepayment rate
equal to of the Prepayment Assumption (as
defined herein) and corresponding weighted average
lives as described herein. The prepayment, yield
and other assumptions to be used for pricing
purposes for the Class A Certificates may vary as
determined at the time of sale.
See "Yield and Prepayment Considerations" herein
and in the Prospectus.
Federal Income Tax
Consequences............. A real estate mortgage investment conduit ("REMIC")
election will be made with respect to the Trust
Fund (exclusive of the Interest Coverage Accounts
and the Pre-Funding Accounts) for federal income
tax purposes. Upon the issuance of the Class A
Certificates, , counsel to the
Depositor, will issue an 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
(exclusive of the Interest Coverage Accounts and
the Pre-Funding Accounts) will qualify as a REMIC
under Sections 860A through 86OG of the Internal
Revenue Code of 1986 (the "Code").
For federal income tax purposes, the Class R
Certificates will be the sole class of "residual
interests" in the REMIC and the Class A
Certificates and the Subordinate Certificates will
represent ownership of "regular interests" in the
REMIC and will generally be treated as representing
ownership of debt instruments of the REMIC.
S-15
<PAGE> 173
For federal income tax reporting purposes, the
Class A Certificates will not be treated as having
been issued with original issue discount. The
prepayment assumption that will be used in
determining the rate of accrual of original issue
discount, market discount and premium, if any, for
federal income tax purposes will be a rate equal to
CPR, with respect to the Class A-1
Certificates, and of the Prepayment
Assumption, with respect to the Class A-2
Certificates. No representation is made that the
Mortgage Loans will prepay at these rates or at any
other rates.
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 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. [Certain classes of Certificates 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."
Legal Investment........... The Class A-1 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.
The Class A-2 Certificates will not constitute
"mortgage related securities" for purposes of SMMEA
because the Group II Loans include Mortgage Loans
that are secured by subordinate liens on the
related Mortgaged Properties. 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
in the Prospectus.
Ratings.................... It is a condition to the issuance of the Class
Certificates that they be rated " " by
(" ") and " " by (" ") and " "
by (" "). The ratings of the Class A
Certificates should be evaluated independently from
similar ratings on other types of securities. A
rating
S-16
<PAGE> 174
is not a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by the rating organization.
A security rating does not address the frequency of
prepayments of Mortgage Loans, or the corresponding
effect on yield to investors. Also, the ratings
issued by , and on payment of principal
and interest do not cover the payment of the Group
I Class A Available Funds Cap Carry-Forward Amount.
See "Yield and Prepayment Considerations" and
"Ratings" herein and in the Prospectus.
Risk Factors............... For a discussion of certain risks associated with
an investment in the Certificates, see "Risk
Factors" on page S-18 herein and on page 17 in the
Prospectus.
S-17
<PAGE> 175
RISK FACTORS
[Description will depend on the particulars of the Mortgage Loans.]
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 Certificates.
UNDERWRITING STANDARDS
The Mortgage Loans were underwritten by (the "Seller") in
accordance with its underwriting standards described in "The Mortgage
Pool -- Underwriting" below and in Appendix A to this Prospectus Supplement
which are primarily intended to provide single family mortgage loans for non-
conforming credits. A "non-conforming credit" means a mortgage loan which is
ineligible for purchase by FNMA or FHLMC due to credit characteristics that do
not meet the FNMA or FHLMC underwriting guidelines, including mortgagors whose
creditworthiness and repayment ability do not satisfy such FNMA or FHLMC
underwriting guidelines and mortgagors who may have a record of credit
write-offs, outstanding judgments, prior bankruptcies and other credit items
that do not satisfy such FNMA or FHLMC underwriting guidelines. ACCORDINGLY,
MORTGAGE LOANS UNDERWRITTEN UNDER THE SELLER'S NON-CONFORMING CREDIT
UNDERWRITING STANDARDS ARE LIKELY TO EXPERIENCE RATES OF DELINQUENCY,
FORECLOSURE AND LOSS THAT ARE HIGHER, AND MAY BE SUBSTANTIALLY HIGHER, THAN
MORTGAGE LOANS ORIGINATED IN ACCORDANCE WITH THE FNMA OR FHLMC UNDERWRITING
GUIDELINES.
Under the Seller's non-conforming credit underwriting standards, the
critical factors in underwriting a Mortgage Loan are the income and employment
history of the prospective mortgagor, the creditworthiness of the prospective
mortgagor, an assessment of the value of the related Mortgaged Property and the
adequacy of such property as collateral in relation to the amount of such
Mortgage Loan. Therefore, changes in values of the Mortgaged Properties may have
a greater effect on the delinquency, foreclosure and loss experience of the
related Mortgage Loans than on mortgage loans originated in accordance with the
FNMA or FHLMC credit underwriting guidelines. No assurance can be given that the
values of the Mortgaged Properties in the related Loan Group have remained or
will remain at the levels in effect on the dates of origination of the related
Mortgage Loans. If the values of the Mortgaged Properties in Loan Group I and
Loan Group II decline after the dates of origination of the related Mortgage
Loans, then the rates of delinquencies, foreclosures and losses on the Group I
Loans and Group II Loans may increase and such increase may be substantial.
CASH FLOW CONSIDERATIONS
Minimum monthly payments on the Mortgage Loans will at least equal and may
exceed accrued interest. Even assuming that the Mortgaged Properties provide
adequate security for the Mortgage Loans, substantial delays could be
encountered in connection with the liquidation of Mortgage Loans that are
delinquent and resulting shortfalls in distributions to Certificateholders could
occur. Further, liquidation expenses (such as legal fees, real estate taxes, and
maintenance and preservation expenses) will reduce the proceeds payable to
Certificateholders and thereby reduce the security for the Mortgage Loans. In
the event any of the Mortgaged Properties fail to provide adequate security for
the related Mortgage Loans, Certificateholders could experience a loss.
PREPAYMENT CONSIDERATIONS AND RISKS
Substantially all of the Mortgage Loans may be prepaid in whole or in part
at any time without penalty. Home equity loans, such as the Mortgage Loans, have
been originated in significant volume only during the past few years and neither
the Depositor nor the Master Servicer is aware of any publicly available studies
or statistics on the rate of prepayment of such loans. Generally, home equity
loans are not viewed by borrowers as permanent financing. Accordingly, the
Mortgage Loans may experience a higher rate of prepayment than traditional
loans. The Trust's prepayment experience may be affected by a wide variety of
factors, including general economic conditions, interest rates, the availability
of alternative financing and homeowner mobility. In addition, substantially all
of the Mortgage Loans contain due-on-sale provisions and the Master Servicer
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<PAGE> 176
intends to enforce such provisions unless (i) such enforcement is not permitted
by applicable law or (ii) the Master Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Mortgage Loan. To the extent permitted by applicable law,
such assumption will not release the original borrower from its obligation under
any such Mortgage Loan. See "Yield and Prepayment Considerations" herein and
"Certain Legal Aspects of Loans -- Due-on-Sale Clauses" in the Prospectus for a
description of certain provisions of the Mortgage Loans that may affect the
prepayment experience thereof. The yield to maturity and weighted average life
of the Certificates will be affected primarily by the rate and timing of
prepayments on the Mortgage Loans. Any reinvestment risks resulting from a
faster or slower incidence of prepayment of Mortgage Loans will be borne
entirely by the Certificateholders. See "Yield and Prepayment Considerations"
herein and in the Prospectus.
CERTIFICATE RATING
The rating of the Certificates will depend primarily on an assessment by
the Rating Agencies of the Mortgage Loans. The rating by the Rating Agencies of
the Certificates is not a recommendation to purchase, hold or sell the
Certificates, inasmuch as such rating does not comment as to the market price or
suitability for a particular investor. There is no assurance that the ratings
will remain in place for any given period of time or that the ratings will not
be lowered or withdrawn by the Rating Agencies. In general, the ratings address
credit risk and do not address the likelihood of prepayments. The ratings of the
Certificates do not address the possibility of the imposition of United States
withholding tax with respect to non-U.S. persons.
BANKRUPTCY AND INSOLVENCY RISKS
The sale of the Mortgage Loans from the Seller to the Depositor will be
treated as a sale of the Mortgage Loans. However, in the event of an insolvency
of the Seller, the receiver of the Seller may attempt to recharacterize the sale
of the Mortgage Loans as a borrowing by the Seller, secured by a pledge of the
applicable Mortgage Loans. If the receiver decided to challenge such transfer,
delays in payments of the Certificates and reductions in the amounts thereof
could occur.
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
Certificateholders from appointing a successor Master Servicer.
GEOGRAPHIC CONCENTRATION
As of the Cut-off Date, approximately % (by Cut-off Date Pool
Principal Balance) of the Mortgaged Properties are located in the State of
. An overall decline in the residential real estate
market could adversely affect the values of the Mortgaged Properties securing
such Mortgage Loans such that the Principal Balances of the related Mortgage
Loans could equal or exceed the value of such Mortgaged Properties. As the
residential real estate market is influenced by many factors, including the
general condition of the economy and interest rates, no assurances may be given
that the residential real estate market will not weaken. If the
residential real estate market should experience an overall decline
in property values after the dates of origination of the Mortgage Loans, the
rates of losses on the Mortgage Loans would be expected to increase, and could
increase substantially.
DELINQUENT MORTGAGE LOANS
The Trust Fund will include Mortgage Loans which are 89 or fewer days
delinquent as of the Cut-off Date. The Cut-off Date Pool Principal Balance of
Mortgage Loans which are between 30 days and 89 days delinquent as of the
Cut-off Date was $ . If there are not sufficient Available Funds on any
Distribution Dates, the aggregate amount of principal returned to the
Certificateholders may be less than the respective Class Certificate Principal
Balances on the day the Certificates were issued.
RISK OF MORTGAGE LOAN YIELD REDUCING PASS-THROUGH RATES ON THE CLASS A-1
CERTIFICATES
The Pass-Through Rate on the Class A-1 Certificates is generally expected
to be based upon clause (i) of the definition thereof, which is primarily based
upon the value of One-Month LIBOR (as defined herein) as
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<PAGE> 177
adjusted every month, while the Mortgage Rates on the Group I Loans adjust
semiannually or annually based upon different indices, either [Six-Month LIBOR
or One-Year CMT], as described under "The Mortgage Pool -- Mortgage Rate
Adjustment" herein. However, clause (ii) of the definition of the Pass-Through
Rate on the Class A-1 Certificates limits the Pass-Through Rate on the Class A-1
Certificates to the Group I Class A Available Funds Pass-Through Rate, which is
generally based upon the Mortgage Rates on the Group I Loans, which are subject
to [Six-Month LIBOR or One-Year CMT.] As a result, the interest paid to the
Class A-1 Certificates may be less than would be determined using clause (i) of
the related definition of Pass-Through Rate. In particular, because the Mortgage
Rates on the Group I Loans adjust less frequently, the Pass-Through Rate on the
Class A-1 Certificates may be determined by the Group I Class A Available Funds
Pass-Through Rate for extended periods in a rising interest rate environment. In
addition, with respect to the Class A-1 Certificates, One-Month LIBOR,
[Six-Month LIBOR and One-Year CMT] may respond to different economic and market
factors, and there is not necessarily any correlation between them. Thus, it is
possible, for example, that One-Month LIBOR may rise during periods in which
[Six-Month LIBOR or One-Year CMT] is stable or is failing or that, even if
One-Month LIBOR, [Six-Month LIBOR and One-Year CMT] all rise during the same
period, One-Month LIBOR may rise much more rapidly than [Six-Month LIBOR and
One-Year CMT]. In addition, the Mortgage Rates on the Group I Loans are subject
to the Periodic Rate Caps and to specified Lifetime Rate Caps and Lifetime Rate
Floors, and the Mortgage Rates on the Loans and Loans, which represent
% and % of the Initial Group I Loans, respectively (by aggregate
outstanding principal balance as of the Statistical Reference Date), will not
have a first Adjustment Date until years and years, respectively, from
the origination of each such Loan and Loan.
THE SUBSEQUENT MORTGAGE LOANS
Subsequent Mortgage Loans may have characteristics different from those of
the related Initial Mortgage Loans. However, each Subsequent Mortgage Loan must
satisfy the eligibility criteria referred to herein under "The Mortgage
Pool -- Conveyance of Subsequent Mortgage Loans and the Pre-Funding Accounts" at
the time of its conveyance to the Trust Fund and be underwritten in accordance
with the criteria set forth herein under "The Mortgage Pool -- Underwriting" and
Appendix A to this Prospectus Supplement.
MANDATORY PREPAYMENT
To the extent that amounts on deposit in the Pre-Funding Accounts have not
been fully applied to the purchase of Subsequent Mortgage Loans by the Trust
Fund by the end of the related Funding Period, the Holders of the related Class
A Certificates will receive, as described herein, on the Distribution Date
occurring in , 199 , any amounts in the related Pre-Funding Account
after giving effect to any purchase of related Subsequent Mortgage Loans.
Although no assurances can be given, the Depositor intends that the principal
amount of Subsequent Mortgage Loans sold to the Trust Fund will require the
application of substantially all amounts on deposit in the Pre-Funding Accounts
and that there will be no material principal payment to the related Class A
Certificateholders on such Distribution Date.
BOOK-ENTRY CERTIFICATES
Issuance of the Class A Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market since investors
may be unwilling to purchase Certificates for which they cannot obtain physical
certificates. See "Description of the Certificates -- Book-Entry Registration"
herein and "Risk Factors --Book-Entry Registration May Reduce Liquidity" in the
Prospectus.
Since transactions in the Book-Entry Certificates will be effected only
through DTC, Cedel, Euroclear, participating organizations, indirect
participants and certain banks, the ability of a Certificate Owner to pledge
Book-Entry Certificate to persons or entities that do not participate in the
DTC, Cedel or Euroclear systems may be limited due to lack of a physical
certificate representing such Certificates. See "Description of the
Certificates -- Book-Entry Registration" herein and "Risk Factors -- Book-Entry
Registration May Reduce Liquidity" in the Prospectus.
S-20
<PAGE> 178
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Book-Entry Certificates since
such distributions will be forwarded by the Trustee to DTC, and DTC will credit
such distributions to the accounts of its Participants (as defined herein) which
will thereafter credit them to the accounts of Certificate Owners either
directly or indirectly through indirect participants. Certificate Owners will
not be recognized as Certificateholders as such term is used in the Pooling and
Servicing Agreement, and Certificate Owners will be permitted to exercise the
rights of Certificateholders only indirectly through DTC and its Participants.
See "Description of the Certificates -- Book-Entry Registration" herein and
"Risk Factors -- Book-Entry Registration May Reduce Liquidity" in the
Prospectus.
THE MORTGAGE POOL
GENERAL
The statistical information presented in this Prospectus Supplement
describes only the mortgage loans included in the Trust Fund as of the Delivery
Date (with respect to Loan Group I and Loan Group II, the "Initial Group I
Loans" and "Initial Group II Loans," respectively) and does not include mortgage
loans purchased by the Trust Fund after the Delivery Date (the "Subsequent
Mortgage Loans"). In addition, such statistical information is dated as of the
Statistical Reference Date, and not as of the Cut-off Date, so such information
will vary slightly from the final initial Mortgage Pool.
With respect to Loan Group I and Loan Group II, Subsequent Mortgage Loans
are intended to be purchased by the Trust Fund from the Depositor from time to
time on or before , 199 , from funds on deposit in the
Pre-Funding Accounts. The Subsequent Mortgage Loans, if available, will be
purchased by the Depositor, and sold by the Depositor to the Trust Fund to
become part of the related Loan Group. The Pooling and Servicing Agreement will
provide that the Group I Loans and Group II Loans, following the conveyance of
the Subsequent Mortgage Loans, must conform in the aggregate for each such Loan
Group as determined separately to certain specified characteristics described
below under "-- Conveyance of Subsequent Mortgage Loans and the Pre-Funding
Accounts." In the sole discretion of the Certificate Insurer, Subsequent
Mortgage Loans with characteristics varying from those described herein may be
purchased by the Trust Fund; provided, however, that the addition of such Group
I Loans and Group II Loans will not materially affect the aggregate
characteristics of the entire related Loan Group.
The Mortgage Loans underlying the Certificates consist of the "Group I
Loans," which had an aggregate outstanding principal balance as of the
Statistical Reference Date of $ and the "Group II Loans," which had an
aggregate outstanding principal balance as of the Statistical Reference Date of
$ (each such group of Mortgage Loans, "Loan Group I" or "Loan Group
II," respectively, or a "Loan Group"). The Group I Loans will consist of
adjustable rate, monthly payment, first lien mortgage loans with terms to
maturity of approximately years from the date of origination or modification.
The Group II Loans will generally consist of fixed-rate, monthly payment, first,
second and third lien mortgage loans. Approximately % of the Initial Group
II Mortgage Loans have terms to maturity from the date of origination or
modification of years and approximately % of the Initial Group II
Mortgage Loans have terms to maturity from the date of origination or
modification of years or less. The Mortgage Loans will be originated or
acquired by the Seller, substantially in accordance with the underwriting
criteria described herein under "--Underwriting" below and in Appendix A. The
Depositor will acquire the Group I Loans and Group II Loans to be included in
Mortgage Pool from the Seller. The Seller in turn either originated such
Mortgage Loans or acquired them pursuant to various mortgage loan purchase
agreements. The Seller will make certain representations and warranties with
respect to the Mortgage Loans and, as more particularly described in the
Prospectus, will have certain repurchase or substitution obligations in
connection with a breach of any such representation or warranty, as well as in
connection with an omission or defect in respect of certain constituent
documents required to be delivered with respect to the Mortgage Loans, in any
event if such breach, omission or defect cannot be cured and it materially and
adversely affects the interests of Certificateholders. See "The Trust
Fund -- Representations by Sellers or Originators; Repurchases" and "The
Agreements -- Assignment of Trust Fund Assets" in the Prospectus. The Mortgage
Loans will have
S-21
<PAGE> 179
been originated or acquired by the Seller in accordance with the underwriting
criteria described herein. See "-- Underwriting" below and Appendix A to this
Prospectus Supplement.
Pursuant to the terms of the Pooling and Servicing Agreement, the Depositor
will assign the representations and warranties made by the Seller to the Trustee
for the benefit of the Certificateholders and the Certificate Insurer.
Each Mortgage Loan will contain a customary "due-on-sale" clause. See
"Certain Legal Aspects of Loans -- Due-On-Sale Clauses" in the Prospectus.
Approximately % and % of the Initial Group I Loans and Initial
Group II Loans, respectively, provide for payment of a prepayment charge.
Generally, each such Mortgage Loan provides for payment of a prepayment charge
for certain partial prepayments and all prepayments in full made within
approximately three or five years of the origination of such Mortgage Loan, in
an amount equal to six months' advance interest on the amount of the prepayment
that, when added to all other amounts prepaid during the twelve-month period
immediately preceding the date of the prepayment, exceeds twenty percent of the
original principal amount of the Mortgage Loan. The Seller will be entitled to
all prepayment charges received on the Mortgage Loans and such amounts will not
be available for distribution on the Certificates.
[None] of the Mortgage Loans are covered by a primary mortgage insurance
policy. See "Credit Enhancement -- Pool Insurance Policies" in the Prospectus.
MORTGAGE RATE ADJUSTMENT
The Mortgage Rate (as defined herein) on each Group I Loan will be subject
to adjustment, commencing (i) with respect to approximately % of the
Initial Group I Loans, approximately
months after the date of origination, (ii) with respect to approximately %
of the Initial Group I Loans, approximately years after origination (each
such Group I Loan, a " Loan") and (iii) with respect to approximately
% of the Initial Group I Loans, approximately years after origination (each
such Group I Loan, a " Loan"). [The Mortgage Rate on each Group I Loan
(i) with an Index of Six-Month LIBOR, will adjust semi-annually (except with
respect to approximately % of the Initial Group I Loans, which will adjust
every three years) or (ii) with an Index of One-Year CMT, will adjust annually,
in each case on the first day of the months specified in the related Mortgage
Note (each such date, an "Adjustment Date") to a rate equal to the sum,
generally rounded to the nearest one-eighth of one percentage point (12.5 basis
points), of (i) the related Index plus (ii) a fixed percentage (the "Gross
Margin"), which is generally subject to a maximum increase or decrease in the
Mortgage Rate on any Adjustment Date (the "Periodic Rate Cap") of % with
respect to approximately % of the Initial Group I Loans and % with
respect to approximately % of the Initial Group I Loans (which percentage
includes the initial
Loans, which loans have a Periodic Rate Cap of for the first Adjustment
Date and for each Adjustment Date thereafter, and Loans, which loans have a
Periodic Rate Cap of % for the first Adjustment Date and for each
Adjustment Date thereafter), each by aggregate Principal Balance as of the
Statistical Reference Date and to specified maximum and minimum lifetime
Mortgage Rates ("Lifetime Rate Caps" and "Lifetime Rate Floors," respectively).]
The Mortgage Loans were generally originated with an initial Mortgage Rate below
the sum of the current Index and the Gross Margin. The Index applicable with
respect to the Group I Loans is based upon either [(i) 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 as of the first business day forty-five, thirty or five
days prior to the Adjustment Date, as specified in the related Mortgage Note or
(ii) the weekly average yield on U.S. Treasury securities adjusted to a constant
maturity of one year ("One-Year CMT") as published by the Federal Reserve Board
in Statistical Release H.15(519) and most recently available as of the first
business day forty-five days prior to the Adjustment Date], as specified in the
related Mortgage Note. The Index for all of the Initial Group I Loans will be
[Six-Month LIBOR]. Subsequent Mortgage Loans in Loan Group I will have an Index
based on either [Six-Month LIBOR or One-Year CMT]. Due to the application of the
Periodic Rate Caps, Lifetime Rate Caps and Lifetime Rate Floors, the Mortgage
Rate on any Group I Loan as adjusted on any related Adjustment Date, may not
equal the sum of the related Index and the Gross Margin.
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<PAGE> 180
The Mortgage Rate on each Group II Loan is fixed. The Due Date is generally the
first day of the month of all of the Mortgage Loans.
Approximately % of the Initial Group I Loans, including all Initial
Group I Loans that are
Loans and Loans, will not have reached their first Adjustment Date on or
before the Statistical Reference Date. The initial Mortgage Rate with respect to
such Mortgage Loans is generally lower than the rate that would have been
produced if the applicable Gross Margin had been added to the Index in effect at
origination. Group I Loans that have not reached their first Adjustment Date
are, therefore, more likely to be subject to the Periodic Rate Cap on their
first Adjustment Date.
MORTGAGE LOAN CHARACTERISTICS
Group I Loans
The Initial Group I Loans will consist of Mortgage Loans with an aggregate
Principal Balance outstanding as of the Statistical Reference Date, after
deducting payments of principal due on or prior to such date, of $ .
All percentages of the Initial Group I Loans described herein are approximate
percentages (except as otherwise indicated) by aggregate principal balance as of
the Statistical Reference Date.
Approximately % of the Initial Group I Loans have original terms to
stated maturity of approximately years and approximately % of the
Initial Group I Loans have terms to stated maturity of approximately years.
Effective with the first payment due on a Group I Loan after each related
Adjustment Date, the Monthly Payment will be adjusted to an amount that will
fully amortize the outstanding principal balance of the Mortgage Loan over its
remaining term. The weighted average number of months from the Statistical
Reference Date to the next Adjustment Date for the Initial Group I Loans is
approximately months.
As of the Statistical Reference Date, each Initial Group I Loan will have
an unpaid principal balance of not less than $ or more than $
and the average unpaid principal balance of the Initial Group I Loans will be
approximately $ . The latest stated maturity date of any of the Initial
Group I Loans will be , 20 ; however, the actual date on
which any Mortgage Loan is paid in full may be earlier than the stated maturity
date due to unscheduled payments of principal. Based on information supplied by
the mortgagors in connection with their loan applications at origination,
approximately % of the Initial Group I Loans will be secured by Mortgaged
Properties which are owner occupied primary residences, approximately % of
the Initial Group I Loans will be secured by Mortgaged Properties which are
second homes and approximately % of the Initial Group I Loans will be
secured by Mortgaged Properties which are non-owner occupied properties. No
Initial Group I Loan provides for negative amortization or deferred interest.
Set forth below is a description of certain additional characteristics of
the Initial Group I Loans as of the Statistical Reference Date (except as
otherwise indicated). Dollar amounts and percentages may not add up to totals
due to rounding.
INITIAL MORTGAGE RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
INITIAL MORTGAGE RATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
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<PAGE> 181
The weighted average Initial Mortgage Rate of the Initial Group I Loans
will be approximately % per annum.
NEXT INTEREST ADJUSTMENT DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
GROSS MARGINS GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
The weighted average remaining months to the next interest Adjustment Date
of the Initial Group I Loans will be approximately months.
GROSS MARGIN
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
GROSS MARGINS GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
The weighted average Gross Margin of the Initial Group I Loans will be
approximately % per annum.
LIFETIME RATE CAP
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
LIFETIME RATE CAP GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
The weighted average Lifetime Rate Cap of the Initial Group I Loans will be
approximately % per annum.
LIFETIME RATE FLOOR
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
LIFETIME RATE FLOOR GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
S-24
<PAGE> 182
The weighted average Lifetime Rate Floor of the Initial Group I Loans
(other than the Initial Group I Loans which have a Lifetime Rate Floor of
%) will be approximately % per annum.
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
REMAINING MONTHS NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
TO STATED MATURITY GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
The weighted average remaining term to stated maturity of the Initial Group
I Loans will be approximately months.
YEARS OF ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
YEARS OF ORIGINATION GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
The earliest month and year of origination of any Initial Group I Loan is
and the latest month and year of origination will be
.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
ORIGINAL STATISTICAL REFERENCE
LOAN-TO-VALUE NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
RATIO GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
The minimum and maximum Loan-to-Value Ratios at origination of the Initial
Group I Loans were approximately % and %, respectively, and the
weighted average Loan-to-Value Ratio at origination of the Initial Group I Loans
was approximately %.
MORTGAGE LOAN PROGRAM
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
LOAN PROGRAM GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
S-25
<PAGE> 183
See "-- Underwriting" below and Appendix A to the Prospectus Supplement for
a description of the Seller's mortgage loan documentation programs.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
ORIGINAL STATISTICAL REFERENCE
MORTGAGE LOAN NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
** 3 ORIGINAL BALANCE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
The average original principal balance of the Initial Group I Loans will be
approximately $ .
PROPERTY TYPES
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
PROPERTY TYPE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
RISK CATEGORIES
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
RISK CLASSIFICATION GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
See "-- Underwriting" below and Appendix A to this Prospectus Supplement
for a description of the Seller's risk classifications.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
STATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
No more than approximately % of the Initial Group I Loans will be secured
by Mortgaged Properties located in any one zip code.
S-26
<PAGE> 184
PURPOSES OF GROUP I LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
LOAN PURPOSE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
In general, in the case of a Mortgage Loan made for "rate/term" refinance
purposes (not for "equity take-out"), substantially all of the proceeds are used
to pay in full the principal balance of a previous mortgage loan of the
mortgagor with respect to a Mortgaged Property and to pay origination and
closing costs associated with such refinancing. Mortgage Loans made for "equity
take out" may involve use of a portion of the proceeds to pay in full the
principal balance of such previous mortgage loan and related costs but the
proceeds are generally retained by the mortgagor for uses unrelated to the
Mortgaged Property. The amount of such proceeds retained by the mortgagor may be
substantial.
OCCUPANCY STATUS
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
OCCUPANCY GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
Group II Loans
The Initial Group II Loans will consist of Mortgage Loans with an aggregate
Principal Balance outstanding as of the Statistical Reference Date, after
deducting payments of principal due on or prior to such date, of $ .
All percentages of the Initial Group II Loans described herein are approximate
percentages (except as otherwise indicated) by aggregate principal balance as of
the Statistical Reference Date.
Approximately % of the Initial Group II Loans have original terms to
stated maturity of approximately years.
As of the Statistical Reference Date, each Initial Group II Loan will have
an unpaid principal balance of not less than $ or more than $
and the average unpaid principal balance of the Initial Group II Loans will be
approximately $ . The latest stated maturity date of any of the Initial
Group II Loans will be , 20 ; however, the actual date on which any
Mortgage Loan is paid in full may be earlier than the stated maturity date due
to unscheduled payments of principal. Based on information supplied by the
mortgagors in connection with their loan applications at origination,
approximately % of the Initial Group II Loans will be secured by Mortgaged
Properties which are owner occupied primary residences, approximately % of
the Initial Group II Loans will be secured by Mortgaged Properties which are
second homes and approximately % of the Initial Group II Loans will be
secured by Mortgaged Properties which are non-owner occupied properties. No
Initial Group II Loan provides for negative amortization or deferred interest.
S-27
<PAGE> 185
Set forth below is a description of certain additional characteristics of
the Group II Loans as of the Statistical Reference Date (except as otherwise
indicated). Dollar amounts and percentages may not add up to totals due to
rounding.
MORTGAGE RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
MORTGAGE RATES GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
The weighted average Mortgage Rate of the Initial Group II Loans will be
approximately % per annum.
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
REMAINING MONTHS TO NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
STATED MATURITY GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
The weighted average remaining term to stated maturity of the Initial Group
II Loans will be approximately months.
YEARS OF ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
YEARS OF ORGANIZATION GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
The earliest month and year of origination of any Initial Group II Loan is
and the latest month and year of origination is .
ORIGINAL LOAN-TO VALUE RATIOS(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
ORIGINAL STATISTICAL REFERENCE
LOAN-TO-VALUE NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
RATIOS GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
- ---------------
(1) The Loan-to-Value Ratio of Group II Loans secured by second and third liens
includes the outstanding principal balance of the related senior liens.
S-28
<PAGE> 186
The minimum and maximum Loan-to-Value Ratios at origination of the Initial
Group II Loans were approximately % and %, respectively, and the weighted
average Loan-to-Value Ratio at origination of the Initial Group II Loans was
approximately %.
MORTGAGE LOAN PROGRAM
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
LOAN PROGRAM GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
See "-- Underwriting" below and Appendix A to the Prospectus Supplement for
a description of the Seller's mortgage loan documentation programs.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
ORIGINAL STATISTICAL REFERENCE
MORTGAGE LOAN NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
PRINCIPAL BALANCE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
The average original principal balance of the Initial Group II Loans will
be approximately $ .
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
PROPERTY TYPE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
RISK CATEGORIES
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
RISK CLASSIFICATION GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
See "-- Underwriting" below and Appendix A to this Prospectus Supplement
for a description of the Seller's risk classifications.
S-29
<PAGE> 187
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
STATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
No more than approximately % of the Initial Group II Loans will be
secured by Mortgaged Properties located in any one zip code.
PROPERTIES OF GROUP II LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
LOAN PURPOSE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
In general, in the case of a Mortgage Loan made for "rate/term" refinance
purposes (not for "equity take-out"), substantially all of the proceeds are used
to pay in full the principal balance of a previous mortgage loan of the
mortgagor with respect to a Mortgaged Property and to pay origination and
closing costs associated with such refinancing. Mortgage Loans made for "equity
take out" may involve the use of a portion of the proceeds to pay in full the
principal balance of such previous mortgage loan and related costs but the
proceeds are generally retained by the mortgagor for uses unrelated to the
Mortgaged Property. The amount of such proceeds retained by the mortgagor may be
substantial.
OCCUPANCY STATUS
<TABLE>
<CAPTION>
PERCENTAGE OF
STATISTICAL REFERENCE
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
OCCUPANCY GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
</TABLE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNTS
With respect to Loan Group I and Loan Group II, under the Pooling and
Servicing Agreement, following the initial issuance of the Certificates, the
Trust Fund will be obligated to purchase from the Depositor during the Funding
Period, subject to the availability thereof, additional Mortgage Loans (the
"Subsequent Mortgage Loans") secured by first, second and third liens on one-to
four-family residential properties. Each Subsequent Mortgage Loan will have been
underwritten in accordance with the criteria set forth herein under "The
Mortgage Pool -- Underwriting" and Appendix A to this Prospectus Supplement.
Subsequent Mortgage Loans will be transferred to the Trust Fund pursuant to
subsequent transfer instruments (the "Subsequent Transfer Instruments") between
the Depositor and the Trust Fund. In connection with the purchase of Subsequent
Mortgage Loans on such dates of transfer (the "Subsequent Transfer Dates"), the
Trust Fund
S-30
<PAGE> 188
will be required to pay to the Depositor from amounts on deposit in one of the
Pre-Funding Accounts (as defined below) a cash purchase price of 100% of the
principal balance thereof. The Depositor will designate the Subsequent Transfer
Date as the cut-off date (the "Subsequent Cut-off Date") with respect to the
related Subsequent Mortgage Loans purchased on such date. The amount paid from
each Pre-Funding Account on each Subsequent Transfer Date will not include
accrued interest on the related Subsequent Mortgage Loans. Following each
Subsequent Transfer Date, the aggregate principal balance of the Mortgage Loans
in the related Loan Group will increase by an amount equal to the aggregate
principal balance of the related Subsequent Mortgage Loans so purchased and the
amount in the related Pre-Funding Account will decrease accordingly.
Two accounts (each, a "Pre-Funding Account") will be established by the
Trustee and funded by the Depositor with approximately $ with respect
to Loan Group I (the "Original Group I Pre-Funded Amount") and $ with
respect to Loan Group II (the "Original Group II Pre-Funded Amount") on the
Delivery Date to provide the Trust Fund with sufficient funds to purchase
Subsequent Mortgage Loans. The related Original Pre-Funded Amount will be
reduced during the Funding Period by the amount used to purchase Subsequent
Mortgage Loans for a related Loan Group in accordance with the Pooling and
Servicing Agreement (on any date of determination, the related Original
Pre-Funded Amount as so reduced, the "Pre-Funded Amount"). During the period
(the "Funding Period"), determined separately for Loan Group I and Loan Group
II, from the Delivery Date until the earliest of (i) the date on which the
amount on deposit in the related Pre-Funding Account is less than $10,000 or
(ii) , 199 , the related Pre-Funded Amount will be maintained in the
related Pre-Funding Account.
Any conveyance of Subsequent Mortgage Loans on a Subsequent Transfer Date
is subject to certain conditions including, but not limited to: (a) each such
Subsequent Mortgage Loan must satisfy the representations and warranties
specified in the related Subsequent Transfer Instrument and the Pooling and
Servicing Agreement; (b) the Depositor will not select such Subsequent Mortgage
Loans in a manner that it believes is adverse to the interests of the
Certificateholders or the Certificate Insurer; (c) the Depositor will deliver
certain opinions of counsel acceptable to the Certificate Insurer with respect
to the validity of the conveyance of such Subsequent Mortgage Loans; (d) as of
the respective Subsequent Cutoff Date the Subsequent Mortgage Loans will satisfy
the following criteria: (i) such Subsequent Mortgage Loan may not be 30 or more
days contractually delinquent as of the related Subsequent Cut-off Date; (ii)
the remaining stated term to maturity of such Subsequent Mortgage Loan will not
exceed 360 months; (iii) such Subsequent Mortgage Loan may not provide for
negative amortization; (iv) such Subsequent Mortgage Loan will be underwritten
in accordance with the criteria set forth under "The Mortgage
Pool -- Underwriting" herein and Appendix A to this Prospectus Supplement; (v)
such Subsequent Mortgage Loan will not have a Loan-to-Value Ratio (or Combined
Loan-to-Value Ratio in the case of second lien Mortgage Loans) greater than
100%; and (vi) such Subsequent Mortgage Loans will have as of the end of the
Funding Period, a weighted average term since origination not in excess of [ ]
months. In addition, following the purchase of any Subsequent Mortgage Loan by
the Trust Fund, the Group I Loans and Group II Loans (including the related
Subsequent Mortgage Loans) will, as determined separately for each Loan Group:
(i) have a weighted average original term to stated maturity of not more than
360 months; (ii) have a weighted average Loan-to-Value Ratio (or weighted
average Combined Loan-to-Value Ratio in the case of second and third lien
Mortgage Loans) of not more than % with respect to Loan Group I, and % with
respect to Loan Group II, each by aggregate principal balance of the related
Mortgage Loans; (iii) have no related Mortgage Loan with a principal balance in
excess of $ ; and (iv) have a weighted average Gross Margin not less
than % with respect to the Group I Loans. In addition, the Trustee shall not
agree to any Subsequent Transfer without a signed certification from the
Certificate Insurer that the Subsequent Mortgage Loans meet the above criteria
plus any additional criteria in the Insurance Agreement. In the sole discretion
of the Certificate Insurer, Subsequent Mortgage Loans with characteristics
varying from those set forth above may be purchased by the Trust Fund; provided,
however, that the addition of such Mortgage Loans will not materially affect the
aggregate characteristics of the entire related Loan Group.
S-31
<PAGE> 189
UNDERWRITING
[Description will depend on the particulars of the Seller]
The Standard Non-Conforming Program
All of the Mortgage Loans were underwritten by the Seller in accordance
with the "Standard Non-Conforming Program" which does not meet the credit
underwriting standards of FNMA or FHLMC. This program is described in detail in
Appendix A to this Prospectus Supplement. The Seller's current single family
mortgage loan volume is generally originated based on loan packages submitted
through a mortgage broker network. Such loan packages, which generally contain
relevant credit, property and underwriting information on the loan request, are
compiled by the applicable mortgage broker and submitted to the Seller for
approval and funding. The mortgage broker receives as compensation all or a
portion of the loan origination fee charged to the mortgagor at the time the
loan is made. As part of their quality control procedures, the Seller accepts
loan packages submitted by preapproved mortgage brokers. In connection with the
approval process, they require that the mortgage broker be licensed by the
appropriate state agencies, as required, and review a package of documents
consisting of, among other things, an application, resumes of key personnel,
narrative of the company, organizational documentation and financial statements.
At least annually, the Seller reviews the performance of each of its respective
mortgage brokers for poor processing, misrepresentation, fraud or delinquency,
and substandard mortgage brokers are terminated.
Each prospective mortgagor completes a mortgage loan application that
includes information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. At least two credit
reports on each applicant from national credit reporting companies are required.
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.
Mortgaged properties are appraised by licensed appraisers. The Seller does
not approve all appraisers but instead relies on the mortgage brokers to
evaluate the appraiser's experience and ability; however, in the event that a
mortgage broker uses an appraiser who has not been approved by the Seller, the
related appraisal will be reviewed by an approved appraiser of the Seller for
conformance with its guidelines. The Seller requires the appraiser to address
neighborhood conditions, site and zoning status and condition and valuation of
improvements. Following each appraisal, the appraiser prepares a report which
includes a reproduction cost analysis (when appropriate) based on the current
cost of constructing a similar home and a market value analysis based on recent
sales of comparable homes in the area. All appraisals are required to conform to
the Uniform Standards of Professional Appraisal Practice and FIRREA and must be
on forms acceptable to FNMA and FHLMC. Every appraisal is reviewed by a
non-affiliated appraisal review firm, or by another review appraiser acceptable
to the Seller before the mortgage loan is made.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Statistical Reference Date, as adjusted for the scheduled
principal payments due on or before such date. Prior to the issuance of the
Class A Certificates, Mortgage Loans may be removed from the Mortgage Pool as a
result of incomplete documentation or otherwise, if the Depositor deems such
removal necessary or appropriate. A limited number of other mortgage loans may
be added to the Mortgage Pool prior to the issuance of the Class A Certificates.
The Depositor believes that the information set forth herein will be
substantially representative of the characteristics of the Mortgage Pool as it
will be constituted at the time the Class A Certificates are issued although the
range of Mortgage Rates and maturities and certain other characteristics of the
Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the Class A
Certificates and will be filed, together with the Pooling and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the Class A Certificates. In the event Mortgage Loans
are removed from or added to the Mortgage Pool as set forth in the preceding
paragraph, such removal or addition
S-32
<PAGE> 190
will be noted in the Current Report on Form 8-K. In addition, a Current Report
on Form 8-K will be filed following each purchase of Subsequent Mortgage Loans.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Mortgage Loan Asset-Backed Pass-Through Certificates, Series 199 ,
(the "Certificates") will include the following two senior classes (the
"Class A Certificates"): (i) Class A-1 Certificates (the "Class A-1
Certificates") and (ii) Class A-2 Certificates (the "Class A-2 Certificates").
In addition to the Class A Certificates, the Mortgage Loan Asset-Backed
Pass-Through Certificates, Series 199 , will include the Class I S
Certificates (the "Group I Subordinate Certificates"), the Class II S
Certificates (the "Group II Subordinate Certificates"; and, together with the
Group I Subordinate Certificates, the "Subordinate Certificates") and the Class
R Certificates (the "Residual Certificates"). Only the Class A Certificates are
offered hereby. The Pass-Through Rate (as defined herein) on the Class A-1
Certificates is adjustable and is calculated as described under "-- Class A
Interest Distribution Amounts" below. The Pass-Through Rate on the Class A-2
Certificates is fixed at % per annum, subject to increase as described herein.
Interest distributions on the Class A Certificates will be payable monthly at
one-twelfth the annual rate.
The Certificates will evidence the entire beneficial ownership interest in
the Trust Fund. The Trust Fund will consist of: (i) the Mortgage Loans; (ii)
such assets as from time to time are identified as deposited in respect of the
Mortgage Loans in the Certificate Accounts; (iii) property acquired by
foreclosure of such Mortgage Loans or deed in lieu of foreclosure; (iv) the
Trustee's rights with respect to the Mortgage Loans under all insurance policies
(including the Certificate Insurance Policies) required to be maintained
pursuant to the Pooling and Servicing Agreement and any proceeds thereof; (v)
liquidation proceeds; (vi) released mortgaged property proceeds; and (vii)
amounts on deposit in the Interest Coverage Accounts and the Pre-Funding
Accounts.
Distributions on the Class A Certificates will be made on the 25th day of
each month or, if such day is not a business day, then on the next succeeding
business day (each, a "Distribution Date"), commencing in 199 , to
Certificateholders of record on the immediately preceding Record Date. The
record date (the "Record Date") for each Distribution Date will be the close of
business on the last day of the month immediately preceding the related
Distribution Date.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of The Depository Trust Company ("DTC") and its Participants
(as defined in the Prospectus).
The Class A Certificates will be represented by one or more certificates
registered in the name of the nominee of DTC (Class A Certificates so
registered, "Book-Entry Certificates"). No person acquiring an interest in the
Class A Certificates will be entitled to receive a certificate representing such
person's interest (a "Definitive Certificate"), except as set forth below under
"-- Book-Entry Registration." Unless and until Definitive Certificates are
issued for the Class A Certificates under the limited circumstances described
herein, all references to actions by Certificateholders with respect to the
Class A Certificates shall refer to actions taken by DTC upon instructions from
its Participants, and all references herein to distributions, notices, reports
and statements to Certificateholders with respect to the Class A Certificates
shall refer to distributions, notices, reports and statements to DTC or its
nominee, as the registered holder of the Class A Certificates, for distribution
to Certificate Owners by DTC in accordance with DTC procedures.
BOOK-ENTRY REGISTRATION
Each Class of Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate initial Class Certificate Balance of each
such Class of Certificates and which will be held by a nominee of The Depository
Trust Company (together with any successor depository selected by the Depositor,
the "Depository"). Beneficial interests in the Book-Entry Certificates will be
held indirectly by investors through the book-entry facilities of the
Depository, as described herein. Investors may hold such beneficial interests in
the
S-33
<PAGE> 191
Book-Entry Certificates in minimum denominations representing an original
principal amount of $25,000] and integral multiples of [$1] in excess thereof.
One investor of each Class of Book-Entry Certificates may hold a beneficial
interest therein that is not an integral multiple of $1,000. The Depositor has
been informed by the Depository that its nominee will be Cede & Co. ("CEDE").
Accordingly, CEDE is expected to be the holder of record of the Book-Entry
Certificates. Except as described in the Prospectus under "Description of the
Securities -- Book-Entry Registration of Securities," no person acquiring a
Book-Entry Certificate (each, a "beneficial owner") will be entitled to receive
a physical certificate representing such Definitive Certificate.
Unless and until Definitive Certificates are issued, it is anticipated that
the only "Certificateholder" of the Book-Entry Certificates will be CEDE, as
nominee of the Depository. Beneficial owners of the Book-Entry Certificates will
not be Certificateholders, as that term is used in the Pooling and Servicing
Agreement. Beneficial owners are only permitted to exercise the rights of
Certificateholders indirectly through Financial Intermediaries and the
Depository. Monthly and annual reports on the Trust Fund provided to CEDE, as
nominee of the Depository, may be made available to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose
Depository accounts the Book-Entry Certificates of such beneficial owners are
credited.
For a description of the procedures generally applicable to the Book-Entry
Certificates, see "Description of the Securities -- Book-Entry Registration of
Securities" in the Prospectus.
OVERCOLLATERALIZATION PROVISIONS AND SUPPORT FEATURES
Overcollateralization Resulting from Cash Flow Structure. The Pooling and
Servicing Agreement requires that, on each Distribution Date, the Net Monthly
Excess Cashflow with respect to each Loan Group, if any, be applied on such
Distribution Date as an accelerated payment of principal on the related Class A
Certificates, but only to the limited extent hereafter described. The "Net
Monthly Excess Cashflow" for any Distribution Date is equal to (x) the amount on
deposit in the Certificate Account on such Distribution Date with respect to the
Mortgage Loans in the related Loan Group, other than the related Insured
Payments and the Trustee's Fee and Premium Amount payable on such Distribution
Date (such amount, the related "Available Funds" for such Distribution Date)
minus (y) the sum of (i) the sum of the related Class A Interest Distribution
Amount and the related Class A Principal Distribution Amount (calculated for
this purpose without regard to any Subordination Increase Amount, Subordination
Reduction Amount or portion thereof included therein) and (ii) any related
Reimbursement Amount (as defined herein) owed to the Certificate Insurer. This
application has the effect of accelerating the amortization of the related Class
A Certificates relative to the amortization of the Mortgage Loans in the related
Loan Group.
With respect to any Distribution Date, the excess, if any, of (x) the sum
of the aggregate Principal 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 (as
defined herein) and the amount of funds in the related Pre-Funding Account as of
such Distribution Date over (y) the Certificate Principal Balance of the related
Class A Certificates as of such Distribution Date (and following the making of
all distributions on such Distribution Date) is the "Subordinated Amount" as of
such Distribution Date. The Pooling and Servicing Agreement requires that the
Net Monthly Excess Cashflows will be applied as an accelerated payment of
principal on the related Class A Certificates until the related Subordinated
Amount has increased to the level equal to the related Required Subordinated
Amount for such Distribution Date. 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 with respect to
a Distribution Date is the "Required Subordinated Amount" with respect to such
Distribution Date. Initially, the Required Subordinated Amount will be set at an
amount equal to a percentage, specified in the Pooling and Servicing Agreement,
of the aggregate Principal Balances of the related Mortgage Loans in the related
Loan Group as of the Cut-off Date and the related Original Pre-Funded Amount.
The Pooling and Servicing Agreement generally provides that the Required
Subordinated Amounts may, over time, decrease, or increase, subject to certain
floors, caps and triggers.
In the event that the Required Subordinated Amount 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
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which would otherwise be distributed to the Holders of the related Class A
Certificates on such Distribution Date shall be distributed to the Holders of
the related Group I or Group II Subordinate Certificates on such Distribution
Date, or applied to the payment of any Group I Class A Available Funds Cap
Carry-Forward Amount. This has the effect of decelerating the amortization of
the Class A Certificates relative to the, amortization of the Mortgage Loans in
the related Loan Group, and of reducing the related Subordinated Amount. With
respect to any Distribution Date, the difference, if any, between (a) the
related Subordinated Amount that would apply on such Distribution Date after
taking into account all distributions to be made on such Distribution Date
(exclusive of any reductions thereto attributable to Subordination Reduction
Amounts (as described below) on such Distribution Date) and (b) the related
Required Subordinated Amount for such Distribution Date is the related "Excess
Subordinated Amount" with respect to such Distribution Date. With respect to any
Distribution Date, an amount equal to the lesser of (a) the related Excess
Subordinated Amount and (b) the principal collections received by the Master
Servicer with respect to the prior Due Period is the related "Subordination
Reduction Amount." In addition, due to the cash flow stricture of the
Certificates as described below, Subordination Reduction Amounts may result even
prior to the occurrence of any decrease or "step down" in the related Required
Subordinated Amount. This is because the Holders of the related Class A
Certificates will generally be entitled to receive 100% of collected principal,
even though the Certificate Principal Balances of the related Class A
Certificates will, following the accelerated amortization resulting from the
application of the related Net Monthly Excess Cashflow, represent less than 100%
of the related Mortgage Loan's principal balance. In the absence of the
provisions relating to Subordination Reduction Amounts, the foregoing may
otherwise increase the Subordinated Amounts above their Required Subordinated
Amount requirements even without the application of any Net Monthly Excess
Cashflow.
The Pooling and Servicing Agreement provides that, on any Distribution
Date, all unscheduled collections on account of principal (other than any such
amount applied to the payment of a Subordination Reduction Amount) with respect
to Mortgage Loans in the related Loan Group during the period beginning on the
second day of the calendar month preceding the calendar month in which such
Distribution Date occurs, and ending on the first day of the calendar month in
which such Distribution Date occurs (the "Due Period") will be distributed to
the Holders of the related Class A Certificates on such Distribution Date. If
any Mortgage Loan became a Liquidated Mortgage Loan (as defined below) during
such Due Period, the net Liquidation Proceeds (as defined in the Prospectus)
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
"Liquidated Loan Loss." 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). In addition, the Pooling and
Servicing Agreement provides that the principal balance of any Mortgage Loan
after it becomes a Liquidated Mortgage Loan shall equal zero. The Pooling and
Servicing Agreement does not contain any rule which requires that the amount of
any Liquidated Loan Loss be distributed to the Holders of the related Class A
Certificates on the Distribution Date which immediately follows the event of
loss; in other words, the Pooling and Servicing Agreement does not require the
current recovery of losses. However, the occurrence of a Liquidated Loan Loss
will reduce the Subordinated Amount, which, to the extent that such reduction
causes the Subordinated Amount to be less than the related Required 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 Required Subordinated Amount).
The effect of the foregoing is to allocate losses to the Holders of the related
Group I or Group II 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 Certificate Insurance Policies. The Pooling
and Servicing Agreement defines a "Subordination Deficit' with respect to a
Distribution Date to be the amount, if any, by which (x) the aggregate
Certificate Principal Balance of the related Class A Certificates as of such
Distribution Date, and following the making of all distributions to be made on
such Distribution Date (except for any payment to be made as to principal from
proceeds of the related Certificate Insurance Policy), exceeds (y) the aggregate
Principal Balances of the Mortgage Loans in the related Loan Group as of the
close of business on
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the preceding Due Date and the amount of funds in the related Pre-Funding
Account on such Distribution Date. The Pooling and Servicing Agreement requires
the Trustee to make a claim for an Insured Payment under the related Certificate
Insurance Policy not later than the second Business Day prior to any
Distribution Date as to which the Trustee has determined that a Subordination
Deficit will occur with respect to a Loan Group for the purpose of applying the
proceeds of such Insured Payment as a payment of principal to the Holders of the
related Class A Certificates on such Distribution Date. Investors in the Class A
Certificates should realize that, under extreme loss or delinquency scenarios,
they may temporarily receive no distributions of principal.
Cross-Collateralization Feature. In the event that on any Distribution
Date after giving effect to distributions pertaining to a particular Loan Group
and its related Certificates (except for any payment to be made as principal
from proceeds of the related Certificate Insurance Policy), either a
Reimbursement Amount exists with respect to either Loan Group or a Subordination
Deficit exists with respect to Loan Group II or the Subordinated Amount with
respect to Loan Group II would be less than the related Required Subordinated
Amount (such difference, a "Cross-Collateralized Subordination Shortfall"), the
Class A-2 Certificates or the Certificate Insurer, as the case may be, will be
entitled to receive an additional payment (a "Cross-Collateralization Payment")
in respect of principal to the extent of such Subordination Deficit or
Cross-Collateralized Subordination Shortfall or as reimbursement of the
Reimbursement Amount, as the case may be, out of funds then on deposit in the
Certificate Account for the other Loan Group that are otherwise payable on such
Distribution Date to the Subordinate Certificates related to such other Loan
Group.
PRIORITY OF PAYMENT
On each Distribution Date, the Trustee shall make the following
distributions, to the extent of funds on deposit in the related Certificate
Account with respect to each Loan Group and the amount of Insured Payments and
Cross-Collateralization Payments (if applicable) to be made on such Distribution
Date, as distributed separately with respect to the Group I and Group II
Certificates:
(a) to the Certificate Insurer, the Premium Amount (as defined herein)
with respect to such Loan Group;
(b) to the Trustee, an amount equal to the Trustee's Fees then due to
it with respect to such Loan Group;
(c) to the Certificate Insurer the lesser of (x) an amount equal to
(i) the amount then on deposit in the related Certificate Account remaining
after the foregoing distributions minus (ii) the Insured Distribution
Amount for such Distribution Date and (y) the amount of all Insured
Payments and other payments made by the Certificate Insurer pursuant to the
related Certificate Insurance Policy (together with interest thereon at the
Pass-Through Rate for the related Class A Certificates) which have not been
previously repaid (the "Reimbursement Amount") as of such Distribution
Date;
(d) from amounts then on deposit in the related Certificate Account
(including any Insured Payments), to the related Class A Certificateholders
an amount equal to the related Class A Interest Distribution Amount (as
described below), distributed on a pro rata basis to the related Class A
Certificateholders as described below;
(e) from amounts then on deposit in the related Certificate Account
(including any related Insured Payments), to the related Class A
Certificateholders an amount equal to the related Class A Principal
Distribution Amount (as described below) to the extent not covered by
payments to be made pursuant to clause (f) below with respect to a
Subordination Deficit allocated as described below;
(f) from amounts then on deposit in the Certificate Account related to
the Group I Loans, to the Class A-2 Certificateholders, an amount equal to
the Cross-Collateralization Payments required to be made on such
Certificates on such Distribution Date;
(g) from amounts then on deposit in the Certificate Accounts related
to the Group I Loans and the Group II Loans, to the Certificate Insurer, an
amount equal to the Cross-Collateralization Payments
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required to be made to the Certificate Insurer from such Certificate
Account on such Distribution Date, to the extent the Certificate Insurer
has not been reimbursed pursuant to clause (c) above;
(h) to the Class A-1 Certificates, an amount equal to the lesser of
(i) any amount then remaining in the related Certificate Account after the
applications described in clauses (a) through (g) above and (ii) the
aggregate Group I Class A Available Funds Cap Carry-Forward Amount for such
Distribution Date shall be paid to the Class A-1 Certificateholders on
account of the Group I Class A Available Funds Cap Carry-Forward Amount, if
any; and
(i) from amounts then on deposit in the related Certificate Account,
to the Holders of the related Group I or Group II Subordinate Certificates,
the amount remaining on such Distribution Date, if any.
CLASS A INTEREST DISTRIBUTION AMOUNTS
On each Distribution Date, holders of each class of Class A Certificates
will be entitled to receive interest distributions in an amount equal to the sum
of (a) interest accrued for the related Accrual Period (as defined below) on the
related Certificate Principal Balance thereof immediately prior to such
Distribution Date at the then-applicable related Pass-Through Rate (to the
extent of the amounts remaining for distributions after payments under clauses
(a) through (c) under "-- Priority of Payment" above), as reduced by shortfalls
caused by the Relief Act (as defined in the Prospectus) or the failure of the
Master Servicer to cover Prepayment Interest Shortfalls to the extent described
herein, with all such reductions allocated among the related Class A
Certificates in proportion to their respective amounts of related Class A
Interest Distribution Amount (as defined below) which would have resulted absent
such reductions and (b) the Group I Class A Carry-Forward Amount or Group II
Class A Carry-Forward Amount, as applicable, allocable to interest. The
aggregate amount of interest allocable to the Class A-1 Certificates and Class
A-2 Certificates as determined separately (the related "Class A Interest
Distribution Amount") will be allocable to the related Class A Certificates on a
pro rata basis in proportion to the amount of interest payable thereon. The
Class A Interest Distribution Amount with respect to the Class A-1 Certificates
is calculated on the basis of a 360-day year and the actual number of days
elapsed, provided that, for any Distribution Date for which clause (ii) of the
related definition of Pass-Through Rate is applicable, the Class A Interest
Distribution Amount will be calculated on the basis of a 30-day month. The Class
A Interest Distribution Amount with respect to the Class A-2 Certificates is
calculated on the basis of a 360-day year and a 30-day month.
With respect to any Distribution Date and the Class A-1 Certificates and
Class A-2 Certificates, the sum of the related Class A Interest Distribution
Amount and the amount of the related Subordination Deficit, if any, with respect
to such Distribution Date is the related "Insured Distribution Amount" for such
Distribution Date.
For each Distribution Date, (i) with respect to the Class A-1 Certificates,
the "Accrual Period" is the period commencing on the Distribution Date
immediately preceding the month on which such Distribution Date occurs and
ending on the calendar day immediately preceding such Distribution Date, except
with respect to the first Distribution Date, which has an accrual period from
, 199 to , 199 and (ii) with respect to the
Class A-2 Certificates, the "Accrual Period" is the previous calendar month.
With respect to the Class A-1 Certificates, the "Group I Class A
Carry-Forward Amount" as of any Distribution Date equals the sum of (a) the
amount, if any, by which (i) the related Insured Distribution Amount for the
immediately preceding Distribution Date exceeded (ii) the amount actually
distributed to the Holders of the Class A-1 Certificates on such Distribution
Date in respect thereof (including, without Imitation, amounts paid under a
Certificate Insurance Policy) and (b) 30 days' interest on such amount at the
Pass-Through Rate applicable to the Class A-1 Certificates for such Distribution
Date. The Group I Class A Carry-Forward Amount does not include any Group I
Class A Available Funds Cap Carry-Forward Amount.
The "Class A-1 Formula Pass-Through Rate" for a Distribution-Date is the
lesser of (x) the rate determined by clause (i) of the definition of
Pass-Through Rate for the Class A-1 Certificates on such Distribution Date and
(y) the weighted average of Net Lifetime Rate Caps of the Group I Loans. The Net
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Lifetime Rate Cap on each Group I Loan is equal to the related Lifetime Rate Cap
minus the sum of the Servicing FeeRate and the rates per annum at which the
Trustee's Fee and the Premium Amount accrue.
The Pooling and Servicing Agreement provides that if the Pass-Through Rate
on the Class A-1 Certificates is less than the Class A-1 Formula Pass-Through
Rate and any resulting shortfall in interest is not paid on such Distribution
Date from any available Net Monthly Excess Cashflow, as described below, then
the amount of any such shortfall will be carried forward and be paid to the
extent of available funds, as described herein, to the Holders of the Class A-1
Certificates on future Distribution Dates and shall accrue interest at the
applicable Class A-1 Formula Pass-Through Rate, until paid (such shortfall,
together with such accrued interest, the "Group I Class A Available Funds Cap
Carry-Forward Amount"). The Certificate Insurance Policy does not cover the
Group I Class A Available Funds Cap Carry-Forward Amount, nor do the ratings
assigned to the Class A-1 Certificates address the payment of the Group I Class
A Available Funds Cap Carry-Forward Amount.
With respect to the Class A-2 Certificates, the "Group II Class A
Carry-Forward Amount" as of any Distribution Date equals the sum of (a) the
amount, if any, by which (i) the related Insured Distribution Amount for the
immediately preceding Distribution Date exceeded (ii) the amount actually
distributed to the Holders of the Class A-2 Certificates on such Distribution
Date in respect thereof (including, without limitation, amounts paid under a
Certificate Insurance Policy) and (b) 30 days' interest on such amount at the
Pass-Through Rate applicable to the Class A-2 Certificates for such Distribution
Date.
The "Prepayment Interest Shortfall" for any Distribution Date is equal to
the aggregate shortfalls if any, in collections of interest (minus the related
Servicing Fee) resulting from Mortgagor prepayments on the Mortgage Loans during
the preceding calendar month. Such shortfalls will result because interest on
prepayments in full is distributed only to the date of prepayment, and because
no interest is distributed on prepayments in part, as such prepayments in part
are applied to reduce the outstanding principal balance of the related Mortgage
Loans as of the Due Date in the month of prepayment. However, with respect to
any Distribution Date, any Prepayment Interest Shortfalls resulting from full or
partial prepayments during the preceding calendar month will be offset by the
Master Servicer, but only to the extent such Prepayment Interest Shortfalls do
not exceed an amount equal to the Servicing Fee payable to the Master Servicer
in respect of its servicing activities with respect to such Distribution Date.
See "Servicing of Mortgage Loans -- Servicing Compensation and Payment of
Expenses" herein. An amount equal to the Class A Certificates' pro rata share,
based on the amount of interest payable on each such class, of any Prepayment
Interest Shortfalls not so covered by the Master Servicer will be made available
by the Certificate Insurer for distribution to the Class A Certificateholders.
The Pass-Through Rate on the Class A-1 Certificates is adjustable and is
calculated as follows: beginning on the Distribution Date in 199 ,
and on each Distribution Date thereafter, the Pass-Through Rate on the Class A-1
Certificates will be adjusted to equal the lesser of (i) (a) with respect to any
Distribution Date which occurs on or prior to the date on which the aggregate
Principal Balance of the Mortgage Loans is less than % of the sum of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date and the
Original Pre-Funded Amounts, One-Month LIBOR (as defined in "Description of the
Certificates -- Calculation of One-Month LIBOR" below) plus % or (b) with
respect to any Distribution Date thereafter, One-Month LIBOR plus % and (ii)
the Group I Class A Available Funds Pass-Through Rate.
The "Group I Class A Available Funds Pass-Through Rate," as of any
Distribution Date, is equal to (i) the weighted average of the Mortgage Rates of
the Group I Loans, minus (ii) the sum of the Servicing Fee Rate and the rates
per annum at which the Trustee's Fee and Premium Amount accrue and minus (iii)
commencing on the seventh Distribution Date, % per annum.
The Pass-Through Rate with respect to the Class A-2 Certificates is equal
to (i) with respect to any Distribution Date which occurs on or prior to the
date on which the aggregate Principal Balance of the Mortgage Loans is less than
% of the sum of the aggregate Principal Balance of the Mortgage Loans as of
the Cut-off Date and the Original Pre-Funded Amounts, % per annum, and (ii)
with respect to any Distribution Date thereafter, % per annum.
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As described herein, the Class A Interest Distribution Amounts allocable to
the Class A Certificates is based on the Certificate Principal Balances thereof
immediately prior to the related Distribution Date. The Certificate Principal
Balance of any Class A Certificate as of any date of determination is equal to
the initial Certificate Principal Balance thereof, reduced as described herein
with respect to such Certificate.
On any Distribution Date, the amount of the premium (the "Premium Amount")
payable to the Certificate Insurer is equal to one-twelfth of the product of a
percentage specified in an exhibit to the Pooling and Servicing Agreement and
the Certificate Principal Balance of the Class A Certificates.
CALCULATION OF ONE-MONTH LIBOR
With respect to the first Distribution Date, on the Delivery Date, and,
with respect to each Distribution Date thereafter, on the second LIBOR Business
Day preceding such Distribution Date (each such date, an "Interest Determination
Date"), One-Month LIBOR shall be established by the Trustee and as to any
Accrual Period, One-Month LIBOR with respect to the Class A-1 Certificates will
equal the rate for United States dollar deposits for one month which appears on
the Telerate Screen Page 3750 as of 11:00 A.M., London time, on such Interest
Determination Date. "Telerate Screen Page 3750" means the display designated as
page 3750 on the Telerate Service (or such other page as may replace page 3750
on that service for the purpose of displaying London interbank offered rates of
major banks). If such rate does not appear on such page (or such other page as
may replace that page on that service, or if such service is no longer offered,
such other service for displaying One-Month LIBOR or comparable rates as may be
selected by the Trustee), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the Trustee) as of 11:00 A.M., London time, on the Interest
Determination Date, to prime banks in the London interbank market for a period
of one month in amounts approximately equal to the aggregate Certificate
Principal Balance of the Class A-1 Certificates. The Trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If at least two such quotations are provided, the rate will be the
arithmetic mean of the quotations. If on such date fewer than two quotations are
provided as requested, the rate will be the arithmetic mean of the rates quoted
by one or more major banks in New York City, selected by the Trustee, as of
11:00 A.M., New York City time, on the Interest Determination Date, for loans in
U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the aggregate Certificate Principal Balance of the Class
A-1 Certificates. If no such quotations can be obtained, the rate will be
One-Month LIBOR for the prior Distribution Date. "LIBOR Business Day" means any
day other than (i) a Saturday or a Sunday or (ii) a day on which banking
institutions in the city of London, England are required or authorized by law to
be closed.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable to
the Class A-1 Certificates for the related Accrual Period shall (in the absence
of manifest error) be final and binding.
CLASS A PRINCIPAL DISTRIBUTION AMOUNT
Holders of the Class A Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the amounts remaining for
distribution after payments under clauses (a) through (d) under "-- Priority of
Payment" above, an amount (as determined separately for the Class A-1
Certificates and Class A-2 Certificates, the related "Class A Principal
Distribution Amount"), in reduction of the Certificate Principal Balance thereof
as described below, which equals the sum of (i) the portion of any Group I Class
A Carry-Forward Amount or Group II Class A Carry-Forward Amount, as applicable,
which relates to a shortfall in a distribution of a related Subordination
Deficit, (ii) all scheduled installments of principal in respect of the Mortgage
Loans in the related Loan Group received or advanced during the related Due
Period, together with all unscheduled recoveries of principal on such Mortgage
Loan received by the Master Servicer during the prior calendar month, (iii) the
Principal Balance of each Mortgage Loan in the related Loan Group that was
repurchased by either the Seller or by the Depositor, (iv) any amounts delivered
by the Depositor on the Master Servicer Remittance Date (as defined herein) in
connection with a substitution of a Mortgage
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Loan in the related Loan Group, (v) the net Liquidation Proceeds (as defined in
the Prospectus) collected by the Master Servicer of all Mortgage Loans in the
related Loan Group during the prior calendar month (to the extent such net
Liquidation Proceeds are related to principal), (vi) the amount of any related
Subordination Deficit for such Distribution Date, (vii) the proceeds received by
the Trustee of any termination of the related Loan Group (to the extent such
proceeds are related to principal), (viii) the amount of any related
Subordination Increase Amount (as defined herein) for such Distribution Date,
and (ix) with respect to the Class A-1 Certificates and Class A-2 Certificates,
with respect to the Distribution Date occurring in 199 , any amounts
in the related Pre-Funding Account after giving effect to any purchase of
related Subsequent Mortgage Loans; minus (x) the amount of any related
Subordination Reduction Amount (as defined herein) for such Distribution Date.
In no event will the Class A Principal Distribution Amount with respect to
any Distribution Date be (x) less than zero or (y) greater than the then
outstanding Certificate Principal Balance of the Class A Certificates.
Distributions of the Class A Principal Distribution Amount with respect to
the Class A-1 Certificates will be allocated to the Class A-1 Certificates in
reduction of the Certificate Principal Balance thereof, until such Certificate
Principal Balance has been reduced to zero. Distributions of the Class A
Principal Distribution Amount with respect to the Class A-2 Certificates will be
allocated to the Class A-2 Certificates in reduction of the Certificate
Principal Balance thereof, until such Certificate Principal Balance has been
reduced to zero.
The "Master Servicer Remittance Date" with respect to any Distribution Date
is the 18th day of the month in which such Distribution Date occurs, or if such
18th day is not a business day, the business day immediately preceding such 18th
day.
The "Principal Balance" of any Mortgage Loan as of any date of
determination is the principal balance of such Mortgage Loan as of the Due Date
preceding such date of determination, as such principal balance is specified for
such Due Date in the amortization schedule, (before any adjustment to such
amortization schedule by reason of any bankruptcy (other than Deficient
Valuations (as defined in the Prospectus)) or similar proceeding or any
moratorium or similar waiver or grace period) after giving effect to prepayments
received prior to such Due Date, Deficient Valuations incurred prior to such Due
Date, and to the payment of principal due on such Due Date and irrespective of
any delinquency in payment by the related Mortgagor. The Principal Balance of a
Mortgage Loan which becomes a Liquidated Mortgage Loan (as defined herein) on or
prior to such Due Date shall be zero.
See "Summary -- Special Prepayment Considerations" and "-- Special Yield
Considerations" and "Yield and Prepayment Considerations" herein.
ADVANCES
Prior to each Distribution Date, the Master Servicer is required to make
Advances with respect to any payments of principal and interest (net of the
related servicing fees) which were due on the Mortgage Loans on the immediately
preceding Due Date and have not been received as of the business day immediately
preceding the related Master Servicer Remittance Date. Such Advances are
required to be made by the Master Servicer only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making such Advances is to
maintain a regular cash flow to the Certificateholders, to maintain a specified
level of overcollateralization and to pay the premium due the Certificate
Insurer and to pay the Trustee, rather than to guarantee or insure against
losses. The Master Servicer will not be required to make any advances with
respect to reductions in the amount of the monthly payments on the Mortgage
Loans due to application of the Relief Act. Any failure by the Master Servicer
to make an Advance as required under the Pooling and Servicing Agreement will
constitute an Event of Default thereunder, in which case the Trustee, as
successor servicer, will be obligated to make any such Advance, in accordance
with the terms of the Pooling and Servicing Agreement.
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All Advances will be reimbursable to the Master Servicer making the Advance
subject to certain conditions and restrictions from late collections, insurance
proceeds and liquidation proceeds from the Mortgage Loan as to which such
unreimbursed Advance was made.
CERTIFICATE GUARANTY INSURANCE POLICIES
The following information regarding the Certificate Insurance Policies has
been supplied by the Certificate Insurer for inclusion in this Prospectus
Supplement.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Insurance Policies, thereby
unconditionally and irrevocably guarantees to any Owner (as defined below) that
an amount equal to each full and complete Insured Payment (as defined below)
will be received by the Trustee, or its successor as Trustee for the Owners, on
behalf of the Owners from 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 Certificate Insurance
Policies 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 the Certificate Insurance
Policies, 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.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policies
do not cover shortfalls, if any, attributable to the liability of the Trust
Fund, the REMIC or the Trustee for withholding taxes, if any (including interest
and penalties in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount (as described below) on the Business Day following receipt on a Business
Day by the Fiscal Agent (as described below) of (i) a certified copy of the
order requiring the return of a preference payment, (ii) an opinion of counsel
satisfactory to the Certificate Insurer that such order is final and not subject
to appeal, (iii) an assignment in such form as is reasonably required by the
Certificate Insurer, irrevocably assigning to the Certificate Insurer all rights
and claims of the Owner relating to or arising under the Class A Certificates
against the debtor which made such preference payment or otherwise with respect
to such preference payment and (iv) appropriate instruments to effect the
appointment of the Certificate Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Certificate Insurer, provided that if such documents are
received after 12:00 noon New York City time on such Business Day, they will be
deemed to be received on the following Business Day. Such payments shall be
disbursed to the receiver or trustee in bankruptcy named in the final order of
the court exercising jurisdiction on behalf of the Owner and not to any Owner
directly unless such Owner has returned principal or interest paid on the Class
A Certificates to such receiver or trustee in bankruptcy, in which case such
payment shall be disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policies no later than 12:00 noon, New York City time, on
the later of the Distribution Date on which the related Insured Payment is due
or the Business Day following receipt in New York, New York on a Business Day by
, as the Certificate Insurer's Fiscal Agent or any successor fiscal
agent appointed by the Certificate Insurer (the "Certificate Insurer's Fiscal
Agent") of a Notice (as described below); provided that if such Notice is
received after 12:00 noon, New York City time, on such Business Day, it will be
deemed to be received on the following Business Day. If any such Notice received
by the Certificate Insurer's Fiscal Agent is not in proper form or is otherwise
insufficient for the purpose of making a claim under any Certificate Insurance
Policy it shall be deemed not to have been received by the Certificate Insurer's
Fiscal Agent for purposes of this paragraph, and the Certificate Insurer or the
Certificate Insurer's Fiscal Agent, as the case may be, shall promptly so advise
the Trustee and the Trustee may submit an amended Notice.
Insured Payments due under the Certificate Insurance Policies, unless
otherwise stated therein, will be disbursed by the Certificate Insurer's Fiscal
Agent to the Trustee on behalf of the Owners by wire transfer of immediately
available funds in the amount of the Insured Payment less, in respect of Insured
Payments
S-41
<PAGE> 199
related to Preference Amounts, any amount held by the Trustee for the payment of
such Insured Payment and legally available therefor.
The Certificate Insurer's Fiscal Agent is the agent of the Certificate
Insurer only and the Certificate Insurer's Fiscal Agent shall in no event be
liable to Owners for any acts of the Certificate Insurer's Fiscal Agent or any
failure of the Certificate Insurer to deposit, or cause to be deposited,
sufficient funds to make payments due under the Certificate Insurance Policies.
As used in the Certificate Insurance Policies, the following terms shall
have the following meanings:
"Business Day" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee under the Pooling and Servicing Agreement
is located are authorized or obligated by law or executive order to close.
"Insured Payment" means (i) as of any Distribution Date, an amount equal to
the sum of (a) the related Class A Interest Distribution Amount minus the
related Available Funds and (b) the related Subordination Deficit (to the extent
not covered, with respect to the Class A-2 Certificates, by
Cross-Collateralization Payments) and (ii) the related unpaid Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to each
Certificate Insurance 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 related Class A Certificateholder (as defined in the
Pooling and Servicing Agreement) who, on the applicable Distribution Date, is
entitled under the terms of the applicable Class A Certificate, to payment under
the related Certificate Insurance Policy.
"Preference Amount" means any amount previously distributed to an Owner on
the related Class A Certificates that is recoverable and sought to be recovered
as a voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.), as amended from time to time in accordance
with a final nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Certificate Insurance Policies and not
otherwise defined in the Certificate Insurance Policies shall have the
respective meanings set forth in the Pooling and Servicing Agreement as of the
date of execution of the Certificate Insurance Policies, without giving effect
to any subsequent amendment or modification to the Pooling and Servicing
Agreement unless such amendment or modification has been approved in writing by
the Certificate Insurer.
Any notice under the Certificate Insurance Policies or service of process
on the Certificate Insurer's Fiscal Agent may be made at the address listed
below for the Certificate Insurer's Fiscal Agent or such other address as the
Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Certificate Insurer's Fiscal Agent is
, Attention: , or such other address as the Certificate
Insurer's Fiscal Agent shall specify to the Trustee in writing.
The Certificate Insurance Policies are 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 the Certificate Insurance Policies is not covered
by the Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law.
The Certificate Insurance Policies are not cancelable for any reason. The
premium on each of the Certificate Insurance Policies is not refundable for any
reason including payment, or provision being made for payment, prior to maturity
of the Class A Certificates.
MANDATORY PREPAYMENTS ON CLASS A-1 CERTIFICATES AND CLASS A-2 CERTIFICATES
The Class A-1 Certificates and Class A-2 Certificates will be prepaid on
the 199 Distribution Date to the extent that any amount remains on
deposit in the related Pre-Funding Account on
S-42
<PAGE> 200
such Distribution Date. Although no assurance can be given, it is anticipated by
the Depositor that the principal amount of Subsequent Mortgage Loans sold to the
Trust Fund will require the application of substantially all of the related
Original Pre-Funded Amount and that there should be no material amount of
principal prepaid to the Class A-1 Certificateholders and Class A-2
Certificateholders from the Pre-Funding Accounts. However, it is unlikely that
the Depositor will be able to deliver Subsequent Mortgage Loans for Loan Group I
and Loan Group II with an aggregate principal balance identical to the related
Original Pre-Funded Amount.
INTEREST COVERAGE ACCOUNT
The Depositor will establish for the benefit of Class A-1
Certificateholders and Class A-2 Certificateholders two trust accounts (the
"Group I Interest Coverage Account" and the "Group II Interest Coverage
Account"; and together the "Interest Coverage Accounts"). On the Delivery Date,
the Depositor will deposit in each such account a cash amount as required by the
Certificate Insurer and specified in the Pooling and Servicing Agreement. On
each Distribution Date during the Funding Period and on the Distribution Date
immediately following, funds on deposit in the Interest Coverage Accounts will
be applied by the Trustee to cover shortfalls in the Group I and Group II Class
A Interest Distribution Amount attributable to the pre-funding feature during
the related Funding Period. Such shortfall initially will exist during the
Funding Period because while the Class A-1 Certificateholders and Class A-2
Certificateholders are entitled to receive interest accruing on the Certificate
Principal Balance of the Class A-1 Certificates and Class A-2 Certificates, the
Certificate Principal Balance of the Class A Certificates during the Funding
Period will be greater than the aggregate principal balance of the related
Mortgage Loans on the Delivery Date. On the first business day following the
first Distribution Date following the termination of the related Funding Period,
funds on deposit in the related Interest Coverage Account will be released by
the Trustee to the Depositor.
[NAME OF INSURER]
The following information about this Certificate Insurer has been supplied
by the Certificate Insurer for inclusion in this Prospectus Supplement:
.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Certificate Insurance Policies and the
Certificate Insurer set forth under the heading "Description of the
Certificates -- Certificate Guaranty Insurance Policies" and "[Name of
Insurer]." The Certificate Insurer makes no additional representations regarding
the Class A Certificates or the advisability of investing in the Class A
Certificates.
rates the claims paying ability of the
Certificate Insurer " ."
rates the claims paying ability of the
Certificate Insurer " ."
rates the claims paying ability of the
Certificate Insurer " ."
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Class A
Certificates and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Class A
Certificates. The Certificate Insurer does not guaranty the market price of the
Class A Certificates nor does it guaranty that the ratings on the Class A
Certificates will not be reversed or withdrawn.
S-43
<PAGE> 201
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity and the aggregate amount of distributions on the
Class A Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans in the related Loan Group and the amount, if any,
distributed from the related Pre-Funding Account at the end of the related
Funding Period. Such yield may be adversely affected by a higher or lower than
anticipated rate of principal payments on the Mortgage Loans in the related Loan
Group. The rate of principal payments on such Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans, the rate and
timing of principal prepayments thereon by the Mortgagors, liquidations of
defaulted Mortgage Loans and purchases of Mortgage Loans in the related Loan
Group due to certain breaches of representations or warranties. The timing of
changes in the rate of prepayments, liquidations and purchases of the Mortgage
Loans in the related Loan Group may, and the timing of losses on the Mortgage
Loans in the related Loan Group will, significantly affect the yield on the
related Class A Certificates to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the Mortgage
Loans in the related Loan Group will depend on future events and on a variety of
factors (as described herein and in the Prospectus under "Yield and Prepayment
Considerations"), no assurance can be given as to such rate or the timing of
principal payments on the related Class A Certificates.
The Mortgage Loans may be prepaid by the mortgagors at any time; [however,
a majority of the Mortgage Loans in each Loan Group are subject to a prepayment
charge for prepayments.] See "The Mortgage Pool" herein. In addition, the
Mortgage Loans contain a provision that may result in the acceleration of the
payment of the Mortgage Loan in the event of the transfer or sale of the related
Mortgaged Property. Prepayments, liquidations and purchases of the Mortgage
Loans in the related Loan Group will result in distributions to holders of the
related Class A Certificates of principal amounts which would otherwise be
distributed over the remaining terms of the Mortgage Loans in the related Loan
Group. Factors affecting prepayment (including defaults and liquidations) of
mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties, changes in the
value of the mortgaged properties, mortgage market interest rates, solicitations
and servicing decisions. In addition, if prevailing mortgage rates fell
significantly below the Mortgage Rates on the Mortgage Loans, the rate of
prepayments (including refinancings) would be expected to increase. Conversely,
if prevailing mortgage rates rose significantly above the Mortgage Rates on the
Mortgage Loans, the rate of prepayments on the Mortgage Loans would be expected
to decrease.
In addition, the yield to maturity on the Class A Certificates will depend
on, among other things, the price paid by the holders of the Class A
Certificates and the related Pass-Through Rate. The extent to which the yield to
maturity of a Class A Certificate is sensitive to prepayments will depend, in
part, upon the degree to which it is purchased at a discount or premium. In
general, if a class of Class A Certificates is 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 purchase. Conversely, if a class of Class A
Certificates is 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 assumed at the time of
purchase. For additional considerations relating to the yield on the
Certificates, see "Yield and Prepayment Considerations" in the Prospectus.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on Mortgage Loans which are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Furthermore, the
rate and timing of prepayments, defaults and liquidations on the Mortgage Loans
will be affected by the general economic condition of the region of the country
in which the related Mortgaged Properties are located. The risk of delinquencies
and loss is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. See "Yield and Prepayment
Considerations" in the Prospectus.
S-44
<PAGE> 202
To the extent that the Original Pre-Funded Amounts have not been fully
applied to the purchase of Subsequent Mortgage Loans by the Trust Fund by the
end of the Funding Period, the Holders of the related Class A-1 Certificates and
Class A-2 Certificates will receive on the first Distribution Date following the
termination of the Funding Period a prepayment of principal in an amount equal
to the lesser of (i) the related Pre-Funded Amount remaining in the related
Pre-Funding Account and (ii) the outstanding Certificate Principal Balance of
the related Class A Certificates. Although no assurance can be given, it is
anticipated by the Depositor that the principal amount of Subsequent Mortgage
Loans sold to the Trust Fund will require the application of substantially all
amounts on deposit in the Pre-Funding Accounts and that there will be no
material amount of principal prepaid to the Class A-1 Certificateholders and
Class A-2 Certificateholders. However, it is unlikely that the Depositor will be
able to deliver Subsequent Mortgage Loans with an aggregate principal balance
identical to the related Pre-Funded Amounts.
The following discussion assumes the characteristics set forth in the
tables below. The Final Scheduled Maturity Date for the Class A Certificates is
as follows: Class A-1 Certificates, , 20 ; Class A-2 Certificates,
, 20 . Such Final Scheduled Maturity Dates (i) with respect to the
Class A-1 Certificates is based on a CPR and (ii) with respect to
the Class A-2 Certificates is based on a Prepayment Assumption, in
each case with no Net Monthly Excess Cashflow used to make accelerated payments
of principal on such classes of Class A Certificates and in each case assuming
that a subsequent Mortgage Loan in the related Loan Group has a first Due Date
of , 199 , and amortizes according to its fully amortizing term of
months, plus twelve months. The weighted average life of the Class A
Certificates is likely to be shorter than would be the case if payments actually
made on the Mortgage Loans conformed to the foregoing assumption, and the final
Distribution Date with respect to the Class A Certificates could occur
significantly earlier than the Final Scheduled Maturity Date because (i)
prepayments (including, for this purpose, prepayments attributable to
foreclosure, liquidation, repurchase and the like) on Mortgage Loans are likely
to occur, (ii) in the case of the Class A-1 Certificates and the Class A-2
Certificates, twelve months have been added to obtain the Final Scheduled
Maturity Date above, and (iii) the holder of a majority interest in the Class R
Certificates or the Master Servicer may cause a liquidation of the Mortgage
Loans when the aggregate outstanding principal amount of the Mortgage Loans is
less than 10% (5% with respect to the Master Servicer (or the Certificate
Insurer, if is removed as Master Servicer)) of the sum of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date and the
aggregate principal balance of the Subsequent Mortgage Loans as of the related
Subsequent Cut-off Date.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security is scheduled to be repaid to an investor (assuming no losses). The
weighted average life of the Class A Certificates will be influenced by the rate
at which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes liquidations due to default). Prepayments on mortgage loans are
commonly measured relative to a prepayment standard or model. The model used in
this Prospectus Supplement with respect to the Class A-1 Certificates is a
constant prepayment assumption ("CPR"), which represents an assumed constant
rate of prepayment, each month relative to the then outstanding principal
balance of the pool of mortgage loans for the life of such mortgage loans. The
model used in this Prospectus Supplement with respect to the Class A-2
Certificates is a prepayment assumption (the "Prepayment Assumption"), which
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of the pool of mortgage loans for the life of such
mortgage loans. A 100% Prepayment Assumption assumes a conditional prepayment
rate of % per annum of the outstanding principal balance of such mortgage
loans in the first month of the life of the mortgage loans and an additional
approximate % (precisely ) (expressed as a percentage per annum)
in each month thereafter until the twelfth month; beginning in the twelfth month
and in each month thereafter during the life of the mortgage loans, a
conditional prepayment rate of % per annum each month is assumed. As used in
the table below, a % CPR or a % Prepayment Assumption assumes a prepayment
rate equal to % CPR or % of the Prepayment Assumption, i.e., no prepayments.
Correspondingly, % Prepayment Assumption assumes prepayment rates equal to %
of the Prepayment Assumption, and so forth. Neither CPR nor the
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<PAGE> 203
Prepayment Assumption purports to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans.
The following tables have been prepared assuming that Loan Group I and Loan
Group II are comprised of Mortgage Loans having the following characteristics
(dollar amounts are approximate):
LOAN GROUP I
(i) the 1st through th hypothetical Mortgage Loans set forth below
comprise the Initial Group I Loans included in Loan Group I and the th
hypothetical Mortgage Loan set forth below comprises the Subsequent Mortgage
Loans included in Loan Group I:
<TABLE>
<CAPTION>
ORIGINAL MONTHS TO REMAINING
TERMS TO NEXT RATE TERM TO GROSS GROSS GROSS
PRINCIPAL MATURITY MORTGAGE ADJUSTMENT MATURITY GROSS LIFETIME LIFETIME PERIODIC
NET MORTGAGE BALANCE RATE (IN MONTHS) DATE (IN MONTHS) RATE MARGIN CAP FLOOR CAP
------------ ------------ ----------- --------- ----------- -------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
(ii) the th hypothetical Mortgage Loan set forth above has an initial Due
Date of , 199 ; however, on the Delivery Date, an amount equal to
interest at % per annum on the principal balance of the Mortgage Loan will be
deposited into the related Certificate Account and will be available for the
Distribution Date occurring in 199 .
LOAN GROUP II
(i) the 1st through th and the th hypothetical Mortgage Loans set
forth below comprise the Initial Group II Loans included in Loan Group II and
the th hypothetical Mortgage Loan set forth below comprises the Subsequent
Mortgage Loans included in Loan Group II:
<TABLE>
<CAPTION>
REMAINING ORIGINAL
TERM TO TERM TO
MATURITY MATURITY
PRINCIPAL BALANCE MORTGAGE RATE NET MORTGAGE RATE (IN MONTHS) (IN MONTHS)
----------------- ------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
</TABLE>
(ii) the th hypothetical Mortgage Loan set forth above has an initial Due
Date of , 199 ; however, on the Delivery Date an amount equal to
the interest at % per annum on the principal balance of the Mortgage Loan will
be deposited into the related Certificate Account and will be available for the
Distribution Date occurring in 199 ; (iii) the th hypothetical
Mortgage Loan is a balloon Mortgage Loan with a Balloon Payment on the th
month.]
In addition, the following tables have been prepared assuming that the Mortgage
Loans in each Loan Group have the following characteristics: (i) with respect to
the Group I Loans and Group II Loans, the Subsequent Mortgage Loans are
purchased by , 199 , resulting in no mandatory prepayment from
the Pre-Funding Accounts on the Distribution Date in , 199 ; (ii)
all calculations for the Mortgage Loans are done on the basis of a 360-day year
consisting of twelve 30-day months; (iii) with respect to the Class A
Certificates, all weighted average lives are calculated on the basis of a
360-day year and a 30-day month; (iv) Due Dates on each Mortgage Loan are the
first day of the month; (v) all scheduled monthly payments on the Mortgage Loans
are made in a timely fashion on the first day of each month, commencing in
199 , and prepayments are assumed to be received on the last day
of each month, commencing in 199 ; (vi) the Mortgage Rate for the
Group I Loans is adjusted on its next Adjustment Date and on subsequent
Adjustment Dates as necessary to a rate equal to the sum of the Index and the
related
S-46
<PAGE> 204
Gross Margin, subject to the related Periodic Rate Cap, Lifetime Rate Cap and
Lifetime Rate Floor; (vii) there are no Prepayment Interest Shortfalls; (viii)
distributions on the Class A Certificates are made on the 25th day of each
month, commencing in 199 ; (ix) the Delivery Date is
, 199 ; (x) the Index is [Six-Month LIBOR and remains constant at
% per annum and One-Month LIBOR remains constant at % per annum]; (xi) the
Required Subordinated Amounts will be set as provided in the Pooling and
Servicing Agreement; (xii) the Mortgage Loans will prepay at the indicated
assumed percentages of CPR or the Prepayment Assumption in the corresponding
order set forth below; and (xiii) and with regard to the weighted average lives
neither the holder of a majority percentage interest of the Class R Certificates
or the Master Servicer (or the Certificate Insurer, if is removed
as Master Servicer) exercises its option to terminate the Trust Fund when the
aggregate principal balance of the Mortgage Loans is reduced to less than 10%
(or 5% in the case of the Master Servicer or the Certificate Insurer) of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date and the
aggregate Principal Balance of the Subsequent Mortgage Loans as of the related
Subsequent Cut-off Date.
Based upon the foregoing assumptions, certain of which may not reflect
actual experience, the following tables indicate the projected weighted average
life of each class of Class A Certificates and the percentages of the initial
Certificate Principal Balance of each such class that would be outstanding after
each of the dates shown at various percentages of CPR and the Prepayment
Assumption which will occur simultaneously for both Loan Groups. Investors in
the Class A Certificates should note that, irrespective of the assumptions
above, including the assumption of no losses on the Mortgage Loans, the
following tables show both CPR with respect to Loan Group I and the Prepayment
Assumption with respect to Loan Group II because Cross-Collateralization
Payments will occur with respect to distributions on Loan Group I being paid to
the Group II Certificates.
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION AND CPR
CLASS A-1 CERTIFICATES
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROUP I (CPR)................................ 0% 15% 18% 20% 25% 30% 35% 40%
GROUP II (PPA)............................... 0% 50% 75% 100% 115% 125% 150% 200%
--- --- --- --- --- --- --- ---
DISTRIBUTION DATE............................
--- --- --- --- --- --- --- ---
</TABLE>
- ---------------
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Principal
Balance by the number of years from the date of issuance of the Certificate
to the related Distribution Date, (ii) adding the results and (iii) dividing
the sum by the initial Certificate Principal Balance of the Certificate.
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR AND
THE PREPAYMENT ASSUMPTION
CLASS A-2 CERTIFICATES
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROUP I (CPR)................................ 0% 15% 18% 20% 25% 30% 35% 40%
GROUP II (PPA)............................... 0% 50% 75% 100% 115% 125% 150% 200%
--- --- --- --- --- --- --- ---
DISTRIBUTION DATE............................
--- --- --- --- --- --- --- ---
</TABLE>
- ---------------
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Principal
Balance by the number of years from the date of issuance of the Certificate
to the related Distribution Date, (ii) adding the results and (iii) dividing
the sum by the initial Certificate Principal Balance of the Certificate.
S-47
<PAGE> 205
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth above,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at the
given levels of CPR or the Prepayment Assumption until maturity or that all of
the Mortgage Loans will prepay at the same level of CPR or the Prepayment
Assumption. Moreover, the diverse remaining terms to maturity of the Mortgage
Loans could produce slower or faster principal distributions than indicated in
the table at the various percentages of CPR or the Prepayment Assumption
specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between such assumptions and the
actual characteristics and performance of the Mortgage Loans, or actual
prepayment or loss experience, will affect the percentages of initial
Certificate Principal Balances outstanding over time and the weighted average
lives of the Class A Certificates.
SERVICING OF MORTGAGE LOANS
GENERAL
The Master Servicer will service the Mortgage Loans in accordance with the
terms set forth in the Pooling and Servicing Agreement. The Master Servicer may
perform any of its obligations under the Pooling and Servicing Agreement through
one or more subservicers. Notwithstanding any such subservicing arrangement, the
Master Servicer will remain liable for its servicing duties and obligations
under the Pooling and Servicing Agreement as if the Master Servicer alone were
servicing the Mortgage Loans. [As of the Closing Date, the Master Servicer will
service the Mortgage Loans without subservicing arrangements.]
The information set forth in the following section through and including
the section captioned "Delinquency Status as of , 199 " has
been provided by the Master Servicer. No representation is made by the Depositor
or any of its affiliates as to the accuracy or completeness of any such
information.
THE MASTER SERVICER
[ ] will act as the Master Servicer of the Mortgage
Loans pursuant to the Pooling and Servicing Agreement.
As of , 199 , the Master Servicer provided servicing
for approximately $ [million] in mortgage loans.
The principal executive offices of the Master Servicer are located at
. Its telephone number is ( ) - .
LOAN SERVICING
[The Master Servicer services substantially all of the mortgage loans it
originates or acquires. Servicing includes, but is not limited to, collecting
and remitting mortgage loan payments, accounting for principal and interest,
holding escrow (impound) funds for payment of taxes and insurance, making
inspections as required of the mortgaged properties, preparation of tax related
information in connection with the mortgage loans, supervision of delinquent
mortgage loans, loss mitigation efforts, foreclosure proceedings and, if
applicable, the disposition of mortgaged properties, and generally administering
the mortgage loans, for which it receives servicing fees.]
COLLECTION PROCEDURES
When a mortgagor fails to make a payment on a mortgage loan, the Master
Servicer attempts to cause the deficiency to be cured by corresponding with the
mortgagor. In most cases, deficiencies are cured promptly. Pursuant to the
Master Servicer's servicing procedures, the Master Servicer generally mails to
the mortgagor a notice of intent to foreclose after the loan becomes 31 days
past due (two payments due but not
S-48
<PAGE> 206
received) and, within 60 days thereafter, if the loan remains delinquent,
institutes appropriate legal action to foreclose on the mortgaged property.
Foreclosure proceedings may be terminated if the delinquency is cured. Mortgage
loans to borrowers in bankruptcy proceedings may be restructured in accordance
with law and with a view to maximizing recovery of such loans, including any
deficiencies.
Once foreclosure is initiated by the Master Servicer, a foreclosure
tracking system is used to monitor the progress of the proceedings. The system
includes state specific parameters to monitor whether proceedings are
progressing within the time frame typical for the state in which the mortgaged
property is located. During the foreclosure proceeding, the Master Servicer
determines the amount of the foreclosure bid and whether to liquidate the
mortgage loan.
After foreclosure, the Master Servicer may liquidate the mortgaged property
and charge-off the loan balance which was not recovered through liquidation
proceeds. If foreclosed, the mortgaged property is sold at a public or private
sale and may be purchased by the Master Servicer.
Servicing and charge-off policies and collection practices may change over
time in accordance with, among other things, the Master Servicer's business
judgment, changes in the servicing portfolio and applicable laws and
regulations.
FORECLOSURE AND DELINQUENCY EXPERIENCE
The following table summarizes the delinquency experience of mortgage loans
serviced by the Master Servicer as of , 199 . A mortgage
loan is characterized as delinquent if the borrower has not paid the minimum
payment due by the due date. The table below excludes mortgage loans where the
mortgage loan is in foreclosure or the borrower has filed for bankruptcy. The
delinquency percentages may be affected by the size and relative lack of
seasoning of the servicing portfolio because many of such loans were not
outstanding long enough to give rise to some or all of the periods of
delinquency indicated in the chart below. Accordingly, the information should
not be considered as a basis for assessing the likelihood, amount, or severity
of delinquency or losses on the Mortgage Loans, and no assurances can be given
that the foreclosure experience presented in the second paragraph below the
table will be indicative of such experience on the Mortgage Loans.
DELINQUENCY STATUS AS OF , 199
<TABLE>
<CAPTION>
DOLLARS PERCENT UNITS PERCENT
------- ------- ----- -------
<S> <C> <C> <C> <C>
Current...................................... $ % %
30-59 Days................................... $ % %
60-89 Days................................... $ % %
90+ Days..................................... $ % %
------- --- ---- ---
Total.............................. $ % %
======= === ==== ===
</TABLE>
This table does not include mortgage loans with principal
balances aggregating $ that were sold, but were being serviced on an
interim basis pending transfer of servicing, as of , 199 .
As of the date hereof, servicing with respect to such mortgage loans has been
transferred.
Delinquencies are reported on a contractual basis. As of
, 199 , mortgage loans with an aggregate principal balance
of $ were in foreclosure and, there were loans in
bankruptcy with a combined loan balance of $ .
[Over the last several years, there has been a general deterioration of the
real estate market and weakening economy in many regions of the country,
including . The general deterioration of the real estate
market has been reflected in increases in delinquencies of loans secured by real
estate, slower absorption rates of real estate into the market and lower sales
prices for real estate. The general weakening of the economy has been reflected
in decreases in the financial strength of borrowers and decreases in the value
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of collateral serving as security for loans. If the real estate market and
economy continue to decline, the Master Servicer may experience an increase in
delinquencies on the loans it services and higher net losses on liquidated
mortgage loans.]
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
[The Master Servicer will be paid a monthly fee from interest collected
with respect to each Mortgage Loan (as well as from any liquidation proceeds
from a Liquidated Mortgage Loan that are applied to accrued and unpaid interest)
equal to one-twelfth of the Stated Principal Balance thereof multiplied by the
Servicing Fee Rate (such product, the "Servicing Fee"). The Servicing Fee Rate
for each Mortgage Loan will equal % per annum. The amount of the monthly
Servicing Fee is subject to adjustment with respect to prepaid Mortgage Loans,
as described herein under "-- Adjustment to Master Servicing Fee in Connection
with Certain Prepaid Mortgage Loans." The Master Servicer is also entitled to
receive, as additional servicing compensation, amounts in respect of interest
paid on Principal Prepayments (as defined below) received from the 2nd day
through the 15th day of a month ("Prepayment Interest Excess"), all late payment
fees, assumption fees, prepayment penalties and other similar charges and all
reinvestment income earned on amounts on deposit in the Certificate Account and
Distribution Account. The Master Servicer is obligated to pay certain ongoing
expenses associated with the Mortgage Loans and incurred by the Trustee in
connection with its responsibilities under the Pooling and Servicing Agreement.]
ADJUSTMENT TO MASTER SERVICING FEE IN CONNECTION WITH CERTAIN PREPAID MORTGAGE
LOANS
When a borrower prepays a Mortgage Loan between Due Dates, the borrower is
required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Except with respect to the month of the Cut-off Date,
principal prepayments by borrowers received by the Master Servicer from the
first day through the fifteenth day of a calendar month will be distributed to
Certificateholders on the Distribution Date in the same month in which such
prepayments are received and, accordingly, no shortfall in the amount of
interest to be distributed to Certificateholders with respect to the prepaid
Mortgage Loans results. Conversely, principal prepayments by borrowers received
by the Master Servicer from the sixteenth day (or, in the case of the first
Distribution Date, from the Cut-off Date) through the last day of a calendar
month will be distributed to Certificateholders on the Distribution Date in the
month following the month of receipt and, accordingly, a shortfall in the amount
of interest to be distributed to Certificateholders with respect to such prepaid
Mortgage Loans would result. Pursuant to the Pooling and Servicing Agreement,
the Master Servicing Fee for any month will be reduced, [but not by more than
one-half of such Master Servicing Fee,] by an amount sufficient to pass through
to Certificateholders the full amount of interest to which they would be
entitled in respect of each such prepaid Mortgage Loan on the related
Distribution Date. If shortfalls in interest as a result of prepayments in any
Prepayment Period exceed an amount equal to [one-half of] the Master Servicing
Fee otherwise payable on the related Distribution Date, the amount of interest
available to be distributed to Certificateholders will be reduced by the amount
of such excess. See "Description of the Certificates -- Class A Interest
Distribution Amounts" herein.
TERMINATION
The Pooling and Servicing Agreement will terminate upon notice to the
Trustee of either: (a) the later of the distribution to Certificateholders of
the final payment or collection with respect to the last Mortgage Loan (or
Advances of same by the Master Servicer), or the disposition of all funds with
respect to the last Mortgage Loan and the remittance of all funds due under the
Pooling and Servicing Agreement and the payment of all amounts due and payable
to the Certificate Insurer and the Trustee or (b) mutual consent of the Master
Servicer, the Certificate Insurer and all Certificateholders in writing;
provided, however, that in no event will the Trust Fund established by the
Pooling and Servicing Agreement terminate later than twenty-one years after the
death of the last surviving lineal descendant of the person named in the Pooling
and Servicing Agreement.
Subject to provisions in the Pooling and Servicing Agreement, the holder of
a majority percentage interest of the Class R Certificates or the Master
Servicer (or the Certificate Insurer, if is removed
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as Master Servicer) may, at its option and at its sole cost and expense, on any
Distribution Date when the aggregate Principal Balance of the Mortgage Loans is
less than % ( % with respect to the exercise of this option by the Master
Servicer or the Certificate Insurer) of the sum of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date and the aggregate principal
balance of the Subsequent Mortgage Loans as of the related Subsequent Cut-off
Date, purchase from the Trust Fund all of the outstanding Mortgage Loans at a
price equal to the sum of (a) 100% of the Principal Balance of each outstanding
Mortgage Loan, (b) the aggregate amount of accrued and unpaid interest on the
Mortgage Loans through the related Due Period and 30 days' accrued interest
thereon at a rate equal to the Mortgage Rate (net of the Servicing Fee Rate in
the case of such a purchase by the Master Servicer), (c) any unreimbursed
amounts due to the Certificate Insurer under the Pooling and Servicing Agreement
or the Insurance Agreement (as defined in the Pooling and Servicing Agreement),
(d) any excess of the actual stated principal balance of each such Mortgage Loan
over the Principal Balance thereof, the aggregate amount of accrued and unpaid
interest on such excess through the related due period and 30 days' interest on
such excess at a rate equal to the related Mortgage Interest Rate with respect
to each related Mortgage Loan and (e) any other unpaid or unreimbursed amounts
owed to the Master Servicer and not included in clauses (a) through (d) above.
Any such purchase shall be accomplished by deposit into the related Certificate
Account of the purchase price specified above. From the amount so deposited, the
Trustee shall reimburse the Master Servicer for the amount of any unpaid
Servicing Fees, unreimbursed Advances and unreimbursed servicing advances. No
such termination is permitted without the prior written consent of the
Certificate Insurer if it would result in a draw on the related Certificate
Insurance Policy. See "The Agreements -- Termination; Optional Termination" in
the Prospectus.
FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, ,
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 (exclusive of the Interest
Coverage Accounts and the Pre-Funding Accounts) will qualify as a REMIC under
the Code.
For federal income tax purposes, the Class A Certificates and the
Subordinate Certificates will represent ownership of "regular interests" in the
REMIC and will generally be treated as representing ownership of debt
instruments issued by the 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 REMICs and its Holders" in the Prospectus.
For federal income tax reporting purposes, the Class A Certificates will
not 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 assumption that, subsequent to the date
of any determination the Mortgage Loans will prepay at a rate equal to a % CPR
and a % Prepayment Assumption, respectively. No representation is made that
the Mortgage Loans will prepay at this rate or at any other rate. See "Federal
Income Tax Consequences -- General -- 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, or are not applicable 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 that provide for payments based on an adjustable rate. 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 an adjustable 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 Certificates are issued with original
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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 are 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 -- General -- Interest and Acquisition
Discount" in the Prospectus.
In certain circumstances the OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
Certificate may be able to select a method for recognizing original issue
discount that differs from that used in preparing reports to the
Certificateholders and the IRS.
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 860G(a)(3) of the
Code if acquired by a REMIC within the time periods prescribed by 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.
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 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.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated , 199 (the "Underwriting Agreement"),
between the Depositor and the Underwriter, an affiliate of the Depositor, the
Depositor has agreed to sell to the Underwriter, and the Underwriter has agreed
to purchase from the Depositor all the Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all the Certificates offered
hereby if any of the Certificates are purchased.
The Depositor has been advised by the Underwriter that it proposes
initially to offer the Certificates to the public in Europe and the United
States and to certain dealers at such price less a discount not in excess of
% of the Certificate denominations. The Underwriter may allow and such
dealers may reallow a discount not in excess of % of the Certificate
denominations to certain other dealers. After the initial public offering, the
public offering price, such concessions and such discounts may be changed.
The distribution of the Certificates by the Underwriter will be effected
from time to time in one or more negotiated transactions or otherwise at varying
prices to be determined, in each case, at the time of sale. The Underwriter may
effect such transactions by selling the Certificates to or through dealers, and
such dealers may receive from the Underwriter compensation in the form of
underwriting discounts, concessions or commissions. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the
Certificates may be deemed to be underwriters, and any discounts, commissions or
concessions received by them, and any profit on the resale of the Certificates
purchased by them, may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "Act").
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Act.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Depositor by
, will pass upon certain legal matters
on behalf of the Underwriter.
RATINGS
It is a condition to the issuance of the Class A Certificates that they be
rated " " by (" "), " " by (" ") and
" " by (" " and, together with and ,
the "Rating Agencies").
The ratings assigned by the Rating Agencies 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. The Rating Agencies' 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. The Rating
Agencies' ratings on such certificates do not, however, constitute a statement
regarding frequency of payments of the mortgage loans.
The ratings of the Rating Agencies do not address the possibility that, as
a result of principal prepayments, Certificateholders may receive a lower than
anticipated yield.
The security ratings assigned to the 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 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 Certificates
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or, if it does, what rating would be assigned by such other rating agency. The
rating assigned by such other rating agency to the Certificates could be lower
than the respective ratings assigned by the Rating Agencies.
LEGAL INVESTMENT
The Class A-1 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 Class A-2 Certificates will
not constitute "mortgage related securities" for purposes of SMMEA because the
Group II Loans include Mortgage Loans that are secured by subordinate liens on
the related Mortgaged Properties.
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 constitutes a legal investment or is 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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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. sec. 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 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.
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 the conditions and
requirements of the Exemption. Morgan Stanley believes that the Exemption will
[not] apply to the acquisition and holding of [Class A Certificates] by Plans.
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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 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 [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.
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 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
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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. [Notwithstanding any of
the foregoing, the Exemption will not apply with respect to any [Class A
Certificates] until such time as the balance of the related Pre-Funding Account
is reduced to zero. Accordingly, until such time, the [Class A Certificates] may
not be purchased by Plans pursuant to the Exemption.] 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.
EXPERTS
The consolidated financial statements of the Certificate Insurer and its
subsidiaries as of , 199 and , 199 and for the three
years ended , 199 , incorporated by reference into this Prospectus
Supplement, have been audited by , 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.
S-57
<PAGE> 215
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
---- ----------
<S> <C>
401(c) Regulations.......................................... S-57
Accrual Period.............................................. S-37
Act......................................................... S-53
Adjustment Date............................................. S-8, 22
Advances.................................................... S-14
Available Funds............................................. S-34
Beneficial owner............................................ S-34
Book Entry Certificates..................................... S-6, 33
Business Day................................................ S-42
CEDE........................................................ S-34
Cedel....................................................... S-6
Certificate Insurance Policies.............................. S-1, 10
Certificate Insurer......................................... S-1, 10, 13
Certificate Insurer's Fiscal Agent.......................... S-41
Certificate Owner........................................... S-6
Certificates................................................ S-1, 33
Citibank.................................................... S-6
Class A Certificates........................................ S-1, 33
Class A Interest Distribution Amount........................ S-11, 37
Class A Principal Distribution Amount....................... S-12, 39
Class A-1 Certificates...................................... S-33
Class A-1 Formula Pass Through Rate......................... S-10
Class A-2 Certificates...................................... S-33
Code........................................................ S-15
CPR......................................................... S-45
Cross-Collateralized Subordination Shortfall................ S-13, 36
Cross-Collateralization Payment............................. S-36
Cross-Collateralized Payment................................ S-13
Cross-Collateralized Subordination Shortfall................ S-13, 36
Definitive Certificate...................................... S-6, 33
Delinquent Mortgage Loans................................... S-7
Depositor................................................... S-2, 6
Depository.................................................. S-33
Distribution Date........................................... S-2, 33
DOL......................................................... S-55
DTC......................................................... S-6, 33
Due Period.................................................. S-35
ERISA....................................................... S-16, 54
Euroclear................................................... S-6
Excess Subordinated Amount.................................. S-35
Exemption................................................... S-55
Fitch....................................................... S-56
Funding Period.............................................. S-31
Gross Margin................................................ S-22
Group I Class A Available Funds Pass-Through Rate........... S-10, 37
Group I Class A Available Funds Cap Carry Forward Amount.... S-11, 38
</TABLE>
S-58
<PAGE> 216
<TABLE>
<CAPTION>
TERM PAGE
---- ----------
<S> <C>
Group I Class A Carry-Forward Amount........................ S-37
Group I Interest Coverage Account........................... S-43
Group I Loans............................................... S-2, 7, 21
Group I Original Pre-Funded Amount.......................... S-8
Group I Subordinate Certificates............................ S-1, 33
Group I Subsequent Mortgage Loans........................... S-8
Group II Class A Carry-Forward Amount....................... S-38
Group II Interest Coverage Account.......................... S-43
Group II Loans.............................................. S-2, 7, 21
Group II Original Pre-Funded Amount......................... S-8
Group II Subordinate Certificates........................... S-1, 33
Group II Subsequent Mortgage Loans.......................... S-8
Initial Group I Loans....................................... S-21
Initial Group II Loans...................................... S-21
Insured Distribution Amount................................. S-37
Insured Payment............................................. S-13, 42
Interest Coverage Accounts.................................. S-43
Interest Determination Date................................. S-39
IRS......................................................... S-51
LIBOR Business Day.......................................... S-39
Lifetime Rate Caps.......................................... S-22
Lifetime Rate Floors........................................ S-22
Liquidated Loan Loss........................................ S-35
Liquidated Mortgage Loan.................................... S-35
Loan Group.................................................. S-2, 7, 21
Loan Group I................................................ S-21
Loan Group II............................................... S-21
Master Servicer............................................. S-6
Master Servicer Remittance Date............................. S-40
Morgan Guaranty............................................. S-6
Morgan Stanley.............................................. S-55
Mortgage Loans.............................................. S-2, 7
Mortgage Rate............................................... S-2
Mortgaged Property.......................................... S-7
Net Monthly Excess Cashflow................................. S-34
Non-conforming credit....................................... S-18
Notice...................................................... S-42
OID Regulations............................................. S-51
One Year CMT................................................ S-2, 9, 22
Original Group I Pre-Funded Amount.......................... S-31
Original Group II Pre-Funded Amount......................... S-31
Original Pre-funded Amounts................................. S-9
Owner....................................................... S-42
Parties in Interest......................................... S-55
Periodic Rate Cap........................................... S-22
Plan........................................................ S-54
Plan Asset Regulation....................................... S-55
Pooling and Servicing Agreement............................. S-9
</TABLE>
S-59
<PAGE> 217
<TABLE>
<CAPTION>
TERM PAGE
---- ----------
<S> <C>
Pre-Funding Account......................................... S-31
Pre-Funded Amount........................................... S-9, 31
Premium Amount.............................................. S-39
Prepayment Assumption....................................... S-45
Prepayment Interest Excess.................................. S-50
PTE......................................................... S-57
Rating Agencies............................................. S-53
Record Date................................................. S-33
Reimbursement Amount........................................ S-36
REMIC....................................................... S-2, 15
Residual Certificates....................................... S-1, 33
Restricted Group............................................ S-57
Seller...................................................... S-6, 18
Servicing Fee............................................... S-50
Six-Month LIBOR............................................. S-2, 9, 22
SMMEA....................................................... S-16, 54
Subordinate Certificates.................................... S-1, 33
Subsequent Cut-off-Date..................................... S-31
Subsequent Mortgage Loans................................... S-21, 30
Subsequent Transfer Dates................................... S-30
Subsequent Transfer Instruments............................. S-30
Trust Fund.................................................. S-2, 9
Trustee..................................................... S-6
Underwriter................................................. S-1
Underwriting Agreement...................................... S-53
Weighted average life....................................... S-45
</TABLE>
S-60
<PAGE> 218
APPENDIX A
UNDERWRITING GUIDELINES APPLICABLE TO THE MORTGAGE LOANS
[Description will depend on the Seller and the particulars of the Mortgage
Loans]
The Mortgage Loans were originated by the Seller under its "Standard
Non-Conforming Program" applicable to residential loans which, for credit
reasons, do not conform to FNMA or FHLMC underwriting guidelines.
THE STANDARD NON-CONFORMING PROGRAM
The Mortgage Loans underwritten under the Standard Non-Conforming Program
were underwritten in accordance with the underwriting criteria of the Seller.
The Seller's underwriting standards under the Standard Non-Conforming
Program are primarily intended to assess creditworthiness of the mortgagor, the
value of the mortgaged property and to evaluate the adequacy of such property as
collateral for the mortgage loan. While their primary consideration in
underwriting a mortgage loan is the mortgagor's employment stability and
debt-to-income ratio, the value of the mortgaged property relative to the amount
of the mortgage loan is another critical factor. In addition, they also
consider, among other things, a mortgagor's credit history and repayment
ability, as well as the type and use of the mortgaged property. All of the
Mortgage Loans underwritten under this program are adjustable rate loans, and
generally bear higher rates of interest than mortgage loans that are originated
in accordance with FNMA and FHLMC standards.
The Mortgage Loans underwritten under the Standard Non-Conforming Program
were underwritten pursuant to the "Non-Conforming Full Documentation,"
"Non-Conforming Alternative Documentation" and "Non-Conforming No-Income
Qualifier" residential loan programs. Under each of these programs, the Seller
reviews the loan applicant's source of income, calculates the amount of income
from sources indicated on the loan application or similar documentation, reviews
the credit history of the applicant, calculates the debt service-to-income ratio
to determine the applicant's ability to repay the loan, reviews the type and use
of the property being financed and reviews the property for compliance with
their standards. In determining the ability of the applicant to repay the
Mortgage Loan, the Seller uses a rate (the "Qualifying Rate") which generally is
a rate equal to the Mortgage Rate at origination plus the amount of the Periodic
Cap. The Seller's underwriting standards are applied in a standardized procedure
which complies with applicable federal and state laws and regulations.
The Seller's criteria require it to verify the income of each borrower and
the source of funds (if any) required to be deposited by the applicant into
escrow under its various programs. Borrowers are generally required to submit
written verification of income signed by the employer covering the most recent
two-year period, together with a current paystub and two years' W-2 forms. Under
the Non-Conforming Alternative Documentation program, borrowers are generally
required to submit two years' W-2 Forms and the most recent paystub showing
year-to-date earnings. A telephone confirmation of employment is made regardless
of the origination program. Under the Non-Conforming No-Income Qualifier
program, borrowers may be qualified based upon monthly income as stated on the
mortgage loan application, without verification; however, self-employed
borrowers are required to submit a business license, one year's bank statements
and a current profit and loss statement. A business credit report, if
applicable, is obtained. Verification of the source of funds (if any) required
to be deposited by the applicant into escrow is generally required under all
documentation programs in the form of a standard verification of deposit or two
months' consecutive bank statements or other acceptable documentation. Twelve
months' mortgage payment or rental history must be verified by lender or
landlord. If appropriate compensating factors exist, the Seller may waive
certain documentation requirements for individual borrowers. All documentation
must be no more than 90 days old at underwriting and no more than 120 days old
at the time of the funding of the related loan.
A-1
<PAGE> 219
The Seller uses the following categories and characteristics as guidelines
to grade the potential likelihood that the mortgagor will satisfy the repayment
conditions of a mortgage loan:
"A-" Risk. Under the "A-" risk category, the prospective mortgagor must
have generally repaid installment or revolving debt according to its terms with
a maximum of three 30-day late payments within the last 12 months or five 30-day
late payments or two 60-day late payments within the last 24 months. Within this
24 month period, however, a maximum of one 30-day late payment, and no 60-day
late payments are acceptable in the last 12 months, or a maximum of two 30-day
late payments, and no 60-day late payments, within the last 24 months are
acceptable on an existing mortgage loan on the subject property. The existing
mortgage obligation must be current. Minor derogatory items are allowed as to
non-mortgage credit. No collection accounts or charge-offs or judgments over
$ within the last five years are allowed. No bankruptcy or notice of
default filings by the borrower may have occurred during the preceding five
years. A maximum Loan-to-Value Ratio of up to % (or % for mortgage
loans originated under the Non-Conforming No-Income Qualifier program, but
% if the borrower is self-employed) is permitted for a mortgage loan on a
single family owner-occupied property. A maximum Loan-to-Value Ratio of %
(or % for mortgage loans originated under the Non-Conforming No-Income
Qualifier program but % if the borrower is self-employed) is permitted for
a mortgage loan on a non-owner occupied property or a second home property. The
debt service-to-income ratio generally is % or less based on the Qualifying
Rate. The maximum loan amount is $ for single-family owner-occupied
properties, regardless of the documentation program. Exceptions to the maximum
loan amount for single-family, owner occupied properties are considered by the
Seller on a limited basis. The maximum loan amount is $ (or $
for mortgage loans originated under the Non-Conforming No-Income Qualifier
Program) for mortgage loans on single-family non-owner-occupied properties or
second homes.
"A" Risk. Under the "A" risk category, the prospective mortgagor must have
generally repaid installment or revolving debt according to its terms with a
maximum of five 30-day late payments or two 60-day late payments on such
obligations within the last 12 months. A maximum of two 30-day payments, and no
60-day late payments, within the last 12 months is acceptable on an existing
mortgage loan on the subject property. The existing mortgage obligation must be
current. Minor derogatory items are allowed as to non-mortgage credit. No unpaid
collection accounts, charge-offs or judgments over $ within the last
two years are allowed. No bankruptcy or notice of default filings by the
borrower may have occurred during the preceding two years. A maximum
Loan-to-Value Ratio of up to % (or % for mortgage loans originated
under the Non-Conforming No-Income Qualifier program, but % if the borrower
is self-employed) is permitted for a mortgage loan on a single family
owner-occupied property. A maximum Loan-to-Value Ratio of up to % (or
% for mortgage loans originated under the Non-Conforming No-Income
Qualifier program) is permitted for a mortgage loan on a non-owner occupied
property or a second home. The debt service-to-income ratio generally is %
or less based on the Qualifying Rate. The maximum loan amount is $ for
single-family owner-occupied properties, under the Non-Conforming Full
Documentation Program. Exceptions to the maximum loan amount for single-family,
owner occupied properties are considered by the Seller on a limited basis. The
maximum loan amount is $ for mortgage loans on single-family
owner-occupied properties under the Non-Conforming No-Income Qualifier Program.
The maximum loan amount is $ (or $ for mortgage loans
originated under the Non-Conforming No-income Qualifier Program) for mortgage
loans on a single-family non-owner-occupied properties or second homes. Loan
applicants with less favorable credit ratings generally are offered loans with
higher interests rates and lower Loan-to-Value ratios than applicants with more
favorable ratings.
"B" Risk. Under the "B" risk category, the prospective mortgagor must have
generally repaid consumer debt according to its terms, with a maximum of eight
30-day late payments or four 60-day late payments or two 90-day late payments on
such obligations within the last 12 months. A maximum of four 30-day late
payment, or three 30-day late payments and one 60-day late payment, within the
last 12 months is acceptable on an existing mortgage loan on the subject
property. The existing mortgage obligation must be current. As to non-mortgage
credit, some prior defaults may have occurred. Isolated and insignificant
collections and/or charge-offs and judgments within the last 18 months,
totalling less than $ are acceptable. No bankruptcy or notice of
default filings by the borrower may have occurred during the preceding 18
months. A
A-2
<PAGE> 220
maximum Loan-to-Value Ratio of % (or % for mortgage loans originated
under the Non-Conforming No-Income Qualifier program, but % if the borrower
is self-employed) is permitted for a mortgage loan on a single family,
owner-occupied property. A maximum Loan-to-Value Ratio of % (or % for
mortgage loans originated under the NonConforming No-Income Qualifier Program)
is permitted for a mortgage loan on a non-owner occupied property or a second
home. The debt service-to-income ratio generally is % or less based on the
Qualifying Rate. The maximum loan amount is $ for single-family
owner-occupied properties, under the Non-Conforming Full Documentation Program.
The maximum loan amount is $ (or $ for mortgage loans
originated under the Non-Conforming No-Income Qualifier Program) for mortgage
loans on a non-owner-occupied property or a second home.
"C" Risk. Under the "C" risk category, the prospective mortgagor may have
experienced significant credit problems in the past. A maximum of twelve 30-day
late payments or six 60-day late payments, or four 90-day late payments, on
consumer debt within the last twelve months is acceptable. A maximum of five
30-day late payments or three 30-day late payments and two 60-day late payments
or three 30-day late payments and one 90-day late payment, within the last 12
months is acceptable on an existing mortgage loan on the subject property. The
existing mortgage obligation can be up to 40 days past due at the funding of the
loan. As to non-mortgage credit, significant prior defaults may have occurred.
There may be open collections or charge-offs not to exceed $ and up to
$ in isolated circumstances. No bankruptcy or notice of default filings
by the borrower may have occurred during the preceding year. A maximum Loan-to-
Value Ratio of % (or % for mortgage loans originated under the
Non-Conforming No-Income Qualifier Program, but % if the borrower is
self-employed) is permitted for a mortgage loan on a single-family
owner-occupied property. A maximum Loan-to-Value Ratio of % (or % for
mortgage loans originated under the Non-Conforming No-Income Qualifier Program,
but % if the borrower is self-employed) is permitted for a mortgage loan on
a non-owner-occupied property or a second home. The debt service-to-income ratio
is generally % or less based on the Qualifying Rate. The maximum loan
amount is $ (or $ for mortgage loans originated under the
Non-Conforming No-Income Qualifier Program) for mortgage loans on single-family
owner-occupied properties. The maximum loan amount is $ (or $
for mortgage loans originated under the Non-Conforming No-Income Qualifier
Program) for mortgage loans on nonowner-occupied properties or second homes.
"CX" Risk. Under the "CX" risk category, the prospective mortgagor may
have experienced significant credit problems in the past. As to non-mortgage
credit, significant prior defaults may have occurred. The borrower is sporadic
in some or all areas with a disregard for timely payment or credit standing.
With respect to an existing mortgage loan on the subject property, no payment
can be more than 90 days past due. Such existing mortgage loan is not required
to be current at the time the application is submitted. The borrower may have
open collections, charge-offs and judgments, all of which must be paid prior to
the funding of the loan, but such items must be paid through the loan proceeds.
No bankruptcy or notice of default filings by the borrower may have occurred
during the preceding six months. A maximum Loan-to-Value Ratio of % (or
% or % for mortgage loans originated under the Non-Conforming
No-Income Qualifier Program, depending on whether the borrower is self-employed)
is permitted for a mortgage loan on a single-family owner-occupied property. No
mortgage loans on non-owner-occupied property or second homes are made in the
"CX" risk category. The maximum loan amount is $ under the
Non-Conforming Full Documentation Program or $ (or $ in the
case of borrowers who are self-employed) under the Non-Conforming No-Income
Qualifier Program. The debt service-to-income ratio generally is % or less
based on the Qualifying Rate.
"D" Risk. Under the "D" risk category, the prospective mortgagor may have
experienced significant credit problems in the past. As to non-mortgage credit,
significant prior defaults may have occurred. The borrower is sporadic in some
or all areas with a general disregard for timely payment or credit standing.
With respect to an existing mortgage loan on the subject property, no payment
can be more than 120 days past due. Such existing mortgage loan is not required
to be current at the time the application is submitted. The borrower may have
open collections, charge-offs and judgments, all of which must be paid
simultaneously with the funding of the loan. No current bankruptcy filings by
the borrower are allowed. Borrowers who are in foreclosure are considered. A
maximum Loan-to-Value Ratio of % (or % for mortgage loans
A-3
<PAGE> 221
originated under the Non-Conforming No-Income Qualifier Program, but % if
the borrower is self-employed) is permitted for a mortgage loan in a
single-family owner-occupied property. No mortgage loans on a non-owner-occupied
property or a second home are made in the "D" risk category. The maximum loan
amount is $ under the Non-Conforming No-Income Qualifier Program, but
$ if the borrower is self-employed) for mortgage loans on a
nonowner-occupied property or a second home. The debt service-to-income ratio is
% or less based on the Qualifying Rate.
Exceptions. As described above, the Seller uses the foregoing categories
and characteristics as underwriting guidelines only. On a case-by-case basis, it
may determine that the prospective mortgagor warrants a risk category upgrade, a
debt service-to-income ratio exception, a pricing exception, a loan-to-value
exception or an exception from certain requirements of a particular risk
category (collectively called an "upgrade" or an "exception"). An upgrade or
exception may generally be allowed if the application reflects certain
compensating factors, among others: low loan-to-value ratio; pride of ownership;
a maximum of one 30-day late payment on all mortgage loans during the last 12
months; stable employment, and the length of residence in the subject property.
Accordingly, they may classify certain mortgage loan applications in a more
favorable risk category than other mortgage loan applications that, in the
absence of such compensating factors, would satisfy only the criteria of a less
favorable risk category.
A-4
<PAGE> 222
INFORMATION CONTAINED HEREON IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Subject to Completion, dated December , 1998
PROSPECTUS SUPPLEMENT (To Prospectus Supplement dated , 199
and Prospectus dated December , 1998)
[ ] Trust, Series 199
[Home Equity Loan Asset Backed Certificates, Series 199 ]
[Home Equity Loan Asset Backed Notes, Series 199 ]
[Home Equity Loan Asset Backed Certificates, Series 199 ]
[Mortgage Loan Asset-Backed Pass Through Certificates, Series 199 ]
Morgan Stanley ABS Capital I Inc.
DEPOSITOR
[ ]
MASTER SERVICER
------------------------
The Prospectus dated , 199 and the Prospectus Supplement dated
, 199 are hereby amended and supplemented as indicated below. Terms
used herein and not otherwise defined have the meanings given them in the
Prospectus and Prospectus Supplement.
This Supplement reflects the issuance on , 199 of
in an original principal amount of $ [and
in an original principal amount of $ ].
Because this Supplement is to be used in connection with offers and sales
related to market-making transactions in the [Certificates] [Securities]
[Underwritten Certificates] [Class A Certificates], the following portions of
the Prospectus Supplement and Prospectus do not apply and are deemed deleted
from such documents to the extent they are used for market-making transactions:
(a) the sentence[s] on [the cover page] [page S-2] of the Prospectus
Supplement stating that ["[t]here can be no assurance that a secondary
market for the Certificates will develop or, if it does develop, that it
will continue".] ["[t]here is currently no market for the Securities offered
hereby and there can be no assurance that such a market will develop or if
it does develop that it will continue."] ["[t]here is currently no secondary
market for the Offered Certificates and there can be no assurance that such
a market will develop or, if it does develop, that it will continue or that
it will provide Certificateholders with a sufficient level of liquidity of
investment."] ["[t]here is no secondary market for the Class A Certificates.
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."]
(Continued on next page)
------------------------
This Supplement to the Prospectus and Prospectus Supplement is to be used by
Morgan Stanley & Co. Incorporated in connection with offers and sales from time
to time related to market-making transactions in the [Certificates] [Securities]
[Underwritten Certificates] [Class A Certificates] in which Morgan Stanley & Co.
Incorporated acts as principal. Morgan Stanley & Co. Incorporated also may act
as agent in such transactions. Sales will be made at negotiated prices
determined at the time of sale. Certain information with respect to the
Prospectus and Prospectus Supplement will be updated periodically by an
incorporation by reference of filings made by the Depositor on behalf of the
Trust Fund pursuant to the Securities and Exchange Act of 1934, as amended. See
"Available Information" herein.
------------------------
MORGAN STANLEY DEAN WITTER
, 199
<PAGE> 223
(b) [the pricing table and related footnotes on the cover page of the
Prospectus Supplement] [the sentence on the front cover page of the
Prospectus Supplement with respect to the purchase of the [Securities]
[Underwritten Certificates] [Class A Certificates] by [Morgan Stanley & Co.
Incorporated] [the Underwriters] from the Depositor and the offering
thereof] and [the sentence on the front cover page of the Prospectus
Supplement with respect to the proceeds to the Depositor from the sale of
the [Notes and Certificates] [Underwritten Certificates] [Class A
Certificates];
(c) the [paragraph] [sentences] with respect to delivery of the
[Certificates] [Securities and Notes] [Underwritten Senior Certificates and
Class A-R Certificates] [Class A Certificates] on the cover page of the
Prospectus Supplement;
[(d) the paragraph with respect to stabilization activities of Morgan
Stanley & Co. Incorporated on page S-2 of the Prospectus Supplement;]
(e) the "Underwriting" section of the prospectus Supplement; and
(f) the "Use of Proceeds" section of the Prospectus.
METHOD OF DISTRIBUTION
The "Method of Distribution" section of the Prospectus is replaced with
the following:
This Supplement is to be used by Morgan Stanley & Co. Incorporated in
connection with offers and sales from time to time related to market-making
transactions in the Securities in which Morgan Stanley & Co. Incorporated acts
as principal. Morgan Stanley & Co. Incorporated also may act as agent in such
transactions. Sales will be made at negotiated prices determined at the time of
sale. Morgan Stanley & Co. Incorporated has no obligation to make a market in
the Securities and may discontinue its market-making activities at any time
without notice, in its sole discretion. There is no assurance that any secondary
market will develop or, that if such market develops, that it will continue.
AVAILABLE INFORMATION
The last sentence of the third paragraph under the "Available
Information" section of the Prospectus is deemed deleted and the following
paragraph is added immediately after such third paragraph:
The Trust Fund is subject to the informational requirements of
the Securities and Exchange Act of 1934, as amended, and, in
accordance therewith, the Depositor, on behalf of the Trust Fund,
files reports and other information with the Securities and
Exchange Commission. Such reports filed by the Depositor on behalf
of the Trust Fund are available for inspection without charge at
the public reference facilities maintained by the Securities and
Exchange Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549; 7 World Trade Center, Suite 1300 New York,
New York 10048; and the Midwest Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials may be obtained from the Public Reference Section of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, at prescribed rates. Such reports
and other documents may also be obtained from the web site that
the Securities and Exchange Commission maintains at
http://www.sec.gov. Such reports and other information are hereby
incorporated by reference in this Supplement. The information
provided in the monthly reports to Securityholders will be
included in such reports, which will include, but are not limited
to, information relating to the principal and interest distributed
to Securityholders on the most recent Distribution Date, the
amount of any Advance, the outstanding principal balance or
notional amounts of each class of the related Series, the
percentage of principal payments and Principal Payments on the
Loans, the amount of servicing compensation retained by Master
Servicer, the delinquency status of the Loans, the book value of
any real estate acquired through foreclosure or grant of a deed in
lieu of foreclosure,and certain Pass-Through Rates or interest
rates. See "Description of the Securities -- Reports to
Securityholders" in the Prospectus.
<PAGE> 224
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 120 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 17.
------------------------
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 DEAN WITTER
December 21, 1998
<PAGE> 225
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.
------------------------
2
<PAGE> 226
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) 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
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<PAGE> 227
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."
4
<PAGE> 228
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary of Terms............................................ 6
Risk Factors................................................ 17
The Trust Fund.............................................. 27
Use of Proceeds............................................. 42
The Depositor............................................... 42
Description of the Securities............................... 42
Credit Enhancement.......................................... 57
Yield and Prepayment Considerations......................... 62
The Agreements.............................................. 64
Certain Legal Aspects of the Loans.......................... 78
Federal Income Tax Consequences............................. 92
State Tax Consequences...................................... 112
ERISA Considerations........................................ 112
Legal Investment............................................ 116
Method of Distribution...................................... 117
Legal Matters............................................... 118
Financial Information....................................... 118
Rating...................................................... 118
Index of Defined Terms...................................... 120
</TABLE>
5
<PAGE> 229
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 120 of this Prospectus for the
location of the definitions of certain capitalized terms.
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 Dean Witter & Co. None
of Morgan Stanley, Morgan Stanley Dean Witter & Co.
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 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-
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<PAGE> 230
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 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 Securi-
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ties. 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
Securities............ Private Mortgage-Backed Securities may include (i)
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 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
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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
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
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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 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 (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
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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.
D. Insurance Policies;
Surety Bonds and
Guarantees............ If so specified in the related Prospectus
Supplement, 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.
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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 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.
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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 obligation 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."
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
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"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."
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
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(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
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 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
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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 17 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 breached. There is no assurance, however, that such
Seller or Originator will have the financial ability to effect such repurchase
or substitution.
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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 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
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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 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
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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.
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
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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 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."
Risks Associated with Non-Owner Occupied Properties. Certain of the
Properties relating to Loans may not be owner occupied. It is possible that the
rates of delinquencies, foreclosures and losses on Loans secured by non-owner
occupied Properties could be higher than such rates on Loans secured by the
primary residence of the borrower.
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
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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 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
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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.
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.
The federal Soldiers' and Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act"), may affect the ability of the Master Servicer to collect
full amounts of interest on certain Loans and could interfere with the ability
of the Master Servicer to foreclose on certain Properties. See "Certain Legal
Aspects of the Loans -- Soldiers' and Sailors' Civil Relief Act" herein.
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
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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."
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES
Generally, under the terms of the Relief Act or similar state legislation,
a mortgagor who enters military service after the origination of the related
mortgage loan (including a mortgagor who is a member of the National Guard or is
in reserve status at the time of the origination of the mortgage loan and is
later called to active duty) may not be charged interest (including fees and
charges) above an annual rate of 6% during the period of such mortgagor's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such action could affect, for an indeterminate period of time,
the ability of the Master Servicer to collect full amounts of interest on
certain of the Loans. In addition, the Relief Act imposes limitations that would
impair the ability of the Master Servicer to foreclose on an affected Loan
during the mortgagor's period of active duty status. 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.
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. In the event of a reduction
in the rating of a Series of Securities, the market price of such Securities
could be adversely affected.
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 industry. In
addition, adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by mortgagors
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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 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
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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.
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.
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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 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.
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*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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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 "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.
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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 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
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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.
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
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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 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
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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 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
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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 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
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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 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).
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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 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
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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 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
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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 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
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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
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-
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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 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.
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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.
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
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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 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 Dean Witter & Co. 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 a form of Master Servicing Agreement have been filed as exhibits
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 time are subject to the related Agreement (exclusive of
any amounts specified in the related Prospectus Supplement ("Retained
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<PAGE> 266
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 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
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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.
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.
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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 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
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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.
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.
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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;
(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;
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(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 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.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
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 as "PACs")..................... A class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming two constant prepayment
rates for the 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 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.
Support Class (also sometimes referred to as
"companion classes")....................... A class that receives principal payments on any
Distribution Date only if scheduled payments have
been made on specified Planned Principal Classes,
Targeted Principal Classes and/or Scheduled
Principal Classes on such Distribution Date.
Targeted Principal Class (also sometimes
referred to as "TACs")..................... A class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming a single constant
prepayment rate for the underlying Trust Fund
Assets.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
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.
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.
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>
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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 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.
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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, (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
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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.
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
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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.
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 Bank, societe anonyme ("CEDEL") or the Euroclear System ("Euroclear") in
Europe if they are participants ("Participants") of such systems, or indirectly
through organizations that 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
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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 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 the Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934. DTC is owned by a number of its direct Participants and by the New
York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
CEDEL is a duly licensed bank organized as a "societe anonyme" (limited
company) under the laws of Luxembourg. 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 37 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 licensed bank, 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
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Morgan Guaranty Trust Company of New York ("Morgan" and in such capacity, the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Belgian Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Belgian Cooperative. The Belgian Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is a
member bank of the Federal Reserve System. As such, it is regulated and examined
by the Board of Governors of the Federal Reserve System and the New York State
Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear,
and receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Under a book-entry format, beneficial owners of 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
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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.
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
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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.
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 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
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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 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
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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.
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
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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
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.
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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 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
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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.
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
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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 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
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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.
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;
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(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;
(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;
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(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
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 8-K, to be filed after the end of the Funding Period,
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
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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.
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.
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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.
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
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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
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.
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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 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 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.
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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 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
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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, 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
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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 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
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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.
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
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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.
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
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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
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
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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
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
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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 subject the lender to
unforeseen environmental risks. Under the laws of certain states, contamination
of a property may give rise to a lien on the property to assure the payment of
the costs of clean-up. In several states such a lien has priority over the lien
of an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose
a lien on property where 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, there are circumstances
under which 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 a third party), or fails to dispose of the property
in a commercially reasonable time frame.
The Asset Conservation, Lender Liability and Deposit Insurance Protection
Act of 1996 amended CERCLA to clarify when actions taken by a lender 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. It 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
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entities may be bankrupt or otherwise judgment proof. The costs associated with
environmental cleanup may be substantial. It is conceivable that costs arising
from the circumstances set forth above could result in a loss to
Certificateholders.
A secured creditor exclusion does not govern liability for cleanup costs
under federal laws other than CERCLA except with respect to underground
petroleum storage tanks regulated under the federal Resource Conservation and
Recovery Act ("RCRA"). The Asset Conservation, Lender Liability and Deposit
Insurance Protection Act of 1996 amended RCRA so that the protections accorded
to lenders under CERCLA are also accorded to the holders of security interests
in underground petroleum storage tanks. It also endorsed EPA's lender liability
rule for underground petroleum storage tanks under Subtitle I of RCRA. Under
this rule, a holder of a security interest in an underground petroleum storage
tank or real property containing an underground petroleum storage tank is not
considered an operator of the underground petroleum storage tank as long as
petroleum is not added to, stored in or dispensed from the tank. It should be
noted, however, that liability for cleanup of petroleum contamination may be
governed by state law, which may not provide for any specific protection for
secured creditors.
Except as otherwise specified in the 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
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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.
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
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assumed by a new home buyer, which may affect the average life of the Loans and
the number of Loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Under certain state laws, prepayment charges may not be imposed
after a certain period of time following the origination of mortgage loans with
respect to prepayments on loans secured by liens encumbering owner-occupied
residential properties. Since many of the Properties will be owner-occupied, it
is anticipated that prepayment charges may not be imposed with respect to many
of the Loans. The absence of such a restraint on prepayment, particularly with
respect to fixed rate Loans having higher Loan Rates, may increase the
likelihood of refinancing or other early retirement of such loans or contracts.
Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V") provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. 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."
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Security Interests in Home Improvements. The contracts that are secured by
the Home Improvements financed thereby grant to the originator of such contracts
a purchase money security interest in such Home Improvements to secure all or
part of the purchase price of such Home Improvements and related services. A
financing statement generally is not required to be filed to perfect a purchase
money security interest in consumer goods. Such purchase money security
interests are assignable. In general, a purchase money security interest grants
to the holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of such collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in such Home Improvement must generally be perfected by a timely fixture filing.
In general, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building material
or other goods that are deemed to lose such characterization upon incorporation
of such materials into the related property, will not be secured by a purchase
money security interest in the Home Improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as the Home
Improvement has not become subject to the real estate law, a creditor can
repossess a Home Improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
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
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Prospectus Supplement, the Manufactured Housing Contracts may contain provisions
prohibiting the borrower from permanently 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 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
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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 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,
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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.
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.
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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 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
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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 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
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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.
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
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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 Andrews & Kurth L.L.P., special counsel to the Depositor,
or other counsel identified in the Prospectus Supplement. 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 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,
Andrews & Kurth L.L.P., special counsel to the Depositor, or other counsel
identified in the Prospectus Supplement 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, special counsel to the Depositor identified
in the Prospectus Supplement 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)(4)(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).
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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.
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
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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 at a "current value" of the index,
(ii) the issue price of the debt instrument does not exceed the total
noncontingent principal payments, (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 and (iv) the principal payments are not
contingent. In the case of Compound Interest Securities, certain Interest
Weighted Securities (as defined herein), and certain of the other Debt
Securities, none of the payments under the instrument will be considered
qualified stated interest, and thus the aggregate amount of all payments will be
included in the stated redemption price.
The 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
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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 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
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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 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
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Securities should consult their tax advisers regarding the election to amortize
premium and the method to be employed.
The IRS has issued 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
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, Andrews & Kurth
L.L.P., special counsel to the Depositor, or other counsel identified in the
Prospectus Supplement 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)(5)(B), and income with respect
to the Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B) (assuming, for both purposes, that at least 95% of
the REMIC's assets are qualifying assets), 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
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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 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
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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 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.
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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.
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.
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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 (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. Under IRS regulations a REMIC Residual Interest
Security acquired after January 3, 1995 cannot be marked-to-market.
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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, Andrews & Kurth L.L.P., special counsel to the Depositor, or
other counsel identified in the Prospectus Supplement, 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 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)
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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.
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
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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)(5)(B) of the
Code, and "loans secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code; interest income attributable to the
Securities should be considered to represent "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Section 856(c)(3)(B) of the Code. Reserves or funds underlying the Securities
may cause a proportionate reduction in the above-described qualifying status
categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to 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.
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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 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
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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."
Final regulations dealing with withholding tax on income paid to foreign
persons and related matters (the "New Withholding Regulations") were issued by
the Treasury Department on October 6, 1997. The New Withholding Regulations will
generally be effective for payments made after December 31, 1999, subject to
certain transition rules. Prospective Securityholders who are foreign persons
are strongly urged to consult their own tax advisors with respect to the New
Withholding Regulations.
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, Andrews & Kurth L.L.P., special counsel to the
Depositor, or other counsel identified in the Prospectus Supplement, 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 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. In the case of a Trust Fund that
issues Notes intended to be debt for federal income tax purposes, 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
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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.
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.
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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 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. In the case of a Trust Fund
that will elect to be treated 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
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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 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
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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).
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
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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 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 or partnership, including an entity treated as a corporation or
partnership for U.S. federal income tax purposes created in the United States or
organized under the laws of the United States or any state thereof or the
District of Columbia (except, in the case of a partnership as otherwise provided
by regulations), an estate, the income of which is includible in gross income
for U.S. federal income tax purposes regardless of its source or a trust whose
administration is subject to the primary supervision of a United States court
and has one or more United States persons who have authority to control all
substantial decisions of the trust.
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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.
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 or other person 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
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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 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. sec. 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
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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 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 or other person 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.
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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 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; (iv) the Plan's
investment in
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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 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
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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.
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
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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 as 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. Purchasers of
Securities, including dealers, may, depending on the facts and circumstances of
such purchases, be deemed to be "underwriters" within the meaning of the
Securities Act of 1933 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 Andrews & Kurth L.L.P. or other counsel identified in the
Prospectus Supplement.
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.
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.
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<PAGE> 342
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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<PAGE> 343
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
---- ----------
<S> <C>
401(c) Regulations.......................................... 116
Accretion Directed.......................................... 48
Accrual..................................................... 50
Accrual Securities.......................................... 45
Advance..................................................... 13
Agency Securities........................................... 1
Agreement................................................... 28
Amortizable Bond Premium Regulations........................ 97
APR......................................................... 32
Auction Rate................................................ 50
Available Funds............................................. 45
balloon payment............................................. 29
Belgian Cooperative......................................... 56
beneficial owner............................................ 54
BIF......................................................... 66
Book-Entry Securities....................................... 54
borrower.................................................... 87
Buydown Fund................................................ 30
Buydown Loans............................................... 30
Calculation Agent........................................... 51
Capitalized Interest Account................................ 68
Cash Flow Bond Method....................................... 103
CEDEL....................................................... 54
CEDEL Participants.......................................... 55
CERCLA...................................................... 22, 81
Certificates................................................ 1, 6
Charter Act................................................. 35
Claimable Amount............................................ 91
Class Security Balance...................................... 45
Closed-End Loans............................................ 6, 29
CMO......................................................... 8, 39
Code........................................................ 14, 92
COFI Securities............................................. 52
Collateral Value............................................ 32
Combined Loan-to-Value Ratio................................ 32
Commission.................................................. 3
Commodity Indexed Securities................................ 44
companion classes........................................... 49
Component Securities........................................ 48
Components.................................................. 48
Contingent Regulations...................................... 94
contracts................................................... 84
Contracts................................................... 1, 7, 31
Cooperative Loans........................................... 29
Cooperatives................................................ 29
Currency Indexed Securities................................. 44
</TABLE>
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<PAGE> 344
<TABLE>
<CAPTION>
TERM PAGE
---- ----------
<S> <C>
Cut-off Date................................................ 6, 27
Cut-off Date Principal Balance.............................. 43
Debt Securities............................................. 93
debt-to-income ratio........................................ 33
Definitive Security......................................... 54
Depositor................................................... 1, 6
Detailed Description........................................ 28
Disqualified Organization................................... 101
Distribution Date........................................... 9
DOL......................................................... 113
DTC......................................................... 24, 54
Duff & Phelps............................................... 115
Eleventh District........................................... 52
EPA......................................................... 81
ERISA....................................................... 15, 112
Euroclear................................................... 54
Euroclear Operator.......................................... 56
Euroclear Participants...................................... 55
European Depositaries....................................... 54
excess servicing............................................ 103
Exchange Act................................................ 3
Exemption................................................... 115
Face Amount................................................. 44
FASIT....................................................... 97
FHA......................................................... 12
FHA Loans................................................... 34
FHLBSF...................................................... 52
FHLMC....................................................... 1
FHLMC Act................................................... 36
FHLMC Certificates.......................................... 7
FHLMC Certificate Group..................................... 37
FHLMC Project Certificates.................................. 38
Financial Intermediary...................................... 54
Fitch....................................................... 115
Fixed Rate.................................................. 50
Floating Rate............................................... 50
FNMA........................................................ 1
FNMA Certificates........................................... 7
FNMA MBS.................................................... 35
FNMA Project Issuers........................................ 35
FNMA SMBS................................................... 35
foreign person.............................................. 107
Funding Period.............................................. 25
Garn-St Germain Act......................................... 83
GNMA........................................................ 1
GNMA Certificates........................................... 7
GNMA Issuer................................................. 34
GNMA Project Certificates................................... 35
</TABLE>
121
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<TABLE>
<CAPTION>
TERM PAGE
---- ----------
<S> <C>
Guaranty Agreement.......................................... 34
Holder in Due Course Rules.................................. 23
Home Improvement Contracts.................................. 1, 7
Home Improvements........................................... 1, 7
Home Equity Loans........................................... 1, 7, 29
Housing Act................................................. 33
HUD......................................................... 33, 39
Indenture................................................... 42
Index....................................................... 44
Indexed Commodity........................................... 44
Indexed Currency............................................ 44
Indexed Principal Amount.................................... 44
Indexed Securities.......................................... 44
Installment Contract........................................ 87
Insurance Proceeds.......................................... 67
Insured Expenses............................................ 67
Interest Only............................................... 50
Interest Weighted Securities................................ 95
Inverse Floating Rate....................................... 50
IRS......................................................... 94
L/C Bank.................................................... 11, 58
L/C Percentage.............................................. 11, 58
lender...................................................... 87
Liquidation Expenses........................................ 67
Liquidation Proceeds........................................ 67
Loan Rate................................................... 10, 29
Loan-to-Value Ratio......................................... 32
Loans....................................................... 1
Lockout periods............................................. 29
Manufactured Homes.......................................... 31
Manufactured Housing Contracts.............................. 1, 7, 31
Master Servicer............................................. 6
Master Servicing Agreement.................................. 28
Master Servicing Fee........................................ 73
mixed used properties....................................... 30
Moody's..................................................... 59, 115
Morgan...................................................... 56
Morgan Stanley.............................................. 1, 117
Mortgage.................................................... 64
Mortgage Loan............................................... 6
Mortgaged Properties........................................ 30
mortgage related securities................................. 14, 117
National Cost of Funds Index................................ 52
NCUA........................................................ 117
1986 Act.................................................... 96
noneconomic residual interest............................... 101
Nonresidents................................................ 105
Notes....................................................... 1, 6
</TABLE>
122
<PAGE> 346
<TABLE>
<CAPTION>
TERM PAGE
---- ----------
<S> <C>
Notional Amount Securities.................................. 49
OID......................................................... 14, 93
OID Regulations............................................. 93
Originator.................................................. 2, 17
OTS......................................................... 53
PACs........................................................ 49
Partial Accrual............................................. 50
Participants................................................ 54
Parties in Interest......................................... 113
Pass-Through Securities..................................... 102
Pass-Through Rate........................................... 10
Pay-Through Security........................................ 94
Percentage Interests........................................ 74
Permitted Investments....................................... 59
Plan........................................................ 112
Plan Asset Regulation....................................... 113
Planned Principal Class..................................... 49
PMBS........................................................ 1
PMBS Agreement.............................................. 39
PMBS Issuer................................................. 8, 39
PMBS Servicer............................................... 8, 39
PMBS Trustee................................................ 8, 39
Policy Statement............................................ 117
Pool........................................................ 6, 27
Pool Insurance Policy....................................... 60
Pool Insurer................................................ 60
Pooling and Servicing Agreement............................. 42
Pre-Funded Amount........................................... 25
Pre-Funding Account......................................... 6, 25
Prepayment Assumption....................................... 94
Primary Mortgage Insurance Policy........................... 30
Prime Rate.................................................. 53
Principal Only.............................................. 50
Principal Prepayments....................................... 46
Private Mortgage-Backed Securities.......................... 1
Properties.................................................. 7, 30
Property Improvement Loans.................................. 89
PTE......................................................... 116
PTE 83-1.................................................... 113
publicly offered security................................... 113
Purchase Price.............................................. 41
Rating Agency............................................... 118
Ratio Strip Securities...................................... 103
RCRA........................................................ 82
Record Date................................................. 43
Reference Banks............................................. 51
Refinance Loan.............................................. 32
Regular Interest Securities................................. 93
</TABLE>
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<TABLE>
<CAPTION>
TERM PAGE
---- ----------
<S> <C>
Relevant Depositary......................................... 54
Relief Act.................................................. 23, 87
REMIC....................................................... 2, 44, 92
REMIC Regulations........................................... 97
Reserve Account............................................. 11, 45
Reserve Interest Rate....................................... 51
Residual Interest Security.................................. 99
Restricted Group............................................ 116
Retained Interest........................................... 42
Revolving Credit Line Loans................................. 7, 29
Riegle Act.................................................. 23
Rules....................................................... 54
S&P......................................................... 115
SAIF........................................................ 66
Scheduled Principal Class................................... 49
secured creditor exclusion.................................. 81
Securities.................................................. 1, 6
Securityholders............................................. 2
Security Account............................................ 66
Security Owners............................................. 54
Security Register........................................... 43
Seller...................................................... 1, 28
Senior Securities........................................... 9, 57
Sequential Pay Class........................................ 49
Series...................................................... 1
Servicing Fee............................................... 102
Short-Term Note............................................. 107
Single Family Properties.................................... 30
Single Family Securities.................................... 114
SMMEA....................................................... 13, 116
Startup Day................................................. 99
Stock Index................................................. 44
Stock Indexed Securities.................................... 44
Strip....................................................... 49
Stripped Securities......................................... 102
Sub-Servicer................................................ 13, 28
Sub-Servicing Agreement..................................... 69
Subordinated Securities..................................... 9, 57
Subsequent Loans............................................ 25
Support Class............................................... 49
TACs........................................................ 49
Targeted Principal Class.................................... 49
Terms and Conditions........................................ 56
TIN......................................................... 105
Title V..................................................... 84, 86
Title I Loans............................................... 89
Title I Program............................................. 88
Trust Agreement............................................. 28, 42
</TABLE>
124
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<TABLE>
<CAPTION>
TERM PAGE
---- ----------
<S> <C>
Trust Fund Assets........................................... 1, 6, 27
Trust Fund.................................................. 1
Trustee..................................................... 6, 42
U.S. Person................................................. 111
UCC......................................................... 80
VA.......................................................... 12
VA Guaranty................................................. 72
VA Loans.................................................... 34
Variable Rate............................................... 50
weighted average life....................................... 19
yield to maturity........................................... 19
</TABLE>
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Securities being registered under this
Registration Statement, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $278,017.00
Printing and Engraving Expenses............................. $ 35,000.00
Legal Fees and Expenses..................................... $ 65,000.00
Trustee Fees and Expenses................................... $ 15,000.00
Accounting Fees and Expenses................................ $ 25,000.00
Blue Sky Fees and Expenses.................................. $ 5,000.00
Rating Agency Fees.......................................... $125,000.00
Miscellaneous............................................... $ 5,000.00
-----------
Total....................................................... $553,017.00
===========
</TABLE>
- ------------
* All amounts except the SEC Registration Fee are estimates of expenses incurred
in connection with the issuance and distribution of a Series of Securities in
an aggregate principal amount assumed for these purposes to be equal to
$250,000,000 of Securities registered hereby.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of Delaware empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that he or she is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise. Depending on the character of the proceeding, a corporation may
indemnify against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if the person indemnified acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no cause to believe his or her conduct was unlawful. In the case
of an action by or in the right of the corporation, no indemnification may be
made in respect to any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
further provides that to the extent a director or officer of a corporation has
been successful in the defense of any action, suit or proceeding referred to
above or in the defense of any claim, issue or matter therein, he or she shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection therewith.
The Certificate of Incorporation and Bylaws of the Registrant provide, in
effect, that, to the extent and under the circumstances permitted by Section 145
of the General Corporation Law of Delaware, the Registrant shall indemnify any
person who was or is a party or is threatened to be made a party to any action,
suit or proceeding of the type described above by reason of the fact that he or
she is or was a director, officer, employee or agent of the Registrant.
II-1
<PAGE> 350
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.**
3.1 Certificate of Incorporation of the Registrant.**
3.2 By-laws of the Registrant.**
4.1 Form of Pooling and Servicing Agreement relating to Home
Equity Loan Asset-Backed Certificates.**
4.2 Form of Pooling and Servicing Agreement relating to Mortgage
Loan Asset-Backed Pass-Through Certificates.**
4.3 Form of Pooling and Servicing Agreement relating to Mortgage
Loan Asset-Backed Pass-Through Certificates.**
4.4 Form of Trust Agreement.**
4.5 Form of Indenture.**
4.6 Form of Master Servicing Agreement.**
5.1 Opinion of Andrews & Kurth L.L.P. as to legality of the
Asset Backed Certificates.*
5.2 Opinion of Andrews & Kurth L.L.P. as to legality of the
Asset Backed Notes.*
8.1 Opinion of Andrews & Kurth L.L.P. as to certain tax
matters.*
10.1 Form of Loan Purchase Agreement.**
23.1 Consent of Andrews & Kurth L.L.P. (included in Exhibits 5.1,
5.2 and 8.1 hereof).
24.1 Power of Attorney.***
</TABLE>
- ------------
* Filed herewith.
** Incorporated by reference to the corresponding exhibit to Amendment No. 2 to
the Registrant's Registration Statement on Form S-3 (File No. 333-19779)
filed on April 29, 1997.
*** Previously filed.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
II-2
<PAGE> 351
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this Registration
Statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of a Trust Fund's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in this Registration Statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939 in accordance
with the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Trust Indenture Act of 1939.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that (i) it reasonably believes that the security rating
requirement of Transaction Requirement B.5 of Form S-3 will be met by the time
of sale of each Series of Securities to which this Registration Statement
relates and (ii) it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on the
15th day of December, 1998.
Morgan Stanley ABS Capital I Inc.
By /s/ JAMES FADEL
------------------------------------
Name: James Fadel
Title: Vice President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<C> <S> <C>
/s/ CRAIG S. PHILLIPS* President and Director December 15, 1998
- ------------------------------------------------ (Principal Executive Officer)
Craig S. Phillips
/s/ JAMES FADEL Vice President December 15, 1998
- ------------------------------------------------
James Fadel
/s/ EILEEN K. MURRAY* Treasurer December 15, 1998
- ------------------------------------------------ (Principal Financial Officer and
Eileen K. Murray Principal Accounting Officer)
/s/ DAVID R. WARREN* Director December 15, 1998
- ------------------------------------------------
David R. Warren
/s/ GAIL P. MCDONNELL* Director December 15, 1998
- ------------------------------------------------
Gail P. McDonnell
*By: /s/ JAMES FADEL
-----------------------------------------
(James Fadel, Attorney-in-Fact)
</TABLE>
II-4
<PAGE> 353
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
- ------- ----------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.**
3.1 -- Certificate of Incorporation of the Registrant.**
3.2 -- By-laws of the Registrant.**
4.1 -- Form of Pooling and Servicing Agreement relating to Home
Equity Loan Asset Backed Certificates.**
4.2 -- Form of Pooling and Servicing Agreement relating to Mortgage
Loan Asset-Backed Pass-Through Certificates.**
4.3 -- Form of Pooling and Servicing Agreement relating to Mortgage
Loan Asset-Backed Pass-Through Certificates.**
4.4 -- Form of Trust Agreement.**
4.5 -- Form of Indenture.**
4.6 -- Form of Master Servicing Agreement.**
5.1 -- Opinion of Andrews & Kurth L.L.P. as to legality of the
Asset Backed Certificates.*
5.2 -- Opinion of Andrews & Kurth L.L.P. as to legality of the
Asset Backed Notes.*
8.1 -- Opinion of Andrews & Kurth L.L.P. as to certain tax
matters.*
10.1 -- Form of Loan Purchase Agreement.**
23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibits 5.1,
5.2 and 8.1).
24.1 -- Power of Attorney.***
</TABLE>
- ------------
* Filed herewith.
** Incorporated by reference to the corresponding exhibit to Amendment No. 2 to
the Registrant's Registration Statement on Form S-3 (File No. 333-19779)
filed on April 29, 1997.
*** Previously filed.
<PAGE> 1
EXHIBIT 5.1
<TABLE>
<CAPTION>
ANDREWS & KURTH L.L.P.
<S> <C> <C>
OTHER OFFICES: A REGISTERED LIMITED LIABILITY PARTNERSHIP TELEPHONE: (202) 662-2700
HOUSTON ATTORNEYS TELECOPIER: (202) 662-2739
DALLAS 1701 PENNSYLVANIA AVENUE, N.W. TELEX: 79-1208
LOS ANGELES SUITE 200
NEW YORK WASHINGTON, D.C. 20006-5805
THE WOODLANDS
LONDON
</TABLE>
December 21, 1998
Morgan Stanley ABS Capital I Inc.
1585 Broadway
New York, New York 10036
Re: Morgan Stanley ABS Capital I Inc.
Registration Statement on Form S-3
(Commission File No. 333-64909)
Ladies and Gentlemen:
We have acted as counsel to Morgan Stanley ABS Capital I Inc., a
Delaware corporation ("the Depositor"), in connection with the authorization and
proposed issuance from time to time after the date hereof in one or more series
(each, a "Series") of up to $1,000,000,000 aggregate principal amount of
asset-backed certificates (the "Certificates") to be offered pursuant to a
registration statement on Form S-3 (such registration statement, the
"Registration Statement") relating to the Certificates. The Registration
Statement has been filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "1933 Act"), and
the rules and regulations promulgated thereunder. As set forth in the
Registration Statement, each Series of Certificates will be issued under and
pursuant to the conditions of a separate pooling and servicing agreement (each,
a "Pooling and Servicing Agreement") or a trust agreement (each, a "Trust
Agreement") among the Depositor, a master servicer to be identified in the
prospectus supplement for such Series of Certificates (the "Master Servicer" for
such Series) and a trustee to be identified in the prospectus supplement for
such Series of Certificates (the "Trustee" for such Series).
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of the organizational documents of the Depositor, the forms
of Pooling and Servicing Agreements incorporated by reference as exhibits to the
Registration Statement, the form of Trust Agreement incorporated by reference as
an exhibit to the Registration Statement, the forms of Certificates included in
such forms of Pooling and Servicing Agreements and Trust Agreement, the
prospectus (the "Prospectus") and forms of prospectus supplements incorporated
by reference as exhibits to the Registration Statement, and such other records,
documents and statutes as we have deemed necessary for the purpose of rendering
this opinion.
Based upon the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement or a Trust Agreement, as
applicable, for a Series of Certificates has been duly and validly authorized by
all necessary action on the part of the Depositor and has been duly executed and
delivered by the Depositor, the Master Servicer, the Trustee and any other party
thereto for such Series, such Pooling and Servicing Agreement or Trust
Agreement,
<PAGE> 2
Morgan Stanley ABS Capital I Inc.
December 21, 1998
Page 2
as applicable, will constitute a legal, valid and binding agreement of the
Depositor, enforceable against the Depositor, in accordance with its terms,
except as enforcement thereof may be limited by (a) bankruptcy, insolvency
reorganization, liquidation, receivership, moratorium or other similar laws
relating to or affecting creditors' rights generally or (b) general principles
of equity or public policy, regardless of whether such enforceability is
considered in a proceeding in equity or at law.
2. When a Series of Certificates has been duly authorized by all
necessary action on the part of the Depositor, duly executed and authenticated
by the Trustee for such Series in accordance with the terms of the related
Pooling and Servicing Agreement or Trust Agreement, as applicable, and issued
and delivered against payment therefor as contemplated in the Registration
Statement, the Certificates of such Series will be legally and validly issued,
fully paid and nonassessable, and the holders thereof will be entitled to the
benefits of the related Pooling and Servicing Agreement or Trust Agreement, as
applicable.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the General Corporate Law of the State of
Delaware, the laws of the State of New York (excluding choice of law principles
therein) and the federal laws of the United States of America.
We hereby consent to the filing of this letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus, without implying or admitting that we are
"experts" within the meaning of the 1933 Act or the rules and regulations of the
Commission issued thereunder, with respect to any part of the Registration
Statement, including this Exhibit 5.1.
Sincerely,
/s/ ANDREWS & KURTH L.L.P.
<PAGE> 1
EXHIBIT 5.2
<TABLE>
<CAPTION>
ANDREWS & KURTH L.L.P.
<S> <C> <C>
OTHER OFFICES: A REGISTERED LIMITED LIABILITY PARTNERSHIP TELEPHONE: (202) 662-2700
HOUSTON ATTORNEYS TELECOPIER: (202) 662-2739
DALLAS 1701 PENNSYLVANIA AVENUE, N.W. TELEX: 79-1208
LOS ANGELES SUITE 200
NEW YORK WASHINGTON, D.C. 20006-5805
THE WOODLANDS
LONDON
</TABLE>
December 21, 1998
Morgan Stanley ABS Capital I Inc.
1585 Broadway
New York, New York 10036
Re: Morgan Stanley ABS Capital I Inc.,
Registration Statement on Form S-3
(Commission File No. 333-64909)
Ladies and Gentlemen:
We have acted as counsel to Morgan Stanley ABS Capital I Inc., a
Delaware corporation (the "Depositor"), in connection with the authorization and
proposed issuance from time to time after the date hereof in one or more series
(each, a "Series") of up to $1,000,000,000 aggregate principal amount of
asset-backed notes (the "Notes") to be offered pursuant to a registration
statement on Form S-3 (such registration statement, the "Registration
Statement") relating to the Notes. The Registration Statement has been filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "1933 Act"), and the rules and
regulations promulgated thereunder. As set forth in the Registration Statement,
each Series of Notes will be issued under and pursuant to the conditions of an
indenture (an "Indenture") between a trust fund to be identified in the
prospectus supplement for such Series of Notes (the "Trust Fund" for such
Series) and a trustee to be identified in the prospectus supplement for such
Series of Notes (the "Trustee" for such Series).
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of the organizational documents of the Depositor, the form
of Indenture incorporated by reference as an exhibit to the Registration
Statement, the form of Notes included in such form of Indenture, the prospectus
(the "Prospectus") and the forms of prospectus supplements incorporated by
reference as exhibits to the Registration Statement, and such other records,
documents and statutes as we have deemed necessary for the purpose of rendering
this opinion.
Based upon the foregoing, we are of the opinion that:
1. When an Indenture for a Series of Notes has been duly and validly
authorized by all necessary action on the part of the Depositor, as sponsor of
the related Trust Fund, and has been duly executed and delivered by such Trust
Fund and the Trustee and any other party thereto for such Series, such Indenture
will constitute a legal, valid and binding agreement of such Trust Fund,
enforceable against the related Trust Fund, in accordance with its terms, except
as enforcement thereof may be limited by (a) bankruptcy, insolvency
reorganization, liquidation, receivership, moratorium or other similar laws
relating to or affecting creditors' rights generally or (b) general principles
of equity or public policy, regardless of whether such enforceability is
considered in a proceeding in equity or at law.
<PAGE> 2
Morgan Stanley ABS Capital I, Inc.
December 21, 1998
Page 2
2. When a Series of Notes has been duly authorized by all necessary
action on the part of the Depositor, as sponsor of the related Trust Fund, duly
executed and authenticated by the Trustee for such Series in accordance with the
terms of the related Indenture, and issued and delivered against payment
therefor as contemplated in the Registration Statement, the Notes of such Series
will be valid and binding non-recourse obligations of such Trust Fund,
enforceable against such Trust Fund, in accordance with their terms, except as
enforcement thereof may be limited by (a) bankruptcy, insolvency reorganization,
liquidation, receivership, moratorium or other similar laws relating to or
affecting creditors' rights generally or (b) general principles of equity or
public policy, regardless of whether such enforceability is considered in a
proceeding in equity or at law.
In rendering the foregoing opinions, we express no opinion as to the
laws of any jurisdiction other than the General Corporate Law of the State of
Delaware, the laws of the State of New York (excluding choice of law principles
therein) and the federal laws of the United States of America.
We hereby consent to the filing of this letter as Exhibit 5.2 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus, without implying or admitting that we are
"experts" within the meaning of the 1933 Act or the rules and regulations of the
Commission issued thereunder, with respect to any part of the Registration
Statement, including this Exhibit 5.2.
Sincerely,
/s/ ANDREWS & KURTH L.L.P.
<PAGE> 1
EXHIBIT 8.1
<TABLE>
<CAPTION>
ANDREWS & KURTH L.L.P.
<S> <C> <C>
OTHER OFFICES: A REGISTERED LIMITED LIABILITY PARTNERSHIP TELEPHONE: (202) 662-2700
HOUSTON ATTORNEYS TELECOPIER: (202) 662-2739
DALLAS 1701 PENNSYLVANIA AVENUE, N.W. TELEX: 79-1208
LOS ANGELES SUITE 200
NEW YORK WASHINGTON, D.C. 20006-5805
THE WOODLANDS
LONDON
</TABLE>
December 21, 1998
Morgan Stanley ABS Capital I Inc.
1585 Broadway
New York, New York 10036
Re: Morgan Stanley ABS Capital I Inc.
Registration Statement on Form S-3
(Commission File No. 333-64909)
Ladies and Gentlemen:
We have acted as counsel to Morgan Stanley ABS Capital I Inc., a
Delaware corporation (the "Depositor"), in connection with the authorization and
proposed issuance from time to time after the date hereof in one or more series
(each, a "Series") of up to $1,000,000,000 aggregate principal amount of
asset-backed certificates (the "Certificates") and asset-backed notes (the
"Notes" and, together with the Certificates, the "Securities") to be offered
pursuant to a registration statement on Form S-3 (such registration statement,
the "Registration Statement") relating to the Securities. The Registration
Statement has been filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "1933 Act"), and
the rules and regulations promulgated thereunder. As set forth in the
Registration Statement, each Series of Certificates will be issued under and
pursuant to the conditions of a pooling and servicing agreement (each, a
"Pooling and Servicing Agreement") or a trust agreement (each, a "Trust
Agreement") among the Depositor, a master servicer to be identified in the
prospectus supplement for such Series of Certificates (the "Master Servicer" for
such Series) and a trustee to be identified in the prospectus supplement for
such Series of Certificates (the "Trustee" for such Series); each Series of
Notes will be issued under and pursuant to the conditions of an indenture (each,
an "Indenture") between a trust fund to be identified in the prospectus
supplement for such Series of Notes (the "Trust Fund" for such Series) and a
trustee to be identified in the prospectus supplement for such Series of Notes
(the "Trustee" for such Series).
We have examined the prospectus contained in the Registration Statement
(the "Prospectus") and such other documents, records and instruments as we have
deemed necessary for the purpose of this opinion.
In arriving at the opinion expressed below, we have assumed that each
Pooling and Servicing Agreement, each Trust Agreement and each Indenture will be
duly authorized by all necessary corporate action on the part of the Depositor,
the related Trustee, the Master Servicer, as applicable, and any other party
thereto for the related Series of Certificates or Notes and will be duly
executed and delivered by the Depositor or the related Trust Fund, as
applicable, the related Trustee, the Master Servicer, as applicable, and any
other party thereto substantially in the forms filed as exhibits to the
Registration Statement, that
<PAGE> 2
Morgan Stanley ABS Capital I Inc.
December 21, 1998
Page 2
the Certificates or the Notes of each Series will be duly executed and delivered
substantially in the forms contemplated by the Pooling and Servicing Agreement,
the Trust Agreement or the Indenture, as applicable, and that the Certificates
or the Notes will be sold in the manner described in the Registration Statement.
Based upon such examination and the qualifications set forth herein and
in reliance thereon, we are of the opinion that the description of federal
income tax consequences appearing under the captions "Summary - Federal Income
Tax Consequences" and "Federal Income Tax Consequences" in the Prospectus
accurately describes the material federal income tax consequences to holders of
the Securities.
The opinion herein is based upon our interpretations of current law,
including court authority and existing final and temporary treasury regulations,
which are subject to change both prospectively and retroactively, and upon the
facts and assumptions discussed herein. This opinion letter is limited to the
matters set forth herein, and no opinions are intended to be implied or may be
inferred beyond those expressly stated herein. Our opinion is rendered as of the
date hereof and we assume no obligation to update or supplement this opinion or
any matter related to this opinion to reflect any change of fact, circumstances
or law after the date hereof. In addition, our opinion is based on the
assumption that the matter, if litigated, will be properly presented to the
applicable court. Furthermore, our opinion is not binding on the Internal
Revenue Service or a court. Our opinion represents merely our best legal
judgment on the matters presented; others may disagree with our conclusion.
There can be no assurance that the Internal Revenue Service will not take a
contrary position or that a court would agree with our opinion if litigated. In
the event any one of the statements, representations or assumptions we have
relied upon to issue this opinion is incorrect, our opinion might be adversely
affected and may not be relied upon.
We hereby consent to the filing of this letter as Exhibit 8.1 to the
Registration Statement and to the reference to this firm under the caption
"Federal Income Tax Consequences" in the Prospectus, without implying or
admitting that we are "experts" within the meaning of the 1933 Act or the rules
and regulations of the Commission issued thereunder, with respect to any part of
the Registration Statement, including this Exhibit 8.1.
Sincerely,
/s/ ANDREWS & KURTH L.L.P.
