<PAGE>
PROSPECTUS SUPPLEMENT Filed pursuant to
(TO PROSPECTUS DATED AUGUST 17, 2000) Rule 424(b)(5)
Registration File
Number 333-64909
$196,366,000 (APPROXIMATE)
MORGAN STANLEY ABS CAPITAL I INC.
DEPOSITOR
MSDWCC HELOC TRUST 2000-1
HELOC ASSET-BACKED NOTES, SERIES 2000-1
MORGAN STANLEY DEAN WITTER CREDIT CORPORATION
SELLER AND SERVICER
------------------------------
THE NOTES
o represent debt obligations of the trust;
o are principally secured by adjustable rate home equity revolving credit
loan agreements, secured primarily by second liens on one- to four-family
residential properties; and
o are not insured or guaranteed by any governmental agency.
THE TRUST
o will issue one class of notes, which is offered hereby; and
o will issue one class of certificates, representing beneficial ownership
in the trust, which is not offered hereby.
The notes represent non-recourse obligations of the trust and will not represent
an interest in or obligation of Morgan Stanley ABS Capital I Inc., Morgan
Stanley Dean Witter Credit Corporation, the indenture trustee, the owner trustee
or any of their affiliates.
Credit enhancement for the notes consists of:
o the investor's interest in the portion of interest paid by the borrowers
in excess of what is necessary to pay interest earned on, and other fees
and expenses associated with, the notes;
o overcollateralization consisting of any excess of the investor's interest
in the principal balance of the revolving credit loans over the balance
of the notes; and
o an irrevocable and unconditional financial guaranty insurance policy to
be issued by Financial Security Assurance Inc.
This prospectus supplement may be used to offer and sell the notes only if
accompanied by the prospectus.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-8 IN THIS
PROSPECTUS SUPPLEMENT AND PAGE 18 IN THE PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NOTES OR DETERMINED THAT THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------------
UNDERWRITING
Morgan Stanley & Co. Incorporated, ABN AMRO Bank N.V. and Banco Santander
Central Hispano, S. A. will purchase the notes from the depositor and will offer
them to the public from time to time in negotiated transactions at prices
determined at the time of sale. In exchange for the notes, the depositor will
receive approximately 99.65% of the initial principal balance of the notes,
before deducting expenses payable by the depositor. The notes are offered
subject to prior sale, when, as and if accepted by Morgan Stanley & Co.
Incorporated, ABN AMRO Bank N.V. and Banco Santander Central Hispano, S. A. and
subject to their right to reject orders in whole or in part. Delivery of the
notes will be made through The Depository Trust Company on or about August 23,
2000, against payment for them in immediately available funds.
------------------------------
MORGAN STANLEY DEAN WITTER
ABN AMRO
BANCO SANTANDER CENTRAL HISPANO
August 17, 2000
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the notes in two separate documents
that provide progressively more detailed information:
o the accompanying prospectus, which provides general information, some of
which may not apply to your series of notes; and
o this prospectus supplement, which describes the specific terms of your
series of notes.
IF THE DESCRIPTION OF YOUR NOTES IN THIS PROSPECTUS SUPPLEMENT DIFFERS FROM
THE RELATED DESCRIPTION IN THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE
INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the HELOC Asset-Backed Notes, Series 2000-1 in any
state where the offer is not permitted.
For 90 days following the date of this prospectus supplement, all dealers
selling notes will deliver a prospectus supplement and prospectus. This
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters of the notes with respect to their unsold allotments
or subscriptions.
This prospectus supplement and the prospectus include cross-references to
captions in these materials where you can find further related discussions. The
following table of contents and the table of contents contained in accompanying
prospectus indicate the pages on which those captions are located.
S-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary....................................... S-4
Risk Factors.................................. S-8
Introduction.................................. S-12
Description of the Mortgage Pool.............. S-12
General..................................... S-12
Revolving Credit Loan Terms................. S-13
Credit Scores............................... S-22
Servicing of Revolving Credit Loans........... S-23
General..................................... S-23
Collection and Liquidation Practices; Loss
Mitigation............................... S-23
Optional Repurchase of Defaulted Revolving
Credit Loans............................. S-23
Morgan Stanley Dean Witter Credit
Corporation................................. S-23
General..................................... S-23
Origination................................. S-24
Delinquency and Loss Experience............. S-24
Servicing and Other Compensation and Payment
of Expenses.............................. S-25
The Issuer.................................... S-26
General..................................... S-26
The Owner Trustee............................. S-26
The Indenture Trustee......................... S-26
The Credit Enhancer........................... S-26
Description of the Securities................. S-30
General..................................... S-30
Book-Entry Notes............................ S-30
Payments on the Notes....................... S-32
Interest Payments on the Notes.............. S-32
Principal Payments on the Notes............. S-33
Allocation of Payments on the Revolving
Credit Loans............................. S-34
Overcollateralization....................... S-35
Rapid Amortization Events................... S-36
The Paying Agent............................ S-37
Maturity and Optional Redemption............ S-37
The Policy.................................... S-37
Certain Yield and Prepayment Considerations... S-39
Description of the Purchase Agreement......... S-43
Transfer of Revolving Credit Loans.......... S-43
Representations and Warranties.............. S-43
Assignment to the Trust..................... S-44
Optional Transfers of Revolving Credit Loans
to the Seller............................ S-44
Description of the Servicing Agreement........ S-45
P&I Collections............................. S-45
Hazard Insurance............................ S-47
Evidence as to Compliance................... S-47
Certain Matters Regarding the Servicer...... S-47
Events of Servicing Termination............. S-48
Rights Upon an Event of Servicing
Termination.............................. S-49
Amendment................................... S-49
Description of the Trust Agreement and
Indenture................................... S-50
The Trust................................ S-50
Reports to Holders....................... S-50
Events of Default; Rights Upon Event of
Default................................ S-50
Certain Covenants........................ S-52
Modification of Indenture................ S-53
Satisfaction and Discharge of
Indenture.............................. S-54
Certain Matters Regarding the Indenture
Trustee and the Issuer................. S-54
Certain Federal Income Tax
Consequences................................ S-54
General.................................. S-54
Characterization of the Notes as
Indebtedness........................... S-54
Taxation of Interest Income of Note
Owners................................. S-55
Possible Classification of the Trust as a
Partnership or Association Taxable as a
Corporation............................ S-55
Possible Classification as a Taxable
Mortgage Pool.......................... S-56
Foreign Investors........................ S-56
Backup Withholding....................... S-57
Tax-Exempt Entities...................... S-58
ERISA Considerations.......................... S-58
Use of Proceeds............................... S-58
Legal Investment.............................. S-58
Method of Distribution........................ S-59
Experts....................................... S-59
Legal Matters................................. S-60
Ratings....................................... S-60
Index of Defined Terms........................ S-61
</TABLE>
S-3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS A GENERAL OVERVIEW OF THE NOTES OFFERED BY THIS
PROSPECTUS SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND THE TERMS OF
THE NOTES, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING
PROSPECTUS.
PRINCIPAL PARTIES AND DATES
<TABLE>
<S> <C>
Issuer................................... MSDWCC HELOC Trust 2000-1.
Depositor................................ Morgan Stanley ABS Capital I Inc. The depositor's principal
executive offices are located at 1585 Broadway, 2nd Floor,
New York, New York 10036 and its phone number is (212)
761-4000. The depositor is an affiliate of the seller, the
servicer and the underwriter.
Seller and servicer...................... Morgan Stanley Dean Witter Credit Corporation. The servicer
is an affiliate of the depositor and Morgan Stanley & Co.
Incorporated, one of the underwriters.
Owner trustee............................ Wilmington Trust Company.
Indenture trustee and custodian.......... Wells Fargo Bank Minnesota, N.A., a national banking
association. The indenture trustee's corporate trust office
is located in Minneapolis, Minnesota.
Credit enhancer.......................... Financial Security Assurance Inc.
Cut-off date............................. August 1, 2000.
Closing date............................. On or about August 23, 2000.
Payment dates............................ Beginning in September 2000 on the 25th of each month or, if
the 25th day is not a business day, on the next business day.
Scheduled final payment date............. September 26, 2011. The actual final payment date could be
substantially earlier.
</TABLE>
S-4
<PAGE>
THE TRUST
The depositor will establish the MSDWCC HELOC Trust 2000-1, a Delaware
business trust, to issue the notes. The trust will be established pursuant to a
trust agreement, dated as of August 1, 2000 between the depositor and the owner
trustee.
THE NOTES
The assets of the trust will consist of the revolving credit loans and
certain related assets.
Payment of interest of and principal on the notes will be made only from
payments received in connection with the revolving credit loans and the
financial guaranty insurance policy described below.
THE MORTGAGE POOL
The mortgage loan pool consists of 3,224 adjustable rate revolving credit
loans with an aggregate unpaid principal balance of approximately $196,366,817
as of the commencement of business on August 1, 2000. The revolving credit loans
are secured primarily by second liens on one-to four-family residential
properties.
Approximately 73.27% and 26.73% of the revolving credit loans are secured
by second mortgages or deeds of trust and first mortgages or deeds of trust,
respectively. In addition, the revolving credit loans have the following
characteristics as of the cut-off date:
<TABLE>
<S> <C>
Range of principal balances.... $1,000 to $2,807,006
Average principal balance...... $60,908
Range of loan rates............ 9.000% to 15.490%
Weighted average loan rate..... 9.741%
Range of credit limits......... $5,500 to $6,000,000
Average credit limit........... $126,821
Weighted average credit limit
utilization rate............. 48.03%
</TABLE>
We refer you to "Description of the Mortgage Pool" in this prospectus
supplement.
The trust will issue approximately $196,366,000 MSDWCC HELOC Asset-Backed
Notes, Series 2000-1 pursuant to an indenture dated as of August 1, 2000 between
the issuer and the indenture trustee. The notes will be issued in book-entry
form through The Depository Trust Company in minimum denominations of $1,000. We
refer you to "Description of the Securities--Book-Entry Notes" in this
prospectus supplement.
THE CERTIFICATES
The trust will also issue MSDWCC HELOC Asset-Backed Certificates,
Series 2000-1, which are not offered by this prospectus supplement. The
certificates will be issued pursuant to the trust agreement and will represent
the beneficial ownership interest in the trust. The principal amount of the
certificates initially will be zero and will change from time to time based
generally on the amount of draws on the revolving credit loans. The seller or an
affiliate of the seller, the servicer or the depositor will initially hold the
certificates.
PAYMENTS ON THE NOTES
Pursuant to the trust agreement, the servicer will collect monthly payments
of interest or principal and interest on the revolving credit loans. The
servicer will forward all collections on the revolving credit loans to the
indenture trustee except the portion representing the servicer's fee and certain
expenses. The indenture trustee shall distribute the investor's interest of such
amounts in the following order:
Step 1
Payment of fees to the indenture trustee and
the owner trustee
Step 2
Payment to the credit enhancer of its premium
for the financial guaranty insurance policy and
previously unpaid premiums (with interest
thereon)
Step 3
Payment of accrued interest on the notes, other
than any net funds cap carryover amount
Step 4
Payment of principal of the notes from certain
principal collections
Step 5
Payment of principal of the notes in respect of
specified amounts of certain losses
S-5
<PAGE>
Step 6
Payment to the notes of an amount equal to the
excess, if any, of the principal balance of the
notes over the investor interest of the
principal balance of the revolving credit loans
Step 7
Payment of other amounts owed to the credit
enhancer including reimbursement for certain
prior draws made on the financial guaranty
insurance policy (with interest thereon)
Step 8
Payment of additional principal to the notes
until the level of overcollateralization
reaches the required amount and, thereafter, as
necessary to restore the overcollateralization
level to the required amount
Step 9
Payment of the net funds cap carryover amount
Step 10
Payment of additional costs and expenses
payable to the indenture trustee or the owner
trustee
Step 11
Payment of any remaining funds to the
certificates
Interest will accrue on the notes at an annual rate of LIBOR plus 0.29% per
annum, subject to the limits and adjustments described in this prospectus
supplement under "Description of the Securities--Interest Payments on the
Notes."
Payments on the notes will be made from collections on the revolving credit
loans in the amounts and as described under "Description of the
Securities--Principal Payments on the Notes" in this prospectus supplement.
During the managed amortization period, the noteholders will receive payments of
principal from their portion of principal collections on the revolving credit
loans in excess of additional draws by borrowers. During the rapid amortization
period or upon the occurrence of a rapid amortization event, the noteholders
will receive payments from all principal collections on the revolving credit
loans.
In addition, payments to noteholders will be made on each payment date from
draws on the financial guaranty insurance policy, if necessary. Such draws will
cover shortfalls in amounts available to pay accrued and unpaid interest on the
notes plus certain losses allocated to the notes.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the notes consists of:
EXCESS INTEREST. Initially, the aggregate of the portion of interest due on
the revolving credit loans allocable to noteholders is expected to be an amount
greater than the amount necessary to pay the interest earned on the notes each
month, thus creating excess interest. Any excess interest will be available to
cover interest shortfalls and will be used to pay principal on the notes up to
the amount of losses allocated to noteholders. In addition, if the level of
overcollateralization described below is less than the required amount, any
remaining excess interest will be paid to the notes as principal. This payment
will reduce the principal balance of the notes faster than the investor interest
in the principal balance of the revolving credit loans until such difference
equals the required level of overcollateralization.
OVERCOLLATERALIZATION. On the date of issuance of the notes, the unpaid
principal balance of the revolving credit loans will equal the principal balance
of the notes. Overcollateralization is the excess, if any, of the investor
interest of the unpaid principal balance of the revolving credit loans over the
principal balance of the notes. Any excess interest not used to cover interest
shortfalls or current period losses as described above will be paid as principal
on the notes to reduce the principal balance of the notes until the required
level of overcollateralization is reached. Loss amounts allocated to the notes
that are not covered by excess interest will be covered by the financial
guaranty insurance policy as described below. If the level of
overcollateralization falls below the required level, the excess interest
described above will again be paid to the notes as principal to reduce the
principal balance of the notes in order to restore the level of
overcollateralization to its required level at that time.
POLICY. On the closing date, the credit enhancer will issue the financial
guaranty insurance policy in favor of the indenture trustee on behalf of the
noteholders. The policy will unconditionally and irrevocably guarantee interest
on the notes, certain losses allocated to the notes and any outstanding note
balance on the maturity date. The financial guaranty insurance policy will not
cover any net funds cap carryover amounts that result if the note
S-6
<PAGE>
rate is capped by the weighted average net loan rate.
We refer you to "The Policy" herein and "Credit Enhancement" in the
prospectus.
OPTIONAL REDEMPTION
On any payment date on which the outstanding principal balance of the
notes, after applying payments of principal on that payment date, is less than
or equal to 10% of the original principal balance of the notes, the servicer
may, but is not required to, repurchase the remaining revolving credit loans,
resulting in redemption of the notes and a termination of the trust. An optional
redemption will cause the outstanding principal balance of the notes to be paid
with accrued interest sooner than they otherwise would have been paid.
We refer you to "Description of the Securities--Maturity and Optional
Redemption" in this prospectus supplement and "The Agreements--Termination;
Optional Termination" in the prospectus.
RATINGS
The notes initially will be rated "Aaa" by Moody's Investors Service, Inc.
and "AAA" by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. A
security rating is not a recommendation to buy, sell or hold a security and is
subject to change or withdrawal at any time by the assigning rating agency. The
ratings also do not address the rate of principal prepayments on the revolving
credit loans or the receipt of any net funds cap carryover amount. The rate of
prepayments, if different than originally anticipated, could adversely affect
the yield realized by holders of the notes.
We refer you to "Risk Factors--Note Rating is based primarily on the
financial strength of the credit enhancer" and "Ratings" in this prospectus
supplement.
LEGAL INVESTMENT
The notes will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended. You should
consult your legal advisors in determining whether, and to what extent, the
notes constitute legal investments for you.
We refer you to "Legal Investment" in this prospectus supplement for
important information concerning possible restrictions on ownership of the notes
by regulated institutions.
ERISA CONSIDERATIONS
Subject to certain considerations, the notes may be eligible for purchase
by persons investing assets of employee benefit plans or individual retirement
accounts. Plans should consult with their legal advisors before investing in the
notes.
We refer you to "ERISA Considerations" in the prospectus supplement and in
the accompanying prospectus for additional information.
TAX STATUS
Tax counsel is of the opinion that the notes will be treated as debt
instruments. The trust itself will not be treated as an association or publicly
traded partnership taxable as a corporation. You must agree to treat your notes
as indebtedness for federal, state and local income and franchise tax purposes.
We refer you to "Certain Federal Income Tax Consequences" in this
prospectus supplement and "Federal Income Tax Consequences" in the accompanying
prospectus for additional information.
S-7
<PAGE>
RISK FACTORS
You should carefully consider, among other things, the following factors
and the risk factors listed in the accompanying prospectus in connection with
the purchase of the notes:
RISKS ASSOCIATED WITH THE REVOLVING CREDIT LOANS
<TABLE>
<S> <C>
Junior lien position may cause a Approximately 73.27% and 26.73% of the revolving credit loans (based
payment delay or a loss. on aggregate loan balance as of August 1, 2000) included in the
mortgage pool are secured by second mortgages or deeds of trust and
first mortgages or deeds of trust, respectively. Accordingly, the
proceeds from any liquidation, insurance or condemnation proceedings
will be available to satisfy the outstanding balance of the revolving
credit loans in a junior lien position only to the extent that the
claims of any senior mortgages have been satisfied in full. If it is
uneconomical to foreclose on a mortgaged property, the servicer may
write off the entire outstanding balance of the related revolving
credit loan as a bad debt. These risks are greater if a revolving
credit loan has a high combined loan-to-value ratio or low junior
ratio because it is more likely that the servicer would determine
foreclosure to be uneconomical.
If the proceeds remaining from a sale of a mortgaged property are
insufficient to satisfy the related mortgage loan in the trust, the
other forms of credit enhancement are insufficient to cover the loss
and the credit enhancer fails to perform its obligations under the
financial guaranty insurance policy, then:
o There will be a delay in payments to you while a deficiency
judgment against the borrower is sought; and
o You may incur a loss if a deficiency judgment cannot be obtained or
is not realized upon.
The majority of the revolving credit All of the revolving credit loans do not require principal payments
loans do not require maturity. principal payments until maturity and, thus, will require payment in
full of the outstanding principal balance (i.e., a balloon payment)
at their stated maturity. Revolving credit loans with balloon
payments involve a greater degree of risk because the ability of a
mortgagor to make a balloon payment typically will depend upon the
mortgagor's ability either to timely refinance the revolving credit
loan or to sell the related mortgaged property. If the borrower is
unable to pay the balloon payment, you will suffer a loss if the
collateral securing the revolving credit loan and the additional
forms of credit enhancement are insufficient to cover the unpaid
principal balance of the revolving credit loan, together with accrued
and unpaid interest, and the credit enhancer fails to perform its
obligations under the financial guaranty insurance policy.
We refer you to "Description of the Mortgage Pool" in this prospectus
supplement.
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
Adverse economic conditions may Loans similar to those included in the trust have been originated
increase risk to investors. only over the past few years. During this time, economic conditions
nationally and in most regions of the country have been generally
favorable. However, a deterioration in economic conditions could
adversely affect the ability and willingness of mortgagors to repay
their revolving credit loans. In those circumstances, no prediction
can be made as to the severity of the effect of an economic downturn
on the rate of delinquencies and losses on the revolving credit
loans. Delinquencies and losses on the revolving credit loans may
cause a payment delay or a loss to you.
Geographic concentration may affect One risk associated with investing in a pool of revolving credit
risk of loss on the revolving loans is created by a high concentration of the related mortgaged
credit loans. properties in one or more geographic regions. If the economy or
housing market of a state (or any other region) having a significant
concentration of the properties underlying the revolving credit loans
becomes weak, the loans may experience high rates of loss and
delinquency, resulting in losses to the trust. A region's economic
condition and housing market may be adversely affected by a variety
of events, including natural disasters such as earthquakes,
hurricanes, floods and eruptions, and civil disturbances such as
riots. The economic impact of any of these events may also be felt in
areas beyond the region immediately affected by the disaster or
disturbance. The properties underlying the revolving credit loans may
be concentrated in these regions. That concentration may result in
greater losses to the trust than those generally present for similar
securities without such concentration. Approximately 40.28%, 7.24%,
6.87% and 6.31% of the revolving credit loans (based on aggregate
loan balance as of August 1, 2000) are secured by properties in
California, New York, Florida and New Jersey, respectively.
Changes in bankruptcy laws may affect The Bankruptcy Reform Act of 1994 established the National Bankruptcy
the investor's interest. Review Commission for purposes of analyzing the nation's bankruptcy
laws and making recommendations to Congress for legislative changes
to the bankruptcy laws. This commission delivered a report on
October 20, 1997 recommending that Congress amend the Bankruptcy Code
with respect to mortgage loans, including revolving credit loans.
Congress adjourned in 1998 without passing any significant bankruptcy
reform legislation addressing the report or the Truth-in-Lending Act
with respect to claims secured by a debtor's principal residence.
Congress continues to debate possible changes to the Bankruptcy Code.
Any such bankruptcy law changes may affect future bankruptcies and
therefore could affect the rate and timing of payments on the
revolving credit loans. Any such changes to the Bankruptcy Code could
have a negative effect on the revolving credit loans and the
enforcement of rights therein.
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
RISKS ASSOCIATED WITH THE NOTES
The notes are complex securities. You should possess, either alone or together with an investment
advisor, the expertise necessary to evaluate the information
contained in this prospectus supplement and the accompanying
prospectus in the context of your financial situation and tolerance
for risk. The notes are not suitable investments for all investors.
In particular, you should not purchase the notes unless you
understand the prepayment, credit, liquidity and market risks
associated with the notes.
Payments on the revolving credit Credit enhancement will be provided for the notes in the form of
loans, together with the financial excess interest collections allocable to the investors, as required
guaranty insurance policy, are the and as described herein, any overcollateralization that may be
sole source of payments. created and by the financial guaranty insurance policy. None of the
seller, the depositor, the underwriter, the servicer or any of their
affiliates will have any obligation to replace or supplement the
credit enhancement, or take any other action to maintain any rating
of the notes. To the extent that the investor's portion of any losses
are incurred on any of the revolving credit loans that are not
covered by the foregoing, the holders of the notes will bear all risk
of such losses resulting from default by mortgagors. Neither the
servicer nor any other person is required to advance scheduled
payments on the revolving credit loans.
Investors may have to hold the notes A secondary market for the notes may not develop. Even if a secondary
to maturity if the marketability of market does develop, it may not continue, or it may be illiquid.
the notes is limited. Illiquidity means an investor may not be able to find a buyer for its
securities readily or at prices that will enable the investor to
realize a desired yield. Illiquidity can have an adverse effect on
the market value of the notes.
The notes may not always receive The notes may not always receive interest at a rate equal to LIBOR
interest based on LIBOR plus the plus the margin. If the weighted average of the loan rates (net of
margin. certain fees, expenses and 0.50% per annum) on the revolving credit
loans, is less than LIBOR plus the margin, the note rate on the notes
will be limited to the weighted average of the net loan rates. As a
result, the yield to investors in the notes will be sensitive to
fluctuations in the level of LIBOR and may be limited by the weighted
average net loan rate on the revolving credit loans. The interest
rates on the revolving credit loans are based on a prime rate. The
prepayment of the revolving credit loans with higher net loan rates
may result in a lower weighted average net loan rate.
If the rate of LIBOR plus the margin exceeds the weighted average net
loan rate, a net funds cap carryover amount will result. This net
funds cap carryover amount will be carried forward from payment date
to payment date, and will accrue interest until it is paid. The net
funds cap carryover amount will not be covered by the financial
guaranty insurance policy, is not addressed by the ratings of the
notes, will only be payable from excess interest allocable to
investors that may be available in future periods and may not be
payable on the optional redemption date.
We refer you to "Description of the Securities--Interest Payments on
the Notes" in this prospectus supplement.
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
An investor's yield to maturity will The yield to maturity of the notes will depend on a variety of
depend on various factors. factors, including:
o the rate and timing of principal payments on the revolving credit
loans (including payments in excess of required installments,
prepayments in full, liquidations and repurchases due to breaches
of representations or warranties);
o the servicer's option to exercise its early redemption rights;
o the rate and timing of new draws on the revolving credit loans;
o the note rate;
o the availability of excess interest to cover any net funds cap
carryover amounts; and
o the purchase price.
In general, if a note is purchased at a price higher than its
outstanding principal balance and principal payments occur more
quickly or draws occur more slowly than assumed at the time of
purchase, the yield will be lower than anticipated. Conversely, if a
note is purchased at a price lower than its outstanding principal
balance and principal payments occur more slowly or draws occur more
quickly than assumed at the time of purchase, the yield will be lower
than anticipated.
The rate of prepayments on the Since mortgagors can generally prepay their revolving credit loans at
revolving credit loans will be any time, the rate and timing of principal payments on the notes will
affected by various factors. be highly uncertain. The interest rates on the revolving credit loans
are subject to adjustment based on changes in the prime rate and are
subject to certain limitations. Any increase in the interest rate on
a revolving credit loan may encourage a mortgagor to prepay the loan.
The deductibility of interest payments for federal tax purposes,
however, may act as a disincentive to prepayment, despite an increase
in the interest rate. In addition, due to the revolving feature of
the loans, the rate of principal payments may be unrelated to changes
in market rates of interest.
Refinancing programs, which may involve soliciting all or some of the
mortgagors to refinance their revolving credit loans, may increase
the rate of prepayments on the revolving credit loans.
We refer you to "Description of the Mortgage Pool--Revolving Credit
Loan Terms" in this prospectus supplement and "Yield and Prepayment
Considerations" in the prospectus.
Note rating is based primarily on the The rating on the notes depends primarily on an assessment by the
financial strength of the credit rating agencies of the revolving credit loans and the financial
enhancer. strength of the credit enhancer. Any reduction of the rating assigned
to the financial strength of the credit enhancer may cause a
corresponding reduction in the rating assigned to the notes. A
reduction in the rating assigned to the notes will reduce the market
value of the notes and may affect your ability to sell them. In
general, the rating on your notes addresses credit risk and does not
address the likelihood of prepayments.
</TABLE>
S-11
<PAGE>
INTRODUCTION
The MSDWCC HELOC Trust 2000-1 (the "ISSUER" or the "TRUST") will be formed
pursuant to a Trust Agreement dated as of August 1, 2000 (the "TRUST
AGREEMENT"), between Morgan Stanley ABS Capital I Inc. (the "DEPOSITOR") and
Wilmington Trust Company (the "OWNER TRUSTEE") as Owner Trustee. On or about
August 23, 2000 (the "CLOSING DATE"), the Issuer will issue approximately
$196,366,000 aggregate principal amount of, MSDWCC HELOC Asset-Backed Notes,
Series 2000-1 (the "NOTES"). The Notes will be issued pursuant to an Indenture
(the "INDENTURE"), to be dated as of August 1, 2000 between the Issuer and Wells
Fargo Bank Minnesota, N.A., as Indenture Trustee. Pursuant to the Trust
Agreement, the Issuer will issue one class of HELOC Asset-Backed Certificates,
Series 2000-1 (the "CERTIFICATES"). The Notes and the Certificates are
collectively referred to herein as the "SECURITIES". Only the Notes are offered
hereby. On the Closing Date, the Depositor will transfer to the Issuer a pool
(the "MORTGAGE POOL") of revolving credit loans (the "REVOLVING CREDIT LOANS")
secured by first and subordinate liens on one- to four-family residential
properties. Morgan Stanley Dean Witter Credit Corporation (the "SERVICER") will
enter into a servicing agreement, dated as of August 1, 2000 (the "SERVICING
AGREEMENT"), with the Issuer and the Indenture Trustee pursuant to which the
Servicer will service the Revolving Credit Loans.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Revolving Credit Loans were originated pursuant to credit line
agreements (each, a "CREDIT LINE AGREEMENT"). Approximately 73.27% and 26.73%
(by aggregate Cut-off Date Pool Balance) of the Revolving Credit Loans are
secured by second mortgages or deeds of trust and first mortgages or deeds of
trust, respectively (each, a "MORTGAGE"). The Mortgage Pool will include the
unpaid principal balance of the Revolving Credit Loans as of the close of
business on the day prior to August 1, 2000 (the "CUT-OFF DATE BALANCE" and
August 1, 2000, the "CUT-OFF DATE") and any additions thereto made on or after
the Cut-off Date as a result of new advances of money made pursuant to the
applicable Credit Line Agreement after such date (the "ADDITIONAL BALANCES" or
"DRAWS") except as otherwise provided herein. The properties securing the
Revolving Credit Loans consist primarily of residential properties that are one-
to four-family properties. As to approximately 91.38% of the Revolving Credit
Loans (by Cut-off Date Pool Balance), the obligor thereunder (the "MORTGAGOR")
has represented at the time of origination that the related Mortgaged Property
would be owner occupied as a primary residence or investment property.
All of the Revolving Credit Loans were originated or acquired by Morgan
Stanley Dean Witter Credit Corporation (in such capacity, the "SELLER"), an
affiliate of Morgan Stanley & Co. Incorporated, one of the Underwriters.
All percentages of the Revolving Credit Loans described herein are
approximate percentages determined (except as otherwise indicated) by Cut-off
Date Balance.
The aggregate Cut-off Date Balance of the Revolving Credit Loans is
approximately $196,366,817 (the "CUT-OFF DATE POOL BALANCE"). The average
Cut-off Date Balance is $60,908, the minimum Cut-off Date Balance is $1,000 and
the maximum Cut-off Date Balance is $2,807,006. The lowest Loan Rate and the
highest Loan Rate on the Cut-off Date are 9.000% and 15.490% per annum,
respectively, and the weighted average Loan Rate on the Cut-off Date is 9.741%
per annum. The Combined Loan-to-Value Ratios range from 4.72% to 124.30%, with a
weighted average of 75.14%. The weighted average Credit Limit Utilization Rate
based on the Credit Limits of the Revolving Credit Loans is 48.03% as of the
Cut-off Date. The weighted average Junior Ratio of the Revolving Credit Loans
based on the related Credit Limit is approximately 45.04% as of the Cut-off
Date. The latest scheduled maturity of any Revolving Credit Loan will occur in
September 2010. With respect to approximately 40.28%, 7.24%, 6.87% and 6.31% of
the Revolving Credit Loans, the related Mortgaged Properties are located in
California, New York, Florida and New Jersey, respectively. No other state or
geographic location had a concentration of Revolving Credit Loans in excess of
5% as of the Cut-off Date.
S-12
<PAGE>
The "CREDIT LIMIT UTILIZATION RATE" with respect to each Revolving Credit
Loan as of the Cut-off Date is determined by dividing the Cut-off Date Balance
of such Revolving Credit Loan by the Credit Limit of such Revolving Credit Loan.
The "CREDIT LIMIT" with respect to each Revolving Credit Loan is the maximum
amount permitted to be drawn under the related Credit Line Agreement.
As of the Cut-off Date, no more than 0.87% of the Revolving Credit Loans
will be between 30 and 59 days delinquent in payment. As of the Cut-off Date, no
more than 0.01% of the Revolving Credit Loans will be more than 59 days
delinquent.
REVOLVING CREDIT LOAN TERMS
Payments will be due with respect to each Revolving Credit Loan on the day
in each month specified as the day of payment in the related Credit Line
Agreement (each, a "DUE DATE").
Interest on each Revolving Credit Loan is calculated based on the average
daily balance outstanding during the Billing Cycle for each Due Date. The
"BILLING CYCLE" for each Due Date is the period from the preceding Billing Date
through the day preceding the current Billing Date. With respect to each
Revolving Credit Loan, the "BILLING DATE" will be twenty-five days prior to the
Due Date.
Each Revolving Credit Loan accrues interest at a rate (the "LOAN RATE")
that is subject to adjustment on the first day of its Billing Cycle commencing
on a specified date (each such day, an "ADJUSTMENT DATE") to equal the sum of
(a) the prime rate for corporate loans at United States commercial banks, as
published in The Wall Street Journal (the "INDEX") on the first business day of
the month in which such Billing Cycle begins, and (b) the gross margin (the
"GROSS MARGIN") specified in the related Credit Line Agreement (as defined
herein), provided, however, that the Loan Rate on each Revolving Credit Loan
will in no event be greater than the maximum Loan Rate (the "MAXIMUM LOAN RATE")
set forth in the related Credit Line Agreement (subject to the maximum rate
permitted by applicable law). If, on any day, more than one prime rate or a
range of prime rates for corporate loans at United States commercial banks is
published in The Wall Street Journal, the Index on such day will be the highest
of the prime rates.
Each Revolving Credit Loan has a term to maturity from the date of
origination of not more than 120 months. The Mortgagor may make a Draw under the
related Credit Line Agreement at any time during the Draw Period. The "DRAW
PERIOD" will be 9 years and 11 months from the date of origination thereof. The
maximum amount of each Draw with respect to any Revolving Credit Loan is equal
to the excess, if any, of the Credit Limit over the outstanding principal
balance under such Credit Line Agreement at the time of such Draw. Each
Revolving Credit Loan may be prepaid in full or in part at any time and without
penalty, but with respect to each Revolving Credit Loan, the related Mortgagor
will have the right during the related Draw Period to make a Draw in the amount
of any principal prepayment previously made with respect to such Revolving
Credit Loan. Each Mortgagor generally will be able to make Draws with checks
provided when the related Revolving Credit Loan closed.
As to each Revolving Credit Loan, the Mortgagor's rights to receive Draws
during the Draw Period may be suspended, or the Credit Limit may be reduced for
cause under a number of circumstances, including, but not limited to: a
materially adverse change in the Mortgagor's financial circumstances; a decline
in the value of the Mortgaged Property significantly below its appraised value
at origination; or a default in payment by the Mortgagor. However, such
suspension or reduction generally will not affect the payment terms for
previously drawn balances. Neither the Servicer nor any other party will have an
obligation to investigate as to whether any such circumstances have occurred and
may have no knowledge thereof. As a result, there can be no assurance that any
Mortgagor's ability to receive Draws will be suspended or reduced in the event
that the foregoing circumstances occur. In the event of default under a
Revolving Credit Loan, the Revolving Credit Loan may be terminated and declared
immediately due and payable in full. For this purpose, a default includes, but
is not limited to: the Mortgagor's failure to make any payment as required; any
action or inaction by the Mortgagor that adversely affects the Mortgaged
Property or the rights in the Mortgaged Property; or fraud or material
misrepresentation by a Mortgagor in connection with the Revolving Credit Loan.
S-13
<PAGE>
Prior to the date of maturity, the Mortgagors for the Revolving Credit
Loans will be obligated to make monthly payments thereon in a minimum amount
that generally will be equal to the Finance Charge (as defined below) for each
Billing Cycle. The Mortgagor will be obligated to make a payment on the related
maturity date in an amount equal to the related Account Balance. See "Risk
Factors--Risks Associated with the Revolving Credit Loans" herein.
With respect to each Revolving Credit Loan, the "FINANCE CHARGE" for any
Billing Cycle will be an amount equal to the aggregate of, as calculated for
each day in the Billing Cycle, the then-applicable Loan Rate divided by 365,
multiplied by such day's Principal Balance. With respect to each Revolving
Credit Loan, the "ACCOUNT BALANCE" on any day generally will be the principal
balance of the Revolving Credit Loan for such day, plus the sum of any unpaid
fees, insurance premiums and other charges, if any (such fees, premiums and
other charges collectively, "ADDITIONAL CHARGES") and any unpaid Finance Charges
for prior unrelated Billing Cycles, plus the aggregate of all related Draws
funded on that day, minus the aggregate of all payments and credits that are
applied to the repayment of any Draws on that day.
With respect to each Revolving Credit Loan, the "COMBINED LOAN-TO-VALUE
RATIO" or "CLTV" generally will be the ratio, expressed as a percentage, of
(A) the sum of (i) the Credit Limit and (ii) any outstanding principal balance,
at the time of origination of such Revolving Credit Loan, of all other mortgage
loans, if any, secured by senior or subordinate liens on the related Mortgaged
Property, to (B) the Appraised Value. The "APPRAISED VALUE" for any Revolving
Credit Loan will be the appraised value of the related Mortgaged Property
determined in the appraisal used in the origination of such Revolving Credit
Loan.
The Credit Line Agreement or Mortgage related to each Revolving Credit Loan
generally will contain a customary "due-on-sale" clause.
REVOLVING CREDIT LOAN CHARACTERISTICS
Set forth below is a description of certain additional characteristics of
the Revolving Credit Loans as of the Cut-off Date. Unless otherwise specified,
all Principal Balances of the Revolving Credit Loans are as of the Cut-off Date.
All percentages are approximate percentages by aggregate Principal Balance as of
the Cut-off Date (except as indicated otherwise).
PROPERTY TYPES
<TABLE>
<CAPTION>
NUMBER OF
REVOLVING CUT-OFF DATE
PROPERTY TYPE CREDIT LOANS BALANCE
------------- --------------- -------------
<S> <C> <C> <C>
Single Family Residence......................................... 2,693 $154,364,924.64 78.61%
PUD............................................................. 258 19,065,859.07 9.71
Condo........................................................... 172 10,729,552.48 5.46
Other........................................................... 101 12,206,480.44 6.22
------ --------------- -------
Total...................................................... 3,224 $196,366,816.63 100.00%
====== =============== =======
</TABLE>
OCCUPANCY TYPES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
OCCUPANCY CREDIT LOANS BALANCE DATE BALANCE
--------- ------------ --------------- -------------
<S> <C> <C> <C>
Primary......................................................... 3,076 $179,447,729.41 91.38%
Second Home..................................................... 103 13,412,154.30 6.83
Investment...................................................... 45 3,506,932.92 1.79
------ --------------- -------
Total...................................................... 3,224 $196,366,816.63 100.00%
====== =============== =======
</TABLE>
S-14
<PAGE>
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF PRINCIPAL BALANCES ($) CREDIT LOANS BALANCE DATE BALANCE
------------------------------- ------------ --------------- -------------
<S> <C> <C> <C>
0.01 to 10,000.00.................................... 636 $ 4,174,922.95 2.13%
10,000.01 to 20,000.00.................................... 462 6,933,271.73 3.53
20,000.01 to 30,000.00.................................... 440 11,001,171.82 5.60
30,000.01 to 40,000.00.................................... 324 11,362,001.74 5.79
40,000.01 to 50,000.00.................................... 339 15,405,849.00 7.85
50,000.01 to 60,000.00.................................... 191 10,534,063.59 5.36
60,000.01 to 70,000.00.................................... 134 8,611,002.27 4.39
70,000.01 to 80,000.00.................................... 111 8,291,475.90 4.22
80,000.01 to 90,000.00.................................... 83 7,066,862.08 3.60
90,000.01 to 100,000.00.................................... 148 14,329,730.19 7.30
100,000.01 to 110,000.00.................................... 51 5,330,509.07 2.71
110,000.01 to 120,000.00.................................... 40 4,631,063.81 2.36
120,000.01 to 130,000.00.................................... 36 4,515,745.62 2.30
130,000.01 to 140,000.00.................................... 23 3,127,085.96 1.59
140,000.01 to 150,000.00.................................... 36 5,261,217.56 2.68
150,000.01 to 200,000.00.................................... 60 10,553,549.03 5.37
200,000.01 to 250,000.00.................................... 21 4,747,244.10 2.42
250,000.01 to 300,000.00.................................... 13 3,611,984.31 1.84
300,000.01 to 350,000.00.................................... 12 3,926,137.70 2.00
350,000.01 to 400,000.00.................................... 10 3,710,098.37 1.89
400,000.01 to 450,000.00.................................... 3 1,263,557.24 0.64
450,000.01 to 500,000.00.................................... 5 2,363,233.93 1.20
500,000.01 to 1,000,000.00.................................... 29 19,898,922.53 10.13
1,000,000.01 to 1,500,000.00.................................... 11 12,824,825.20 6.53
1,500,000.01 to 2,000,000.00.................................... 3 5,595,759.91 2.85
2,000,000.01 to 2,500,000.00.................................... 2 4,488,525.02 2.29
2,500,000.01 to 3,000,000.00.................................... 1 2,807,006.00 1.43
------ --------------- -------
Total...................................................... 3,224 $196,366,816.63 100.00%
====== =============== =======
</TABLE>
The average Principal Balance of the Revolving Credit Loans as of the
Cut-off Date was approximately $60,908.
S-15
<PAGE>
GEOGRAPHICAL DISTRIBUTION
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
GEOGRAPHIC LOCATION CREDIT LOANS BALANCE DATE BALANCE
------------------- ------------ --------------- -------------
<S> <C> <C> <C>
Alabama......................................................... 25 $ 1,048,109.12 0.53%
Alaska.......................................................... 10 376,363.82 0.19
Arizona......................................................... 82 3,317,607.35 1.69
California-Northern............................................. 536 35,162,645.53 17.91
California-Southern............................................. 610 43,934,623.90 22.37
Colorado........................................................ 101 5,513,844.61 2.81
Connecticut..................................................... 65 3,020,001.42 1.54
Delaware........................................................ 11 370,504.90 0.19
District of Columbia............................................ 2 148,389.03 0.08
Florida......................................................... 173 13,484,662.31 6.87
Georgia......................................................... 88 5,646,722.25 2.88
Hawaii.......................................................... 12 530,758.91 0.27
Idaho........................................................... 16 608,935.97 0.31
Illinois........................................................ 130 5,876,212.02 2.99
Indiana......................................................... 25 630,524.62 0.32
Iowa............................................................ 5 365,955.54 0.19
Kansas.......................................................... 16 540,796.05 0.28
Kentucky........................................................ 15 1,521,937.75 0.78
Louisiana....................................................... 24 673,971.83 0.34
Maine........................................................... 10 261,684.27 0.13
Maryland........................................................ 44 1,917,735.67 0.98
Massachusetts................................................... 89 7,652,206.80 3.90
Michigan........................................................ 108 5,283,658.27 2.69
Minnesota....................................................... 39 1,305,986.10 0.67
Mississippi..................................................... 9 387,426.09 0.20
Missouri........................................................ 56 1,917,617.90 0.98
Montana......................................................... 7 411,309.90 0.21
Nebraska........................................................ 6 212,976.50 0.11
Nevada.......................................................... 28 1,177,840.11 0.60
New Hampshire................................................... 13 1,121,789.26 0.57
New Jersey...................................................... 176 12,399,720.64 6.31
New Mexico...................................................... 26 1,179,185.24 0.60
New York........................................................ 218 14,208,521.45 7.24
North Carolina.................................................. 38 2,382,900.41 1.21
Ohio............................................................ 41 1,783,146.40 0.91
Oklahoma........................................................ 17 578,901.48 0.29
Oregon.......................................................... 50 3,081,896.05 1.57
Pennsylvania.................................................... 68 2,722,918.98 1.39
Rhode Island.................................................... 11 401,891.40 0.20
South Carolina.................................................. 27 3,702,824.99 1.89
South Dakota.................................................... 5 184,755.20 0.09
Tennessee....................................................... 12 630,321.95 0.32
Utah............................................................ 24 1,025,449.92 0.52
Vermont......................................................... 8 272,832.23 0.14
Virginia........................................................ 55 2,818,546.97 1.44
Washington...................................................... 66 3,477,743.65 1.77
West Virginia................................................... 3 84,551.65 0.04
Wisconsin....................................................... 20 888,145.58 0.45
Wyoming......................................................... 4 119,764.64 0.06
------ --------------- -------
Totals..................................................... 3,224 $196,366,816.63 100.00%
====== =============== =======
</TABLE>
Number of States represented (including the District of Columbia): 48.
S-16
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF COMBINED LOAN-TO-VALUE RATIOS(%) CREDIT LOANS BALANCE DATE BALANCE
----------------------------------------- ------------ --------------- -------------
<S> <C> <C> <C>
0.01 to 5.00................................................ 1 $ 25,000.00 0.01%
5.01 to 10.00................................................ 4 178,740.58 0.09
10.01 to 15.00................................................ 16 430,978.61 0.22
15.01 to 20.00................................................ 18 720,784.69 0.37
20.01 to 25.00................................................ 26 1,002,809.39 0.51
25.01 to 30.00................................................ 35 1,647,826.87 0.84
30.01 to 35.00................................................ 50 2,197,622.88 1.12
35.01 to 40.00................................................ 47 2,537,154.68 1.29
40.01 to 45.00................................................ 69 2,911,726.35 1.48
45.01 to 50.00................................................ 99 6,097,583.53 3.11
50.01 to 55.00................................................ 96 3,691,550.36 1.88
55.01 to 60.00................................................ 123 5,539,562.65 2.82
60.01 to 65.00................................................ 155 11,908,236.49 6.06
65.01 to 70.00................................................ 185 11,104,122.98 5.65
70.01 to 75.00................................................ 226 16,770,282.02 8.54
75.01 to 80.00................................................ 328 22,718,009.09 11.57
80.01 to 85.00................................................ 440 25,536,637.75 13.00
85.01 to 90.00................................................ 1,255 76,724,920.25 39.07
90.01 to 95.00................................................ 17 2,669,589.46 1.36
95.01 to 100.00................................................ 32 1,858,867.42 0.95
105.01 to 110.00................................................ 1 89,785.83 0.05
Greater than 110.01............................................. 1 5,024.75 *
------ --------------- -------
Totals..................................................... 3,224 $196,366,816.63 100.00%
====== =============== =======
</TABLE>
------------------
Represents less than 0.01% of the Cut-off Date Pool Balance.
The weighted average Combined Loan-to-Value Ratio based on the Credit
Limits of the Revolving Credit Loans as of the Cut-off Date for which the Seller
has adequate information was approximately 75.14%.
JUNIOR RATIOS(1)
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF JUNIOR RATIOS(%) CREDIT LOANS BALANCE DATE BALANCE
------------------------- ------------ --------------- -------------
<S> <C> <C> <C>
5.01 to 10.00................................................. 29 $ 604,397.00 0.42%
10.01 to 15.00................................................. 179 5,480,440.98 3.81
15.01 to 20.00................................................. 247 9,114,488.79 6.33
20.01 to 25.00................................................. 327 14,846,079.76 10.32
25.01 to 30.00................................................. 359 14,870,562.79 10.34
30.01 to 40.00................................................. 537 29,983,780.45 20.84
40.01 to 50.00................................................. 378 23,653,140.39 16.44
50.01 to 60.00................................................. 235 15,595,095.06 10.84
60.01 to 70.00................................................. 147 15,104,165.09 10.50
70.01 to 80.00................................................. 78 8,082,178.71 5.62
80.01 to 90.00................................................. 50 4,577,941.72 3.18
90.01 to 100.00................................................. 40 1,969,411.78 1.37
------ --------------- -------
Totals..................................................... 2,606 $143,881,682.52 100.00%
====== =============== =======
</TABLE>
(footnotes on next page)
S-17
<PAGE>
(footnotes from previous page)
(1) First liens are excluded. "JUNIOR RATIO" is defined as the ratio, expressed
as a percentage, of the Credit Limits as of the applicable origination date
of the subordinate lien revolving credit loans to the sum of (i) the Credit
Limits of the subordinate lien revolving credit loans, and (ii) the unpaid
principal balance of any senior lien balance at the time of origination of
the subordinate lien revolving credit loan.
The weighted average Junior Ratio as of the Cut-off Date based on the
Credit Limit of the Revolving Credit Loans for which Junior Ratios are shown in
the table above was approximately 45.04%.
LOAN RATES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF LOAN RATES(%) CREDIT LOANS BALANCE DATE BALANCE
---------------------- ------------ --------------- -------------
<S> <C> <C> <C>
8.501 to 9.000................................................ 2 $ 133,506.30 0.07%
9.001 to 9.500................................................ 1,911 151,404,820.07 77.10
9.501 to 10.000................................................ 10 1,813,024.09 0.92
10.001 to 10.500................................................ 888 32,507,935.46 16.55
10.501 to 11.000................................................ 7 426,868.34 0.22
11.001 to 11.500................................................ 353 8,471,419.41 4.31
11.501 to 12.000................................................ 5 154,787.27 0.08
12.001 to 12.500................................................ 10 354,822.79 0.18
12.501 to 13.000................................................ 8 188,495.19 0.10
13.001 to 13.500................................................ 9 286,128.48 0.15
14.001 to 14.500................................................ 18 474,581.19 0.24
14.501 to 15.000................................................ 2 51,695.60 0.03
15.001 to 15.500................................................ 1 98,732.44 0.05
------ --------------- -------
Totals..................................................... 3,224 $196,366,816.63 100.00%
====== =============== =======
</TABLE>
The weighted average Loan Rate as of the Cut-off Date was approximately
9.741%.
GROSS MARGINS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF GROSS MARGINS (%) CREDIT LOANS BALANCE DATE BALANCE
-------------------------- ------------ --------------- -------------
<S> <C> <C> <C>
0.000........................................................... 1,899 $151,026,860.02 76.91%
0.001 to 0.500.................................................. 9 1,731,161.45 0.88
0.501 to 1.000.................................................. 895 32,883,702.12 16.75
1.001 to 1.500.................................................. 7 426,868.34 0.22
1.501 to 2.000.................................................. 356 8,540,711.94 4.35
2.001 to 2.500.................................................. 7 210,994.77 0.11
2.501 to 3.000.................................................. 12 441,860.34 0.23
3.001 to 3.500.................................................. 8 188,495.19 0.10
3.501 to 4.000.................................................. 10 291,153.23 0.15
4.501 to 5.000.................................................. 18 474,581.19 0.24
5.001 to 5.500.................................................. 2 51,695.60 0.03
5.501 to 6.000.................................................. 1 98,732.44 0.05
------ --------------- -------
Totals..................................................... 3,224 $196,366,816.63 100.00%
====== =============== =======
</TABLE>
The weighted average Gross Margin as of the Cut-off Date was approximately
0.245%.
S-18
<PAGE>
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF CREDIT LIMIT UTILIZATION RATES(%) CREDIT LOANS BALANCE DATE BALANCE
------------------------------------------ ------------ --------------- -------------
<S> <C> <C> <C>
0.01 to 5.00................................................ 275 $ 1,471,353.07 0.75%
5.01 to 10.00................................................ 250 2,437,936.15 1.24
10.01 to 15.00................................................ 204 3,406,739.63 1.73
15.01 to 20.00................................................ 195 3,938,185.78 2.01
20.01 to 25.00................................................ 131 3,748,141.60 1.91
25.01 to 30.00................................................ 137 4,743,986.40 2.42
30.01 to 35.00................................................ 99 3,572,725.32 1.82
35.01 to 40.00................................................ 126 6,326,611.70 3.22
40.01 to 45.00................................................ 122 7,036,445.02 3.58
45.01 to 50.00................................................ 111 6,526,694.86 3.32
50.01 to 55.00................................................ 117 8,201,049.68 4.18
55.01 to 60.00................................................ 97 4,846,248.49 2.47
60.01 to 65.00................................................ 89 5,860,518.61 2.98
65.01 to 70.00................................................ 87 7,383,876.09 3.76
70.01 to 75.00................................................ 94 9,292,957.39 4.73
75.01 to 80.00................................................ 75 6,889,226.34 3.51
80.01 to 85.00................................................ 87 8,993,179.46 4.58
85.01 to 90.00................................................ 125 13,964,243.46 7.11
90.01 to 95.00................................................ 136 12,900,077.86 6.57
95.01 to 100.00................................................ 641 72,227,409.85 36.78
100.01 to 105.00................................................ 26 2,599,209.87 1.32
------ --------------- -------
Totals..................................................... 3,224 $196,366,816.63 100.00%
====== =============== =======
</TABLE>
The weighted average Credit Limit Utilization Rate based on the Credit
Limits of the Revolving Credit Loans as of the Cut-off Date was approximately
48.03%.
S-19
<PAGE>
CREDIT LIMITS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE BY CUT-OFF
RANGE OF CREDIT LIMITS ($) CREDIT LOANS BALANCE DATE BALANCE
-------------------------- ------------ --------------- -------------
<S> <C> <C> <C>
0.01 to 10,000.00.................................... 17 $ 139,831.87 0.07%
10,000.01 to 20,000.00.................................... 81 1,146,308.15 0.58
20,000.01 to 30,000.00.................................... 134 2,721,766.18 1.39
30,000.01 to 40,000.00.................................... 127 3,341,390.68 1.70
40,000.01 to 50,000.00.................................... 554 15,982,156.39 8.14
50,000.01 to 60,000.00.................................... 144 5,164,677.36 2.63
60,000.01 to 70,000.00.................................... 131 5,598,467.65 2.85
70,000.01 to 80,000.00.................................... 135 5,725,134.09 2.92
80,000.01 to 90,000.00.................................... 81 3,817,526.49 1.94
90,000.01 to 100,000.00.................................... 947 35,880,224.03 18.27
100,000.01 to 110,000.00.................................... 51 3,057,202.70 1.56
110,000.01 to 120,000.00.................................... 66 3,913,200.97 1.99
120,000.01 to 130,000.00.................................... 79 5,434,797.13 2.77
130,000.01 to 140,000.00.................................... 40 2,202,899.62 1.12
140,000.01 to 150,000.00.................................... 127 9,256,171.41 4.71
150,000.01 to 200,000.00.................................... 201 15,020,415.20 7.65
200,000.01 to 250,000.00.................................... 90 8,026,859.31 4.09
250,000.01 to 300,000.00.................................... 58 6,350,621.15 3.23
300,000.01 to 350,000.00.................................... 21 2,318,289.75 1.18
350,000.01 to 400,000.00.................................... 31 4,540,595.25 2.31
400,000.01 to 450,000.00.................................... 8 1,714,443.91 0.87
450,000.01 to 500,000.00.................................... 25 3,271,883.43 1.67
500,000.01 to 1,000,000.00.................................... 48 20,405,287.63 10.39
1,000,000.01 to 1,500,000.00.................................... 16 13,388,965.05 6.82
1,500,000.01 to 2,000,000.00.................................... 6 8,305,347.16 4.23
2,000,000.01 to 2,500,000.00.................................... 2 4,488,525.02 2.29
2,500,000.01 to 3,000,000.00.................................... 2 2,224,666.61 1.13
3,500,000.01 to 4,000,000.00.................................... 1 2,807,006.00 1.43
5,500,000.01 to 6,000,000.00.................................... 1 122,156.44 0.06
------ --------------- -------
Total:..................................................... 3,224 $196,366,816.63 100.00%
====== =============== =======
</TABLE>
The total Credit Limit as of the Cut-off Date was approximately
$408,872,309. The average Credit Limit as of the Cut-off Date was approximately
$126,821.
MAXIMUM LOAN RATES
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF MORTGAGE POOL
REVOLVING CUT-OFF DATE LOANS BY CUT-OFF
MAXIMUM LOAN RATES (%) CREDIT LOANS BALANCE DATE BALANCE
---------------------- ------------ --------------- ----------------
<S> <C> <C> <C>
11.251 to 11.500.............................................. 1 $ 8,447.02 *%
11.751 to 12.000.............................................. 88 6,862,071.38 3.49
12.251 to 12.500.............................................. 2 49,956.00 0.03
14.751 to 15.000.............................................. 2 71,073.81 0.04
15.251 to 15.500.............................................. 5 340,236.09 0.17
15.751 to 16.000.............................................. 38 2,382,900.41 1.21
16.251 to 16.500.............................................. 2 30,042.89 0.02
16.751 to 17.000.............................................. 7 357,383.20 0.18
17.751 to 18.000.............................................. 3,079 186,264,705.83 94.86
------ --------------- ------
Total:................................................... 3,224 $196,366,816.63 100.00%
====== =============== ======
</TABLE>
------------------
* Represents less than 0.01% of the Cut-off Date Pool Balance.
The weighted average Maximum Loan Rate as of the Cut-off Date was
approximately 17.757%.
S-20
<PAGE>
NUMBER OF MONTHS SINCE FIRST PAYMENT DATE
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
REVOLVING MORTGAGE POOL
CREDIT CUT-OFF DATE BY CUT-OFF
RANGE OF NUMBER OF MONTHS SINCE FIRST PAYMENT DATE (MONTHS) LOANS BALANCE DATE BALANCE
---------------------------------------------------------------- ------------ --------------- -------------
<S> <C> <C> <C>
0........................................................ 498 $ 20,133,655.44 10.25%
1 to 3........................................................ 2,041 117,261,355.74 59.72
4 to 6........................................................ 373 30,522,557.55 15.54
7 to 9........................................................ 156 13,529,653.63 6.89
10 to 12........................................................ 84 7,597,497.20 3.87
13 to 15........................................................ 70 7,205,540.58 3.67
16 to 18........................................................ 1 17,824.05 0.01
22 to 24........................................................ 1 98,732.44 0.05
------ --------------- -------
Totals..................................................... 3,224 $196,366,816.63 100.00%
====== =============== =======
</TABLE>
The weighted average number of months since origination as of the Cut-off
Date was approximately 3.5 months.
NUMBER OF MONTHS REMAINING TO MATURITY
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
REVOLVING MORTGAGE POOL
CREDIT CUT-OFF DATE BY CUT-OFF
RANGE OF NUMBER OF MONTHS REMAINING TO MATURITY LOANS BALANCE DATE BALANCE
----------------------------------------------- ------------ --------------- -------------
<S> <C> <C> <C>
97 to 99...................................................... 1 $ 98,732.44 0.05%
103 to 105...................................................... 18 2,619,665.39 1.33
106 to 108...................................................... 74 5,480,395.30 2.79
109 to 111...................................................... 97 12,146,729.00 6.19
112 to 114...................................................... 168 13,659,661.45 6.96
115 to 117...................................................... 1,074 66,478,109.19 33.85
118 to 120...................................................... 1,792 95,883,523.86 48.83
------ --------------- -------
Totals:.................................................... 3,224 $196,366,816.63 100.00%
====== =============== =======
</TABLE>
The weighted average number of months remaining to maturity as of the
Cut-off Date was approximately 116.5 months.
ORIGINATION YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
REVOLVING MORTGAGE POOL
CREDIT CUT-OFF DATE BY CUT-OFF
ORIGINATION YEAR LOANS BALANCE DATE BALANCE
---------------- ------------ --------------- -------------
<S> <C> <C> <C>
1998............................................................ 1 $ 98,732.44 0.05%
1999............................................................ 316 28,484,055.07 14.51
2000............................................................ 2,907 167,784,029.12 85.44
------ --------------- -------
Totals:.................................................... 3,224 $196,366,816.63 100.00%
====== =============== =======
</TABLE>
LIEN PRIORITY
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
REVOLVING MORTGAGE POOL
CREDIT CUT-OFF DATE BY CUT-OFF
LIEN PRIORITY LOANS BALANCE DATE BALANCE
------------- ------------ --------------- -------------
<S> <C> <C> <C>
First........................................................... 618 $ 52,485,134.11 26.73%
Second.......................................................... 2,606 143,881,682.52 73.27
------ --------------- -------
Totals:.................................................... 3,224 $196,366,816.63 100.00%
====== =============== =======
</TABLE>
S-21
<PAGE>
CREDIT SCORES
Credit scores are obtained by many lenders in connection with revolving
credit loan applications to help assess a borrower's creditworthiness (the
"Credit Scores"). Credit Scores are derived in part from information obtained
from credit-reporting organizations, and are designed to evaluate an applicant's
creditworthiness mechanically, based on key attributes of the applicant and
aspects of the credit transaction. Credit Scores may be used alone or in
connection with the evaluation of additional information of the applicant. The
Credit Score is designed to assess a borrower's credit history at a single point
in time, using objective information currently on file for the borrower at a
particular credit reporting organization. Information utilized to create a
Credit Score may include, among other things, payment history, delinquencies on
accounts, levels of outstanding indebtedness, length of credit history, types of
credit, and bankruptcy experience. Credit Scores range from approximately 350 to
approximately 840, with higher scores indicating an individual with a more
favorable credit history compared to an individual with a lower score. However,
a Credit Score purports only to be a measurement of the relative degree of risk
a borrower represents to a lender, i.e., a borrower with a higher score is
statistically expected to be less likely to default in payment than a borrower
with a lower score. In addition, it should be noted that Credit Scores were
developed to indicate a level of default probability over a two-year period,
which does not correspond to the life of a revolving credit loan. Furthermore,
Credit Scores were not developed specifically for use in connection with home
equity revolving credit loans, but for consumer loans in general, and assess
only the borrower's past credit history. Therefore, a Credit Score does not take
into consideration the differences between home equity revolving credit loans
and consumer loans generally or the specific characteristics of the related
revolving credit loan (for example, the Combined Loan-to-Value Ratio, the
collateral for the revolving credit loan, or the debt to income ratio). There
can be no assurance that the Credit Scores of the Mortgagors will be an accurate
predictor of the likelihood of repayment of the related Revolving Credit Loans.
The following table sets forth information as to the Credit Scores of the
related Mortgagors as of the Cut-off Date.
CREDIT SCORES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
REVOLVING MORTGAGE POOL
CREDIT CUT-OFF DATE BY CUT-OFF
RANGE OF CREDIT SCORES LOANS BALANCE DATE BALANCE
---------------------- ------------ --------------- -------------
<S> <C> <C> <C>
0...................................................... 4 $ 408,564.63 0.21%
501 to 525...................................................... 3 303,101.71 0.15
526 to 550...................................................... 16 1,250,622.40 0.64
551 to 575...................................................... 25 1,132,414.68 0.58
576 to 600...................................................... 93 5,026,561.03 2.56
601 to 625...................................................... 140 11,595,986.84 5.91
626 to 650...................................................... 142 10,777,376.47 5.49
651 to 675...................................................... 309 17,471,057.87 8.90
676 to 700...................................................... 482 31,794,110.20 16.19
701 to 725...................................................... 535 29,853,783.05 15.20
726 to 750...................................................... 511 35,485,915.32 18.07
751 to 775...................................................... 487 25,661,857.54 13.07
776 to 800...................................................... 406 23,039,159.10 11.73
801 to 825...................................................... 69 2,492,540.22 1.27
826 to 850...................................................... 2 73,765.57 0.04
------ --------------- -------
Totals:.................................................... 3,224 $196,366,816.63 100.00%
====== =============== =======
</TABLE>
S-22
<PAGE>
SERVICING OF REVOLVING CREDIT LOANS
GENERAL
The Servicer will be responsible for servicing the Revolving Credit Loans
in a manner consistent with the terms of the Servicing Agreement and in a manner
which shall be normal and usual in its general servicing activities.
Billing statements are mailed monthly by the Servicer. The statement
details the monthly activity on the related Revolving Credit Loan and specifies
the minimum payment due to the Servicer and the available credit line. Notice of
changes in the applicable Loan Rate are provided by the Servicer to the
Mortgagor with such statements. The Servicing Agreement permits the Servicer to
execute assumption agreements, substitution agreements and instruments of
satisfaction or cancellation or of partial or full release or discharge or any
other agreement contemplated by the Servicing Agreement. A partial release may
be made only if the new Combined Loan-to-Value Ratio would not exceed the
Combined Loan-to-Value Ratio as of the Cut-off Date.
The Servicer may increase the Credit Limits and may also permit the
refinancing of any existing lien senior to a Revolving Credit Loan subject to
the terms described in the Servicing Agreement.
Servicing and charge-off policies and collection practices may change over
time in accordance with the Servicer's business judgment, changes in the
Servicer's portfolio of real estate secured revolving-credit line loans that it
services for its clients, applicable laws and regulations and other
considerations.
COLLECTION AND LIQUIDATION PRACTICES; LOSS MITIGATION
The Servicer is authorized to engage in a wide variety of loss mitigation
practices with respect to the Revolving Credit Loans, including waivers,
modifications, payment forbearances, partial forgiveness, entering into
repayment schedule arrangements and capitalization of arrearages; provided, in
any case, that the Servicer determines that such action is generally consistent
with the Servicer's policies with respect to similar loans; and provided,
further, that certain of such modifications (including reductions in the Loan
Rate, partial forgiveness or a maturity extension) may only be taken if the
Revolving Credit Loan is in default or if default is reasonably foreseeable.
With respect to Revolving Credit Loans that come into and continue in default,
the Servicer may take a variety of actions including foreclosure upon the
related Mortgaged Property, writing off the balance of the Revolving Credit Loan
as a bad debt, taking a deed in lieu of foreclosure, accepting a short sale,
arranging for a repayment plan, modifications as described above or taking an
unsecured note.
OPTIONAL REPURCHASE OF DEFAULTED REVOLVING CREDIT LOANS
Pursuant to the Servicing Agreement, the Servicer will have the option to
purchase from the Trust any Revolving Credit Loan which is 60 days or more
delinquent at a purchase price equal to the Principal Balance thereof plus
accrued interest thereon.
MORGAN STANLEY DEAN WITTER CREDIT CORPORATION
The information set forth herein with respect to Morgan Stanley Dean Witter
Credit Corporation ("MSDWCC") has been provided by MSDWCC, and neither the
Depositor nor any of its affiliates makes any representations or warranties as
to the accuracy or completeness of such information.
GENERAL
MSDWCC is an indirect wholly-owned subsidiary of Morgan Stanley Dean Witter
& Co. In August 1999, MSDWCC changed its name from NOVUS Financial Corporation
to Morgan Stanley Credit Corporation. MSDWCC was originally established in 1962
as Allstate Enterprises, Inc., the financing arm of Allstate Insurance Co.
S-23
<PAGE>
MSDWCC is a retail residential mortgage lender that originates and services
loans for borrowers who are clients of Morgan Stanley Dean Witter & Co. Clients
are introduced to MSDWCC typically through Morgan Stanley Dean Witter brokerage
account relationships, and through Discover Card cardmember relationships.
MSDWCC utilizes each of these companies' sales forces to reinforce brand
identity and customer relationships, in addition to marketing to these consumers
directly through the mail or via inserts in existing account statements.
MSDWCC is structured to operate nationally on a remote basis and through
the World Wide Web. Clients are provided toll-free telephone number access to
loan officers who will discuss alternative products to meet specific needs. Loan
officers take mortgage loan applications, and lead customers through the entire
mortgage loan origination process. MSDWCC's loan origination, servicing, and
collection systems are fully integrated providing a more flexible, user-friendly
technology foundation and enhanced customer service. In order to provide
convenient customer service for all U.S. properties, MSDWCC maintains corporate
licensing/authorization to conduct business in all 50 states. All MSDWCC loans
are serviced and supported by MSDWCC's servicing center located in Sioux Falls,
South Dakota (the "SIOUX FALLS SERVICING CENTER").
ORIGINATION
Generally, a potential borrower may submit written or telephone
applications which provide pertinent information about the applicant's ability
to repay the proposed loan. For example, information supporting the potential
borrower's assets, liabilities, income and expenses is required. Such
information typically includes verification of income, deposits and mortgage
payment history. Additionally, the Seller obtains and reviews a property
appraisal, title policy, credit bureau reporting credit history, analysis of
income supporting repayment ability and proof of insurance coverage.
A potential borrower's ability to make the proposed loan payments is
measured by the applicant's income ratio, credit, residence stability and
assets. One test to determine this ability is the debt-to-income ratio, which is
the borrower's total monthly debt service divided by total monthly gross income.
The Seller typically allows for a debt-to-income of 40% when the borrower's
annual income is less than or equal to $75,000 or 45% when the borrower's annual
income is greater than $75,000. Debt-to-income exceptions must be approved by
the appropriate level underwriter, and supported by compensating factors.
The adequacy of the mortgaged property as security for the proposed mortage
loan will generally be determined by an appraisal acceptable to the Seller.
Appraisals are conducted by independent appraisers acceptable to the Seller.
Appraisals over 180 days old will not be sufficient if conducted by an
independent appraiser engaged by the potential borrower. If the proposed loan
amount exceeds $1,000,000, a second appraisal will be required.
MSDWCC's Combined Loan-to-Value Ratio Guidelines vary by the major
origination sources. For origination sources with higher average credit quality
of applicants, a Combined Loan-to-Value Ratio of 90% is allowed on up to
$2,000,000. The acceptable combined Loan-to-Value Ratio then declines as the
property value increases. Exceptions to these policies are typically made when
other compensating factors are present, such as high net worth.
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth certain information concerning the
delinquency experience (including pending foreclosures) on revolving credit
loans that were originated or acquired by MSDWCC and were being serviced by
MSDWCC on November 30, 1996, November 30, 1997, November 30, 1998, November 30,
1999 and July 31, 2000. The indicated periods of delinquency are based on the
number of days past due on a contractual basis. No mortgage loan is considered
delinquent for these purposes until, in general, it is one month past due on a
contractual basis.
S-24
<PAGE>
DELINQUENCY EXPERIENCE OF THE MSDWCC PORTFOLIO
OF REVOLVING CREDIT LOANS
<TABLE>
<CAPTION>
NOV. 30, NOV. 30, NOV. 30, NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1996 1996 1997 1997 1998 1998 1999
--------- ------------ --------- ------------ --------- ------------ ----------
BY NUMBER BY DOLLAR BY NUMBER BY DOLLAR BY NUMBER BY DOLLAR BY NUMBER
OF LOANS AMOUNT OF OF LOANS AMOUNT OF OF LOANS AMOUNT OF OF LOANS
LOAN LOAN LOAN
<S> <C> <C> <C> <C> <C> <C> <C>
Loan Portfolio........... 15,781 $507,135,721 14,711 $475,993,335 12,103 $385,958,129 13,215
Period of Delinquency(1)
30 through 59 days...... 119 4,332,176 131 4,619,158 87 3,077,796 95
60 through 89 days...... 32 1,186,195 33 1,271,061 16 444,643 17
90 days or more......... 128 6,616,014 86 5,158,670 68 4,250,846 43
------- ------------ ------- ------------ ------- ------------ ----------
Total Delinquent........ 279 $ 12,134,385 250 $ 11,048,889 171 $ 7,773,285 155
======= ============ ======= ============ ======= ============ ==========
Percent of Loan
Portfolio............... 1.77% 2.39% 1.70% 2.32% 1.41% 2.01% 1.17%
<CAPTION>
NOV. 30, JULY 31, JULY 31,
1999 2000 2000
------------ ---------- ------------
BY DOLLAR BY NUMBER BY DOLLAR
AMOUNT OF OF LOANS AMOUNT OF
LOAN LOAN
<S> <C> <C> <C>
Loan Portfolio........... $478,351,413 17,382 $790,902,520
Period of Delinquency(1)
30 through 59 days...... 3,488,123 91 5,125,720
60 through 89 days...... 1,231,616 23 670,472
90 days or more......... 2,417,219 43 3,309,240
------------ ---------- ------------
Total Delinquent........ $ 7,136,959 157 $ 9,105,432
============ ========== ============
Percent of Loan
Portfolio............... 1.49% 0.90% 1.15%
</TABLE>
------------------
(1) Delinquency is based on the number of days payments are contractually past
due. Any loans in foreclosure status are included in the respective aging
category indicated in the chart.
The following table sets forth certain information concerning loan loss
experience of MSDWCC for the years ended November 30, 1996, November 30, 1997,
November 30, 1998, November 30, 1999 and July 31, 2000 with respect to the
revolving credit loans referred to above.
LOAN LOSS EXPERIENCE OF THE MSDWCC PORTFOLIO OF REVOLVING CREDIT LOANS
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, JULY 31,
LOSSES 1996 1997 1998 1999 2000
------------------------------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Average portfolio balance(1)......... 510,183,765 498,012,789 434,912,267 402,539,132 613,398,571
Net losses(2)........................ 4,108,405 4,316,442 2,037,733 763,853 335,222
Net losses as a percentage of average
portfolio balance.................. 0.81% 0.87% 0.47% 0.19% 0.08%
</TABLE>
------------------
(1) Average portfolio balance is the sum of the prior year-end balance plus the
sum of each month-end balance for the year indicated divided by thirteen
periods (or nine periods in the case of July 31, 2000).
(2) Net losses are stated after giving effect to the recovery of liquidation
proceeds.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fee for each Revolving Credit Loan is payable out of the
interest payments on such Revolving Credit Loan. The "SERVICING FEE RATE" will
be 0.50% per annum and the Servicing Fee with respect to a Collection Period
will be the sum of the product of (a) the actual interest collected with respect
to each Revolving Credit Loan during such Collection Period and (b) the ratio of
the Servicing Fee Rate over the applicable Loan Rate on the last day of such
Collection Period for each Revolving Credit Loan for such Collection Period. The
Servicing Fee consists of servicing compensation payable to the Servicer in
respect of its servicing activities. In addition, the Servicer is entitled to
certain other amounts, such as late payments charges and foreclosure profits.
The Servicer is obligated to pay certain ongoing expenses associated with its
servicing activities and incurred by the Servicer in connection with its
responsibilities under the Servicing Agreement.
S-25
<PAGE>
THE ISSUER
GENERAL
The MSDWCC HELOC Trust 2000-1 is a business trust formed under the laws of
the State of Delaware pursuant to the Trust Agreement for the purposes 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 and holding the Revolving Credit Loans and the other assets of the
Issuer and proceeds therefrom, (ii) issuing the Notes and the Certificates,
(iii) making payments on the Notes and the Certificates and (iv) engaging in
other activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith. The Issuer's
principal offices are in Wilmington, Delaware, in care of Wilmington Trust
Company, as Owner Trustee, at 1100 N. Market Street, Wilmington, Delaware
19890-0001.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust Agreement.
The Owner Trustee is a Delaware banking corporation and its principal offices
are located at Rodney Square North, 1100 North Market Street, in Wilmington,
Delaware 19890-0001.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Noteholders 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 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. 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 the Trust
Agreement.
THE INDENTURE TRUSTEE
Wells Fargo Bank Minnesota, N.A., a national banking association, is the
Indenture Trustee under the Indenture. The Indenture Trustee is a national
banking association with executive offices located at Sixth Street and Marquette
Avenue, Minneapolis, Minnesota.
The Indenture Trustee may own Notes and have normal banking relationships
with the Servicer, the Seller and the Credit Enhancer and/or their affiliates.
The Indenture Trustee may resign at any time, in which event the Credit
Enhancer may (and if the Credit Enhancer fails to do so, the Issuer will be
obligated to) appoint a successor Indenture Trustee. The Credit Enhancer may
also remove the Indenture Trustee if the Indenture Trustee ceases to be eligible
to continue as such under the Indenture or if the Indenture Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Credit Enhancer may
(and if the Credit Enhancer fails to do so, the Issuer will be obligated to)
appoint a successor Indenture Trustee, as approved by the Credit Enhancer. Any
resignation or removal of the Indenture Trustee and appointment of a successor
Indenture Trustee acceptable to the Credit Enhancer will not become effective
until the acceptance of the appointment by the successor Indenture Trustee.
THE CREDIT ENHANCER
The Credit Enhancer is a monoline insurance company incorporated in 1984
under the laws of the State of New York. The Credit Enhancer is licensed to
engage in financial guaranty insurance business in all 50 states, the District
of Columbia, Puerto Rico and the U.S. Virgin Islands.
S-26
<PAGE>
The Credit Enhancer and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. Financial guaranty insurance provides a
guaranty of scheduled payments of an issuer's securities, thereby enhancing the
credit rating of those securities, in consideration for the payment of a premium
to the insurer. The Credit Enhancer and its subsidiaries principally insure
asset-backed, collateralized and municipal securities. Asset-backed securities
are typically supported by residential mortgage loans, consumer or trade
receivables, securities or other assets having an ascertainable cash flow or
market value. Collateralized securities include public utility first mortgage
bonds and sale/leaseback obligation bonds. Municipal securities include general
obligation bonds, special revenue bonds and other special obligation of state
and local governments. The Credit Enhancer insures both newly-issued securities
sold in the primary market and outstanding securities sold in the secondary
market that satisfy the Credit Enhancer's underwriting criteria.
The Credit Enhancer is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd., which is referred to in this prospectus supplement as
"HOLDINGS." Holdings is an indirect subsidiary of Dexia S.A., a publicly held
Belgian corporation. Dexia S.A., through its bank subsidiaries, is primarily
engaged in the business of public finance in France, Belgium and other European
countries. No shareholder of Holdings or of the Credit Enhancer is obligated to
pay any debt of the Credit Enhancer or any claim under any insurance policy
issued by the Credit Enhancer or to make any additional contribution to the
capital of the Credit Enhancer.
The principal executive offices of the Credit Enhancer are located at 350
Park Avenue, New York, New York 10022, and its telephone number at that location
is (212) 826-0100.
REINSURANCE
Under an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the Credit Enhancer or its
domestic or Bermuda operating insurance company subsidiaries are generally
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the Credit Enhancer
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with other reinsurers under various treaties and on a
transaction-by-transaction basis. This reinsurance is used by the Credit
Enhancer as a risk management device and to comply with statutory and rating
agency requirements; it does not alter or limit the Credit Enhancer's
obligations under any financial guaranty insurance policy.
RATINGS
The Credit Enhancer's financial strength is rated "Aaa" by Moody's. The
Credit Enhancer's insurer financial strength is rated "AAA" by Standard & Poor's
and Standard & Poor's (Australia) Pty. Ltd. The Credit Enhancer's insurance
financial strength is rated "AAA" by Fitch, Inc. The Credit Enhancer's claims-
paying ability is rated "AAA" by Japan Rating and Investment Information, Inc.
Such ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
S-27
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Financial Security and
its subsidiaries as of June 30, 2000, on the basis of accounting principles
generally accepted in the United States of America:
<TABLE>
<CAPTION>
JUNE 30, 2000
-----------------
(IN THOUSANDS)
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums)....................... $ 574,825
-----------
Surplus Notes........................................................................ 120,000
-----------
Minority Interest.................................................................... 34,054
-----------
Shareholder's Equity:
Common Stock....................................................................... 15,000
Additional Paid-In Capital......................................................... 841,036
Accumulated Other Comprehensive Income (net of deferred income taxes).............. 662
Accumulated Earnings............................................................... 520,869
-----------
Total Shareholder's Equity........................................................... 1,377,567
-----------
Total Deferred Premium Revenue, Surplus Notes, Minority Interest and Shareholder's
Equity............................................................................. $ 2,106,446
===========
</TABLE>
For further information concerning the Credit Enhancer, see the
Consolidated Financial Statements of the Credit Enhancer and Subsidiaries, and
the notes thereto, incorporated by reference herein. The Credit Enhancer's
financial statements are included as exhibits to the Annual Reports on
Form 10-K and Quarterly Reports on Form 10-Q that are filed with the Securities
and Exchange Commission (the "COMMISSION") by Holdings and may be viewed at the
EDGAR website maintained by the Commission and at Holding's website,
http://www.FSA.com. Copies of the statutory quarterly and annual financial
statements filed with the State of New York Insurance Department by Financial
Security are available upon request to the State of New York Insurance
Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents filed with the Commission described in the
accompanying prospectus under "Incorporation of Certain Information by
Reference," the financial statements of the Credit Enhancer included in, or as
exhibits to, the following documents which have been filed by Holdings with the
Commission, are hereby incorporated by reference: (a) Annual Report on
Form 10-K for the year ended December 31, 1999, (b) Quarterly Report on Form
10-Q for the period ended March 31, 2000 and (c) Quarterly Report on Form 10-Q
for the period ended June 30, 2000.
All financial statements of the Credit Enhancer included in, or as exhibits
to, documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, after the filing of
this prospectus supplement and before the termination of the offering of the
offered certificates shall be deemed to be incorporated by reference into this
prospectus supplement.
You may request a free copy of any of the filings incorporated by reference
in this prospectus supplement by writing Morgan Stanley Dean Witter Credit
Corporation, 2500 Lake Cook Road, 3 West Riverwoods, IL 60015.
The Depositor on behalf of the Trust hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the trust's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, and each filing of the financial statements of
the Credit Enhancer included in or as an exhibit to the annual report of
Holdings filed pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in this prospectus
supplement, as defined in the prospectus, shall be deemed to be a new
registration statement relating to the offered securities offered hereby, and
the offering of such offered securities at that time shall be deemed to be the
initial bona fide offering thereof.
S-28
<PAGE>
INSURANCE REGULATION
The Credit Enhancer is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, the Credit Enhancer and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial guaranty
insurance corporation licensed to do business in the State of New York, the
Credit Enhancer is subject to Article 69 of the New York Insurance Law which,
among other things, limits the business of each such insurer to financial
guaranty insurance and related lines, requires that each such insurer maintain a
minimum surplus to policyholders, establishes contingency, loss and unearned
premium reserve requirements for each such insurer, and limits the size of
individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as the Credit Enhancer, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
S-29
<PAGE>
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture. The Certificates will
be issued pursuant to the Trust Agreement. The following summaries describe
certain provisions of the Securities, the Indenture and the Trust Agreement. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the applicable agreement.
The Notes will be secured by the assets of the Trust pledged by the Issuer
to the Indenture Trustee pursuant to the Indenture which will consist of, among
other things: (i) the Revolving Credit Loans; (ii) all amounts on deposit in the
Collection Account and the Payment Account; and (iii) proceeds of the foregoing.
As of the Closing Date, the principal amount of the Notes will equal
approximately $196,366,000 (subject to a variance of plus or minus 5%) (the
"ORIGINAL INVESTOR AMOUNT"), which represents approximately 100% of the Cut-off
Date Pool Balance. The "ORIGINAL SECURITY BALANCE," which represents the
original aggregate principal balance of the Notes will equal the Original
Investor Amount. Following the Closing Date, the "INVESTOR AMOUNT" with respect
to any Payment Date will be an amount equal to the Original Investor Amount
minus the sum of (i) the aggregate Principal Collection Distribution Amount for
all prior Payment Dates and (ii) any Investor Liquidation Loss Amounts for all
prior Payment Dates. The principal amount of the outstanding Class of Notes (the
"SECURITY BALANCE") on any Payment Date is equal to the Original Security
Balance minus the aggregate of amounts actually distributed as principal to the
Noteholders.
The holder of a Note shall be referred to herein as a "NOTEHOLDER."
The "CERTIFICATEHOLDER INTEREST" with respect to any Payment Date is the
Pool Balance less the Investor Amount for such Payment Date. On the Closing
Date, the Certificateholder Interest will equal 0% of the Cut-off Date Pool
Balance. The "CERTIFICATEHOLDER" as of any date is the owner of the
Certificates, which initially will be the Seller or an affiliate of the Seller
and the Servicer. In general, the Pool Balance will vary each day as principal
is paid on the Revolving Credit Loans, liquidation losses are incurred and
Additional Balances are drawn down by borrowers.
BOOK-ENTRY NOTES
General. The Notes will initially be issued as "BOOK-ENTRY NOTES." Persons
acquiring beneficial ownership interests in the Notes ("NOTE OWNERS") may elect
to hold their Notes through The Depository Trust Company ("DTC") in the United
States, or Clearstream, Luxembourg or Euroclear, in Europe if they are
Participants of such systems, or indirectly through organizations which are
Participants in such systems. The Book-Entry Notes will be issued in one or more
securities which equal the aggregate principal balance of the Notes and will
initially be registered in the name of Cede & Co., the nominee of DTC.
Clearstream, Luxembourg and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in Clearstream,
Luxembourg's and Euroclear's names on the books of their respective depositaries
(in such capacities, individually the "RELEVANT DEPOSITARY"and collectively the
"EUROPEAN DEPOSITARIES") which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Investors
may hold such beneficial interests in the Book-Entry Notes in minimum
denominations representing Security Balances of $1,000 and in integral multiples
of $1 in excess thereof. Except as described below, no Beneficial Owner will be
entitled to receive a physical certificate representing such security (a
"DEFINITIVE NOTE"). Unless and until Definitive Notes are issued, it is
anticipated that the only "Holder" of the Notes will be Cede & Co., as nominee
of DTC. Note Owners will not be Holders as that term is used in the Indenture.
The Beneficial Owner's ownership of a Book-Entry Note 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 Notes 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
S-30
<PAGE>
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream, Luxembourg or Euroclear, as appropriate).
Note Owners will receive all payments of principal and interest on the
Notes from the Indenture Trustee through DTC and DTC Participants. While the
Notes 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 Notes and is required
to receive and transmit payments of principal and interest on the Notes.
Participants and Indirect Participants with whom Note Owners have accounts
with respect to Notes are similarly required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Note Owners.
Accordingly, although Note Owners will not possess physical certificates, the
Rules provide a mechanism by which Note Owners will receive payments and will be
able to transfer their interest.
Note Owners will not receive or be entitled to receive Definitive Notes
representing their respective interests in the Notes, except under the limited
circumstances described below. Unless and until Definitive Notes are issued,
Note Owners who are not Participants may transfer ownership of Notes only
through Participants and Indirect Participants by instructing such Participants
and Indirect Participants to transfer the Notes, by book-entry transfer, through
DTC for the account of the purchasers of such Notes, which account is maintained
with their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Notes 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 Note Owners.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Indenture Trustee to Cede & Co. Payments with respect to Notes
held through Clearstream, Luxembourg or Euroclear will be credited to the cash
accounts of Clearstream, Luxembourg Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Because DTC can only act on behalf of Financial Intermediaries, the ability of a
Beneficial Owner to pledge Book-Entry Notes to persons or entities that do not
participate in the Depositary system, or otherwise take actions in respect of
such Book-Entry Notes, may be limited due to the lack of physical certificates
for such Book-Entry Notes. In addition, issuance of the Book-Entry Notes in
book-entry form may reduce the liquidity of such Notes in the secondary market
since certain potential investors may be unwilling to purchase securities for
which they cannot obtain physical certificates.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the holders
of the Book-Entry Notes under the Indenture only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Notes are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Notes. Clearsteam,
Luxembourg or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by Noteholders under the Indenture on behalf of a
Clearsteam, Luxembourg 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
Notes which conflict with actions taken with respect to other Notes.
Definitive Notes. Definitive Notes will be issued to Beneficial Owners of
the Book-Entry Notes, or their nominees, rather than to DTC, if (a) the
Indenture Trustee determines that the DTC is no longer willing, qualified or
able to discharge properly its responsibilities as nominee and depository with
respect to the Book-Entry Notes and the Indenture Trustee is unable to locate a
qualified successor, (b) the Indenture Trustee elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default, pursuant
to the Indenture, Beneficial Owners having Percentage Interests aggregating at
least a majority of the Security Balances of the Notes advise the DTC through
the Financial Intermediaries and the
S-31
<PAGE>
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 Indenture Trustee will be required to notify all
Beneficial Owners of the occurrence of such event and the availability through
DTC of Definitive Notes. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue and authenticate Definitive
Notes, and thereafter the Indenture Trustee will recognize the holders of such
Definitive Notes as Holders under the Indenture.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Notes among
Participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time. See Annex I hereto.
The foregoing information with respect to DTC has been provided to the
Industry by DTC for informational purposes only and is not intended to serve as
a representation, warranty, or contract modification of any kind. Neither the
Depositor nor any of its affiliates makes any representations as to the DTC
Services.
For additional information regarding DTC, Clearstream, Luxembourg,
Euroclear and the Notes, see "Description of the Securities--Book-Entry
Registration of Securities" in the Prospectus.
PAYMENTS ON THE NOTES
Payments on the Notes will be made by the Indenture Trustee or the Paying
Agent on the 25th day of each month or, if such day is not a Business Day, then
the next succeeding Business Day, commencing in September 2000. Payments on the
Notes will be made to the persons in whose names such Notes are registered at
the close of business on the day prior to each Payment Date or, if the Notes are
no longer Book-Entry Notes, on the Record Date. See "Description of the
Securities--Distributions on the Securities" in the Prospectus. Payments will be
made by wire transfer to DTC or its nominee in amounts calculated as described
herein on the Determination Date. With respect to any Payment Date, the related
"RECORD DATE" will be the Business Day immediately preceding that Payment Date.
A "BUSINESS DAY" is any day other than (i) a Saturday or Sunday or (ii) a day on
which banking institutions in the State of South Dakota, Minnesota, New York,
Maryland, or Delaware are required or authorized by law to be closed.
INTEREST PAYMENTS ON THE NOTES
Interest payments will be made on the Notes on each Payment Date at the
Note Rate for the related Interest Period, subject to the limitations set forth
below, which may result in Net Funds Cap Carryover Amounts (as defined herein).
The "NOTE RATE" for an Interest Period will generally be a floating rate equal
to the lesser of (i) the sum of (a) LIBOR, determined as specified herein, as of
two LIBOR Business Days 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) plus (b) 0.29% per annum (or 0.58% per annum after the first
possible Optional Redemption Date) and (ii) the Net Funds Cap for such Interest
Period. However, on any Payment Date on which interest that would have accrued
on the Notes during the related Interest Period without regard to the Net Funds
Cap exceeds an amount equal to the product of (A) the ratio of the actual number
of days in the related Interest Period to 365 multiplied by (B) the product of
(a) the Security Balance for that Payment Date (before taking into account
payments to be made on such Payment Date) multiplied by (b) the Net Funds Cap
(as described below), the amount of such difference (any such amount, a "NET
FUNDS CAP CARRYOVER AMOUNT") will not be included as interest payments on the
Notes for such Payment Date and such amount will accrue interest at the Note
Rate on the Notes (as adjusted from time to time) and will be paid on future
Payment Dates, to the extent funds are available therefor as set forth herein
under "--Allocation of Payments on the Revolving Credit Loans." Net Funds Cap
Carryover Amounts will not be covered by the Policy and may remain unpaid on the
Final Payment Date if there are insufficient funds from collections on the
Revolving Credit Loans for payment thereof. In addition, the securities ratings
on the Notes do not address the likelihood of the receipt of any amounts in
respect of Net Funds Cap Carryover Amounts.
S-32
<PAGE>
The "Net Funds Cap" will be equal to the weighted average of the Loan Rates as
of the last day of the related Billing Cycle (net of the sum of the per annum
rate at which the fee payable to the Servicer is calculated, the fee payable to
the Indenture Trustee is calculated, the fee payable to the Owner Trustee is
calculated, the premium for the Policy is payable and 0.50%), adjusted to an
effective rate reflecting accrued interest calculated on the basis of the actual
number of days in the related Interest Period and a year assumed to consist of
360 days.
Interest on the Notes in respect of any Payment Date will accrue on the
applicable Security Balance from the preceding Payment Date (or in the case of
the first Payment Date, from the Closing Date) through the day preceding such
Payment Date (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 Notes will be funded from Investor P&I Collections (as defined herein) and,
if necessary, from draws on the Policy (subject to certain limitations).
Calculation of LIBOR. LIBOR shall be established by the Indenture Trustee.
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 Bridge 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 Indenture Trustee after consultation
with the Servicer and the Credit Enhancer), the rate will be the Reference Bank
Rate. The "REFERENCE BANK RATE" for any Interest Period 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 Indenture Trustee
after consultation with the Servicer and the Credit Enhancer) as of 11:00 A.M.,
London time, on the second LIBOR Business Day prior to the first day of such
Interest Period to prime banks in the London interbank market for a period of
one month in amounts approximately equal to the aggregate Security Balances of
all of the Securities then outstanding. The Indenture Trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If at least two such quotations are provided, the rate will be the
arithmetic mean of the quotations. If on such date fewer than two quotations are
provided as requested, the rate will be the arithmetic mean of the rates quoted
by one or more major banks in New York City, selected by the Indenture Trustee
after consultation with the Servicer and the Credit Enhancer, 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 aggregate
Security Balances of all of the Securities then outstanding. If no such
quotations can be obtained, LIBOR will remain the same as the prior Payment
Date. "LIBOR BUSINESS DAY" means any day other than (i) a Saturday or a Sunday
or (ii) a day on which banking institutions in the city of London, England are
required or authorized by law to be closed.
The establishment of LIBOR as to each Interest Period by the Indenture
Trustee and the Indenture Trustee's calculation of the rate of interest
applicable to the Notes for the related Interest Period shall (in the absence of
manifest error) be final and binding.
PRINCIPAL PAYMENTS ON THE NOTES
On each Payment Date, other than the Payment Date in September 2011 (the
"FINAL PAYMENT DATE"), principal payments will be due and payable on the Notes
in an amount equal to the Principal Collection Distribution Amount less the
Principal Reduction Amount, together with any Liquidation Loss Distribution
Amounts (each as defined below) for such Payment Date, as and to the extent
described below. On the Final Payment Date, principal will be due and payable on
the Notes in an amount equal to the Security Balance, if any, of the Notes on
such Payment Date. In no event will principal payments on the Notes on any
Payment Date exceed the Security Balance thereof on such date.
S-33
<PAGE>
ALLOCATION OF PAYMENTS ON THE REVOLVING CREDIT LOANS
The Indenture Trustee on behalf of the Trust will establish an account (the
"PAYMENT ACCOUNT") into which the Servicer will deposit Investor P&I Collections
for each Payment Date on the Determination Date. The Seller P&I Collections (as
defined herein) will be paid to the Certificateholder. The Payment Account will
be an eligible account, as described in the Indenture, and amounts on deposit in
the Payment Account will be invested and reinvested by the Indenture Trustee for
the benefit of the Indenture Trustee as determined in its sole discretion, but
only in Permitted Investments.
On each Payment Date, Investor P&I Collections will be allocated from the
Payment Account in the following order of priority:
(i) as payment to the Indenture Trustee for its fee for services
rendered pursuant to the Indenture and to the Owner Trustee for its fee for
services rendered pursuant to the Trust Agreement;
(ii) as payment to the Credit Enhancer for the premium for the Policy
and any previously unpaid premiums (with interest thereon);
(iii) as payment to the Noteholders for the accrued interest due and
any overdue accrued interest (with interest thereon to the extent permitted
by law) on the Security Balance of the Notes, other than any amount
representing any Net Funds Cap Carryover Amount;
(iv) as payment to the Noteholders of principal equal to the Principal
Collection Distribution Amount less the Principal Reduction Amount, each
for such Payment Date;
(v) as payment to the Noteholders, an amount equal to (A) the Investor
Liquidation Loss Amounts on such Payment Date, plus (B) any Investor
Liquidation Loss Amounts remaining undistributed from any preceding Payment
Date, provided that any Investor Liquidation Loss Amount shall not be
required to be paid to the extent that such Investor Liquidation Loss
Amount was paid on the Notes by means of a draw on the Policy (the
aggregate amount so paid under this clause (v) on any Payment Date, a
"LIQUIDATION LOSS DISTRIBUTION AMOUNT");
(vi) as payment to the Noteholders in an amount equal to the
Overcollateralization Deficit;
(vii) as reimbursement to the Credit Enhancer for prior draws made
under the Policy (with interest thereon) and any other amounts owed to the
Credit Enhancer pursuant to the Insurance Agreement;
(viii) as payment to the Noteholders until the Investor Amount exceeds
the Security Balance by the Required Overcollateralization Amount (any such
payment, the "ACCELERATED PRINCIPAL PAYMENT AMOUNT");
(ix) as payment to the Noteholders in the amount of any outstanding
Net Funds Cap Carryover Amount (together with interest thereon to the
extent permitted by law);
(x) as payment of any additional costs and expenses payable to the
Indenture Trustee or Owner Trustee under the Indenture or the Trust
Agreement, respectively; and
(xi) to pay any remaining amounts to the holders of the Certificates.
Payments to Noteholders pursuant to clauses (iii) and (ix) will be interest
payments on the Notes. Payments to Noteholders pursuant to clauses (iv), (v),
(vi) and (viii) will be principal payments on the Notes and will therefore
generally reduce the Security Balance; however, payments pursuant to clause
(viii) will not reduce the Investor Amount. The Accelerated Principal Payment
Amount is not guaranteed by the Policy.
"INVESTOR FLOATING ALLOCATION PERCENTAGE" means, with respect to any
Payment Date, the percentage equivalent of a fraction, the numerator of which is
the Investor Amount as of the end of the immediately preceding Payment Date and
the denominator of which is the Pool Balance at the beginning of the related
Collection Period.
"INVESTOR LIQUIDATION LOSS AMOUNT" means with respect to any Payment Date,
the product of the Investor Floating Allocation Percentage and the aggregate of
Liquidation Loss Amounts for the related Collection Period.
S-34
<PAGE>
"INVESTOR P&I COLLECTIONS" means with respect to (i) any Payment Date
during the Managed Amortization Period, the sum of (a) the product of the
Investor Floating Allocation Percentage and Interest Collections, each for such
Payment Date, and (b) the product of the Investor Floating Allocation Percentage
and Net Principal Collections, each for such Payment Date, and (ii) any Payment
Date during the Rapid Amortization Period, the sum of (a) the product of the
Investor Floating Allocation Percentage and Interest Collections, each for such
Payment Date, and (b) Principal Collections for such Payment Date.
A "LIQUIDATED REVOLVING CREDIT LOAN" means, as to any Payment Date, any
Revolving Credit Loan in respect of which the Servicer has determined, based on
the servicing procedures specified in the Servicing Agreement, as of the end of
the related Collection Period that all liquidation proceeds which it expects to
recover with respect to the disposition of the related Mortgaged Property have
been recovered.
"LIQUIDATION LOSS AMOUNT" means with respect to any Liquidated Revolving
Credit Loan, the unrecovered Principal Balance thereof at the end of the related
Collection Period in which such Revolving Credit Loan became a Liquidated
Revolving Credit Loan, after giving effect to the Net Liquidation Proceeds
applied in reduction of the Principal Balance thereof.
"MANAGED AMORTIZATION PERIOD" is the period from the Closing Date through
the earlier to occur of (i) the Payment Date in August 2005 and (ii) the
occurrence of a Rapid Amortization Event.
The "OVERCOLLATERALIZATION AMOUNT" on any date of determination is the
amount, if any, by which the Investor Amount exceeds the Security Balance on
that day.
The "OVERCOLLATERALIZATION DEFICIT" on any Payment Date is the amount, if
any, by which the Security Balance of the Notes on such Payment Date (after
giving effect to principal payments to be made on such Payment Date) exceeds the
Investor Amount as of the end of the related Collection Period.
For any Payment Date, the "PRINCIPAL COLLECTION DISTRIBUTION AMOUNT" will
equal (i) the Investor Floating Allocation Percentage of the Net Principal
Collections for such Payment Date, if such Payment Date is during the Managed
Amortization Period, or (ii) Principal Collections for such Payment Date if such
Payment Date is after the end of the Managed Amortization Period.
For any Payment Date, the "PRINCIPAL REDUCTION AMOUNT" is the lesser of
(a) the Principal Collection Distribution Amount and (b) the greater of (1) the
excess, if any, of the Overcollateralization Amount over the Required
Overcollateralization Amount for such Payment Date and (2) zero.
"RAPID AMORTIZATION PERIOD" is the period commencing at the end of the
Managed Amortization Period and concluding upon the later of (i) the termination
of the Trust and (ii) the date on which all amounts due and owing to the
Noteholders and the Credit Enhancer have been paid.
The "REQUIRED OVERCOLLATERALIZATION AMOUNT" shall be an amount determined
as set forth in the Insurance Agreement, subject to reduction and performance
triggers as described therein.
"SELLER P&I COLLECTIONS" for any Payment Date shall be the excess of P&I
Collections over the Investor P&I Collections for such Payment Date.
OVERCOLLATERALIZATION
The payment of the aggregate Accelerated Principal Payment Amount, if any,
to Noteholders may result in the Investor Amount being greater than the Security
Balance, thereby creating overcollateralization. On each Payment Date, to the
extent of funds available therefor, the Accelerated Principal Payment Amount
will be used to increase the Overcollateralization Amount until such amount is
equal to the Required Overcollateralization Amount for such Payment Date.
S-35
<PAGE>
RAPID AMORTIZATION EVENTS
As described above, the Managed Amortization Period will continue through
and including the Payment Date in August 2005, unless a Rapid Amortization Event
occurs prior to such date. "RAPID AMORTIZATION EVENT" refers to any of the
following events:
(a) the failure on the part of the Seller (i) to make any payment or
deposit required to be made under the Purchase Agreement within five
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 and such failure materially and adversely affects the interests of
the Securityholders or the Credit Enhancer;
(b) if any representation or warranty made by the Seller in the
Purchase Agreement proves to have been incorrect in any material respect
when made and which continues to be incorrect in any material respect for a
period of 60 days with respect to any representation or warranty of the
Seller as to itself in the Purchase Agreement or 90 days with respect to
any representation or warranty made as to the Revolving Credit Loans in the
Purchase Agreement after written notice and as a result of which the
interests of the Securityholders or the Credit Enhancer are materially and
adversely affected; provided, however, that a Rapid Amortization Event
shall not be deemed to occur if the Seller has repurchased or caused to be
repurchased or substituted for the related Revolving Credit Loans or all
Revolving Credit Loans, if applicable, during such period (or within an
additional 60 days with the consent of the Indenture Trustee and the Credit
Enhancer) in accordance with the provisions of the Indenture;
(c) the entry against the Seller or the Issuer of a decree or order by
a court or agency or supervisory authority having jurisdiction in the
premises for the appointment of a trustee, conservator, receiver or
liquidator in any insolvency, conservatorship, receivership, readjustment
of debt, marshalling of assets and liabilities or similar proceedings, or
for the winding up or liquidation of its affairs, and the continuance of
any such decree or order unstayed and in effect for a period of 60
consecutive days;
(d) the Seller or the Issuer shall voluntarily go into liquidation,
consent to the appointment of a conservator, receiver, liquidator or
similar person in any insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings of or relating to the Seller
or the Issuer or of or relating to all or substantially all of its
property, or a decree or order of a court, agency or supervisory authority
having jurisdiction in the premises for the appointment of a conservator,
receiver, liquidator or similar person in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings, or for
the winding-up or liquidation of its affairs, shall have been entered
against the Seller or the Issuer and such decree or order shall have
remained in force undischarged, unbonded or unstayed for a period of
60 days; or the Seller or the Issuer shall admit in writing its inability
to pay its debts generally as they become due, file a petition to take
advantage of any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors or voluntarily suspend payment
of its obligations;
(e) the Issuer 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;
(f) a servicing default relating to the Servicer occurs under the
Servicing Agreement and the Servicer is the Seller;
(g) the aggregate of all draws under the Policy exceeds 1.00% of the
Cut-off Date Pool Balance; or
(h) the Issuer is determined to be an association taxable as a
corporation for federal income tax purposes.
In the case of any event described in (a), (b) or (f), a Rapid Amortization
Event will be deemed to have occurred only if, after any applicable grace period
described in such clauses, the Credit Enhancer or, with the consent of the
Credit Enhancer, Securityholders evidencing not less than 51% of the Security
Balance of each of the Notes and the Certificates, by written notice to the
Seller, the Servicer, the Indenture Trustee, the Depositor and the Owner
Trustee, declare that a Rapid Amortization Event has occurred as of the date of
S-36
<PAGE>
such notice. In the case of any event described in clauses (c), (d), (e), (g) or
(h), an Rapid Amortization Event will be deemed to have occurred without any
notice or other action on the part of the Noteholders or the Credit Enhancer
immediately upon the occurrence of such event; provided, that any Rapid
Amortization Event may be waived and deemed of no effect with the written
consent of the Credit Enhancer and each Rating Agency, subject to the
satisfaction of any conditions to such waiver.
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Seller and no Rapid Amortization
Event exists other than such conservatorship, receivership or insolvency of the
Seller, the conservator, receiver or trustee-in-bankruptcy may have the power to
prevent the commencement of the Rapid Amortization Period.
THE PAYING AGENT
The Paying Agent shall initially be the Indenture Trustee, together with
any successor thereto. The Paying Agent shall have the revocable power to
withdraw funds from the Payment Account for the purpose of making payments to
the Noteholders.
MATURITY AND OPTIONAL REDEMPTION
The Notes will be payable in full on the Final Payment Date, to the extent
of the related outstanding Security Balance on such date, if any. In addition, a
principal payment may be made in full redemption of the Notes after the Security
Balance is reduced to an amount less than or equal to 10% of the Original
Security Balance (such date, the "OPTIONAL REDEMPTION DATE"), upon the exercise
by the Servicer of its option to purchase all of the Revolving Credit Loans and
related assets. In the event that all of the outstanding Notes are purchased by
the Servicer, the purchase price will be equal to the sum of (i) the outstanding
Security Balance and accrued and unpaid interest thereon at the Note Rate
through the day preceding the Payment Date (including any Net Funds Cap
Carryover Amounts) on which such purchase occurs and (ii) all amounts due and
owing to the Credit Enhancer.
THE POLICY
On or before the Closing Date, the Policy will be issued by the Credit
Enhancer pursuant to the provisions of the Insurance and Indemnity Agreement
(the "INSURANCE AGREEMENT") to be dated as of the Closing Date, among the
Seller, the Depositor, the Servicer, the Issuer and the Credit Enhancer.
The Policy will irrevocably and unconditionally guarantee payment on each
Payment Date to the Indenture Trustee for the benefit of the Noteholders the
full and complete payment of Insured Amounts with respect to the Notes for such
Payment Date. An "INSURED AMOUNT" shall equal, with respect to the Notes as of
any Payment Date, any shortfall in amounts available in the Payment Account to
pay (a)(i) the Guaranteed Principal Distribution Amount (as defined herein) with
respect to such Payment Date and (ii) accrued and unpaid interest due on the
Notes (together, the "GUARANTEED DISTRIBUTIONS"), with such Guaranteed
Distributions having been calculated in accordance with the original terms of
the Notes or the Indenture except for amendments or modifications to which the
Credit Enhancer has given its prior written consent and (b) any Preference
Amount (as defined herein) which occurs prior to the related Determination Date.
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 Notes.
The "GUARANTEED PRINCIPAL DISTRIBUTION AMOUNT" for any Payment Date (other
than the Payment Date in September 2011) shall be the amount, if any, by which
the Security Balance (after giving effect to all other amounts distributable and
allocable to principal on the Notes) exceeds the Investor Amount as of such
Payment Date (after giving effect to all other amounts distributable and
allocable to principal on the Notes for such Distribution Date) and on the
Payment Date in September 2011 (after giving effect to all other amounts
distributable and allocable to principal on such Payment Date) any amount
necessary to pay the outstanding Security Balance in full.
A "PREFERENCE AMOUNT" means any amount previously distributed to a
Noteholder that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States
S-37
<PAGE>
Bankruptcy Code, as amended from time to time, in accordance with a final
nonappealable order of a court having competent jurisdiction.
Payment of claims on the Policy will be made by the Credit Enhancer
following Receipt by the Credit Enhancer 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 Payment Date.
The terms "RECEIPT" and "RECEIVED," with respect to the Policy, mean actual
delivery to the Credit Enhancer 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 Received on the next
succeeding Business Day. If any notice or certificate given under the Policy by
the Indenture 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
Credit Enhancer shall promptly so advise the Indenture Trustee and the Indenture
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 states of New York,
South Dakota or Illinois or the city in which the corporate trust office of the
Indenture Trustee or the Credit Enhancer is located, are authorized or obligated
by law or executive order to be closed.
The Credit Enhancer's obligations under the Policy in respect of Insured
Amounts shall be discharged to the extent funds are transferred to the Indenture
Trustee as provided in the Policy, whether or not such funds are properly
applied by the Indenture Trustee.
The Credit Enhancer shall be subrogated to the rights of each Noteholder to
receive payments of principal and interest, as applicable, with respect to
distributions on the Notes to the extent of any payment by the Credit Enhancer
under the Policy. To the extent the Credit Enhancer pays Insured Amounts, either
directly or indirectly (as by paying through the Indenture Trustee), to the
Noteholders, the Credit Enhancer will be subrogated to the rights of the
Noteholders, as applicable, with respect to such Insured Amounts and shall be
deemed to the extent of the payments so made to be a registered Noteholder for
purposes of payment.
The Policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law.
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 New York.
Insured Amounts shall be paid only at the time set forth in the Policy and
no accelerated Insured Amounts shall be paid regardless of any acceleration of
the Notes, unless the Credit Enhancer elects to make such payments following
acceleration in its sole discretion. The Policy does not cover shortfalls, if
any, attributable to the liability of the Trust or the Indenture Trustee for
withholding taxes, if any (including interest and penalties in respect of any
such liability) or any Net Funds Cap Carryover Amount.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the Indenture as of the
date of execution of the Policy, without giving effect to any subsequent
amendment or modification to the Indenture unless such amendment or modification
has been approved in writing by the Credit Enhancer.
Pursuant to the terms of the Indenture, unless a Credit Enhancer default
exists, the Credit Enhancer shall be deemed to be the Holder of the Notes for
certain purposes (other than with respect to payment on the Notes), will be
entitled to exercise all rights of the Noteholders thereunder, without the
consent of such Holders and the Holders of the Notes may exercise such rights
only with the prior written consent of the Credit Enhancer. In addition, the
Credit Enhancer will have certain additional rights as third party beneficiary
to the Indenture.
In the absence of payments under the Policy, Noteholders will bear directly
the credit and other risks associated with losses in the Trust.
S-38
<PAGE>
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
PROSPECTIVE NOTEHOLDERS SHOULD CONSIDER, AMONG OTHER THINGS, THE ITEMS
DISCUSSED UNDER "RISK FACTORS" HEREIN, "YIELD AND PREPAYMENT CONSIDERATIONS" IN
THE PROSPECTUS AND THE FOLLOWING FACTORS IN CONNECTION WITH THE PURCHASE OF THE
NOTES.
The rate and timing of defaults on the Revolving Credit Loans will affect
the rate and timing of principal payments on the Revolving Credit Loans and thus
the yield on the Notes. There can be no assurance as to the rate of losses or
delinquencies on any of the Revolving Credit Loans, however, the rate of such
losses and delinquencies are likely to be higher than those of traditional first
lien mortgage loans, particularly in the case of Revolving Credit Loans with
high Combined Loan-to-Value Ratios or low Junior Ratios. In addition, because
Mortgagors under most of the Revolving Credit Loans are required to make a
relatively large single payment upon maturity, the default risk associated with
the Revolving Credit Loans is greater than that associated with fully amortizing
revolving credit loans. See "Risk Factors" herein. To the extent that any losses
are incurred on any of the Revolving Credit Loans that are not covered by excess
interest allocable to investors or the Policy, Holders of the Notes will bear
all risk of such losses resulting from default by Mortgagors. See "Risk
Factors--Limitations on Credit Enhancement for Protection Against Losses" in the
Prospectus. Even where the Policy covers certain losses incurred on the
Revolving Credit Loans, the effect of losses may be to increase prepayment rates
on the Revolving Credit Loans, thus reducing the weighted average life and
affecting the yield to maturity. In addition, the rate of prepayments of the
Revolving Credit Loans and the yield to investors on the Notes may be affected
by certain refinancing programs, which may include general or targeted
solicitations.
Although the Loan Rates on the Revolving Credit Loans are subject to
adjustment, the Loan Rates adjust based on the Index, while the Notes adjust
based on LIBOR. Changes in LIBOR may not correlate with changes in the Index and
neither may correlate with prevailing interest rates. It is possible that an
increased level of the Index could occur simultaneously with a lower level of
prevailing interest rates, which would be expected to result in faster
prepayments, thereby reducing the weighted average life of the Notes.
There can be no assurance as to the rate of principal payments and Draws on
the Revolving Credit Loans. The rate of principal payments and the rate of Draws
may fluctuate substantially from time to time. Generally, home equity loans are
not viewed by mortgagors as permanent financing. Due to the unpredictable nature
of both principal payments and Draws, the rates of principal payments net of
Draws on the Revolving Credit Loans may be much more volatile than for typical
first lien mortgage loans. See "Yield and Prepayment Considerations" in the
Prospectus and "Risk Factors" herein.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of distribution to the
investor of each dollar distributed in reduction of principal of such security
(assuming no losses). The weighted average life of the Notes will be influenced
by, among other things, the rate of principal payments and Draws on the
Revolving Credit Loans.
The model used in this Prospectus Supplement assumes that the outstanding
principal balance of a pool of revolving credit loans prepays at a specified
constant annual rate ("CPR"). In generating monthly cash flows, this rate is
converted to an equivalent constant monthly rate. To assume 35% of CPR or any
other CPR Percentage is to assume that the stated percentage of the outstanding
principal balance of the pool is prepaid over the course of a year. No
representation is made that the Revolving Credit Loans will prepay at that or
any other rate. In addition, the model assumes that the amount of Additional
Balances on the Revolving Credit Loans drawn each month is drawn at a specified
annual rate (the "CONSTANT DRAW RATE"). This rate is converted to a constant
monthly rate. To assume a 20% Constant Draw Rate is to assume the stated
percentage of the outstanding principal balance of the pool is drawn on over the
course of the year. No representation is made that draws will be made on the
Revolving Credit Loans at that or any other rate.
S-39
<PAGE>
The tables set forth below are based on a CPR, Constant Draw Rate and
optional redemption assumptions as indicated in the tables below. For the
following tables, it was assumed that the Revolving Credit Loans have been
aggregated into six pools with the following characteristics:
<TABLE>
<CAPTION>
CREDIT
CURRENT REMAINING ORIGINAL LIMIT MAXIMUM
LOAN TERM TO TERM TO UTILIZATION LOAN GROSS
RATE SEASONING MATURITY MATURITY RATE RATE MARGIN
PRINCIPAL BALANCE($) (%) (MONTHS) (MONTHS) (MONTHS) (%) (%) (%)
------------------------------ -------- --------- ----------- --------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
160,630,721.65................ 9.64480 3 117 120 51 17.74299 0.15031
6,569,170.00................ 9.57835 14 106 120 56 17.97206 0.07835
752,927.07................ 12.28560 15 105 120 93 17.93326 2.78560
8,280,342.47................ 11.45664 3 117 120 77 17.83233 1.95664
18,895,322.32................ 9.62811 0 120 120 28 17.74938 0.12811
1,238,333.12................ 11.75953 0 120 120 64 17.92497 2.25953
</TABLE>
In addition, in creating the tables below it was assumed that (i) payments
are made in accordance with the description set forth under "Description of the
Securities," (ii) payments on the Notes will be made on the 25th day of each
calendar month regardless of the day on which the Payment Date actually occurs,
commencing in September 2000, (iii) no extension past the scheduled maturity
date of a Revolving Credit Loan is made, (iv) no delinquencies or defaults
occur, (v) monthly Draws are calculated under each of the assumptions as set
forth in the tables below before giving effect to prepayments, (vi) the
Revolving Credit Loans pay on the basis of a 30-day month and a 360-day year,
(vii) no Rapid Amortization Event occurs, (viii) the scheduled Due Date for each
of the Revolving Credit Loans is the first day of each month, (ix) the Closing
Date is August 23, 2000, (x) for each Payment Date, the Note Rate is equal to
6.91% per annum, (xi) the index with respect to the Revolving Credit Loans
remains constant at 9.50% and (xii) the initial Security Balance of the Notes is
approximately $196,366,000.
The actual characteristics and performance of the Revolving Credit Loans
will differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a general
sense of how the principal cash flows might behave under varying prepayment and
Draw scenarios. For example, it is very unlikely that the Revolving Credit Loans
will prepay and experience Draws at a constant rate until maturity or that all
of the Revolving Credit Loans will prepay or experience Draws at the same rate.
Moreover, the diverse remaining terms to stated maturity and current loan rates
of the Revolving Credit Loans could produce slower or faster principal
distributions than indicated in the tables at the various assumptions specified,
even if the weighted average remaining terms to stated maturity and current loan
rates of the Revolving Credit Loans are as assumed. Any difference between such
assumptions and the actual characteristics and performance of the Revolving
Credit Loans, or actual prepayment experience, will affect the percentages of
initial Security Balance outstanding over time and the weighted average life of
the Notes.
S-40
<PAGE>
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the Notes, and sets forth the percentages
of the initial Security Balance of the Notes that would be outstanding after
each of the Payment Dates shown at various percentages of CPR and Constant Draw
Rates.
PERCENT OF INITIAL SECURITY BALANCE OUTSTANDING
<TABLE>
<CAPTION>
CPR(1)(2)
----------------------------------------------------
PAYMENT DATE 25% 30% 35% 40% 45% 50% 60%
----------------------------------------------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................................... 100% 100% 100% 100% 100% 100% 100%
August 25, 2001...................................... 92 86 80 74 67 61 49
August 25, 2002...................................... 86 75 65 55 46 38 24
August 25, 2003...................................... 81 65 52 41 32 24 12
August 25, 2004...................................... 76 57 42 31 22 15 0
August 25, 2005...................................... 71 50 35 23 15 0 0
August 25, 2006...................................... 51 33 21 13 0 0 0
August 25, 2007...................................... 32 18 0 0 0 0 0
August 25, 2008...................................... 14 0 0 0 0 0 0
August 25, 2009...................................... 0 0 0 0 0 0 0
---- ---- ---- ---- ---- ---- ----
Weighted Average Life (in years) (3) 5.5 4.4 3.5 2.9 2.3 1.9 1.3
</TABLE>
------------------
(1) Assumes (i) that an optional redemption is exercised on the first Payment
Date when the outstanding Security Balance is less than or equal to 10% of
the Security Balance on the Closing Date and (ii) a Constant Draw Rate of
20%.
(2) All percentages are rounded to the nearest 1%.
(3) The weighted average life of a Note is determined by (i) multiplying the net
reduction, if any, of the Security Balance by the number of years from the
date of issuance of the Note to the related Payment Date, (ii) adding the
results, and (iii) dividing the sum by the aggregate of the net reduction of
the Security Balance described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE STRUCTURING ASSUMPTIONS
(INCLUDING THE ASSUMPTIONS REGARDING THE CHARACTERISTICS AND PERFORMANCE OF THE
REVOLVING CREDIT LOANS WHICH DIFFER FROM THE ACTUAL CHARACTERISTICS AND
PERFORMANCE THEREOF) AND SHOULD BE READ IN CONJUNCTION THEREWITH.
S-41
<PAGE>
WEIGHTED AVERAGE LIFE ("WAL")(1) AND FINAL EXPECTED
PAYMENT DATE ("DATE")(2) SENSITIVITY OF THE NOTES
TO PREPAYMENTS AND DRAWS
<TABLE>
<CAPTION>
CPR(3)
-------------
0% 15% 20% 25% 30% 35%
CONSTANT ------------- ------------- ------------- ------------- ------------- -------------
DRAW RATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE
------------- --- ----- --- ----- --- ----- --- ----- --- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0%........... 9.5 05/10 4.8 05/10 3.9 05/10 3.1 07/08 2.5 12/06 2.1 11/05
10%.......... 9.5 05/10 6.5 05/10 5.1 03/10 4.0 02/09 3.3 01/08 2.7 01/07
15%.......... 9.5 05/10 7.8 05/10 6.0 10/09 4.7 01/09 3.7 03/08 3.0 06/07
20%.......... 9.5 05/10 7.0 04/09 7.1 06/09 5.5 11/08 4.4 04/08 3.5 08/07
25%.......... 9.5 05/10 6.5 06/08 6.4 05/08 6.6 10/08 5.2 03/08 4.1 09/07
30%.......... 9.5 05/10 6.4 04/08 6.1 09/07 6.1 10/07 6.3 03/08 5.0 10/07
<CAPTION>
40% 45% 50% 60%
CONSTANT ---------- ------------- ------------- -------------
DRAW RATE WAL DATE WAL DATE WAL DATE WAL DATE
------------- ---- ----- --- ----- --- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0%........... 1.7 01/05 1.5 06/04 1.3 12/03 1.0 12/02
10%.......... 2.2 02/06 1.8 04/05 1.5 07/04 1.1 06/03
15%.......... 2.5 08/06 2.1 11/05 1.7 12/04 1.2 09/03
20%.......... 2.9 01/07 2.3 04/06 1.9 07/05 1.3 12/03
25%.......... 3.3 03/07 2.7 09/06 2.2 01/06 1.5 05/04
30%.......... 3.9 05/07 3.2 12/06 2.6 06/06 1.6 10/04
</TABLE>
<TABLE>
<CAPTION>
CPR(4)
-------------
0% 15% 20% 25% 30% 35%
CONSTANT ------------- ------------- ------------- ------------- ------------- -------------
DRAW RATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE WAL DATE
------------- --- ----- --- ----- --- ----- --- ----- --- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0%........... 9.6 08/10 4.8 08/10 3.9 08/10 3.2 08/10 2.7 05/10 2.2 05/10
10%.......... 9.5 05/10 6.5 05/10 5.1 05/10 4.1 05/10 3.4 04/10 2.8 09/09
15%.......... 9.5 05/10 7.8 05/10 6.0 05/10 4.7 12/09 3.8 07/09 3.1 03/09
20%.......... 9.5 05/10 7.0 06/09 7.1 12/09 5.5 06/09 4.4 02/09 3.6 10/08
25%.......... 9.5 05/10 6.5 10/08 6.5 08/08 6.6 02/09 5.2 09/08 4.2 06/08
30%.......... 9.5 05/10 6.4 08/08 6.1 12/07 6.1 12/07 6.3 06/08 5.0 03/08
<CAPTION>
40% 45% 50% 60%
CONSTANT ---------- ------------- ------------- -------------
DRAW RATE WAL DATE WAL DATE WAL DATE WAL DATE
------------- ---- ----- --- ----- --- ----- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0%........... 1.9 05/10 1.6 06/09 1.4 04/08 1.1 06/06
10%.......... 2.3 03/09 2.0 09/08 1.7 02/08 1.2 12/06
15%.......... 2.6 10/08 2.2 05/08 1.8 01/08 1.3 01/07
20%.......... 2.9 06/08 2.4 03/08 2.0 11/07 1.4 02/07
25%.......... 3.4 03/08 2.8 12/07 2.3 09/07 1.6 03/07
30%.......... 4.0 12/07 3.2 10/07 2.6 08/07 1.8 02/07
</TABLE>
------------------
(1) The weighted average life of a Note is determined by (i) multiplying the net
reduction, if any, of the Security Balance by the number of years from the
date of issuance of the Note to the related Payment Date, (ii) adding the
results, and (iii) dividing the sum by the aggregate of the net reduction in
the Security Balance described in (i) above.
(2) The final expected payment date of the Notes is the date on which the
Security Balance thereof is reduced to zero.
(3) Assumes that an optional redemption is exercised on the first Payment Date
when the outstanding Security Balance is less than or equal to 10% of the
Security Balance on the Closing Date.
(4) Assumes no optional redemption is exercised.
S-42
<PAGE>
DESCRIPTION OF THE PURCHASE AGREEMENT
The Revolving Credit Loans and related Additional Balances to be
transferred to the Trust by the Depositor were or will be purchased by the
Depositor from the Seller pursuant to a Revolving Credit Loan Purchase Agreement
(the "PURCHASE AGREEMENT"). The following summary describes certain terms of the
form of the Purchase Agreement and is qualified in its entirety by reference to
the form of Purchase Agreement.
TRANSFER OF REVOLVING CREDIT 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 Revolving
Credit Loans, the related Credit Line Agreement, mortgages and other related
documents (collectively, the "RELATED DOCUMENTS") and all of the Additional
Balances thereafter created. The purchase price of the Revolving Credit Loans is
a specified percentage of the face amount thereof as of the time of transfer and
is payable by the Depositor as provided in the Purchase Agreement. The purchase
price of each Additional Balance is the amount of the related new advance and is
payable by the Trust, either in cash or in the form of an increase in the
Security Balance of the Certificates, as provided in the Purchase Agreement.
The Purchase Agreement will require that, within the time period specified
therein, the Seller deliver to the Indenture Trustee (as the Trust's agent for
such purpose) the Revolving Credit Loans and the Related Documents. In lieu of
delivery of original mortgages, the Seller may deliver true and correct copies
thereof if the original mortgage is out for recording or if the original
recorded mortgage was retained by the public recording office. In addition,
under the terms of the Purchase Agreement, the Seller will record assignments of
mortgages relating only to certain first lien Revolving Credit Loans as required
by the Purchase Agreement. Upon the occurrence of certain events, and subject to
the exceptions, described in the Purchase Agreement, the Seller will record, or
cause to be recorded, the assignments of mortgage relating to the mortgages in a
subordinate lien position.
Within 90 days of the Closing Date, Wells Fargo Bank Minnesota, N.A. (the
"CUSTODIAN") will review the file for the Revolving Credit Loans and determine
whether certain documents are missing.
REPRESENTATIONS AND WARRANTIES
The Seller will also represent and warrant to the Depositor that, among
other things, (a) the information with respect to the Revolving Credit Loans set
forth in the schedule attached to the Purchase Agreement is true and correct in
all material respects and (b) immediately prior to the sale of the Revolving
Credit Loans to the Depositor, the Seller was the sole owner and holder of the
Revolving Credit Loans free and clear of any and all liens and security
interests. 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) upon
payment therefor, the Purchase Agreement constitutes a valid transfer and
assignment to the Depositor of all right, title and interest of the Seller in
and to the Revolving Credit Loans and the proceeds thereof. The benefit of the
representations and warranties made to the Depositor by the Seller in the
Purchase Agreement will be assigned by the Depositor to the Trust.
If any Revolving Credit Loan or Related Document is found to be defective
in any material respect, which may materially and adversely affect the value of
the related Revolving Credit Loan, or the interests of the Indenture Trustee (as
pledgee of the Trust), the Noteholders, the Certificateholders or the Credit
Enhancer in such Revolving Credit Loan and such defect is not cured within
90 days following notification thereof to the Seller and the Trust by the
Custodian, the Seller will be obligated under the Purchase Agreement to deposit
the Repurchase Price into the Collection Account. In lieu of any such deposit,
the Seller may substitute an Eligible Substitute Loan. Any such purchase or
substitution will result in the removal of such Revolving Credit Loan required
to be removed from the Trust (each such Revolving Credit Loan, a "DELETED
LOAN"). The obligation of the Seller to remove a Deleted Loan from the Trust is
the sole remedy regarding any defects in the Revolving Credit Loans and Related
Documents available to the Trust, the Certificateholders (or the Owner Trustee
on behalf of the Certificateholders) and the Noteholders (or the Indenture
Trustee on behalf of the Noteholders) against the Seller.
S-43
<PAGE>
With respect to any Revolving Credit Loan, the "REPURCHASE PRICE" is equal
to the Principal Balance of such Revolving Credit Loan at the time of any
removal described above plus accrued and unpaid interest thereon to the date of
removal. In connection with the substitution of an Eligible Substitute Loan, the
Seller will be required to deposit in the Collection Account an amount (the
"SUBSTITUTION ADJUSTMENT AMOUNT") equal to the excess of the Principal Balance
of the related Deleted Loan over the Principal Balance of such Eligible
Substitute Loan.
An "ELIGIBLE SUBSTITUTE LOAN" is a revolving credit loan substituted by the
Seller for a Deleted 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 Revolving Credit Loan for a Deleted Loan, an
aggregate Principal Balance) not in excess of the Principal Balance
relating to such Deleted Loan;
(ii) have a Loan Rate, Net Loan Rate and Gross Margin no lower than
and not more than 1% in excess of the Loan Rate, Net Loan Rate and Gross
Margin, respectively, of such Deleted Loan;
(iii) have a Combined Loan-to-Value Ratio at the time of substitution
no higher than that of the Deleted Loan at the time of substitution;
(iv) have a remaining term to maturity not more than one year earlier
and not later than the remaining term to maturity of the Deleted Loan;
(v) comply with each representation and warranty as to the Revolving
Credit Loans set forth in the Purchase Agreement (deemed to be made as of
the date of substitution); and
(vi) satisfy certain other conditions specified in the Indenture.
In addition, the Seller will be obligated to deposit the Repurchase Price
or substitute an Eligible Substitute Loan with respect to a Revolving Credit
Loan as to which there is a breach of a representation or warranty in the
Purchase Agreement and such breach is not cured by the Seller within the time
provided in the Purchase Agreement.
The Seller has also agreed to indemnify the Depositor and the Trust from
and against certain losses, liabilities and expenses (including reasonable
attorneys' fees) suffered or sustained pursuant to the Purchase Agreement.
ASSIGNMENT TO THE TRUST
The Seller expressly acknowledges and consents to the Depositor's transfer
of its rights relating to the Revolving Credit Loans and its obligation to pay
for the Additional Balances under the Purchase Agreement to the Trust, the
Trust's pledge of its interest in the Purchase Agreement to the Indenture
Trustee and the enforcement by the Indenture Trustee of any such right or remedy
against the Seller.
OPTIONAL TRANSFERS OF REVOLVING CREDIT LOANS TO THE SELLER
In order to permit the Seller to remove Revolving Credit Loans from the
Trust at such times, if any, as the Certificateholder Interest exceeds the level
required by the Credit Enhancer and the Rating Agencies, on any Payment Date the
Seller may, but shall not be obligated to, remove on such Payment Date (the
"TRANSFER DATE") from the Trust, certain Revolving Credit Loans without notice
to the Noteholders. The Seller is permitted to designate the Revolving Credit
Loans to be removed. Revolving Credit 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 Certificateholder Interest as of such Transfer Date (after
giving effect to such removal) exceeds the Minimum Certificateholder
Interest;
(iii) the removal of any Revolving Credit Loans on any Transfer Date
during the Managed Amortization Period (as defined herein) shall not, in
the reasonable belief of the Seller, cause a Rapid Amortization Event;
S-44
<PAGE>
(iv) the Seller shall have delivered to the Indenture Trustee a "LOAN
SCHEDULE" containing a list of all Revolving Credit Loans remaining in the
Trust after such removal;
(v) the Seller shall represent and warrant that no selection
procedures which the Seller reasonably believes are adverse to the
interests of the Noteholders or the Credit Enhancer were used by the Seller
in selecting such Revolving Credit Loans;
(vi) in connection with the first such retransfer of Revolving Credit
Loans, the Rating Agencies and the Credit Enhancer shall have been notified
of the proposed transfer and prior to the Transfer Date each Rating Agency
has confirmed in writing that such transfer would not result in a reduction
or withdrawal of the ratings assigned to the Notes without regard to the
Policy; and
(vii) the Seller shall have delivered to the Indenture Trustee and the
Credit Enhancer an officer's certificate confirming the conditions set
forth in clauses (i) through (vi).
As of any date of determination, the "MINIMUM CERTIFICATEHOLDER INTEREST"
is an amount equal to the lesser of (a) 5% of the Pool Balance on such date and
(b) 2% of the Cut-off Date Pool Balance. The term "Minimum Certificateholder
Interest" is only used in connection with the removal of Revolving Credit Loans.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing Agreement,
dated as of August 1, 2000 among the Trust, the Indenture Trustee and the
Servicer. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Servicing
Agreement. Whenever particular defined terms of the Servicing Agreement are
referred to, such defined terms are thereby incorporated herein by reference.
See "The Agreements" in the Prospectus.
P&I COLLECTIONS
The Servicer shall establish and maintain an account (the "COLLECTION
ACCOUNT") in which the Servicer shall deposit or cause to be deposited any
amounts representing payments on and any collections received in respect of the
Revolving Credit Loans received by it subsequent to the Cut-off Date. The
Collection Account shall be an eligible account as defined in the Indenture. On
the 18th day of each month or if such day is not a Business Day, the preceding
Business Day (the "DETERMINATION DATE"), the Servicer will notify the Paying
Agent and the Indenture Trustee of the aggregate amounts required to be
withdrawn from the Collection Account and deposited into the Payment Account, as
determined below.
"PERMITTED INVESTMENTS" are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from time
to time as being consistent with their then-current ratings of the Notes.
The Servicer will make the following withdrawals from the Collection
Account and deposit such amounts as follows:
(i) to the Payment Account, an amount equal to the P&I Collections on
the related Determination Date; and
(ii) prior to the Rapid Amortization Period, to pay to the Seller, the
amount of any Additional Balances, up to the amount of Principal
Collections for the related Collection Period;
(iii) to reimburse itself for previously unreimbursed expenses
incurred (a) in maintaining individual hazard insurance policies to the
extent of late recoveries of those payments on particular Revolving Credit
Loans or (b) in connection with liquidation of a Revolving Credit Loan from
related proceeds of the liquidation;
(iv) to pay itself the Servicing Fee on account of interest on a
Revolving Credit Loan, to the extent not previously retained;
S-45
<PAGE>
(v) to pay itself, as additional servicing compensation, any interest
or investment income earned on funds on deposit in the Collection Account;
(vi) to pay itself as additional servicing compensation, any profit
realized in the foreclosure of a liquidated Revolving Credit Loan;
(vii) to withdraw any amounts deposited in the Collection Account that
were not required to be deposited to the Collection Account; and
(viii) to pay to itself or the Seller any additional reimbursement
amounts and other amounts as provided in the Servicing Agreement.
As to any Payment Date, "P&I COLLECTIONS" will equal the sum of (a)
Interest Collections for such Payment Date and (b) prior to the Rapid
Amortization Period, "NET PRINCIPAL COLLECTIONS" for such Payment Date which are
the excess, if any, of Principal Collections for that Payment Date over the
aggregate amount of Additional Balances created during the related Collection
Period and conveyed to the Trust, or during the Rapid Amortization Period, the
Principal Collections for such date. During the Rapid Amortization Period,
Principal Collections for a Collection Period will no longer be applied to
acquire Additional Balances during such Collection Period.
All collections on the Revolving Credit 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
Payment Date, "INTEREST COLLECTIONS" will be equal to the sum of (i) the amounts
collected during the related Collection Period, including the interest portion
of any Net Liquidation Proceeds (as defined below), allocated to interest
pursuant to the terms of the Credit Line Agreements, reduced by the Servicing
Fees for such Collection Period and (ii) the interest portion of the Repurchase
Price for any Deleted Loans and of the cash purchase price paid in connection
with any optional purchase of the Revolving Credit Loans by the Servicer. As to
any Payment Date, "PRINCIPAL COLLECTIONS"will be equal to the sum of (i) the
amount of principal collected during the related Collection Period, including
Net Liquidation Proceeds allocated to principal pursuant to the terms of the
Credit Line Agreements and (ii) any Substitution Adjustment Amounts and the
principal portion of the Repurchase Price for any Deleted Loans and (iii) the
cash purchase price paid in connection with any optional purchase of the
Revolving Credit Loans by the Servicer.
As to any Payment Date, the related "COLLECTION PERIOD" is the calendar
month preceding the month of such Payment Date.
"NET LIQUIDATION PROCEEDS" with respect to a Revolving Credit Loan are the
proceeds (excluding amounts drawn on the Policy) received in connection with the
liquidation of any Revolving Credit 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
Revolving Credit Loan at the end of the Collection Period immediately preceding
the Collection Period in which such Revolving Credit Loan became a Liquidated
Revolving Credit Loan.
With respect to any date, the "POOL BALANCE" will be equal to the aggregate
of the Principal Balances of all Revolving Credit Loans as of such date owned by
the Trust. The "PRINCIPAL BALANCE" of a Revolving Credit Loan (other than a
Liquidated Revolving Credit Loan) on any day is equal to the Cut-off Date
Balance thereof, plus (i) any Additional Balances in respect of such Revolving
Credit Loan conveyed to the Trust minus (ii) all collections credited against
the Principal Balance of such Revolving Credit Loan in accordance with the
related Credit Line Agreement prior to such day. The Principal Balance of a
Liquidated Revolving Credit Loan after final recovery of substantially all of
the related Liquidation Proceeds which the Servicer reasonably expects to
receive shall be zero.
S-46
<PAGE>
HAZARD INSURANCE
The Servicing Agreement provides that the Servicer maintain certain hazard
insurance on the Mortgaged Properties relating to Revolving Credit Loans that
either (i) are in the first lien position or (ii) have a credit limit at
origination in excess of $50,000. The Servicer will not monitor the existence or
continued validity of any hazard insurance on the Mortgaged Properties relating
to the other Revolving Credit Loans.
With respect to any Mortgaged Property for which the Servicer is required
to maintain hazard insurance, the Servicing Agreement requires the Servicer to
maintain 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 Revolving Credit Loan plus the outstanding balance
on any mortgage loan senior to such Revolving Credit Loan. The Servicer shall
also cause to be maintained on property acquired upon foreclosure, or deed in
lieu of foreclosure, of any Revolving Credit Loan, fire insurance with extended
coverage. The Servicing Agreement provides that the 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 Servicer will be obligated to deposit
in the Collection Account the sums which would have been deposited therein but
for such clause. As set forth above, all amounts collected by the Servicer (net
of any reimbursements to the 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.
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement provides for delivery on or before the last day of
February in each year, beginning in February 28, 2001, to the Indenture Trustee
and the Credit Enhancer of an annual statement signed by an officer of the
Servicer to the effect that the Servicer has fulfilled its material obligations
under the Servicing Agreement throughout the preceding fiscal year, except as
specified in such statement.
On or before the last day of February of each year, beginning February 28,
2001, the Servicer will furnish a report prepared by a firm of nationally
recognized independent public accountants (who may also render other services to
the Servicer) to the Indenture Trustee pursuant to the Uniform Single
Attestation Program for Mortgage Bankers.
CERTAIN MATTERS REGARDING THE SERVICER
The Servicing Agreement provides that the 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 Servicer has proposed a successor servicer to the Trust, the
Credit Enhancer and the Indenture Trustee in writing and such proposed successor
servicer is reasonably acceptable to the Trust and the Indenture Trustee;
(b) the Rating Agencies have confirmed to the Trust, the Indenture Trustee and
the Credit Enhancer that the appointment of such proposed successor servicer as
the Servicer will not result in the qualification, reduction or withdrawal of
the then current rating of the Notes (without regard to the Policy); and
(c) such proposed successor servicer is acceptable to the Credit Enhancer. No
such resignation will become effective until the Indenture Trustee or a
successor servicer has assumed the Servicer's obligations and duties under the
Servicing Agreement.
The Servicer may perform any of its duties and obligations under the
Servicing Agreement through one or more subservicers or delegates, which may be
affiliates of the Servicer. Notwithstanding any such arrangement, the Servicer
will remain liable and obligated to the Trust for the Servicer's duties and
obligations under the Servicing Agreement, without any diminution of such duties
and obligations and as if the Servicer itself were performing such duties and
obligations.
The Servicing Agreement provides that the Servicer will indemnify the
Trust, the Owner Trustee and the Indenture Trustee, as the case may be, from and
against any loss, liability or expense, imposed by reason of its willful
misfeasance, bad faith or negligence in the performance of its duties under the
Servicing
S-47
<PAGE>
Agreement or by reason of its reckless disregard of its obligations and duties
under the Servicing Agreement. The Servicing Agreement provides that neither the
Servicer nor its directors, officers, employees or agents will be under any
other liability to the Owner Trustee, the Indenture Trustee, or any other person
for any action taken or for refraining from taking any action pursuant to the
Servicing Agreement. The Servicer and any director or officer or employee or
agent of the Servicer shall be indemnified by the Issuer and held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the Servicing Agreement or the Securities, other than any
loss, liability or expense related to any specific Revolving Credit Loan or
Revolving Credit Loans (except as any such loss, liability or expense shall be
otherwise reimbursable pursuant to the Servicing Agreement) and any loss,
liability or expense incurred by reason of its willful misfeasance, bad faith or
negligence in the performance of its duties thereunder or by reason of its
reckless disregard of its obligations and duties thereunder. In addition, the
Servicing Agreement provides that the Servicer will not be under any obligation
to appear in, prosecute or defend any legal action which is not incidental to
its servicing responsibilities under the Servicing Agreement and which in its
opinion may expose it to any expense or liability. The Servicer may, in its sole
discretion, undertake any such legal action which it may deem necessary or
desirable with respect to the Servicing Agreement and the rights and duties of
the parties thereto.
Any corporation into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Servicer shall be a party, or any corporation succeeding to the business of
the Servicer shall be the successor of the Servicer hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything in the Servicing Agreement to the contrary
notwithstanding.
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of, among other events, the
following:
(i) any failure by the Servicer to (a) deposit in the Collection
Account, or Payment Account any deposit required to be made under the
Servicing Agreement or (b) to pay when due any amount payable by it under
the terms of the Insurance Agreement, which failure continues unremedied
for (x) five Business Days with respect to deposits to be made in the
Collection Account or payments under the Insurance Agreement, or (y) one
Business Day with respect to deposits to be made in the Payment Account
after the giving of written notice of such failure to the Servicer by the
Issuer or Indenture Trustee, or to the Servicer, the Issuer and the
Indenture Trustee by the Credit Enhancer;
(ii) any failure by the Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Servicing
Agreement or Insurance Agreement which, in each case, materially and
adversely affects the interests of the Noteholders or the Credit Enhancer
and continues unremedied for 45 days or 60 days, respectively, after the
giving of written notice of such failure to the Servicer by the Issuer or
the Indenture Trustee, or to the Servicer, the Issuer and the Indenture
Trustee by the Credit Enhancer; or
(iii) certain events of insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings relating to the Servicer
and certain actions by the Servicer indicating insolvency, reorganization
or inability to pay its obligations.
Under the above circumstances, the Indenture Trustee with the consent of
the Credit Enhancer or the Credit Enhancer may deliver written notice to the
Servicer terminating all the rights and obligations of the Servicer under the
Servicing Agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for the applicable periods referred to
therein or referred to under clause (ii) above for the applicable periods
referred to therein, shall not constitute an Event of Servicing Termination if
such delay or failure could not be prevented by the exercise of reasonable
diligence by the Servicer and such delay or failure was caused by an act of God
or other similar occurrence. Upon the occurrence of any such event the Servicer
shall not be relieved from using reasonable efforts to perform its obligations
in a timely manner in accordance with the terms of the Servicing Agreement and
the Servicer shall provide the Issuer, the Credit Enhancer and the
S-48
<PAGE>
Indenture Trustee 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, the
Indenture Trustee with the consent of the Credit Enhancer or the Credit Enhancer
may terminate all of the rights and obligations of the Servicer under the
Servicing Agreement and in and to the Revolving Credit Loans, whereupon the
Indenture Trustee or another successor designated by the Credit Enhancer in a
period not to exceed 90 days, will succeed to all the responsibilities, duties
and liabilities of the Servicer under the Servicing Agreement or, if the Credit
Enhancer does not designate a successor Servicer, appoint any other person as
successor Servicer, as provided in the Servicing Agreement and will be entitled
to the compensation arrangements and reimbursements provided in the Servicing
Agreement. During such 90 day period, neither the Indenture Trustee nor any
successor Servicer shall be responsible for any lack of information or documents
that it cannot reasonably obtain on a practical basis under the circumstances.
Neither the Indenture Trustee nor any successor Servicer shall be liable for any
action taken by the terminated Servicer during such 90 day period. In the event
that the Indenture Trustee would be obligated to succeed the Servicer but is
unwilling or unable so to act or to appoint a successor Servicer, it may
appoint, or petition a court of competent jurisdiction for the appointment of,
an established housing and home finance institution, bank or other mortgage loan
or home equity loan servicer having a net worth of at least $10,000,000 and
acceptable to the Credit Enhancer to act as successor to the Servicer under the
Servicing Agreement; provided such appointment does not result in the
qualification, reduction or withdrawal of the rating on the Notes without regard
to the Policy. Pending such appointment, the Indenture Trustee will be obligated
to act in such capacity or to appoint a successor Servicer unless prohibited by
law. Such successor will be entitled to receive the compensation and
reimbursements provided in the Servicing Agreement (or such other compensation
as the Issuer and such successor may agree). A receiver or conservator for the
Servicer may be empowered to prevent the termination and replacement of the
Servicer where the only Event of Servicing Termination that has occurred is an
Insolvency Event.
AMENDMENT
The Servicing Agreement may be amended from time to time by the Servicer,
the Issuer and the Indenture Trustee, with the consent of the Credit Enhancer,
provided that the Rating Agencies confirm in writing that such amendment will
not result in a downgrading or a withdrawal of the rating then assigned to the
Securities (without regard to the Policy).
S-49
<PAGE>
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE
The following summary describes certain terms of the Trust Agreement and
the Indenture. The summary does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the provisions of the Trust
Agreement and the Indenture. Whenever particular defined terms of the Indenture
are referred to, such defined terms are thereby incorporated herein by
reference. See "The Agreements" in the Prospectus.
THE TRUST
Simultaneously with the issuance of the Notes, the Issuer will pledge the
Revolving Credit Loans, funds on deposit in the Payment Account and the Policy
to the Indenture Trustee as collateral for the Notes. As pledgee of the
Revolving Credit Loans, the Indenture Trustee will be entitled to direct the
Issuer in the exercise of all rights and remedies of the Depositor against the
Seller under the Purchase Agreement and against the Servicer under the Servicing
Agreement.
REPORTS TO HOLDERS
The Indenture Trustee will make available to each Noteholder listed on the
Security Register maintained with the Indenture Trustee, a report setting forth
certain amounts relating to the Notes for each Payment Date to the extent such
information is provided to the Indenture Trustee by the Servicer pursuant to the
Servicing Agreement, among other things:
(i) the amount of principal, if any, payable on such Payment Date to
Noteholders;
(ii) the amount of interest payable on such Payment Date to
Noteholders separately stating the portion thereof in respect of overdue
accrued interest;
(iii) the Security Balance of the Notes after giving effect to the
payment of principal on such Payment Date;
(iv) P&I Collections for the related Collection Period and Investor
P&I Collections for the related Collection Period;
(v) the aggregate Principal Balance of the Revolving Credit Loans and
the Investor Amount as of the end of the preceding Collection Period; and
(vi) the amount paid, if any, under the Policy for such Payment Date.
In the case of information furnished pursuant to clauses (i) and (ii)
above, the amounts shall be expressed as a dollar amount per $1,000 in face
amount of Notes.
The Indenture Trustee will make the monthly statement (and, at its option,
any additional files containing the same information in an alternative format)
available each month to Noteholders via the Indenture Trustee's internet website
and its fax-on-demand service. The Indenture Trustee's fax-on-demand service may
be accessed by calling (301) 815-6610. The Indenture Trustee's internet website
shall initially be located at "www.ctslink.com." Assistance in using the website
or the fax-on-demand service can be obtained by calling the Indenture Trustee's
customer service desk at (301) 815-6600. Parties that are unable to use the
above distribution options are entitled to have a paper copy mailed to them via
first class mail by calling the customer service desk and requesting a copy. The
Indenture Trustee shall have the right to change the way monthly statements are
distributed in order to make such distribution more convenient and/or more
accessible to the Noteholders and the Indenture Trustee shall provide timely and
adequate notification to all the Noteholders regarding any such changes.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
With respect to the Notes, "Events of Default" occur under the Indenture at
any time when any one of the following events occurs:
(i) a default of any interest on any Note when the same becomes due
and payable, and such default continues for a period of five days;
S-50
<PAGE>
(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, and
such default continues for a period of five days;
(iii) default in the observance or performance of any covenant or
agreement of the Issuer made in the Indenture, or any representation or
warranty of the Issuer made in the Indenture or in any certificate or other
writing delivered pursuant hereto or in connection herewith proving to have
been incorrect in any material respect as of the time when the same shall
have been made, and such default shall continue or not be cured, or the
circumstance or condition in respect of which such representation or
warranty was incorrect shall not have been eliminated or otherwise cured,
for a period of 30 days after there shall have been given, by registered or
certified mail, to the Issuer by the Indenture Trustee or to the Issuer and
the Indenture Trustee by the Holders of at least 25% in principal amount of
the Notes then outstanding or the Credit Enhancer, a written notice
specifying such default or incorrect representation or warranty and
requiring it to be remedied and stating that such notice is a notice of
default hereunder;
(iv) the filing of a decree or order for relief by a court having
jurisdiction in the premises in respect of the Issuer or any substantial
part of the Trust in an involuntary case under any applicable federal or
state bankruptcy, insolvency or other similar law now or hereafter in
effect, or appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Issuer or for any substantial part
of the Trust, or ordering the winding-up or liquidation of the Issuer's
affairs, and such decree or order shall remain unstayed and in effect for a
period of 60 consecutive days;
(v) the commencement by the Issuer of a voluntary case under any
applicable federal or state bankruptcy, insolvency or other similar law now
or hereafter in effect, or the consent by the Issuer to the entry of an
order for relief in an involuntary case under any such law, or the consent
by the Issuer to the appointment or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official
of the Issuer or for any substantial part of the assets of the Trust, or
the making by the Issuer of any general assignment for the benefit of
creditors, or the failure by the Issuer generally to pay its debts as such
debts become due, or the taking of any action by the Issuer in furtherance
of any of the foregoing; or
(vi) any other events specified in the Indenture.
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
Note Rate 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, with the consent of the
Credit Enhancer, or the Credit Enhancer 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, with the consent of the Credit Enhancer, or by the
Credit Enhancer. 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 property of the Trust or exercise remedies as a
secured party with the prior written consent of the Credit Enhancer.
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 Credit
Enhancer or the holders of a majority in principal amount of the outstanding
Notes (with the consent of the Credit Enhancer) 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 Credit Enhancer or the holders of a majority
in principal amount of the Notes then outstanding (with the consent of the
Credit Enhancer) may, in certain cases, waive any default with respect thereto.
No holder of a Note will have the right to institute any proceeding with respect
to the Indenture, unless the Credit Enhancer consents to such proceeding and:
(i) such holder previously has given the Indenture Trustee written
notice of a continuing Event of Default;
S-51
<PAGE>
(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 Issuer
any bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law. With respect to the Issuer, neither the Indenture
Trustee nor the Owner Trustee in its individual capacity, nor any Holder
representing an ownership interest in the Issuer 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 Issuer contained in the Indenture.
CERTAIN COVENANTS
The Indenture will provide that the Issuer 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, by an indenture supplemental to
the Indenture, the Issuer's obligation to make due and punctual payments
upon the Notes and the performance or observance of any agreement and
covenant of the Issuer under the Indenture;
(iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation;
(iv) the Issuer has received consent of the Credit Enhancer and has
been advised that the ratings of the Securities (without regard to the
Policy) then in effect would not be reduced or withdrawn by any Rating
Agency as a result of such merger or consolidation;
(v) any action that is necessary to maintain the lien and security
interest created by the Indenture is taken;
(vi) the Issuer has received an Opinion of Counsel to the effect that
such consolidation or merger would have no material adverse tax consequence
to the Issuer or to any Noteholder or Certificateholder; and
(vii) the Issuer has delivered to the Indenture Trustee an officer's
certificate and an Opinion of Counsel each stating that such consolidation
or merger and such supplemental indenture comply with the Indenture and
that all conditions precedent, as provided in the Indenture, relating to
such transaction have been complied with.
The Issuer 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 Issuer;
(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 Issuer;
S-52
<PAGE>
(iii) 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;
(iv) 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 Issuer or any part thereof, or any
interest therein or the proceeds thereof;
(v) permit the lien of the Indenture not to constitute a valid first
priority security interest in the Trust; or
(vi) impair or cause to be impaired the Issuer's interest in the
Revolving Credit Loans, the Purchase Agreement or any other Agreement, if
that action would materially and adversely affect the interests of holder
of the Notes.
The Issuer may not engage in any activity other than as specified under
"The Issuer" herein.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority of the outstanding Notes and
the Credit Enhancer, the Issuer 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 and the Credit Enhancer, 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 change any place of payment where or the coin or
currency in which any Note or any 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 Issuer, 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;
(vi) modify any of the provisions of the Indenture in such manner as
to affect the calculation of the amount of any payment of interest or
principal due on any Note (including the calculation of any of the
individual components of such calculation);
(vii) permit the creation of any lien ranking prior to or, except as
otherwise contemplated by the Indenture, 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; or
(viii) reduce the percentage of aggregate amount of the outstanding
Notes required to direct the Indenture Trustee to direct the Issuer to
liquidate or sell the Trust.
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Credit Enhancer and without obtaining the
consent of the Noteholders, for the purpose of, among other things, curing any
ambiguity or correcting or supplementing any provision in the Indenture that may
be inconsistent with any other provision therein.
S-53
<PAGE>
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 and all amounts due
the Credit Enhancer.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER
Neither the Indenture Trustee nor any director, officer or employee of the
Indenture Trustee will be under any liability to the Issuer 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 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 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 Issuer 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 negligence in the
performance of its duties under such Indenture or by reason of reckless
disregard of its obligations and duties under the Indenture. 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 the Indenture.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes certain U.S. federal income tax
aspects of the purchase, ownership and disposition of the Notes, 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 Note Owners in light of their personal
investment circumstances or to certain types of Note 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 Notes.
CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in the
Indenture, the Trust Agreement and the Servicing Agreement (collectively, the
"AGREEMENTS") and other relevant documents and assuming compliance with the
terms of the Agreements as in effect on the date of issuance of the Notes, Brown
& Wood LLP, special tax counsel to the Trust ("TAX COUNSEL") and counsel to the
Underwriters, is of the opinion that (i) the Notes will be treated as debt
instruments for federal income tax purposes as of such date and (ii) the Trust
will not be characterized as an association (or publicly traded partnership)
taxable as a corporation or as a taxable mortgage pool within the meaning of
Section 7701(i) of the Code. Accordingly, upon issuance, the Notes will be
treated as "Debt Securities" as described in the Prospectus. See "Federal Income
Tax Consideration" in the Prospectus.
The Seller, the Certificateholder and the Noteholders express in the
Agreements their intent that, for applicable tax purposes, the Notes will be
indebtedness secured by the Revolving Credit Loans. The Seller, the Depositor
and the Noteholders, by accepting the Notes, and each Note Owner by its
acquisition of a beneficial interest in a Note, have agreed to treat the Notes
as indebtedness for U.S. federal income tax purposes. However, because different
criteria are used to determine the non-tax accounting characterization of
S-54
<PAGE>
the transaction, the Seller intends to treat this transaction as a sale of an
interest in the Principal Balances of the Revolving Credit 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 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 Revolving Credit Loans has been
retained by the Depositor and has not been transferred to the Note Owners.
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 Notes as debt or otherwise makes the
rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF NOTE OWNERS
Assuming that the Note Owners are holders of debt obligations for U.S.
federal income tax purposes, the Notes generally will be taxable as Debt
Securities. See "Federal Income Tax Consideration" in the Prospectus.
While it is not anticipated that the Notes will be issued at a greater than
de minimis discount, under Treasury regulations (the "OID REGULATIONS") it is
possible that the Notes 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 Notes
would be includible in income of Note Owners as OID, but would not be includible
again when the interest is actually received. See "Federal Income Tax
Consideration--Taxation of Debt Securities; Interest and Acquisition Discount"
in the Prospectus for a discussion of the application of the OID rules if the
Notes 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 Notes will be treated as Pay-Through
Securities.
POSSIBLE CLASSIFICATION OF THE TRUST 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 Notes
constitutes a sale of the Revolving Credit Loans (or an interest therein) to the
Note Owners and that the proper classification of the legal relationship between
the Certificateholder and the Note Owners resulting from this transaction is
that of a partnership (including a publicly traded partnership), a publicly
traded partnership treated as a corporation, or an association taxable as a
corporation. Since Tax Counsel has advised that the Notes will be treated as
indebtedness in the hands of the Noteholders for U.S. federal income tax
purposes, the Certificateholder will not attempt to comply with U.S. federal
income tax reporting requirements applicable to partnerships or corporations as
such requirements would apply if the Notes 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 would be subject to U.S. federal income tax at corporate
income tax rates on the income it derives from the Revolving Credit Loans, which
would reduce the amounts available for payment to the Note Owners. Cash payments
to the Note 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 Note Owners and the
Certificateholder, the partnership itself would not be subject to U.S. federal
income tax (unless it were to be characterized as a
S-55
<PAGE>
publicly traded partnership taxable as a corporation); rather, the
Certificateholder and each Note 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 Note Owner could differ if the Notes were held to constitute partnership
interests rather than indebtedness.
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.
Assuming that all of the provisions of the Agreements, as in effect on the
date of issuance, are complied with, Tax Counsel is of the opinion that the
arrangement created by the Agreements will not be a taxable mortgage pool under
Section 7701(i) of the Code because only one maturity of indebtedness has been
issued and secured by the Revolving Credit Loans.
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 Agreements 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 Revolving Credit Loans. Such a tax might
reduce amounts available for payments to Note Owners. The amount of such a tax
would depend upon whether payments to Note 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 Note to a person other than: (i) a citizen or resident of the United States,
(ii) a corporation, partnership or other entity (treated as a corporation or a
partnership for federal income tax purposes) created or organized in or under
the laws of the United States, any state thereof or the District of Columbia,
(other than a partnership that is not treated as a United States person under
any applicable Treasury regulations), (iii) an estate whose income is subject to
United States federal income tax regardless of its source or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust (including certain
trusts in existence on August 20, 1996 that may elect to be treated as United
States persons to the extent permitted in Treasury regulations) (a "NON-U.S.
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 Note Owner provides the required foreign person
information certification. See "Federal Income Tax Consideration--Tax Treatment
of Foreign Investors" in the Prospectus.
Interest paid (or accrued) to a Note Owner who is a non-U.S. Person will be
considered "portfolio interest" and generally will not be subject to United
States federal income tax and withholding tax, provided, that (i) the interest
is not effectively connected with the conduct of a trade or business within the
United States by the non-U.S. Person, (ii) the non-U.S. Person provides the
Trust or other person who is otherwise required to withhold U.S. tax with
respect to the Note with an appropriate statement (on Form W-8 BEN or other
similar form), signed under penalties of perjury, certifying that the beneficial
owner of the Note is a foreign person and providing that non-U.S. person's name
and addresses. 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 BEN or
substitute form provided by the non-U.S. Person that owns that interest in the
Note. If such interest does not constitute portfolio interest, then it will be
subject to U.S.
S-56
<PAGE>
federal income and withholding tax at a rate of 30%, unless reduced or
eliminated pursuant to an applicable tax treaty and the non-U.S. Person provides
the Trust, or an organization or financial institution described above, with an
appropriate statement (e.g., a Form W-8 BEN), signed under penalties of perjury,
to that effect.
If the interests of the Note Owners were deemed to be partnership
interests, the partnership, if it were considered to be engaged in a U.S. trade
or business, 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 were taxable as a corporation, payments to foreign persons, to
the extent treated as dividends (or if the Trust were characterized as a
partnership that was not engaged in a trade or business, all interest payments),
would generally be subject to withholding at the rate of 30%, unless such rate
were reduced by an applicable tax treaty.
In addition, the interest paid on Notes could be subject to a 30%
withholding tax (or lower treaty rate) either because the interest on the
Mortgage Loans does not appear to satisfy the requirements to be treated as
"portfolio interest" under the Code, or because, even if such Mortgage Loan
interest were to be treated as portfolio interest, interest payments on the
Notes could be treated as "guaranteed payments" within the meaning of the
partnership provisions of the Code.
If, contrary to the opinion of Tax Counsel, the Notes are recharacterized
as equity interests in a partnership, or in an association or publicly traded
partnership taxable as a corporation, any taxes required to be so withheld will
be treated for all purposes of the Notes and the Policy as having been paid to
the related Noteholder.
BACKUP WITHHOLDING
Certain Note Owners may be subject to backup withholding at the rate of 31%
with respect to interest paid on the Notes if the Note Owners, upon issuance,
fail to supply the Indenture 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) property, or, under certain circumstances, fail to provide the Indenture
Trustee or his broker with a certified statement, under penalty of perjury, that
he is not subject to backup withholding.
The Indenture Trustee will be required to report annually to the IRS, and
to each Noteholder of record, the amount of interest paid (and OID accrued, if
any) on the Notes (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 status as nonresidents). As long as
the only "Noteholder" of record is Cede, as nominee for DTC, Note Owners and the
IRS will receive tax and other information including the amount of interest paid
on the Notes from Participants and Indirect Participants rather than from the
Indenture Trustee. (The Indenture 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 Note 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 Note 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.
Final regulations dealing with backup withholding and information reporting
on income paid to a foreign person and related matters (the "NEW WITHHOLDING
REGULATIONS") were published in the Federal Register on October 14, 1997. In
general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms
S-57
<PAGE>
and clarify reliance standards. The New Withholding Regulations generally will
be effective for payments made after December 31, 2000, subject to certain
transition rules. The discussion set forth above does not take the New
Withholding Regulations into account. Prospective Note Owners are strongly urged
to consult their own tax advisor with respect to the New Withholding
Regulations.
TAX-EXEMPT ENTITIES
A tax-exempt Note Owner may be subject to less favorable tax treatment
because an interest in a partnership may generate "unrelated business taxable
income" and thereby subject the Note Owner to the "unrelated business, taxable
income" provisions of the Code.
ERISA CONSIDERATIONS
Any fiduciary or other investor of Plan assets that proposes to acquire or
hold the Notes on behalf of or with Plan assets of any Plan should consult with
its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment. See "ERISA Considerations" in the
Prospectus.
Each Purchaser of a Note, by its acceptance of such Note, shall be deemed
to have represented that the acquisition and holding of the Note by such
purchaser or the acquisition of the Note by such purchaser does not constitute
or give rise to a prohibited transaction under section 406 of ERISA or
section 4975 of the Code, for which no statutory, regulatory or administrative
exemption is available. See "ERISA Considerations" in the Prospectus.
Insurance companies contemplating the investment of general account assets
in the Notes should consult with their legal advisors with respect to the
applicability of Section 401(c) of ERISA, as described under "ERISA
Considerations--Insurance Company Purchasers" in the Prospectus. The DOL
published final regulations under Section 401(c) on January 5, 2000, which
regulations generally become applicable on July 5, 2001.
The Notes may not be purchased with the assets of a Plan if the Depositor,
the Servicer, the Indenture Trustee, the Owner Trustee or any of their
affiliates (a) has investment or administrative discretion with respect to such
Plan assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets, for a fee and pursuant to an
agreement or understanding that such advice (i) will serve as a primary basis
for investment decisions with respect to such Plan assets and (ii) will be based
on the particular investment needs for such Plan; or (c) is an employer
maintaining or contributing to such Plan.
USE OF PROCEEDS
The Depositor intends to use the net proceeds to be received from the sale
of the Notes to acquire the Revolving Credit Loans and to pay other expenses
associated with creating the Trust and the issuance of the Notes.
LEGAL INVESTMENT
The Notes will not constitute "mortgage related securities" for purposes of
SMMEA. Accordingly, many institutions with legal authority to invest in mortgage
related securities may not be legally authorized to invest in the Notes. No
representation is made herein as to whether the Notes constitute legal
investments for any entity under any applicable statute, law, rule, regulation
or order. Prospective purchasers are urged to consult with their counsel
concerning the status of the Notes as legal investments for such purchasers
prior to investing in Notes.
S-58
<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated August 17, 2000 (the "UNDERWRITING AGREEMENT"), the Depositor has agreed
to sell to the Notes to the underwriters specified below (the "UNDERWRITERS" and
the Underwriters have agreed to purchase the Notes in the respective amount set
forth opposite their names below:
<TABLE>
<CAPTION>
UNDERWRITER PRINCIPAL AMOUNT OF NOTES
----------- -------------------------
<S> <C>
Morgan Stanley & Co. Incorporated................................... $ 196,364,000
ABN AMRO Bank N.V................................................... 1,000
Banco Santander Central Hispano, S.A................................ 1,000
-------------
Total............................................................... $ 196,366,000
=============
</TABLE>
It is expected that delivery of the Notes will be made only in book-entry
form through the Same Day Funds Settlement System of DTC, Clearsteam, Luxembourg
and Euroclear on or about August 23, 2000, against payment therefor in
immediately available funds.
The Notes may be distributed 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. Proceeds to the Depositor from the sale of the Notes are
expected to be approximately 99.65% of the initial principal amount of the
Notes, before deducting expenses payable by the Depositor. The Underwriters may
effect such transactions by selling the Notes to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters. In connection with the sale of
the Notes, each Underwriter may be deemed to have received compensation from the
Depositor in the form of underwriting compensation. The Underwriters and any
dealers that participate with the Underwriters in the distribution of the Notes
may be deemed to be underwriters and any commissions received by them and any
profit on the resale of the Notes positioned by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933.
In addition, the Underwriting Agreement provides that the obligations of
the Underwriters to pay for and accept delivery of the Notes are subject to
certain conditions precedent and that the Underwriters will be obligated to
purchase all of the Notes if any of the Notes are purchased.
The Underwriting Agreement and certain indemnity letters provide that the
Depositor and the Seller will indemnify the Underwriters, and that under limited
circumstances the Underwriters will indemnify the Depositor, against certain
civil liabilities under the Securities Act of 1933, or contribute to payments
required to be made in respect thereof.
The Underwriters intend to make a secondary market in the Notes, but have
no obligation to do so. Currently, no secondary market for the Notes exists. We
cannot assure you, nor can you assume, that such a market will develop or, if
one does develop, that it will continue to operate in the future or provide you
with a sufficient level of liquidity for your investment.
Morgan Stanley & Co. Incorporated is an affiliate of the Depositor, the
Seller and the Servicer.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
its subsidiaries as of December 31, 1999 and 1998 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 December 31, 1999, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
S-59
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon for the
Depositor, Morgan Stanley & Co. Incorporated, an Underwriter, the Seller and the
Servicer by Brown & Wood LLP, New York.
RATINGS
It is a condition to issuance that the Notes be rated "Aaa" by Moody's
Investors Services, Inc. ("MOODY'S") and "AAA" by Standard & Poor's, a division
of The McGraw-Hill Companies, Inc. ("STANDARD & POOR'S"). The Depositor has not
requested a rating on the Notes by any rating agency other than Moody's and
Standard & Poor's. However, there can be no assurance as to whether any other
rating agency will rate the Notes, or, if it does, what rating would be assigned
by any such other rating agency. A rating on the Notes by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Notes by
Moody's and Standard & Poor's. A securities rating addresses the likelihood of
the receipt by Holders of Notes of distributions on the Revolving Credit Loans.
The rating takes into consideration the structural and legal aspects associated
with the Notes. The ratings on the Notes do not, however, constitute statements
regarding the possibility that Holders might realize a lower than anticipated
yield or the timing of the receipt of principal. In addition, such ratings do
not address the likelihood of the receipt of any amounts in respect of the Net
Funds Cap Carryover Amount. A securities rating is not a recommendation to buy,
sell or hold securities and may be subject to revision or withdrawal at any time
by the assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
S-60
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Accelerated Principal Payment Amount............................................................... S-34
Account Balance.................................................................................... S-14
Additional Balances................................................................................ S-12
Additional Charges................................................................................. S-14
Adjustment Date.................................................................................... S-13
Agreements......................................................................................... S-54
Aggregate risks.................................................................................... S-29
Appraised Value.................................................................................... S-14
Billing Cycle...................................................................................... S-13
Billing Date....................................................................................... S-13
Book-Entry Notes................................................................................... S-30
Business Day....................................................................................... S-32, S-38
Calculated Principal Balance....................................................................... S-25
Certificateholder.................................................................................. S-30
Certificateholder Interest......................................................................... S-30
Certificates....................................................................................... S-12
Closing Date....................................................................................... S-12
CLTV............................................................................................... S-14
Code............................................................................................... S-54
Collection Account................................................................................. S-45
Collection Period.................................................................................. S-46
Combined Loan-to-Value Ratio....................................................................... S-14
Commission......................................................................................... S-28
Constant Draw Rate................................................................................. S-39
CPR................................................................................................ S-39
Credit Limit....................................................................................... S-13
Credit Limit Utilization Rate...................................................................... S-13
Credit Line Agreement.............................................................................. S-12
Credit Scores...................................................................................... S-21
Custodian.......................................................................................... S-43
Cut-off Date....................................................................................... S-12
Cut-off Date Balance............................................................................... S-12
Cut-off Date Pool Balance.......................................................................... S-12
Date............................................................................................... S-42
Definitive Note.................................................................................... S-30
Deleted Loan....................................................................................... S-43
Depositor.......................................................................................... S-12
Determination Date................................................................................. S-45
Draw Period........................................................................................ S-13
Draws.............................................................................................. S-12
DTC................................................................................................ S-30
Due Date........................................................................................... S-13
Eligible Substitute Loan........................................................................... S-44
European Depositaries.............................................................................. S-30
Events of Default.................................................................................. S-50
Events of Servicing Termination.................................................................... S-48
Final Payment Date................................................................................. S-33
Finance Charge..................................................................................... S-14
Financial Intermediary............................................................................. S-30
Global Securities.................................................................................. I-1
Gross Margin....................................................................................... S-13
Guaranteed Distributions........................................................................... S-37
</TABLE>
S-61
<PAGE>
<TABLE>
<S> <C>
Guaranteed Principal Distribution Amount........................................................... S-37
Holder............................................................................................. S-30
Holdings........................................................................................... S-27
Indenture.......................................................................................... S-12
Index.............................................................................................. S-13
Insurance Agreement................................................................................ S-37
Insured Amount..................................................................................... S-37
Interest Collections............................................................................... S-46
Interest Period.................................................................................... S-33
Investor Amount.................................................................................... S-30
Investor Floating Allocation Percentage............................................................ S-34
Investor Liquidation Loss Amount................................................................... S-34
Investor P&I Collections........................................................................... S-35
IRS................................................................................................ S-55
Issuer............................................................................................. S-12
Junior Ratio....................................................................................... S-18
LIBOR Business Day................................................................................. S-33
Liquidated Revolving Credit Loan................................................................... S-35
Liquidation Loss Amount............................................................................ S-35
Liquidation Loss Distribution Amount............................................................... S-34
Loan Rate.......................................................................................... S-13
Loan Schedule...................................................................................... S-45
Managed Amortization Period........................................................................ S-35
Maximum Loan Rate.................................................................................. S-13
Minimum Certificateholder Interest................................................................. S-45
Moody's............................................................................................ S-60
Mortgage........................................................................................... S-12
Mortgage Pool...................................................................................... S-12
Mortgagor.......................................................................................... S-12
MSDWCC............................................................................................. S-23
Net Funds Cap...................................................................................... S-32
Net Funds Cap Carryover Amount..................................................................... S-32
Net Liquidation Proceeds........................................................................... S-46
Net Principal Collections.......................................................................... S-46
New Withholding Regulations........................................................................ S-57
Non-U.S. Person.................................................................................... S-56, I-4
Note Owners........................................................................................ S-30
Note Rate.......................................................................................... S-32
Noteholder......................................................................................... S-30, S-57
Notes.............................................................................................. S-12
OID................................................................................................ S-55
OID Regulations.................................................................................... S-55
Optional Redemption Date........................................................................... S-37
Original Investor Amount........................................................................... S-30
Original Security Balance.......................................................................... S-30
Overcollateralization Amount....................................................................... S-35
Overcollateralization Deficit...................................................................... S-35
Owner Trustee...................................................................................... S-12
P&I Collections.................................................................................... S-46
Payment Account.................................................................................... S-34
Permitted Investments.............................................................................. S-45
Pool Balance....................................................................................... S-46
Preference Amount.................................................................................. S-37
Principal Balance.................................................................................. S-46
</TABLE>
S-62
<PAGE>
<TABLE>
<S> <C>
Principal Collection Distribution Amount........................................................... S-35
Principal Collections.............................................................................. S-46
Principal Reduction Amount......................................................................... S-35
Purchase Agreement................................................................................. S-43
Rapid Amortization Event........................................................................... S-36
Rapid Amortization Period.......................................................................... S-35
Receipt............................................................................................ S-38
Received........................................................................................... S-38
Record Date........................................................................................ S-32
Reference Bank Rate................................................................................ S-33
Related Documents.................................................................................. S-43
Relevant Depositary................................................................................ S-30
Repurchase Price................................................................................... S-44
Required Overcollateralization Amount.............................................................. S-35
Revolving Credit Loans............................................................................. S-12
Rules.............................................................................................. S-31
Securities......................................................................................... S-12
Security Balance................................................................................... S-30
Seller............................................................................................. S-12
Seller P&I Collections............................................................................. S-35
Servicer........................................................................................... S-12
Servicing Agreement................................................................................ S-12
Servicing Fee Rate................................................................................. S-25
Single Risks....................................................................................... S-29
Sioux Falls Servicing Center....................................................................... S-24
Standard & Poor's.................................................................................. S-60
Substitution Adjustment Amount..................................................................... S-44
Tax Counsel........................................................................................ S-54
Telerate Screen Page 3750.......................................................................... S-33
Transfer Date...................................................................................... S-44
Trust.............................................................................................. S-12
Trust Agreement.................................................................................... S-12
U.S. Person........................................................................................ I-4
Underwriters....................................................................................... S-59
Underwriting Agreement............................................................................. S-59
WAL................................................................................................ S-42
</TABLE>
S-63
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
S-64
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered MSDWCC HELOC
Asset-Backed Notes, Series 2000-1 (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, Clearstream, Luxembourg or Euroclear. The Global
Securities will be tradable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors through Clearstream, Luxembourg
and Euroclear will be conducted in the ordinary way in accordance with the
normal rules and operating procedures of Clearstream, Luxembourg and Euroclear
and in accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Clearstream, Luxembourg or Euroclear
and DTC Participants holding Notes will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream, Luxembourg 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, Clearstream, Luxembourg and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream,
Luxembourg 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 mortgage
loan asset-backed certificates issues in same-day funds.
Trading between Clearstream, Luxembourg and/or Euroclear
Participants. Secondary market trading between Clearstream, Luxembourg
Participants or Euroclear Participants will be settled using the procedures
applicable to conventional eurobonds in same-day funds. Trading between DTC,
Seller and Clearstream, Luxembourg or Euroclear Participants. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Clearstream, Luxembourg Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream, Luxembourg or Euroclear through
a Clearstream, Luxembourg Participant or Euroclear Participant at least one
business day prior to settlement. Clearstream, Luxembourg or Euroclear will
instruct the Relevant Depositary, as the case may be, to receive the Global
I-1
<PAGE>
Securities against payment. Payment will include interest accrued on the Global
Securities from and including the last coupon payment date to and excluding the
settlement date, on the basis of the actual number of days in such accrual
period and a year assumed to consist of 360 days. For transactions settling on
the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. Payment will then be made by the Relevant
Depositary to the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Clearstream, Luxembourg
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 Clearstream, Luxembourg or Euroclear cash debt will be valued instead as of
the actual settlement date.
Clearstream, Luxembourg Participants and Euroclear Participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global Securities are credited
to their account one day later. As an alternative, if Clearstream, Luxembourg or
Euroclear has extended a line of credit to them, Clearstream, Luxembourg
Participants or Euroclear Participants can elect not to preposition funds and
allow that credit line to be drawn upon to finance settlement. Under this
procedure, Clearstream, Luxembourg Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each Clearstream,
Luxembourg Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for Crediting Global Securities
to the respective European Depositary for the benefit of Clearstream, Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Clearstream, Luxembourg or Euroclear Seller and DTC
Purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
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 Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases Clearstream,
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to credit the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of the actual number of days in such accrual period and a year assumed to
consist of 360 days. For transactions settling on the 31st of the month, payment
will include interest accrued to and excluding the first day of the following
month. The payment will then be reflected in the account of Clearstream,
Luxembourg Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream, Luxembourg 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 Clearstream,
Luxembourg 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 Clearstream, Luxembourg Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
I-2
<PAGE>
Finally, day traders that use Clearstream, Luxembourg or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream,
Luxembourg Participants or Euroclear Participants should note that these trades
would automatically fail on the sale side unless affirmative action is taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Clearstream, Luxembourg or Euroclear for one day
(until the purchase side of the trade is reflected in their Clearstream,
Luxembourg 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 Clearstream, Luxembourg
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 Clearstream,
Luxembourg Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons (as defined below), unless (i) each
clearing system, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business in the chain of
intermediaries between such beneficial owner and the U.S. entity required to
withhold tax complies with applicable certification requirements and (ii) such
beneficial owner takes one of the following steps to obtain an exemption or
reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8BEN). Beneficial Holders of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8BEN (Certificate
of Foreign Status). If the information shown on Form W-8BEN changes, a new Form
W-8BEN must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form W-8
ECI). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form W-8 ECI (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 W-8BEN). Non-U.S. Persons residing in a country that has a tax treaty
with the United States can obtain an exemption or reduced tax rate (depending on
the treaty terms) by filing Form W-8BEN (Ownership, Exemption or Reduced Rate
Certificate). (Certificate of Foreign Status of Beneficial Owner for United
States Tax Withholding.) If Form W-8BEN (treaty relief) is provided and the
treaty provides only for a reduced rate, withholding tax will be imposed at that
rate unless the filer alternatively files Form W-8BEN (Certificate of Foreign
Status). Form W-8BEN may be filed by Noteholders or their agent. Exemption for
U.S. Persons (Form W-9). U.S. Persons can obtain a complete exemption from the
withholding tax by filing Form W-9 (Payer's Request for Taxpayer Identification
Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder of a Global
Security or, in the case of a Form W-8BEN or a Form W-8 ECI filer, his agent,
files by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8BEN and Form W-8 ECI are effective until
the third succeeding Calendar year from the date the form is signed
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, any state thereof or the District of Columbia thereof (unless, in
the case of a partnership, future Treasury regulations provide otherwise)
(iii) an estate that
I-3
<PAGE>
is subject to U.S. federal income tax regardless of the source of its income or
(iv) a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in Treasury
regulations, certain trusts in existence on August 20, 1996, and treated as
United States persons under the Code and applicable Treasury regulations
thereunder prior to such date, that elect to continue to be treated as United
States persons also will be a U.S. Person. The term "NON-U.S. PERSON" means any
person who is not a U.S. Person. This summary does not deal with all aspects of
U.S. Federal income tax withholding that may be relevant to foreign holders of
the Global Securities. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of the Global
Securities.
I-4
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
I-5
<PAGE>
PROSPECTUS
MORGAN STANLEY ABS CAPITAL I INC.
DEPOSITOR
$1,000,000,000
(AGGREGATE AMOUNT)
ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
------------------------
This Prospectus relates to the issuance of Asset Backed Certificates (the
"Certificates") and Asset Backed Notes (the "Notes" and, together with the
Certificates, the "Securities"), which may be sold from time to time in one or
more series (each, a "Series") by Morgan Stanley ABS Capital 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
Affordable-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 122 of this Prospectus for the location of
the definitions of certain capitalized terms.
------------------------
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 18.
------------------------
THE CERTIFICATES OF A GIVEN SERIES WILL REPRESENT BENEFICIAL INTERESTS IN, AND
THE NOTES OF A GIVEN SERIES WILL REPRESENT OBLIGATIONS OF, THE RELATED TRUST
FUND ONLY AND WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
DEPOSITOR, MORGAN STANLEY & CO. INCORPORATED, THE MASTER SERVICER, ANY
SELLER OR ANY AFFILIATES THEREOF, EXCEPT TO THE EXTENT DESCRIBED IN
THE RELATED PROSPECTUS SUPPLEMENT. THE SECURITIES AND THE LOANS
WILL NOT BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR OR ANY OTHER PERSON OR
ENTITY, EXCEPT IN EACH CASE TO THE EXTENT DESCRIBED IN THE
RELATED PROSPECTUS SUPPLEMENT.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------
Prior to issuance there will have been no market for the Securities of any
Series and there can be no assurance that a secondary market for any Securities
will develop, or if it does develop, that it will continue or provide
Securityholders with a sufficient level of liquidity of investment.
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by Morgan Stanley & Co. Incorporated ("Morgan Stanley")
and the other underwriters set forth in the related Prospectus Supplement, if
any, subject to prior sale, to withdrawal, cancellation or modification of the
offer without notice to, delivery to and acceptance by Morgan Stanley and the
other underwriters, if any, and certain further conditions. Retain this
Prospectus for future reference. This Prospectus may not be used to consummate
sales of the Securities offered hereby unless accompanied by a Prospectus
Supplement.
------------------------
MORGAN STANLEY DEAN WITTER
August 17, 2000
<PAGE>
Each Series of Securities will be issued in one or more classes. Each class
of Certificates of a Series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on the related Trust Fund Assets. Each class of Notes of a Series will be
secured by the related Trust Fund Assets or, if so specified in the related
Prospectus Supplement, a portion thereof. A Series of Securities may include one
or more classes that are senior in right of payment to one or more other classes
of Securities of such Series. One or more classes of Securities of a Series may
be entitled to receive distributions of principal, interest or any combination
thereof prior to one or more other classes of Securities of such Series or after
the occurrence of specified events, in each case as specified in the related
Prospectus Supplement.
Distributions to holders of Securities ("SECURITYHOLDERS") will be made
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the Securities
of a Series will be made from the related Trust Fund Assets or proceeds thereof
pledged for the benefit of the Securityholders as specified in the related
Prospectus Supplement.
The related Prospectus Supplement will describe any insurance or guarantee
provided with respect to the related Series of Securities including, without
limitation, any insurance or guarantee provided by the Department of Housing and
Urban Development, the United States Department of Veterans' Affairs or any
private insurer or guarantor. Unless otherwise specified in the related
Prospectus Supplement, the only obligations of the Depositor with respect to a
Series of Securities will be to obtain certain representations and warranties
from each Seller or each originator (the "ORIGINATOR") of the Trust Fund Assets
and to assign to the Trustee for the related Series of Securities the
Depositor's rights with respect to such representations and warranties. The
principal obligations of the Master Servicer named in the related Prospectus
Supplement with respect to the related Series of Securities will be limited to
obligations pursuant to certain representations and warranties and to its
contractual servicing obligations, including any obligation it may have to
advance delinquent payments on the related Trust Fund Assets.
The yield on each class of Securities of a Series will be affected by,
among other things, the rate of payments of principal (including prepayments) on
the related Trust Fund Assets and the timing of receipt of such payments as
described under "Risk Factors--Prepayment and Yield Considerations and
Reinvestment Risk" and "Yield and Prepayment Considerations" herein and in the
related Prospectus Supplement. A Trust Fund may be subject to early termination
under the circumstances described under "The Agreements--Termination; Optional
Termination" herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, one or more elections
may be made to treat a Trust Fund or specified portions thereof as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax purposes.
See "Federal Income Tax Consequences."
Until 90 days after the date of each prospectus supplement, all dealers
effecting transactions in the securities covered by such prospectus supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
------------------------
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things, set
forth with respect to such Securities, as appropriate: (i) the aggregate
principal amount, interest rate and authorized denominations of each class of
such Series of Securities; (ii) information as to the assets comprising the
Trust Fund, including the general characteristics of the related Trust Fund
Assets included therein and, if applicable, the insurance policies, surety
bonds, guaranties, letters of credit or other instruments or agreements included
in the Trust Fund or otherwise, and the amount and source of any reserve account
or other cash account; (iii) the circumstances, if any, under which the Trust
Fund may be subject to early termination; (iv) the circumstances, if any, under
which the
2
<PAGE>
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 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
3
<PAGE>
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>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Terms........................................................................................... 6
Risk Factors............................................................................................... 18
The Trust Fund............................................................................................. 29
Use of Proceeds............................................................................................ 43
The Depositor.............................................................................................. 43
Description of The Securities.............................................................................. 44
Credit Enhancement......................................................................................... 59
Yield And Prepayment Considerations........................................................................ 64
The Agreements............................................................................................. 66
Certain Legal Aspects of The Loans......................................................................... 80
Federal Income Tax Consequences............................................................................ 94
State Tax Considerations................................................................................... 114
Erisa Considerations....................................................................................... 114
Legal Investment........................................................................................... 118
Method of Distribution..................................................................................... 119
Legal Matters.............................................................................................. 120
Financial Information...................................................................................... 120
Rating..................................................................................................... 120
Index of Defined Terms..................................................................................... 122
</TABLE>
5
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement with respect to the Series of Securities offered thereby and to the
related Agreement (as such term is defined below) which will be prepared in
connection with each Series of Securities. Unless otherwise specified,
capitalized terms used and not defined in this Summary of Terms have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement. See "Index of Defined Terms" on Page 122 of this Prospectus for the
location of the definitions of certain capitalized terms.
<TABLE>
<S> <C>
Title of Securities.......................... Asset Backed Certificates (the "Certificates") and Asset Backed
Notes (the "Notes" and, together with the Certificates, the
"Securities"), which are issuable in Series.
Depositor.................................... Morgan Stanley ABS Capital I Inc., a wholly-owned subsidiary of
Morgan Stanley Group Inc. None of Morgan Stanley, Morgan Stanley
Group Inc. or any other affiliate of the Depositor, the Master
Servicer, the Trustee or the Seller has guaranteed or is otherwise
obligated with respect to the Securities of any Series. See "The
Depositor."
Trustee...................................... The trustee(s) (the "Trustee") for each Series of Securities will
be specified in the related Prospectus Supplement. See "The
Agreements" herein for a description of the Trustee's rights and
obligations.
Master Servicer.............................. The entity or entities named as Master Servicer (the "Master
Servicer") in the related Prospectus Supplement. See "The
Agreements--Certain Matters Regarding the Master Servicer and the
Depositor."
Trust Fund Assets............................ Assets of the Trust Fund for a Series of Securities will include
assets (the "Trust Fund Assets") which will consist of Loans,
Agency Securities and/or Private Mortgage-Backed Securities,
together with payments in respect of such Trust Fund Assets, as
specified in the related Prospectus Supplement. At the time of
issuance of Securities of a Series, the Depositor will cause
Loans, Agency Securities and/or Private Mortgage-Backed Securities
comprising the related Trust Fund to be assigned to the Trustee,
without recourse. The Loans, Agency Securities and/or Private
Mortgage-Backed Securities will be collected in a pool (each, a
"Pool") as of the first day of the month of the issuance of the
related Series of Securities or such other date specified in the
related Prospectus Supplement (the "Cut-off Date"). A Trust Fund
may include a number of different types and concentrations of
Trust Fund Assets to the extent described in the related
Prospectus Supplement. Trust Fund Assets also may include
insurance policies, surety bonds, cash accounts, spread accounts,
reinvestment income, guaranties, letters of credit, interest rate
cap agreements or interest rate swap agreements. See "Credit
Enhancement." In addition, if the related Prospectus Supplement so
provides, the related Trust 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."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
A. Loans................................ The Loans will consist of (i) mortgage loans secured by first,
second and/or more subordinate liens on one-to four-family
residential properties or security interests in shares issued by
cooperative housing corporations (each, a "Mortgage Loan"),
(ii) closed-end loans (the "Closed-End Loans") and/or revolving
home equity loans or certain balances thereof (the "Revolving
Credit Line Loans," together with the Closed-End Loans, the "Home
Equity Loans") secured by first, second and/or more subordinate
liens on one- to four-family residential properties, (iii) home
improvement installment sales contracts and installment loan
agreements (the "Home Improvement Contracts") that are either
unsecured or secured by first, second and/or more subordinate
liens on one- to four-family residential proper-ties, 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
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
distributions) or the interest distributions (but not the
principal distributions) or in some specified portion of the
principal and interest distributions (but not all of such
distributions) on certain GNMA, FNMA, FHLMC or other government
agency or government-sponsored agency certificates and, unless
otherwise specified in the related Prospectus Supplement,
guaranteed to the same extent as the underlying securities,
(v) another type of guaranteed pass-through certificate issued or
guaranteed by GNMA, FNMA, FHLMC or other government agency or
government-sponsored agency and described in the related
Prospectus Supplement, or (vi) a combination of such Agency
Securities. All GNMA Certificates will be backed by the full faith
and credit of the United States. No FNMA or FHLMC Certificates
will be backed, directly or indirectly, by the full faith and
credit of the United States. The Agency Securities may consist of
pass-through securities issued under the GNMA I Program, the GNMA
II Program, FHLMC's Cash or Guarantor Program or another program
specified in the Prospectus Supplement. The payment
characteristics of the Mortgage Loans underlying the Agency
Securities will be described in the related Prospectus Supplement.
See "The Trust Fund--Agency Securities."
C. Private Mortgage-Backed
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
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
pass-through or certificate rate of the Private Mortgage-Backed
Securities; (vii) the issuer of the Private Mortgage-Backed
Securities (the "PMBS Issuer"), the servicer of the Private
Mortgage-Backed Securities (the "PMBS Servicer") and the trustee
of the Private Mortgage-Backed Securities (the "PMBS Trustee");
(viii) certain characteristics of credit support, if any, such as
reserve funds, insurance policies, letters of credit, financial
guaranty insurance policies or third party guarantees, relating to
the mortgage loans underlying the Private Mortgage-Backed
Securities, or to such Private Mortgage-Backed Securities
themselves; (ix) the terms on which underlying mortgage loans for
such Private Mortgage-Backed Securities may, or are required to,
be repurchased prior to stated maturity and (x) the terms on which
substitute mortgage loans may be delivered to replace those
initially deposited with the PMBS Trustee. See "The Trust
Fund--Private Mortgage-Backed Securities."
Description of the Securities................ Each Security will represent a beneficial ownership interest in,
or be secured by the assets of, a Trust Fund created by the
Depositor pursuant to an Agreement among the Depositor, the Master
Servicer and the Trustee for the related Series. The Securities of
any Series may be issued in one or more classes as specified in
the related Prospectus Supplement. A Series of Securities may
include one or more classes of senior Securities (collectively,
the "Senior Securities") and one or more classes of subordinate
Securities (collectively, the "Subordinated Securities"). Certain
Series or classes of Securities may be covered by insurance
policies or other forms of credit enhancement, in each case as
described under "Credit Enhancement" herein and in the related
Prospectus Supplement. One or more classes of Securities of each
Series (i) may be entitled to receive distributions allocable only
to principal, only to interest or to any combination thereof;
(ii) may be entitled to receive distributions only of prepayments
of 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
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
accrue interest until such events occur, in each case as specified
in the related Prospectus Supplement. The timing and amounts of
such distributions may vary among classes or over time, as
specified in the related Prospectus Supplement.
Distributions on the Securities.............. Distributions on the Securities entitled thereto will be made
monthly, quarterly, semi-annually or at such other intervals and
on the dates specified in the related Prospectus Supplement (each,
a "Distribution Date") out of the payments received in respect of
the assets of the related Trust Fund or Funds or other assets
pledged for the benefit of the Securities as described under
"Credit Enhancement" herein to the extent specified in the related
Prospectus Supplement. The amount allocable to payments of
principal and interest on any Distribution Date will be determined
as specified in the related Prospectus Supplement. The Prospectus
Supplement for a Series of Securities will describe the method of
allocating distributions among Securities of different classes as
well as the method for allocating distributions among Securities
for any particular class. Unless otherwise specified in the
related Prospectus Supplement, the aggregate original principal
balance of the Securities will not exceed the aggregate
distributions allocable to principal that such Securities will be
entitled to receive. If specified in the related Prospectus
Supplement, the Securities will have an aggregate original
principal balance equal to the aggregate unpaid principal balance
of the Trust Fund Assets as of the related Cut-off Date and will
bear interest in the aggregate at a rate equal to the interest
rate borne by the underlying Loans (the "Loan Rate") net of the
aggregate servicing fees and any other amounts specified in 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 afixed
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."
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
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
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
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
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 usedto provide coverage for the risks of default
or types of losses set forth in such Prospectus Supplement.
E. Over-Collateralization............... If so provided in the Prospectus Supplement for a Series of
Securities, a portion of the interest payment on each Loan may be
applied as an additional distribution in respect of principal to
reduce the principal balance of a certain class or classes of
Securities and, thus, accelerate the rate of payment of principal
on such class or classes of Securities.
F. Loan Pool Insurance Policy........... A mortgage pool insurance policy or policies may be obtained and
maintained for Loans relating to any Series of Securities, which
shall be limited in scope, covering defaults on the related Loans
in an initial amount equal to a specified percentage of the
aggregate principal balance of all Loans included in the Pool as
of the related Cut-off Date.
G. FHA Insurance........................ If specified in the related Prospectus Supplement, all or a
portion of the Loans relating to any Series of Securities may be
(i) insured by the Federal Housing Administration (the "FHA")
and/or (ii) partially guaranteed by the Department of Veterans'
Affairs (the "VA"). See "Certain Legal Aspects of the Loans--The
Title I Program."
H. Cross-Collateralization.............. If specified in the related Prospectus Supplement, separate
classes of a Series of Securities may evidence the beneficial
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
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."
I. Other Arrangements................... Other arrangements as described in the related Prospectus
Supplement including, but not limited to, one or more bankruptcy
bonds, special hazard insurance policies, other insurance or
third-party guarantees, interest rate swap agreements, interest
rate cap agreements or other similar arrangements will be
described in the related Prospectus Supplement. An interest rate
swap agreement involves an agreement between two parties under
which one party makes to the other party periodic payments based
on a fixed rate of interest and receives in return periodic
payments based on a variable rate of interest, which rates of
interest are calculated on the basis of a specified notional
amount of principal for a specified period of time as will be
described in the related Prospectus Supplement. An interest rate
cap agreement involves an agreement between two parties in which
one party agrees to make payments to the other party when a
designated market interest rate goes above a designated level on
predetermined dates or during a specified time period as will be
described in the related Prospectus Supplement.
Advances..................................... The Master Servicer and, if applicable, each mortgage servicing
institution that services a Loan in a Pool on behalf of the Master
Servicer (each, a "Sub-Servicer") may be obligated to advance
amounts (each, an "Advance") corresponding to delinquent interest
and/or principal payments on such Loan (including, in the case of
Cooperative Loans, unpaid maintenance fees or other charges under
the related proprietary lease), net of the Servicing Fee if so
specified in the related Prospectus Supplement, until the date, as
specified in the related Prospectus Supplement, following the date
on which the related Property is sold at a foreclosure sale or the
related Loan is otherwise liquidated. Any 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."
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
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 86F(g) (4) of the Code.
Legal Investment............................. The Prospectus Supplement for each series of Securities will
specify which, if any, of the classes of Securities offered
thereby constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
Classes of Securities that qualify as "mortgage related
securities" will be legal investments for certain types of
institutional investors to the extent provided in SMMEA, subject,
in any case, to any other regulations which may govern investments
by such institutional investors. Institutions whose investment
activities are subject to review by federal or state authorities
should consult with their counsel or the applicable authorities to
determine whether an investment in a particular class of
Securities (whether or not such class constitutes a "mortgage
related security") complies with applicable guidelines, policy
statements or restrictions. See "Legal Investment."
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
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
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 uncollectable. As
a result, the amount of income (including OID) reported by a
holder of a Security in any period could significantly exceed the
amount of cash distributed to such holder in that period.
If a REMIC election is made with respect to a Series of
Securities, then, upon the issuance of those Securities, special
counsel to the Depositor will issue an opinion generally to the
effect that the arrangement by which such Securities are issued
will be treated as a REMIC as long as all of the provisions of the
applicable Agreement are complied with and the statutory and
regulatory requirements are satisfied. Such Securities will be
designated as "regular interests" or "residual interests" in a
REMIC. A REMIC will not be subject to entity-level tax. Rather,
the taxable income or net loss of a REMIC will be taken into
account by the holders of residual interests. Such holders will
report their proportionate share of the taxable income of the
REMIC whether or not they receive cash distributions from the
REMIC attributable to such income. A portion (or, in some cases,
all) of the income from a residual interest (i) may not be subject
to offset by losses from other activities, (ii) for a holder that
is subject to tax under the Code on unrelated business taxable
income, may be treated as unrelated business 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
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
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 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
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
servicing and operation of asset pools, provided that certain
conditions are satisfied as will be described in the related
Prospectus Supplement. Certain classes of Securities may not be
transferred unless the Trustee and the Depositor are furnished
with a letter of representation or an opinion of counsel to the
effect that such transfer will not result in a violation of the
prohibited transaction provisions and will not subject the
Trustee, the Depositor or the Master Servicer to additional
obligations. See "Description of the Securities--General" and
"ERISA Considerations."
Rating....................................... It will be a requirement for issuance of any Series that the
Securities offered by this Prospectus and the related Prospectus
Supplement be rated by at least one Rating Agency in one of its
four highest applicable rating categories. The rating or ratings
applicable to Securities of each Series offered hereby and by the
related Prospectus Supplement will be as set forth in the related
Prospectus Supplement. A securities rating should be evaluated
independently of similar ratings on different types of securities.
A securities rating does not address the effect that the rate of
prepayments on Loans for a Series may have on the yield to
investors in the Securities of such Series. See "Risk
Factors--Ratings are not Recommendations."
Risk Factors................................. For a discussion of certain risks associated with an investment in
the Securities, see "Risk Factors" on page 18 herein and in the
related Prospectus Supplement.
</TABLE>
17
<PAGE>
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.
18
<PAGE>
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
19
<PAGE>
assurance that the FHA's enforcement of the FHA regulations will not become more
strict in the future. See "Certain Legal Aspects of the Loans--The Title I
Program."
BASIS RISK AND POSSIBLE INTEREST SHORTFALLS
The Trust Fund Assets may accrue interest at variable rates based on
changes in specified indexes (as set forth in the related Prospectus Supplement)
which may adjust monthly, quarterly, annually or otherwise. The Securities,
however, may accrue interest at interest rates based on different indexes and
may adjust on different periods. As a result, there may be periods during which
the weighted average rate of interest at which the Trust Fund Assets are
accruing interest is less than the rate of interest on the Securities. The
resulting shortfall in interest collections on the Trust Fund Assets vis-a-vis
the amount of interest owed on the Securities will, unless otherwise specified
in the related Prospectus Supplement, be born 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 higher than those payable on the
Securities. See "Yield and Prepayment Considerations" and "The
Agreements--Pre-Funding Account."
20
<PAGE>
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 applicable Prospectus Supplement will be
borne by the holders of one or more classes of Securities of the related Series.
21
<PAGE>
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 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
22
<PAGE>
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 Improve- ments 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 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.
23
<PAGE>
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 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."
24
<PAGE>
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 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."
25
<PAGE>
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 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.
26
<PAGE>
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 arc 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. 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.
27
<PAGE>
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.
28
<PAGE>
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") composed 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.
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
------------------
* 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 or one specific Series, as applicable, and the
term "TRUST FUND" will refer to one specific Trust Fund.
29
<PAGE>
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-servicer 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.
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" 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
30
<PAGE>
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 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.
31
<PAGE>
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 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
32
<PAGE>
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 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.
33
<PAGE>
Underwriting Standards. The Loans will be acquired by the Depositor,
either directly or through affiliates, from the Sellers. The Depositor does not
originate Loans and has not identified specific Originators or Sellers of Loans
from whom the Depositor, either directly or through affiliates, will purchase
Loans. Unless otherwise specified in the related Prospectus Supplement, the
Loans will be originated in accordance with the following underwriting criteria.
Each Seller or Originator will represent and warrant that all Loans originated
and/or sold by it to the Depositor or one of its affiliates will have been
underwritten in accordance with standards consistent with those utilized by
lenders generally during the period of origination for similar types of loans.
As to any Loan insured by the FHA or partially guaranteed by the VA, the Seller
or Originator will represent that it has complied with underwriting policies of
the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Mortgaged Property, Home Improvements or Manufactured Home, as
applicable, as collateral. In general, a prospective borrower applying for a
Loan is required to fill out a detailed application designed to provide to the
underwriting officer pertinent credit information, including, among other
things, the principal balance and payment history with respect to any senior
mortgage, if any, which, unless otherwise specified in the related Prospectus
Supplement, will be verified by the related Seller or Originator. As part of the
description of the borrower's financial condition, the borrower generally is
required to provide a current list of assets and liabilities and a statement of
income and expenses, as well as an authorization to apply for a credit report
which summarizes the borrower's credit history with local merchants and lenders
and any record of bankruptcy. In most cases, an employment verification is
obtained from an independent source (typically the borrower's employer) which
verification reports, among other things, the length of employment with that
organization and the borrower's current salary. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
In determining the adequacy of the property to be used as collateral, an
appraisal, if applicable, will generally be made of each property considered for
financing. The appraiser is generally required to inspect the property, issue a
report on its condition and, if applicable, verify construction, if new, has
been completed. The appraisal is based on the market value of comparable
properties, the estimated rental income (if considered applicable by the
appraiser) and the cost of replacing the collateral. The value of the property
being financed, as indicated by the appraisal, must be such that it currently
supports, and is anticipated to support in the future, the outstanding loan
balance.
The maximum loan amount will vary depending upon a borrower's credit grade
and loan program but will not generally exceed an amount specified in the
related Prospectus Supplement. Variations in maximum loan amount limits will be
permitted based on compensating factors. Compensating factors may generally
include, to the extent specified in the related Prospectus Supplement, low
loan-to-value ratio, low debt-to-income ratio, stable employment, favorable
credit history and the nature of the underlying first mortgage loan, if
applicable.
Each Seller's or Originator's underwriting standards will generally permit
loans with loan-to-value ratios at origination of up to 100% depending on the
loan program, type and use of the property, creditworthiness of the borrower and
debt-to-income ratio.
After obtaining all applicable employment, credit and property information,
the related Seller or Originator will use a debt-to-income ratio to assist in
determining whether the prospective borrower has sufficient monthly income
available to support the payments of principal and interest on the loan in
addition to other monthly credit obligations. The "debt-to-income ratio" is the
ratio of the borrower's total 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
34
<PAGE>
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 State Department of
Housing and Urban Development ("HUD"). Section 306(g) of Title II of the
National Housing Act of 1934, as amended (the "HOUSING ACT"), authorizes GNMA
to, among other things, guarantee the timely payment of the principal of and
interest on certificates which represent an interest in a pool of mortgage loans
insured by the FHA under the Housing Act or Title V of the Housing Act of 1949
("FHA LOANS"), or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or chapter 37 of Title 38, United States
Code ("VA LOANS").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guarantee under this subsection." In order to meet
its obligations under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an amount which is at any
time sufficient to enable GNMA, with no limitations as to amount, to perform its
obligations under its guarantee.
GNMA Certificates. Each GNMA Certificate held in a Trust Fund (which may
be a GNMA I Certificate or a GNMA II Certificate) will be a "fully modified
pass-through" mortgaged-backed certificate issued and serviced by a mortgage
banking company or other financial concern ("GNMA ISSUER") approved by GNMA or
approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The mortgage
loans underlying the GNMA Certificates held in a Trust Fund will consist of FHA
Loans and/or VA Loans. Each such mortgage loan is secured by a one- to
four-family residential property or a manufactured home. GNMA will approve the
issuance of each such GNMA Certificate in accordance with a guaranty agreement
(a "GUARANTY AGREEMENT") between GNMA and the GNMA Issuer. Pursuant to its
Guaranty Agreement, a GNMA Issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each such GNMA Certificate,
even if the payments received by the GNMA Issuer on the FHA Loans or VA Loans
underlying each such GNMA Certificate are less than the amounts due on each such
GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA 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.
35
<PAGE>
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer 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
36
<PAGE>
"CHARTER ACT"). FNMA was originally established in 1938 as a United States
government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder-owned and privately-managed corporation by
legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates. FNMA Certificates are either Guaranteed Mortgage
Pass-Through Certificates ("FNMA MBS") or Stripped Mortgage-Backed Securities
("FNMA SMBS"). The following discussion of FNMA Certificates applies equally to
both FNMA MBS and FNMA SMBS, except as otherwise indicated. Each FNMA
Certificate included in the Trust Fund for a Series will represent a fractional
undivided interest in a pool of mortgage loans formed by FNMA. Each such pool
will consist of mortgage loans of one of the following types: (i) fixed-rate
level installment conventional mortgage loans; (ii) fixed-rate level installment
mortgage loans that are insured by FHA or partially guaranteed by the VA;
(iii) adjustable rate conventional mortgage loans; or (iv) adjustable rate
mortgage loans that are insured by the FHA or partially guaranteed by the VA.
Each mortgage loan must meet the applicable standards set forth under the FNMA
purchase program. Each such mortgage loan will be secured by a first lien on a
one- to four-family residential property. Each such FNMA Certificate will be
issued pursuant to a trust indenture. Original maturities of substantially all
of the conventional, level payment mortgage loans underlying a FNMA Certificate
are expected to be between either 8 to 15 years or 20 to 40 years. The original
maturities of substantially all of the fixed rate level payment FHA Loans or VA
Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA MBS (and the series pass-through rate payable with
respect to a FNMA SMBS) is equal to the lowest interest rate of any mortgage
loan in the related pool, less a specified minimum annual percentage
representing servicing compensation and FNMA's guaranty fee. Under a regular
servicing option (pursuant to which the mortgagee or other Servicer assumes the
entire risk of foreclosure losses), the annual interest rates on the mortgage
loans underlying a FNMA Certificate will be between 50 basis points and 250
basis points greater than the annual pass-through rate if a FNMA MBS or the
series pass-through rate if a FNMA SMBS; and under a special servicing option
(pursuant to which FNMA assumes the entire risk for foreclosure losses), the
annual interest rates on the mortgage loans underlying a FNMA Certificate will
generally be between 55 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
37
<PAGE>
effective rate of interest on the principal of each class of FNMA SMBS may be
significantly higher or lower than the series pass-through rate and/or the
weighted average interest rate of the underlying mortgage loans.
Unless otherwise specified by FNMA, FNMA Certificates evidencing interests
in pools of mortgages formed on or after May 1, 1985 will be available in
book-entry form only. Distributions of principal and interest on each FNMA
Certificate will be made by FNMA on the 25th day of each month to the persons in
whose name the FNMA Certificate is entered in the books of the Federal Reserve
Banks (or registered on the FNMA Certificate register in the case of fully
registered FNMA Certificates) as of the close of business on the last day of the
preceding month. With respect to FNMA Certificates issued in book-entry form,
distributions thereon will be made by wire, and with respect to fully registered
FNMA Certificates, distributions thereon will be made by check.
Federal Home Loan Mortgage Corporation. FHLMC is a publicly held United
States government-sponsored enterprise created pursuant to the Federal Home Loan
Mortgage Corporation Act, Title III of the Emergency Home Finance Act of 1970,
as amended (the "FHLMC ACT"). The common stock of FHLMC is owned by the Federal
Home Loan Banks. FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of FHLMC currently
consists of the purchase of first lien conventional mortgage loans FHA Loans, VA
Loans or participation interests in such mortgage loans and the sale of the
loans or participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality, type and class
as to meet generally the purchase standards imposed by private institutional
mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien conventional
loans, FHA Loans or VA Loans (a "FHLMC CERTIFICATE GROUP"). FHLMC Certificates
are sold under the terms of a Mortgage Participation Certificate Agreement. A
FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program. Unless otherwise described in the Prospectus Supplement, mortgage loans
underlying the FHLMC Certificates held by a Trust Fund will consist of mortgage
loans with original terms to maturity of between 10 and 40 years. Each such
mortgage loan must meet the applicable standards set forth in the 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
38
<PAGE>
same manner as for mortgage loans which it has purchased but not sold. The
length of time necessary for FHLMC to determine that a mortgage loan should be
accelerated varies with the particular circumstances of each mortgagor, and
FHLMC has not adopted standards which require that the demand be made within any
specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, with respect to pools formed prior to June 1,
1987, there is no limitation on the amount by which interest rates on the
mortgage loans underlying a FHLMC Certificate may exceed the pass-through rate
on the FHLMC Certificate. With respect to FHLMC Certificates issued on or after
June 1, 1987, the maximum interest rate on the mortgage loans underlying such
FHLMC Certificates may exceed the pass-through rate of the FHLMC Certificates by
50 to 100 basis points. Under such program, FHLMC purchases groups of whole
mortgage loans from sellers at specified percentages of their unpaid principal
balances, adjusted for accrued or prepaid interest, which when applied to the
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
39
<PAGE>
by a Trust Fund that includes FHLMC Project Certificates will set forth
additional information regarding multi-family residential mortgage loans that
qualify for purchase by FHLMC.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA, GNMA
or other government agency or government-sponsored agency Certificates. The
underlying securities will be held under a trust agreement by FHLMC, FNMA, GNMA
or another government agency or government-sponsored agency, each as trustee, or
by another trustee named in the related Prospectus Supplement FHLMC, FNMA, GNMA
or another government agency or government-sponsored agency will guarantee each
stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security, unless otherwise
specified in the related Prospectus Supplement.
Other Agency Securities. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through certificates
issued or guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies. The characteristics of any such mortgage pass-
through certificates will be described in such Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be hold 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
40
<PAGE>
distributions will be made on the Private Mortgage-Backed Securities by the PMBS
Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS Servicer may have the
right to repurchase assets underlying the Private Mortgage-Backed Securities
after a certain date or under other circumstances specified in the related
Prospectus Supplement.
Underlying Loans. The mortgage loans underlying the Private
Mortgage-Backed Securities may consist of fixed rate, level payment, fully
amortizing or graduated payment mortgage loans, buydown loans, adjustable rate
mortgage loans, or loans having balloon or other special payment features. Such
mortgage loans may be Single Family Loans, Multifamily Loans, Cooperative Loans
or Contracts secured by Manufactured Homes. As specified in the related
Prospectus Supplement (i) no mortgage loan underlying the Private
Mortgage-Backed Securities will have had a Combined Loan-to-Value Ratio at
origination in excess of the percentage set forth in the related Prospectus
Supplement (ii) each underlying mortgage loan will have had an original term to
stated maturity of not less than 5 years and not more than 40 years, (iii) each
underlying mortgage loan (other than Cooperative Loans) will be required to be
covered by a standard hazard insurance policy (which may be a blanket policy),
and (iv) each mortgage loan (other than Cooperative Loans or Contracts secured
by a Manufactured Home) will be covered by a title insurance policy.
Credit Support Relating to Private Mortgage-Backed Securities. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the mortgage loans underlying the
Private Mortgage-Backed Securities or with respect to the Private
Mortgage-Backed Securities themselves.
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
41
<PAGE>
(subject only to permissible liens disclosed, if applicable, title insurance
exceptions, if applicable, and certain other exceptions described in the
Agreement) and that the Property was free from damage and was in acceptable
condition; (iv) that there were no delinquent tax or assessment liens against
the Property, (v) that no required payment on a Loan was delinquent more than
the number of days specified in the related Prospectus Supplement; and
(vi) that each Loan was made in compliance with, and is enforceable under, all
applicable local, state and federal laws and regulations in all material
respects.
If so specified in the related Prospectus Supplement, the representations
and warranties of a Seller or Originator in respect of a Loan will be made not
as of the Cut-off Date but as of the date on which such Originator sold the Loan
to the Seller or the Depositor or such Seller sold the Loan to the Depositor or
one of its affiliates. Under such circumstances, a substantial period of time
may have elapsed between the sale date and the date of initial issuance of the
Series of Securities evidencing an interest in such Loan. Since the
representations and warranties of a Seller or Originator do not address events
that may occur following the sale of a Loan by such Seller or Originator, its
repurchase obligation described below will not arise if the relevant event that
would otherwise have given rise to such an obligation with respect to a Loan
occurs after the date of sale of such Loan by such Originator to the Seller or
the Depositor or by such Seller to the Depositor or its affiliates. However, the
Depositor will not include any Loan in the Trust Fund for any Series of
Securities if anything has come to the Depositor's attention that would cause it
to believe 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."
42
<PAGE>
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.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Trust Fund Assets, (ii) to establish any Pre-Funding
Account, Capitalized Interest Account or Reserve Account as described in the
related Prospectus Supplement and (iii) to pay the costs of structuring and
issuing such Securities, including the costs of obtaining any credit enhancement
as described under "Credit Enhancement." The Depositor expects to sell
Securities in Series from time to time, but the timing and amount of offerings
of Securities will depend on a number of factors, including the volume of Trust
Fund Assets acquired by the Depositor, prevailing interest rates, availability
of funds and general market conditions.
THE DEPOSITOR
Morgan Stanley ABS Capital I Inc., the Depositor, is a direct, wholly-owned
subsidiary of Morgan Stanley Group Inc. and was incorporated in the State of
Delaware on January 7, 1997. The principal executive offices of the Depositor
are located at 1585 Broadway, 2nd Floor, New York, New York 10036. Its telephone
number is (212) 761-4000. 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.
43
<PAGE>
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
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
44
<PAGE>
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 (B) provides
an opinion of counsel satisfactory to the Trustee and the Depositor that the
purchase of Securities of such a class by or on behalf of such plan, account or
arrangement is permissible under applicable law and will not subject the
Trustee, the Master Servicer or the Depositor to any obligation or liability in
addition to those undertaken in the Agreements.
As to each Series, an election may be made to treat the related Trust Fund
or designated portions thereof as a "real estate mortgage investment conduit" or
"REMIC" as defined in the Code. The related Prospectus Supplement will specify
whether a REMIC election is to be made. Alternatively, the Agreement for a
Series may provide that a REMIC election may be made at the discretion of the
Depositor or the Master Servicer and may only be made if certain conditions are
satisfied. As to any such Series, the terms and provisions applicable to the
making of a REMIC election will be set forth in the related Prospectus
Supplement. If such an election is made with respect to a Series, one of the
classes will be designated as evidencing the sole class of "residual interests"
in the related REMIC, as defined in the Code. All other classes of Securities in
such a Series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each Series with respect to which a REMIC election is
to be made, the Trustee, the Master Servicer or a holder of the related residual
certificate will be obligated to take all actions required in order to comply
with applicable laws and regulations and will be obligated to pay any prohibited
action 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
45
<PAGE>
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.
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-
46
<PAGE>
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 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
47
<PAGE>
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.
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.
48
<PAGE>
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date, the
Master Servicer or the Trustee will furnish to each Securityholder of record of
the related Series a statement setting forth, to the extent applicable to such
Series of Securities, among other things:
(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;
(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
49
<PAGE>
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.
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.
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
------------------------------------------ ---------------------------------------------------------------------
<S> <C>
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.
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 home 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.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
------------------------------------------ ---------------------------------------------------------------------
<S> <C>
Accrual................................... A class that accretes the amount of accrued interest otherwise
distributable on such class, which amount will be added as principal
to the principal balance of such class on each applicable
Distribution Date. Such accretion may continue until some specified
event has occurred or until such Accrual Class is retired
</TABLE>
INDICES APPLICABLE TO FLOATING RATE AND INVERSE FLOATING RATE CLASSES
Unless otherwise specified in the related Prospectus Supplement, the
indices applicable to Floating Rate and Inverse Floating Rate Classes either
will be LIBOR, the Eleventh District Cost of Funds Index, the Treasury Index or
the Prime Rate, in each case calculated as described below.
LIBOR
Unless otherwise specified in the related Prospectus Supplement, on the
LIBOR Determination Date (as such term is defined in the related Prospectus
Supplement) for each class of Securities of a Series as to which the applicable
interest rate is determined by reference to an index denominated as LIBOR, the
Person designated in the related Agreement (the "CALCULATION AGENT") will
determine LIBOR by reference to the quotations, as set forth on the Reuters
Screen LIBO Page (as defined in the International Swap Dealers Association, Inc.
Code of Standard Wording, Assumptions and Provisions for Swaps, 1986 Edition),
offered by the principal London office of each of the designated reference banks
meeting the criteria set forth below (the "REFERENCE BANKS") for making
one-month United States dollar deposits in leading banks in the London Interbank
market, as of 11:00 am. (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 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 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
52
<PAGE>
Bank should be unwilling or unable to act as such or if appointment of any such
Reference Bank is terminated, another leading bank meeting the criteria
specified above will be appointed.
The establishment of LIBOR on each LIBOR Determination Date by the
Calculation Agent and its calculation of the rate of interest for the applicable
classes for the related Interest Accrual Period shall (in the absence of
manifest error) be final and binding.
COFI
The Eleventh District Cost of Funds Index is designed to represent the
monthly weighted average cost of funds for savings institutions in Arizona,
California and Nevada that are member institutions of the Eleventh Federal Home
Loan Bank District (the "ELEVENTH DISTRICT"). The Eleventh District Cost of
Funds Index for a particular month reflects the interest costs paid on all types
of funds held by Eleventh District member institutions and is calculated by
dividing the cost of funds by the average of the total amount of those funds
outstanding at the end of that month and of the prior month and annualizing and
adjusting the result to reflect the actual number of days in the particular
month. If necessary, before these calculations are made, the component figures
are adjusted by the Federal Home Loan Bank of San Francisco ("FHLBSF") to
neutralize the effect of events such as member institutions leaving the Eleventh
District or acquiring institutions outside the Eleventh District. The Eleventh
District Cost of Funds Index is weighted to reflect the relative amount of each
type of funds held at the end of the relevant month. The major components of
funds of Eleventh District member institutions are: (i) savings deposits,
(ii) time deposits, (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.
53
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, if on the
tenth day of the month in which any Interest Accrual Period commences for a
class of COFI Securities the most recently published Eleventh District Cost of
Funds Index relates to a month prior to the third preceding month, the index for
such current Interest Accrual Period and for each succeeding Interest Accrual
Period will, except as described in the next to last sentence of this paragraph,
be based on the National Monthly Median Cost of Funds Ratio to SAIF-Insured
Institutions (the "NATIONAL COST OF FUNDS INDEX") published by the Office of
Thrift Supervision (the "OTS") for the third preceding month (or the fourth
preceding month if the National Cost of Funds Index for the third preceding
month has not been published on such tenth day of an Interest Accrual Period).
Information on the National Cost of Funds Index may be obtained by writing the
OTS at 1700 G Street, N.W., Washington, D.C. 20552 or calling (202) 906-6677,
and the current National Cost of Funds Index may be obtained by calling
(202) 906-6988. If on any such tenth day of the month in which an Interest
Accrual Period commences the most recently published National Cost of Funds
Index relates to a month prior to the fourth preceding month, the applicable
index for such Interest Accrual Period and each succeeding Interest Accrual
Period will be based on LIBOR, as determined by the Calculation Agent in
accordance with the Agreement relating to such Series of Securities. A change of
index from the Eleventh District Cost of Funds Index to an alternative index
will result in a change in the index level, and, particularly if LIBOR is the
alternative index, could increase its volatility.
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.
54
<PAGE>
PRIME RATE
Unless otherwise specified in the related Prospectus Supplement, on the
Prime Rate Determination Date (as such term is defined in the related Prospectus
Supplement) for each class of Securities of a Series as to which the applicable
interest rate is determined by reference to an index denominated as the Prime
Rate, the Calculation Agent will ascertain the Prime Rate for the related
Interest Accrual Period. Unless otherwise specified in the related Prospectus
Supplement, the Prime Rate for an Interest Accrual Period will be the "Prime
Rate" as published in the "Money Rates" section of The Wall Street Journal (or
if not so published, the "Prime Rate" as published in a newspaper of general
circulation selected by the Calculation Agent in its sole discretion) on the
related Prime Rate Determination Date. If a prime rate range is given, then the
average of such range will be used. In the event that the Prime Rate is no
longer published, a new index based upon comparable data and methodology will be
designated in accordance with the Agreement relating to the particular Series of
Securities. The Calculation Agent's determination of the Prime Rate and its
calculation of the rates of interest for the related Interest Accrual Period
shall (in the absence of manifest error) be final and binding.
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.
55
<PAGE>
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such 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.
56
<PAGE>
Euroclear was created in 1968 to hold securities for its participants
("EUROCLEAR PARTICIPANTS") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York ("MORGAN" and in such capacity, the
"EUROCLEAR OPERATOR"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "BELGIAN COOPERATIVE"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Belgian Cooperative. The Belgian Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant either directly or indirectly.
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
57
<PAGE>
actions, at the direction of the related Participants, with respect to some
Securities which conflict with actions taken with respect to other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
None of the Master Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
58
<PAGE>
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 born first by the various classes of Subordinated Securities and
thereafter by the various classes of Senior Securities, in each case under the
circumstances and subject to the limitations specified in such Prospectus
Supplement. The aggregate distributions in respect of delinquent payments on the
Loans over the lives of the Securities or at any time, the aggregate losses in
respect of defaulted Loans which must be borne by the Subordinated Securities by
virtue of subordination and the amount of the distributions otherwise
distributable to the Subordinated Securityholders that will be distributable to
Senior Securityholders on any Distribution Date may be limited as specified in
the related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Loans or aggregate losses in respect of such Loans
were to exceed an amount specified in the related Prospectus Supplement, holders
of Senior Securities would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the related
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Securities on any Distribution Date may instead be
deposited into one or more Reserve Accounts established with the Trustee or
distributed to holders of Senior Securities. Such deposits may be made on each
Distribution Date, for specified periods or until the balance in the Reserve
Account has reached a specified amount and, following payments from the Reserve
Account to holders of Senior Securities or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Account to required levels, in
each case as specified in the related Prospectus Supplement. Amounts on deposit
in the Reserve Account may be released to the holders of certain classes of
Securities at the times and under the circumstances specified in such Prospectus
Supplement.
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.
59
<PAGE>
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.
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.
60
<PAGE>
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 term 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 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
61
<PAGE>
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;
(E) 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 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
62
<PAGE>
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
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
63
<PAGE>
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.
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
64
<PAGE>
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 home 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 home 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 fun 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 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
65
<PAGE>
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 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
66
<PAGE>
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 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.
67
<PAGE>
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;
(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
68
<PAGE>
("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;
(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.
69
<PAGE>
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 123 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 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.
70
<PAGE>
SUB-SERVICING BY SELLERS
Each Seller of a Loan or any other servicing entity may act as the
Sub-Servicer for such Loan pursuant to an agreement (each, a "SUB-SERVICING
AGREEMENT"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely between
the Master Servicer and the Sub-Servicer, the Agreement pursuant to which a
Series of Securities is issued will provide that, if for any reason the Master
Servicer for such Series of Securities is no longer the Master Servicer of the
related Loans, the Trustee or any successor Master Servicer may assume the
Master Servicer's rights and obligations under such Sub-Servicing Agreement.
Notwithstanding any such subservicing arrangement, unless otherwise provided in
the related Prospectus Supplement, the Master Servicer will remain liable for
its servicing duties and obligations under the Master Servicing Agreement as if
the Master Servicer alone were servicing the Loans.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Loans and
will, consistent with each Agreement and any Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty, bankruptcy bond or
alternative arrangements, follow such collection procedures as are customary
with respect to loans that are comparable to the Loans. Consistent with the
above, the Master Servicer may, in its discretion, unless otherwise specified in
the related Prospectus Supplement (i) waive any assumption fee, late payment or
other charge in connection with a Loan and (ii) to the extent not inconsistent
with the coverage of such Loan by a Pool Insurance Policy, Primary Mortgage
Insurance Policy, FHA Insurance, VA Guaranty, bankruptcy bond or alternative
arrangements, if applicable, arrange with a borrower a schedule for the
liquidation of delinquencies running for no more than 125 days after the
applicable due date for each payment. Each Agreement and the related Prospectus
Supplement will specify the time period during which payments received by the
Master Servicer may be commingled with the Master Servicer's own funds prior to
each Distribution Date. To the extent the Master Servicer is obligated to make
or cause to be made Advances, such obligation will remain during any period of
such an arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a Loan has been, or is about to be, conveyed by
the mortgagor or obligor, the Master Servicer will, to the extent it has
knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law and will not impair or threaten to impair any
recovery under any Primary Mortgage Insurance Policy. If these conditions are
not met or if the Master Servicer reasonably believes it is unable under
applicable law to enforce such due-on-sale clause or if such Loan is a mortgage
loan insured by the FHA or partially guaranteed by the VA, the Master Servicer
will enter into or cause to be entered into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable for repayment of the Loan
and, to the extent permitted by applicable law, the mortgagor remains liable
thereon. Any fee collected by or on behalf of the Master Servicer for entering
into an assumption agreement will be retained by or on behalf of the Master
Servicer as additional servicing compensation. See "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses." In connection with any such assumption, the terms
of the related Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Loans." This approval is usually based on the purchaser's income and net worth
and numerous other factors. Although the Cooperative's approval is unlikely to
be unreasonably withheld or delayed, the necessity of acquiring such approval
could limit the number of potential purchasers for those shares and otherwise
limit the Trust Fund's ability to sell and realize the value of those shares.
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
71
<PAGE>
for amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Code Section 216(a) to the
corporation under Code Sections 163 and 164. In order for a corporation to
qualify under Code Section 216(b)(1) for its taxable year in which such items
are allowable as a deduction to the corporation, such Section requires, among
other things, that at least 80% of the gross income of the corporation be
derived from its tenant-stockholders (as defined in Code Section 216(b)(2)). By
virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Code Section 216(a) with respect to those years. In view of the significance of
the tax benefits accorded tenant-stockholders of a corporation that qualifies
under Code Section 216(b)(1), the likelihood that such a failure would be
permitted to continue over a period of years appears remote.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to maintain a
hazard insurance policy providing for no less than the coverage of the standard
form of fire insurance policy with "extended coverage customary for the type of
Property in the state in which such Property is located. Such coverage will be
in an amount that is at least equal to the lesser of (i) the maximum insurable
value of the improvements securing such Loan or (ii) the greater of (y) the
outstanding principal balance of the Loan and (z) an amount such that the
proceeds of such policy shall be sufficient to prevent the mortgagor and/or the
mortgagee from becoming a co-insurer. All amounts collected by the Master
Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Property or released to the mortgagor or obligor in
accordance with the Master Servicer's normal servicing procedures) will be
deposited in the related Security Account. In the event that the Master Servicer
maintains a blanket policy insuring against hazard losses on all the Loans
comprising part of a Trust Fund, it will conclusively be deemed to have
satisfied its obligation relating to the maintenance of hazard insurance. Such
blanket policy may contain a deductible clause, in which case the Master
Servicer will be required to deposit from its own funds into the related
Security Account the amounts which would have been deposited therein but for
such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a Loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism. The foregoing list is merely indicative
of certain kinds of uninsured risks and is not intended to be all inclusive. If
the Property securing a Loan is located in a federally designated special flood
area at the time of origination, the Master Servicer will require the mortgagor
or obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of a specified percentage (generally
80% to 90%) of the full replacement value of the insured property in order to
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
72
<PAGE>
principal balances owing thereon decrease, and since improved real estate
generally has appreciated in value over time in the past, the effect of this
requirement in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property. If specified in the
related Prospectus Supplement, a special hazard insurance policy will be
obtained to insure against certain of the uninsured risks described above. See
"Credit Enhancement."
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will not require that a standard hazard or flood insurance policy be
maintained on the cooperative dwelling relating to any Cooperative Loan.
Generally, the Cooperative itself is responsible for maintenance of hazard
insurance for the property owned by the Cooperative and the tenant-stockholders
of that Cooperative do not maintain individual hazard insurance policies. To the
extent, however, that a Cooperative and the related borrower on a Cooperative
Loan do not maintain such insurance or do not maintain adequate coverage or any
insurance proceeds are not applied to the restoration of damaged property, any
damage to such borrower's cooperative dwelling or such Cooperative's building
could significantly reduce the value of the collateral securing such Cooperative
Loan to the extent not covered by other credit support.
If the Property securing a defaulted Loan is damaged and proceeds, if any,
from the related hazard insurance policy are insufficient to restore the damaged
Property, the Master Servicer is not required to expend its own funds to restore
the damaged Property unless it determines (i) that such restoration will
increase the proceeds to Securityholders on liquidation of the Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is not
available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer will
be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the defaulted
Loan are less than the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Trust Fund will realize a loss
in the amount of such difference plus the aggregate of expenses incurred by the
Master Servicer in connection with such proceedings and which are reimbursable
under the Agreement. In the unlikely event that any such proceedings result in a
total recovery which is, after reimbursement to the Master Servicer of its
expenses, in excess of the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Master Servicer will be entitled
to withdraw or retain from the Security Account amounts representing its normal
servicing compensation with respect to such Loan and, unless otherwise specified
in the related Prospectus Supplement, amounts representing the balance of such
excess, exclusive of any amount required by law to be forwarded to the related
borrower, as additional servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if the
Master Servicer or its designee recovers Insurance Proceeds which, when added to
any related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the Master Servicer, exceed the principal balance of such Loan
plus interest accrued thereon that is payable to Securityholders, the Master
Servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to such
Loan.
In the event that the Master Servicer has expended its own funds to restore
the damaged Property and such funds have not been reimbursed under the related
hazard insurance policy, it will be entitled to withdraw from the Security
Account out of related Liquidation Proceeds or Insurance Proceeds an amount
equal to such expenses incurred by it, in which event the Trust Fund may realize
a loss 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
73
<PAGE>
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.
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).
74
<PAGE>
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.
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 willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. Each Agreement will further provide that 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
75
<PAGE>
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 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.
76
<PAGE>
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 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
77
<PAGE>
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 a 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 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
78
<PAGE>
"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 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.
79
<PAGE>
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 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
80
<PAGE>
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 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
81
<PAGE>
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 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
82
<PAGE>
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 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
83
<PAGE>
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 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.
84
<PAGE>
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the
mortgaged property is not the debtor's principal residence and the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any such proceedings under the federal Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the Loans underlying a Series of Securities and possible
reductions in the aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party.
DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, each
conventional Loan will contain a due-on-sale clause which will generally provide
that if the mortgagor or obligor sells, transfers or conveys the Property, the
loan or contract may be accelerated by the mortgagee or secured party. Court
decisions and legislative actions have placed substantial restriction on the
right of lenders to enforce such clauses in many states. For instance, the
California Supreme Court in August 1978 held that due-on-sale clauses were
generally unenforceable. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "GARN-ST GERMAIN ACT"), subject to certain exceptions, preempts
state constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the Garn-St
Germain Act which ended in all cases not later than October 15, 1982, and
(ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. FHLMC has taken the position in its
published mortgage servicing standards that, out of a total of eleven "window
period states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered by the Act may
not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related Property to an
uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
Loans and the number of Loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for 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
85
<PAGE>
charge if the loan is prepaid. Under certain state laws, prepayment charges may
not be imposed after a certain period of time following the origination of
mortgage loans with respect to prepayments on loans secured by liens encumbering
owner-occupied residential properties. Since many of the Properties will be
owner-occupied, it is anticipated that prepayment charges may not be imposed
with respect to many of the Loans. The absence of such a restraint on
prepayment, particularly with respect to fixed rate Loans having higher Loan
Rates, may increase the likelihood of refinancing or other early retirement of
such loans or contracts. Late charges and prepayment fees are typically retained
by servicers as additional servicing compensation.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("TITLE V") provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition, even
where Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered by
Title V. Certain states have taken action to reimpose interest rate limits
and/or to limit discount points or other charges.
THE CONTRACTS
General. The Contracts, other than those Contracts that are unsecured or
secured by mortgages on real estate (such Contracts are hereinafter referred to
in this section as "CONTRACTS") generally are "chattel paper" or constitute
"purchase money security interests" each as defined in the UCC. Pursuant to the
UCC, the sale of chattel paper is treated in a manner similar to perfection of a
security interest in chattel paper. Under the related Agreement, the Depositor
will transfer physical possession of the contracts to the Trustee or a
designated custodian or may retain possession of the contracts as custodian for
the Trustee. In addition, the Depositor will make an appropriate filing of a
UCC-1 financing statement in the appropriate states to, among other things, give
notice of the Trust Fund's ownership of the contracts. Unless otherwise
specified in the related Prospectus Supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Trustee. With respect to each transaction, a decision will be made as to
whether or not the contracts will be stamped or otherwise marked to reflect
their assignment from the Depositor to the Trustee, based upon, among other
things, the practices and procedures of the related Originator and Master
Servicer and after consultation with the applicable Rating Agency or Rating
Agencies.
Therefore, if the contracts are not stamped or otherwise marked to reflect
their assignment from the Depositor to the Trustee and through negligence, fraud
or otherwise, a subsequent purchaser were able to take physical possession of
the contracts without notice of such assignment, the Trust Fund's interest in
the contracts could be defeated. See "Risk Factors--Security Interest Risks
Associated with Certain Loans."
Security Interests in Home Improvements. The contracts that are secured by
the Home Improvements financed thereby grant to the originator of such contracts
a purchase money security interest in such Home Improvements to secure all or
part of the purchase price of such Home Improvements and related services. A
financing statement generally is not required to be filed to perfect a purchase
money security interest in consumer goods. Such purchase money security
interests are assignable. In general, a purchase money security interest grants
to the holder a security interest that has priority over a conflicting security
interest 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
86
<PAGE>
such characterization upon incorporation of such materials into the related
property, will not be secured by a purchase money security interest in the Home
Improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as the Home
Improvement has not become subject to the real estate law, a creditor can
repossess a Home Improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Security Interests in the Manufactured Homes. The Manufactured Homes
securing the Manufactured Housing Contracts may be located in all 50 states and
the District of Columbia. Security interests in manufactured homes may be
perfected either by notation of the secured party's lien on the certificate of
title or by delivery of the required documents and payment of a fee to the state
motor vehicle authority, depending on state law. Unless otherwise specified in
the related Prospectus Supplement, the security interests of the related Trustee
in the Manufactured Homes will not be noted on the certificates of title or by
delivery of the required documents and payment of fees to the applicable state
motor vehicle authorities. With respect to each transaction, a decision will be
made as to whether or not the security interests of the related Trustee in the
Manufactured Homes will be noted on the certificates of title and the required
documents and fees will be delivered to the applicable state motor vehicle
authorities based upon, among other things, the practices and procedures of the
related Originator and Master Servicer and after consultation with the
applicable Rating Agency or Rating Agencies. See "Risk Factors--Security
Interest Risks Associated with Certain Loans." In some nontitle states,
perfection pursuant to the provisions of the UCC is required. As manufactured
homes have become large and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the manufactured home under applicable state
real estate law. In order to perfect a security interest in a manufactured home
under real estate laws, the secured party must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the manufactured home is located.
If so specified in the related Prospectus Supplement, the Manufactured Housing
Contracts may contain provisions prohibiting the borrower from permanently
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
87
<PAGE>
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
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
88
<PAGE>
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 readjustment 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, 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,
89
<PAGE>
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.
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
90
<PAGE>
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 Tide I Loans with respect to multiple properties, and a borrower may
obtain more than one Title I Loan with respect to a single property, in each
case as long as the total outstanding balance of all Title I Loans in the same
property does not exceed the maximum loan amount for the type of Title I Loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property, and that the borrower have equity in the property being
improved at least equal to the amount of the Title I Loan if such loan amount
exceeds $15,000. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than six months after disbursement of the loan proceeds with one six month
extension if necessary, a completion certificate, signed by the borrower. The
lender is required to conduct an on-site inspection on any Title I Loan where
the principal obligation is $7,500 or more, and on any direct Title I Loan where
the borrower fails to submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program, the FHA establishes an
insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance
91
<PAGE>
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 lenders 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 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
92
<PAGE>
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 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.
93
<PAGE>
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).
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
94
<PAGE>
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
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
95
<PAGE>
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 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
96
<PAGE>
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 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."
97
<PAGE>
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 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.
98
<PAGE>
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 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.
99
<PAGE>
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 in come tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue-discount accrued on Regular Interest
Securities, amortization of any premium with respect to Loans, and servicing
fees and other expenses of the REMIC. A holder of a Residual Interest Security
that is an individual or a "pass-through interest holder" (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such holder's adjusted
gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the startup
day (generally, the day that the interests are issued) (the "STARTUP DAY"). That
aggregate basis will be allocated among the assets of the REMIC in proportion to
their respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See "Federal Income Tax
100
<PAGE>
Consequences--General" above. However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of a Security representing a residual interest (a "RESIDUAL
INTEREST SECURITY") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount (if this occurs, it is likely that
cash distributions will exceed taxable income in later years). Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
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
101
<PAGE>
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 arc effective for tax years beginning after
December 31, 1995, unless a residual holder elects to have such rules apply only
to tax years beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Day multiplied
by (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.
102
<PAGE>
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 181(a)(2)(C) of the Code,
or any entity exempt from the tax imposed by Sections I-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.
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
103
<PAGE>
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
ompensation) 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) 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
104
<PAGE>
(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 (0)s ecured by(2) those loans. Nevertheless, it is
believed that the Cash Flow Bond Method is a reasonable method of reporting
income for such Securities, and it is expected that OID will be reported on that
basis unless otherwise specified in the related Prospectus Supplement. In
applying the calculation to Pass-Through Securities, the Trustee will treat all
payments to be received by a holder with respect to the underlying Loans as
payments on a single installment obligation. The IRS could, however, assert that
original issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the Trustee intends, absent contrary authority, to report income to holders of
Securities as OID, in the manner described above for Interest Weighted
Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS
105
<PAGE>
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.
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.
106
<PAGE>
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 transfer the transferor reasonably expects that the REMIC will
distribute to the transferee residual interest holder amounts that will equal at
least 309% 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.
107
<PAGE>
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), a within the
meaning of the OID regulations. If these conditions are not satisfied with
respect to any given Series of Notes, additional tax considerations with respect
to such Notes will be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a holder of a Note as
ordinary interest income when received or accrued in accordance with such
holder's method of tax accounting. Under the OID regulations, a holder of a Note
issued with a de minimis amount of OID must include such OID in income, on a pro
rata basis, as principal payments are made on the Note. It is believed that any
prepayment premium paid as a result of a mandatory redemption will be taxable as
contingent interest when it becomes fixed and unconditionally payable. A
purchaser who buys a Note for more or less than its principal amount will
generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "SHORT-TERM NOTE") may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis
108
<PAGE>
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 "1 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 pecent, unless reduced or
eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt holder of a Note
fail to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the Depositor, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust
109
<PAGE>
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 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. AR 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
110
<PAGE>
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 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).
111
<PAGE>
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Loans would generally be treated as
ordinary income to the holder and would give rise to special tax reporting
requirements. The Trust Fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust Fund will elect to include market discount in
income as it accrues.
If a holder of a Certificate is required to recognize an aggregate amount
of income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the holders of
Certificates in proportion to the principal amount of Certificates owned by them
as of the close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the holders of Certificates. The
Trust Fund's method of allocation between transferors and transferees may be
revised to conform to a method permitted by future regulations.
Section 754 Election. In the event that a holder of a Certificate sells
its Certificates at a profit (loss), the purchasing holder of a Certificate will
have a higher (lower) basis in the Certificates than the selling holder of a
Certificate had. The tax basis of the Trust Fund's assets will not be adjusted
to reflect that higher (or lower) basis unless the Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Trust Fund
will not make such election. As a result, holders of Certificates might be
allocated a greater or lesser amount of Trust Fund income than would be
appropriate based on their own purchase price for Certificates.
Administrative Matters. The Owner Trustee (as defined in the applicable
Prospectus Supplement) is required to keep or have kept complete and accurate
books of the Trust Fund. Such books will be maintained for financial reporting
and tax purposes on an accrual basis and the fiscal year of the Trust Fund will
be the calendar year. The Owner Trustee will file a partnership information
return (IRS Form 1065) with the IRS for each taxable year of the Trust Fund and
will report each holder's allocable share of items of Trust Fund income and
expense to holders and the IRS on Schedule K-1. The Trust Fund will provide the
Schedule K-1 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.
112
<PAGE>
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.
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.
113
<PAGE>
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition of
the Securities. State and local income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
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
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.
Depending on the relevant facts and circumstances, certain prohibited
transaction exemptions may apply to the purchase or holding of the
Securities--for example, Prohibited Transaction Class Exemption ("PTE") 96-23,
which exempts certain transactions effected on behalf of a Plan by an "in-house
asset manager"; PTE 95-60, which exempts certain transactions between insurance
company general accounts and
114
<PAGE>
parties in interest; PTE 91-38, which exempts certain transactions between bank
collective investment funds and parties in interest; PTE 90-1, which exempts
certain transactions between insurance company pooled separate accounts and
parties in interest; or PTE-84-14, which exempts certain transactions effected
on behalf of a Plan by a "qualified professional asset manager". There can be no
assurance that any of these exemptions will apply with respect to any Plan's
investment in the Securities, or that such an exemption, if it did apply, would
apply to all prohibited transactions that may occur in connection with such
investment. Furthermore, these exemptions would not apply to transactions
involved in operation of the Trust Fund if, as described below, the assets of
the Trust Fund were considered to include Plan assets.
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. "ss." 2510.3-101, the "PLAN ASSET
REGULATION"). The Plan Asset Regulation describes the circumstances under which
the assets of an entity in which a Plan invests will be considered to be "plan
assets" such that any person who exercises control over such assets would be
subject to ERISA's fiduciary standards. Under the Plan Asset Regulation,
generally when a Plan invests in another entity, the Plan's assets do not
include, solely by reason of such investment, any of the underlying assets of
the entity. However, the Plan Asset Regulation provides that, if a Plan acquires
an "equity interest" in an entity that is neither a "publicly-offered security"
(defined as a security which is widely held, freely transferable and registered
under the Securities Exchange Act of 1934, as amended) nor a security issued by
an investment company registered under the Investment Company Act of 1940, as
amended, the assets of the entity will be treated as assets of the Plan unless
certain exceptions apply. If the Securities were deemed to be equity interests
and no statutory, regulatory or administrative exemption applies, the Trust Fund
could be considered to hold plan assets by reason of a Plan's investment in the
Securities. Such plan assets would include an undivided interest in any assets
held by the Trust Fund. In such an event, the Trustee and other persons, in
providing services with respect to the Trust Fund's assets, may be Parties in
Interest with respect to such Plans, subject to the fiduciary responsibility
provisions of ERISA, including the prohibited transaction provisions with
respect to transactions involving the Trust Fund's assets.
Under the Plan Asset Regulation, the term "equity interest" is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." Although the Plan Assets Regulation is silent with respect to the
question of which law constitutes "applicable local law" for this purpose, the
DOL has stated that these determinations should be made under the state law
governing interpretation of the instrument in question. In the preamble to the
Plan Assets Regulation, the DOL declined to provide a precise definition of what
features are equity features or the circumstances under which such features
would be considered "substantial," noting that the question of whether a plan's
interest has substantial equity features is an inherently factual one, but that
in making a determination it would be appropriate to take into account whether
the equity features are such that a Plan's investment would be a practical
vehicle for the indirect provision of investment management services.
EXEMPTION 83-1
In Prohibited Transaction Class Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Class Exemption 81-7, the DOL exempted from ERISA's
prohibited transaction rules certain transactions relating to the operation of
residential mortgage pool investment trusts and the purchase, sale and holding
of , "mortgage pool pass-through certificates" in the initial issuance of such
certificates. PTE 83-1 permits, subject to certain conditions, transactions
which might otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans related to the origination, maintenance and termination
of mortgage pools consisting of mortgage loans secured by first or second
mortgages or deeds of trust on single-family residential property, and the
acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by Plans. If the general
conditions (discussed below) of PTE 83-1 are satisfied, investments by a Plan in
Securities that represent interests in a Pool consisting of Loans ("SINGLE
FAMILY SECURITIES") will be exempt from the prohibitions of ERISA
Sections 406(a) and 407
115
<PAGE>
(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.
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.
116
<PAGE>
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 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").
117
<PAGE>
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 published final regulations ("401(c) Regulations") on January 5,
2000, providing 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. The 401(c) Regulations generally provide that,
until July 5, 2001, 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 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 on or after July 5, 2001.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify which,
if any, of the classes of Securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of Securities that qualify as "mortgage related
securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts, and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state 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
118
<PAGE>
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 11 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 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
119
<PAGE>
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.
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
120
<PAGE>
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.
121
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
---- ---------
<S> <C>
1986 Act.............................................................................................. 98
401 (c) Regulations................................................................................... 118
Accretion Directed.................................................................................... 50
Accrual............................................................................................... 52
Accrual Securities.................................................................................... 47
Advance............................................................................................... 13
Agency Securities..................................................................................... 1
Amortizable Bond Premium Regulations.................................................................. 98
APR................................................................................................... 33
Auction Rate.......................................................................................... 51
Available Funds....................................................................................... 46
BIF................................................................................................... 68
balloon payment....................................................................................... 31
Belgian Cooperative................................................................................... 57
beneficial owner...................................................................................... 55
Book-Entry Securities................................................................................. 55
borrower.............................................................................................. 88
Buydown Fund.......................................................................................... 31
Buydown Loans......................................................................................... 31
Calculation Agent..................................................................................... 52
Capitalized Interest Account.......................................................................... 70
Cash Flow Bond Method................................................................................. 105
CEDEL................................................................................................. 55
CEDEL Participants.................................................................................... 56
CERCLA................................................................................................ 23, 83
Certificates.......................................................................................... 1, 6
Charter Act........................................................................................... 37
Claimable Amount...................................................................................... 93
Class Security Balance................................................................................ 46
Closed-End Loans...................................................................................... 7
CMOs.................................................................................................. 8
CMO's................................................................................................. 40
Code.................................................................................................. 15, 94
COFI Securities....................................................................................... 53
Combined Loan-to-Value Ratio.......................................................................... 33
Commission............................................................................................ 3
Commodity Indexed Securities.......................................................................... 46
companion classes..................................................................................... 51
Component Securities.................................................................................. 50
Contingent Regulations................................................................................ 96
contracts............................................................................................. 86
Contracts............................................................................................. 1, 7, 33
Cooperative Loans..................................................................................... 30
Cooperatives.......................................................................................... 30
Currency Indexed Securities........................................................................... 46
Cut-off Date.......................................................................................... 6, 29
Cut-off Date Principal Balance........................................................................ 44
Debt Securities....................................................................................... 95
Definitive Security................................................................................... 55
Depositor............................................................................................. 1
</TABLE>
122
<PAGE>
<TABLE>
<CAPTION>
<CAPTION>
TERM PAGE
---- ---------
<S> <C>
Detailed Description.................................................................................. 30
Distribution Date..................................................................................... 10
DOL................................................................................................... 115
DTC................................................................................................... 26, 55
Duff & Phelps......................................................................................... 117
Eleventh District..................................................................................... 53
EPA................................................................................................... 83
ERISA................................................................................................. 16, 114
Euroclear Operator.................................................................................... 57
Euroclear............................................................................................. 55
Euroclear Participants................................................................................ 57
European Depositaries................................................................................. 55
excess servicing...................................................................................... 105
Exchange Act.......................................................................................... 3
Exemption............................................................................................. 116
Face Amount........................................................................................... 46
FASIT................................................................................................. 99
FHA................................................................................................... 12
FHA Loans............................................................................................. 35
FHLBSF................................................................................................ 53
FHLMC................................................................................................. 1
FHLMC Act............................................................................................. 38
FHLMC Certificate Group............................................................................... 38
FHLMC Certificates.................................................................................... 7
FHLMC Project Certificates............................................................................ 39
Financial Intermediary................................................................................ 55
Fitch................................................................................................. 117
Fixed Rate............................................................................................ 51
Floating Rate......................................................................................... 51
FNMA.................................................................................................. 1
FNMA Certificates..................................................................................... 7
FNMA MBS.............................................................................................. 37
FNMA Project Issuers.................................................................................. 36
FNMA SMBS............................................................................................. 37
foreign person........................................................................................ 109
Funding Period........................................................................................ 26
Garn-St Germain Act................................................................................... 85
GNMA.................................................................................................. 1
GNMA Certificates..................................................................................... 7
GNMA Issuer........................................................................................... 35
GNMA Project Certificates............................................................................. 36
Guaranty Agreement.................................................................................... 35
Holder in Due Course Rules............................................................................ 24, 88
Home Equity Loans..................................................................................... 1, 7
Home Improvement Contracts............................................................................ 1, 7
Home Improvements..................................................................................... 1, 7
Housing Act........................................................................................... 35
HUD................................................................................................... 35, 40
Indenture............................................................................................. 44
Index................................................................................................. 45
Indexed Commodity..................................................................................... 46
Indexed Currency...................................................................................... 46
Indexed Principal Amount.............................................................................. 45
</TABLE>
123
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
---- ---------
<S> <C>
Indexed Securities.................................................................................... 45
Installment Contract.................................................................................. 88
Insurance Proceeds.................................................................................... 68
Insured Expenses...................................................................................... 68
Interest Only......................................................................................... 51
Interest Weighted Securities.......................................................................... 97
Inverse Floating Rate................................................................................. 51
IRS................................................................................................... 96
L/C Bank.............................................................................................. 12, 60
L/C Percentage........................................................................................ 12, 60
lender................................................................................................ 88
Liquidation Expenses.................................................................................. 68
Liquidation Proceeds.................................................................................. 69
Loan Rate............................................................................................. 10, 30
Loans................................................................................................. 1
Loan-to-Value Ratio................................................................................... 33
lockout periods....................................................................................... 31
Manufactured Homes.................................................................................... 32
Manufactured Housing Contracts........................................................................ 1, 7, 32
Master Servicer....................................................................................... 6
Master Servicing Agreement............................................................................ 29
Master Servicing Fee.................................................................................. 74
Moody's............................................................................................... 61, 117
Morgan................................................................................................ 57
Morgan Stanley........................................................................................ 1, 119
Mortgage.............................................................................................. 66
Mortgage Loan......................................................................................... 7
mortgage related security............................................................................. 14, 119
National Cost of Funds Index.......................................................................... 54
NCUA.................................................................................................. 118
New Withholding Regulations........................................................................... 107
Nonresidents.......................................................................................... 107
Notes................................................................................................. 1, 6
Notional Amount Securities............................................................................ 50
OID................................................................................................... 15, 95
OID Regulations....................................................................................... 95
Originator............................................................................................ 2, 18
OTS................................................................................................... 54
PACs.................................................................................................. 50
Partial Accrual....................................................................................... 51
Participants.......................................................................................... 55
Parties in Interest................................................................................... 114
Pass-Through Rate..................................................................................... 10
Pass-Through Securities............................................................................... 104
Pay-Through Security.................................................................................. 96
Percentage Interests.................................................................................. 76
Permitted Investments................................................................................. 61
Plan.................................................................................................. 114
Plan Asset Regulation................................................................................. 115
PMBS.................................................................................................. 1
PMBS Agreement........................................................................................ 40
PMBS Issuer........................................................................................... 9, 40
PMBS Servicer......................................................................................... 9, 40
</TABLE>
124
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
---- ---------
<S> <C>
PMBS Trustee.......................................................................................... 9, 40
Policy Statement...................................................................................... 119
Pool.................................................................................................. 6, 29
Pooling and Servicing Agreement....................................................................... 44
Pool Insurance Policy................................................................................. 62
Pool Insurer.......................................................................................... 62
Pre-Funded Amount..................................................................................... 26
Pre-Funding Account................................................................................... 6, 26
Prepayment Assumption................................................................................. 96
Primary Mortgage Insurance Policy..................................................................... 32
Principal Only........................................................................................ 51
Principal Prepayments................................................................................. 47
Property Improvement Loans............................................................................ 90
PTE................................................................................................... 118
PTE 83-1.............................................................................................. 115
Purchase Price........................................................................................ 42
Rating Agency......................................................................................... 120
Ratio Strip Securities................................................................................ 105
RCRA.................................................................................................. 83
Record Date........................................................................................... 45
Reference Banks....................................................................................... 52
Refinance Loan........................................................................................ 33
Regular Interest Securities........................................................................... 94
Relevant Depositary................................................................................... 55
Relief Act............................................................................................ 24, 89
REMIC................................................................................................. 2, 94
REMIC Regulations..................................................................................... 99
Reserve Account....................................................................................... 11, 46
Reserve Interest Rate................................................................................. 52
Residual Interest Security............................................................................ 101
Restricted Group...................................................................................... 117
Retained Interest..................................................................................... 44
Revolving Credit Loans................................................................................ 7
Riegle Act............................................................................................ 24
Rules................................................................................................. 55
SAIF.................................................................................................. 68
S&P................................................................................................... 117
Scheduled Principal Class............................................................................. 50
secured creditor exclusion............................................................................ 83
Securities............................................................................................ 1, 6
Security Account...................................................................................... 68
Security Owners....................................................................................... 55
Security Register..................................................................................... 45
Securityholders....................................................................................... 2
Seller................................................................................................ 1
Sellers............................................................................................... 29
Senior Securities..................................................................................... 9, 59
Sequential Pay Class.................................................................................. 50
Series................................................................................................ 1
Servicing Fee......................................................................................... 104
Short-Term Note....................................................................................... 108
Single Family Properties.............................................................................. 31
Single Family Securities.............................................................................. 115
</TABLE>
125
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
---- ---------
<S> <C>
SMMEA................................................................................................. 14, 118
Startup Day........................................................................................... 100
Stock Index........................................................................................... 46
Stock Indexed Securities.............................................................................. 46
Strip................................................................................................. 51
Stripped Securities................................................................................... 104
Subordinated Securities............................................................................... 9, 59
Subsequent Loans...................................................................................... 26
Sub-Servicer.......................................................................................... 13
Sub-Servicers......................................................................................... 29
Sub-Servicing Agreement............................................................................... 71
Support Class......................................................................................... 51
TACs.................................................................................................. 51
Terms and Conditions.................................................................................. 57
thrift institutions................................................................................... 102
TIN................................................................................................... 106
Title I Loans......................................................................................... 90
Title I Program....................................................................................... 90
Title V............................................................................................... 86, 88
Trust Agreement....................................................................................... 29, 44
Trust Fund............................................................................................ 1
Trust Fund Assets..................................................................................... 1, 6, 29
Trustee............................................................................................... 6, 44
UCC................................................................................................... 82
U.S. Person........................................................................................... 113
VA.................................................................................................... 12
VA Guaranty........................................................................................... 74
VA Loans.............................................................................................. 35
yield to maturity..................................................................................... 20
</TABLE>
126
