As Filed with the Securities and Exchange Commission on June 16, 1997
Registration No. 333-24599
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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
Amendment No. 4
to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
EQUITY ONE ABS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-2029487
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
(302) 478-6160
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(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Dennis Kildea
Equity One ABS, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
(302) 478-6160
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
With a copy to:
Brian S. Vargo
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103-7098
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Approximate date of commencement of proposed sale to the public:
From time to time on or after the effective date of the registration
statement, as determined by market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.|_|____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.|_|____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.|_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to Be Registered Registered Per Unit(1) Offering Price(1) Fee(2)
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<S> <C> <C> <C> <C>
Asset Backed Notes and
Asset Certificates........ $325,000,000 100% $325,000,000 $98,484.85
=======================================================================================
</TABLE>
(1) Estimated for the purpose of calculating the registration fee.
(2) The full amount of the registration fee has already been remitted to the
Commission.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes a basic prospectus and two
illustrative forms of prospectus supplement for use in an offering of
asset-backed securities--one for an offering of senior and subordinated
certificate classes and one for an offering of certificates and notes. The
description of credit enhancement mechanisms or other features in the forms of
prospectus supplement is intended merely as an illustration of the principal
features of a possible series of asset-backed securities; the features
applicable to any actual series of asset-backed securities may include some, all
or none of the features so illustrated and may include any features specified in
the prospectus.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation, or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED [______], 199___
PROSPECTUS SUPPLEMENT
(To Prospectus dated __________, 199___)
$
(Approximate)
Mortgage Pass-Through Certificates, Series 19__-__
Distributions payable on the ____ day of each month, commencing in _____ 19__
Equity One ABS, Inc.
Depositor
Equity One, Inc.
Servicer
-----------------
The Mortgage Pass-Through Certificates, Series 199__-__ (the
"Certificates") will represent the entire beneficial interest in a Trust Fund
consisting of a pool (the "Mortgage Pool") of the following types of loans
(collectively, the "Loans"): fixed rate and variable rate mortgage loans secured
by first and/or subordinate liens on (A) one- to four-family residential
properties, (each, a "Residential Loan") and (B) mixed commercial/residential
use properties (each, a "Mixed Use Loan"). Only the classes of Certificates
identified in the table below (collectively, the "Offered Certificates") are
offered hereby. See "Index of Defined Terms" on Page [ ] of this Prospectus
Supplement and on Page [ ] of the Prospectus for the location of the definitions
of certain capitalized terms.
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PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE [ ] HEREIN AND ON PAGE [ ] IN THE ACCOMPANYING PROSPECTUS.
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE SELLERS, THE SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR THE LOANS ARE INSURED OR GUARANTEED BY
ANY GOVERNMENTAL ENTITY, THE DEPOSITOR, THE SELLERS, THE SERVICER, THE TRUSTEE
OR ANY OF THEIR AFFILIATES OR ANY OTHER PERSON. DISTRIBUTIONS ON THE
CERTIFICATES WILL BE PAYABLE SOLELY FROM THE ASSETS TRANSFERRED TO THE TRUST
FUND FOR THE BENEFIT OF CERTIFICATEHOLDERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Offered Certificates will be purchased by _______________ (the
"Underwriter") from the Depositor and will be offered by the Underwriter from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of the
Offered Certificates are expected to be approximately $_______, plus accrued
interest, before deducting issuance expenses payable by the Depositor. The Class
___, Class PO and Class X Certificates will be issued to the Depositor on or
about _________, 19__ as partial consideration for the sale of the Loans to the
Trust Fund.
<PAGE>
The Offered Certificates are offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to its right to reject orders in whole or in part. It is expected that delivery
of the Offered Certificates will be made in book-entry form only through the
facilities of The Depository Trust Company on or about _______________, 19__.
[Underwriter]
-2-
<PAGE>
The Loans will be sold to the Depositor by Equity One, Inc., ______,
______, and ____________ (individually, a "Seller" and collectively, the
"Sellers").
An election will be made to treat the Trust Fund as a "real estate
mortgage investment conduit" (the "REMIC") for federal income tax purposes. As
described more fully herein and in the Prospectus, Offered Certificates, other
than the Class A-R Certificates, will constitute "regular interests" in the
REMIC. The Class A-R Certificates will constitute the sole class of "residual
interest" in the REMIC. Prospective investors are cautioned that a Class A-R
Certificateholder's REMIC taxable income and the tax liability thereon will
exceed cash distributions in certain periods, in which event such holder must
have sufficient alternative sources of funds to pay such tax liability. See
"Federal Income Tax Consequences" herein and in the Prospectus.
The Class A-R Certificates will be subject to certain transfer
restrictions. See "Description of the Certificates--Restrictions on Transfer of
the Class A-R Certificates."
The yield to investors on each class of Offered Certificates will be
sensitive in varying degrees to, among other things, the rate and timing of
principal payments (including prepayments) of the Loans, which may vary
significantly over time. The yield to maturity of a class of Offered
Certificates purchased at a discount or premium will be more sensitive to the
rate and timing of payments thereon. Holders of the Offered Certificates should
consider, in the case of any such Certificates purchased at a discount, and
particularly the Principal Only Certificates, the risk that a slower than
anticipated rate of principal payments on the Loans could result in an actual
yield that is lower than the anticipated yield and, in the case of any Offered
Certificates purchased at a premium and particularly the Interest Only
Certificates, the risk that a faster than anticipated rate of principal payments
on the Loans could result in an actual yield that is lower than the anticipated
yield. Holders of the Interest Only Certificates should carefully consider the
risk that a rapid rate of principal payments on the Loans could result in the
failure of such holders to recover their initial investments. The yield to
investors in the Offered Certificates, and particularly the Class ____
Certificates, also will be adversely affected by Net Interest Shortfalls and by
Realized Losses. No representation is made as to the anticipated rate of
prepayments on the Loans, the amount and timing of Net Interest Shortfalls or
Realized Losses, or as to the resulting yield to maturity of any class of
Certificates.
The Underwriter intends to make a secondary market in the classes of
Offered Certificates but has no obligation to do so. There is currently no
secondary market for the Offered Certificates and there can be no assurance that
such a market will develop or, if it does develop, that it will continue or that
it will provide Certificateholders with a sufficient level of liquidity of
investment.
Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Offered Certificates, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and the Prospectus. This is in addition to the obligation of dealers
to deliver a Prospectus Supplement and the Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
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This Prospectus Supplement does not contain complete information about the
offering of the Offered Certificates. Additional information is contained in the
Prospectus of the Depositor dated , 199___ (the "Prospectus") and
purchasers are urged to read both this Prospectus Supplement and the
Prospectus in full. Sales of the Offered Certificates may not be consummated
unless the purchaser has received both this Prospectus Supplement and the
Prospectus.
The Trustee on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus Supplement is delivered, on the written or
oral request of such person, a copy of any or all of the documents referred to
in the Prospectus under "Incorporation of Certain Documents by Reference" that
have been or may be incorporated by reference in the Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
the Prospectus incorporates). Such requests should be directed to the Corporate
Trust Office of the Trustee at _____________, telephone:_________, facsimile
number:_____________, attention:__________ (the "Corporate Trust Office").
S-3
<PAGE>
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SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary of
Terms are defined elsewhere in this Prospectus Supplement or in the Prospectus.
See "Index of Defined Terms" on Page [ ] of this Prospectus Supplement and on
Page [ ] of the Prospectus for the location of the definitions of certain
capitalized terms.
Title of Certificates............. Mortgage Pass-Through Certificates, Series
199 - (the "Certificates").
Offered Certificates.............. Class A- , Class , Class PO, Class X, Class
A-R, Class B- and Class Certificates
(collectively, the "Offered Certificates").
Only the Offered Certificates are offered
hereby. The aggregate initial Class
Certificate Balances of the Certificates
will be subject to a permitted variance in
the aggregate of plus or minus __%.
Variances in the Class Certificate Balances
may result in variances in the Notional
Amount of the class of Notional Amount
Certificates.
The Notional Amount of the Class X
Certificates for any Distribution Date will
be equal to the aggregate of the Stated
Principal Balances of the Non-Discount Loans
with respect to such Distribution Date. The
initial Notional Amount of the Class X
Certificates will be equal to the aggregate
of the Stated Principal Balances of the
Non-Discount Loans as of the Cut-off Date.
Certificates other than the
Offered Certificates............ In addition to the Offered Certificates, the
following classes of Certificates will be
issued in the indicated approximate initial
Class Certificate Balances and will bear
interest at the indicated Pass-Through
Rates, but are not offered hereby:
Initial Class
Certificate Pass-Through
Balance Rate
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Class (1)..... $ %
Class (1)..... $ %
Class (1)..... $ %
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(1) The Class ______________, Class
_________ and Class __________ Certificates
will provide limited credit support to the
Senior Certificates and the other
Subordinated Certificates, as described
under "Description of the
Certificates--Principal--Subordinated
Principal Distribution Amount" and "Credit
Enhancement--Subordination of Certain
Classes."
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S-4
<PAGE>
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Any information contained herein with
respect to the Class _______, Class ______
and Class ______ Certificates is provided
only to permit a better understanding of the
Offered Certificates.
Designations
Regular Certificates............ All classes of Certificates other than the
Class A-R Certificates.
Residual Certificates........... Class A-R Certificates.
Senior Certificates............. Class A- , Class ______________, Class PO,
Class X and Class A-R Certificates.
Subordinated Certificates....... Class B- , Class ______________, and Class
_____________ Certificates.
Principal Only Certificates..... Class PO Certificates.
Interest Only Certificates...... Class X Certificates.
Notional Amount
Certificates................. Class X Certificates.
Fixed Rate Certificates......... All classes of Certificates other than the
Class PO and Class X Certificates.
Variable Rate Certificates...... Class X Certificates.
Physical Certificates........... Class PO, Class X and Class A-R Certificates
and the Subordinated Certificates.
Book-Entry Certificates......... All classes of Certificates other than the
Physical Certificates.
Trust Fund........................ The Certificates will represent the entire
beneficial interest in a Trust Fund
consisting of a pool of Loans (the "Mortgage
Pool").
Pooling and Servicing
Agreement....................... The Certificates will be issued pursuant to
a Pooling and Servicing Agreement dated as
of ______________, 19__ (the "Agreement"),
among the Depositor, the Sellers, the
Servicer and the Trustee.
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S-5
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Depositor......................... Equity One ABS, Inc. (the "Depositor"), a
Delaware corporation and a limited purpose
finance subsidiary of Equity One, Inc., a
Delaware Corporation ("Equity One"). See
"The Depositor" in the Prospectus.
Servicer.......................... Equity One (in its capacity as servicer of
the Loans, the "Servicer"). See "Servicing
of Loans--The Servicer." The Loans were
originated or acquired in the normal course
of business by the Sellers and will be
acquired by the Depositor in a privately
negotiated transaction. The Servicer will be
responsible for the servicing of the Loans
and will receive the Servicing Fee from
interest collected on the Loans. See
"Servicing of Loans--Servicing Compensation
and Payment of Expenses."
Sellers........................... The Loans will be sold to the Depositor by
______, ______, ______, _____ and _____
(collectively, the "Sellers").
Trustee........................... __________________, a _____________________
organized under the laws of
__________________ (the "Trustee").
Cut-off Date...................... ________, 19__.
Closing Date...................... On or about __________, 19__.
Determination Date................ The day of each month or, if such day is
not a business day, the preceding business
day (each, a "Determination Date"); provided
that the Determination Date in each month
will be at least two business days prior to
the related Distribution Date.
Loans............................. The Mortgage Pool will consist of the
following types of loans (collectively, the
"Loans"): fixed rate and variable rate
mortgage loans secured by first and/or
subordinate liens on (A) one- to four-family
residential properties, (each, a
"Residential Loan") and (B) mixed
commercial/residential use properties (each,
a "Mixed Use Loan"). Distributions of
principal and interest on the Certificates
will be based solely on payments received on
the Loans, as described under "Description
of the Certificates." See "The Mortgage
Pool."
Mortgaged Properties.............. [The real properties which secure repayment
of the Loans and on which Sellers have a
first or subordinate lien.]
Distribution Date................. The _________ day of each month or, if such
day is not a business day, on the first
business day thereafter, commencing in
___________ 19 (each, a "Distribution
Date"). Distributions on
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S-6
<PAGE>
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each Distribution Date will be made to
Certificateholders of record as of the
related Record Date, except that the final
distribution on the Certificates will be
made only upon presentment and surrender of
the Certificates at the Corporate Trust
Office of the Trustee.
Record Date....................... The Record Date for each Distribution Date
will be the last business day of the month
preceding the month of such Distribution
Date.
Priority of Distributions......... Distributions will be made on each
Distribution Date from Available Funds in
the following order of priority: (i) to
interest on each interest bearing class of
Senior Certificates; (ii) to principal on
the classes of Senior Certificates then
entitled to receive distributions of
principal, in the order and subject to the
priorities set forth herein under
"Description of the Certificates--
Principal," in each case in an aggregate
amount up to the maximum amount of principal
to be distributed on such classes on such
Distribution Date; (iii) to any Class PO
Deferred Amounts with respect to the Class
PO Certificates, but only from amounts that
would otherwise be distributable on such
Distribution Date as principal of the
Subordinated Certificates; and (iv) to
interest on and then principal of each class
of Subordinated Certificates, in the order
of their numerical class designations,
beginning with the Class __ Certificates, in
each case subject to the limitations set
forth herein under "Description of the
Certificates--Principal."
Under certain circumstances, distributions
from Available Funds for a Distribution Date
that would otherwise be made on the
Subordinated Certificates may be distributed
instead on the Senior Certificates. See
"Description of the Certificates--Allocation
of Losses." herein.
Distributions of Interest......... To the extent funds are available therefor,
each interest bearing class of Certificates
will be entitled to receive interest in the
amount of the Interest Distribution Amount
for such class. The Class PO Certificates
are Principal Only Certificates and will not
bear interest. See "Description of the
Certificates--Interest."
A. Interest Distribution
Amount....................... For each interest bearing class of
Certificates, the amount of interest accrued
during the related Interest Accrual Period
at the applicable Pass-Through Rate on the
related Class Certificate Balance or
Notional Amount, as the case may be.
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S-7
<PAGE>
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B. Pass-Through Rate............ The Pass-Through Rate for each interest
bearing class of Offered Certificates for
each Distribution Date will be as set forth
or described on the cover page hereof.
The Pass-Through Rate for the Class X
Certificates for any Distribution Date will
be equal to the excess of (a) the weighted
average of the Net Mortgage Rates of the
Non-Discount Loans over (b) % per annum. The
Pass-Through Rate for the Class X
Certificates for the first Distribution Date
is expected to be approximately ___% per
annum.
With respect to each Distribution Date, the
"Interest Accrual Period" for each interest
bearing class of Certificates will be the
calendar month preceding the month of such
Distribution Date.
Distributions of Principal........ On each Distribution Date, to the extent
funds are available therefor, principal
distributions in reduction of the Class
Certificate Balances of each class of
Certificates (other than the Notional Amount
Certificates) will be made in the order and
subject to the priorities set forth herein
under "Description of the
Certificates--Principal" in an aggregate
amount equal to such class' allocable
portion of the Senior Principal Distribution
Amount, the Class PO Principal Distribution
Amount or the Subordinated Principal
Distribution Amount, as applicable. The
Notional Amount Certificates do not have
principal balances and are not entitled to
any distributions in respect of principal of
the Loans. See "Description of the
Certificates--Principal."
Credit Enhancement................ Credit enhancement for the Senior
Certificates will be provided by the
Subordinated Certificates and credit
enhancement for each class of Subordinated
Certificates will be provided by the class
or classes of Subordinated Certificates with
higher numerical class designations, as
described below. The aggregate of the
initial Class Certificate Balances of the
Class ____________, Class ___________ and
Class ___ Certificates, which are the only
Certificates supporting the Class
Certificates, is expected to be
approximately $________________.
Subordination..................... The rights of holders of the Subordinated
Certificates to receive distributions with
respect to the Loans in the Trust Fund will
be subordinated to such rights of holders of
the Senior Certificates, and the rights of
the holders of each class of Subordinated
Certificates (other than the Class
______________ Certificates) to receive such
distributions will be further subordinated
to such rights of the class or classes of
Subordinated Certificates with lower
numerical class designations, in each case
only to the extent described under "Credit
Enhancement--Subordination of Certain
Classes."
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S-8
<PAGE>
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The subordination of the Subordinated
Certificates to the Senior Certificates, and
the further subordination within the
Subordinated Certificates, is intended to
increase the likelihood of timely receipt by
the holders of Certificates with higher
relative payment priority of the maximum
amount to which they are entitled on any
Distribution Date and to provide such
holders protection against losses on the
Loans to the extent described under
"Description of Certificates--Allocation of
Losses." The Subordinated Certificates also
provide protection, to a lesser extent,
against Special Hazard Losses, Bankruptcy
Losses and Fraud Losses. However, in certain
circumstances the amount of available
subordination (including the limited
subordination provided for certain types of
losses) may be exhausted and shortfalls in
distributions on the Certificates could
result. Holders of the Senior Certificates
will bear their proportionate share of any
losses realized on the Loans in excess of
the available subordination amount. See
"Description of the Certificates--Priority
of Distributions Among Certificates,"
"--Allocation of Losses," and "Credit
Enhancement--Subordination of Certain
Classes."
In addition, Realized Losses on the Loans
will reduce the Class Certificate Balances
of the applicable class of Subordinated
Certificates to the extent of any losses
allocated thereto (as described under
"Description of the Certificates--Allocation
of Losses"), without the receipt of cash
attributable to such reduction. As a result
of such reductions, less interest will
accrue on such class of Subordinated
Certificates than otherwise would be the
case. The yield to maturity of the
Subordinated Certificates will also be
affected by the disproportionate allocation
of principal prepayments to the Senior
Certificates, Net Interest Shortfalls, other
cash shortfalls in Available Funds and
distribution of funds to Class PO
Certificateholders otherwise available for
distribution on the Subordinated
Certificates to the extent of reimbursement
for Class PO Deferred Amounts. See
"Description of the Certificates--Allocation
of Losses."
Advances.......................... The Servicer is obligated to make cash
advances (each, an "Advance") with respect
to delinquent payments of principal of and
interest on any Loan to the extent described
under "Servicing of Loans--Advances." The
Trustee will be obligated to make any such
Advance if the Servicer fails in its
obligation to do so, to the extent provided
in the Agreement. See "Servicing of
Loans--Advances."
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S-9
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Prepayment Considerations and
Risks; Reinvestment Risk........ The rate of principal payments on the
Offered Certificates, the aggregate amount
of distributions on the Offered Certificates
and the yield to maturity of the Offered
Certificates will be related to the rate and
timing of payments of principal on the
Loans.
Since the rate of payment of principal on
the Loans will depend on future events and a
variety of factors, no assurance can be
given as to such rate or the rate of
principal prepayments. The extent to which
the yield to maturity of a class of Offered
Certificates may vary from the anticipated
yield may depend upon the degree to which it
is purchased at a discount or premium, and
the degree to which the timing of payments
thereon is sensitive to prepayments,
liquidations and purchases of the Loans.
Further, an investor should consider the
risk that, in the case of the Principal Only
Certificates and any other Offered
Certificate purchased at a discount, a
slower than anticipated rate of principal
payments (including prepayments) on the
Loans could result in an actual yield to
such investor that is lower than the
anticipated yield and, in the case of the
Interest Only Certificates and any other
Offered Certificate purchased at a premium,
a faster than anticipated rate of principal
payments could result in an actual yield to
such investor that is lower than the
anticipated yield. Investors in the Interest
Only Certificates should carefully consider
the risk that a rapid rate of principal
payments on the Loans could result in the
failure of such investors to recover their
initial investments.
Because the Loans may be prepaid at any
time, it is not possible to predict the rate
at which distributions of principal of the
Offered Certificates will be received. Since
prevailing interest rates are subject to
fluctuation, there can be no assurance that
investors in the Offered Certificates will
be able to reinvest the distributions
thereon at yields equaling or exceeding the
yields on such Offered Certificates. It is
possible that yields on any such
reinvestments will be lower, and may be
significantly lower, than the yields on the
Offered Certificates. See "Risk
Factors--Prepayment Considerations and
Risks" and "Yield, Prepayment and Maturity
Considerations."
Optional Termination.............. On any Distribution Date on which the Pool
Principal Balance is less than 5% of the
Cut-off Date Pool Principal Balance, the
Servicer will have the option to purchase,
in whole, the Loans and the REO Property, if
any, remaining in the Trust Fund. See
"Description of the Certificates--Optional
Termination."
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S-10
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Federal Income Tax
Consequences.................... An election will be made to treat the Trust
Fund as a "real estate mortgage investment
conduit" ("REMIC") for federal income tax
purposes. The Regular Certificates will
constitute "regular interests" in the REMIC
and the Residual Certificates will
constitute the sole class of "residual
interest" in the REMIC. The Class PO and
Class X Certificates will, and depending on
their respective issue prices certain other
classes of Offered Certificates may, be
issued with original issue discount ("OID")
for federal income tax purposes. See
"Federal Income Tax Consequences" herein and
in the Prospectus.
The holders of the Class A-R Certificates
will be subject to special federal income
tax rules that may significantly reduce the
after-tax yield of such Certificates.
Further, significant restrictions apply to
the transfer of the Class A-R Certificates.
See "Description of the
Certificates--Restrictions on Transfer of
the Class A-R Certificates."
ERISA Considerations.............. The acquisition of an Offered Certificate by
a pension or other employee benefit plan (a
"Plan") subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), could, in some instances, result
in a prohibited transaction or other
violation of the fiduciary responsibility
provisions of ERISA and Section 4975 of the
Internal Revenue Code of 1986, as amended
(the "Code").
Subject to the considerations and conditions
described under "ERISA Considerations," it
is expected that the Senior Certificates
(other than the Class PO, Class X and Class
A-R Certificates) may be purchased by a
Plan.
Any Plan fiduciary considering whether to
purchase any Offered Certificates on behalf
of a Plan should consult with its counsel
regarding the applicability of the
provisions of ERISA and the Code. See "ERISA
Considerations."
Legal Investment.................. The Senior Certificates and the Class
______________ Certificates will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA") so long as
they are rated in one of the two highest
rating categories by at least one nationally
recognized statistical rating organization
and, as such, are legal investments for
certain entities to the extent provided for
in SMMEA.
- --------------------------------------------------------------------------------
S-11
<PAGE>
- --------------------------------------------------------------------------------
It is anticipated that the Class ________
and Class ________ Certificates will not be
rated in one of the two highest rating
categories by a nationally recognized
statistical rating organization and,
therefore, will not constitute "mortgage
related securities" for purposes of SMMEA.
Institutions whose investment activities are
subject to review by federal or state
regulatory authorities should consult with
their counsel or the applicable authorities
to determine whether an investment in the
Offered Certificates complies with
applicable guidelines, policy statements or
restrictions. See "Legal Investment" in the
Prospectus.
Ratings........................... It is a condition to the issuance of the
Senior Certificates that they be rated
________ by ("__________") and ________ by
("__________" and, together with _________,
the "Rating Agencies"). See "Ratings." It is
a condition to the issuance of the Class
________, Class ________ and Class ________
Certificates that they be rated at least
_______, ______ and _________, respectively,
by _________. The ratings of the Offered
Certificates of any class should be
evaluated independently from similar ratings
on other types of securities. A rating is
not a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by either of the
Rating Agencies. See "Risk Factors--
Certificate Rating Subject to Change" and
"Ratings."
Risk Factors...................... For a discussion of risks associated with an
investment in the Certificates, see "Risk
Factors" on Page [ ] herein and on Page [ ]
in the Prospectus.
- --------------------------------------------------------------------------------
S-12
<PAGE>
RISK FACTORS
Investors should consider the following risks in connection with the
purchase of the Certificates. For a discussion of additional risks pertaining to
the Certificates, see "Risk Factors" in the Prospectus.
Consequences of Owning Book-Entry Certificates
Issuance of the Certificates in book-entry form may reduce the liquidity
of such Certificates in the secondary trading market since investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates. See "Description of the Certificates--Book-Entry Certificates"
herein and "Risk Factors--Book-Entry Registration" in the Prospectus.
Since transactions in the Certificates can be effected only through DTC,
participating organizations, indirect participants and certain banks, the
ability of a Beneficial Owner to pledge a Certificate to persons or entities
that do not participate in the DTC system may be limited due to lack of a
physical certificate representing the Certificates. See "Description of the
Certificates--Book-Entry Certificates" herein and "Risk Factors--Book-Entry
Registration" in the Prospectus.
Beneficial Owners may experience some delay in their receipt of
distributions of interest and principal on the Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of DTC Participants which will thereafter credit
them to the accounts of Beneficial Owners either directly or indirectly through
indirect participants. Beneficial Owners will not be recognized as
"Certificateholders" as such term is used in the Agreement, and Beneficial
Owners will be permitted to exercise the rights of Certificateholders only
indirectly through DTC and DTC Participants. See "Description of the
Certificates--Book-Entry Certificates" herein and "Risk Factors--Book-Entry
Registration" in the Prospectus.
Cash Flow Considerations and Risks
Minimum monthly payments on the Loans will at least equal and may exceed
accrued interest. Even assuming that the Mortgaged Properties provide adequate
security for the Loans, substantial delays could be encountered in connection
with the liquidation of Loans that are delinquent and resulting shortfalls in
distributions to Certificateholders could occur. Further, liquidation expenses
(such as legal fees, real estate taxes, and maintenance and preservation
expenses) will reduce the proceeds payable to Certificateholders and thereby
reduce the security for the Loans. In the event any of the Mortgaged Properties
fail to provide adequate security for the related Loans, Certificateholders
could experience a loss.
Prepayment Considerations and Risks
All of the Loans may be prepaid in whole or in part at any time, most
without penalty. [Approximately ___% provide for the payment by the borrower of
a prepayment charge in limited circumstances.] See "The Mortgage Pool--General"
herein and "Yield and Prepayment Considerations" in the Prospectus. The Trust
Fund's prepayment experience may be affected by a wide variety of factors,
including general economic conditions, interest rates, the availability of
alternative financing and homeowner mobility. In addition, substantially all of
the Loans contain due-on-sale provisions and the Servicer intends to enforce
such provisions unless (i) such enforcement is not permitted by applicable law
or (ii) the Servicer, in a manner consistent with reasonable commercial
practice, permits the purchaser of the related Mortgaged Property to assume the
Loan. To the extent permitted by applicable law, such assumption will not
release the original borrower from its obligation under any such Loan. See
"Yield, Prepayment and Maturity Considerations--
S-13
<PAGE>
Prepayment Considerations and Risks" herein and "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses" in the Prospectus for a description of certain
provisions of the Loans that may affect the prepayment experience thereof. The
yield to maturity and weighted average life of the Certificates will be affected
primarily by the rate and timing of prepayment on the Loans. Any reinvestment
risks resulting from a faster or slower incidence of prepayment of Loans will be
borne entirely by the Certificateholders. See "Yield, Prepayment and Maturity
Considerations" herein and "Yield and Prepayment Considerations" in the
Prospectus.
Defaults and Delinquent Payments
The yields to maturity of the Offered Certificates will be sensitive to
defaults and delinquent payments on the Loans. If a purchaser of an Offered
Certificate calculates its anticipated yield based on an assumed rate of default
and amount of losses that is lower than the default rate and amount of losses
actually incurred and, its actual yield to maturity will be lower than that so
calculated and could, in the event of substantial losses, be negative. The
timing of Realized Losses will also affect an investor's actual yield to
maturity even if the rate of defaults and severity of such losses are consistent
with an investor's expectations. In general, the earlier a loss occurs, the
greater is the effect on an investor's yield to maturity. There can be no
assurance as to the delinquency, foreclosure or loss experience with respect to
the Loans.
Payment Delay
Under the Agreement, payments of principal and interest on the Loans
received in any calendar month generally will not be passed through to the
holders of the Offered Certificates until the Distribution Date in the following
calendar month. As a result, the monthly distributions to the holders of the
Offered Certificates generally will reflect mortgagor payments during the prior
calendar month. Each Distribution Date will be on the _______ day of each month
(or the next succeeding business day), commencing in ________ 199_. Thus, the
effective yield to the holders of all Offered Certificates will be below that
otherwise produced by the related Pass-Through Rate and the price paid for the
Offered Certificates by such holders because distributions on the Offered
Certificates in respect of any given month will not be made until on or about
the ___ day of the following month.
Balloon Loans
About ___% of the Loans in the Mortgage Pool are balloon loans,
which generally have an original term of 15 years and provide for monthly
payments based on a 30 year amortization schedule and a final monthly payment
substantially greater than the preceding monthly payments. The existence of a
Balloon Payment generally will require the related mortgagor to refinance the
Loan or to sell the Mortgaged Property on or prior to the stated maturity date.
The ability of a mortgagor 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 mortgagor's equity in the related Mortgaged
Property, the financial condition of the mortgagor, tax laws and prevailing
general economic conditions. None of the Sellers, the Servicer, the Depositor or
the Trustee is obligated to refinance any Loan.
Mixed Use Loans
Mixed Use Loans represent approximately ___% of the Loans in the Mortgage
Pool. The Properties securing Mixed Use Loans consist of multi-family properties
and structures which include residential dwelling units and space used for
retail, professional or other commercial uses (the "Mixed Use Properties"). The
maximum Loan-to-Value Ratio on Mixed Use Properties will not exceed 70%. Due to
the limited market
S-14
<PAGE>
for such Mixed Use Properties, in the event of a foreclosure, it is expected
that the time it takes to recover Liquidation Proceeds will be longer than with
Single Family Properties.
Subordinate Liens
Loans representing approximately ___% of the Mortgage Pool are secured by
first liens, with the remaining Loans (representing approximately ___% of the
Mortgage Pool) being secured by subordinate liens.
Information is provided under "The Mortgage Pool--General" with respect to
the Combined Loan-toValue Ratios of the Loans. The value of the Mortgaged
Properties could be adversely affected by a number of factors. See "Risk
Factors--Nature of Mortgages" in the Prospectus. As a result, despite the
amortization of the Loans on such Mortgaged Properties, there can be no
assurance that the Combined Loan-to-Value Ratios of such Loans, determined as of
a date subsequent to the origination date, will be the same or lower than the
Combined Loan-to-Value Ratios for such Loans, determined as of the origination
date.
Loans secured by investor-owned Mortgaged Properties represent (based
solely upon statements made by the borrowers at the time of origination of the
related Loan) approximately ___% of the Mortgage Pool. It is possible that the
rate of delinquencies, foreclosures and losses on subordinate liens secured by
nonowner occupied Mortgaged Properties could be higher than for Loans secured by
the primary residence of the borrower.
Certificate Rating Subject to Change
The rating of the Certificates will depend primarily on an assessment by
the Rating Agencies of the Loans. The rating by the Rating Agencies of the
Certificates is not a recommendation to purchase, hold or sell the Certificates,
inasmuch as such rating does not comment as to the market price or suitability
for a particular investor. There is no assurance that the ratings will remain in
place for any given period of time or that the ratings will not be lowered or
withdrawn by the Rating Agencies. In general, the ratings address credit risk
and do not address the likelihood of prepayments. The ratings of the
Certificates do not address the possibility of the imposition of United States
withholding tax with respect to non-United States persons.
Legal Considerations--Lien Priority
Each Loan is secured by first or subordinate deeds of trust or mortgages
on the related Mortgaged Property. Loans secured by second mortgages are
entitled to proceeds that remain from the sale of the related Mortgaged Property
after any related senior mortgage loan and prior statutory liens have been
satisfied. In the event that proceeds from realization on the Mortgaged
Properties are insufficient to satisfy such loans and prior liens in the
aggregate, the Trust Fund and, accordingly, the holders, bear (i) the risk of
delay in distributions while a deficiency judgment against the borrower is
obtained and (ii) the risk of loss if the deficiency judgment cannot be obtained
or is not realized upon. See "Certain Legal Aspects of the Loans" in the
Prospectus.
Bankruptcy and Insolvency Risks
The Servicer, the Sellers and the Depositor each intend that each
conveyance of Loans by the Sellers to the Depositor constitutes a sale, rather
than a pledge of the Loans to secure indebtedness of the Sellers. The Depositor
intends that each conveyance of Loans from the Depositor to the Trust Fund
constitutes a sale, rather than a pledge of the Loans to secure indebtedness of
the Depositor. As a sale of the Loans by the
S-15
<PAGE>
Sellers to the Depositor, the Loans would not be part of a Seller's bankruptcy
estate and would not be available to a Seller's creditors. However, in the event
of the bankruptcy or insolvency of a Seller, it is possible that the bankruptcy
trustee, a conservator or receiver of the Seller or another person may attempt
to recharacterize the sale of the Loans as a borrowing by the Seller, secured by
a pledge of the Loans. Similarly, as a sale of the Loans by the Depositor to the
Trust Fund, the Loans would not be part of the Depositor's bankruptcy estate and
would not be available to the Depositor's creditors. However, in the event of
the bankruptcy or insolvency of the Depositor, it is possible that the
bankruptcy trustee, a conservator or receiver of the Depositor or another person
may attempt to recharacterize the sale of the Loans as a borrowing by the
Depositor, secured by a pledge of the Loans. In either case, this position, if
argued before or accepted by a court, could prevent timely payments of amounts
due on the Certificates and result in a reduction of payments due on the
Certificates.
Geographic Concentration
As of the Cut-off Date, approximately _____% (by Cut-off Date Pool
Principal Balance) of the Mortgaged Properties are located in the State of
__________, approximately _____% (by Cut-off Date Pool Principal Balance) of the
Mortgaged Properties are located in the State of __________, approximately
_____% (by Cut-off Date Pool Principal Balance) of the Mortgaged Properties are
located in the State of __________ and approximately _____% (by Cut-off Date
Pool Principal Balance) of the Mortgaged Properties are located in the State of
__________. An overall decline in the residential real estate markets of
_____________, ________________, _______________ and _______________ could
adversely affect the values of the Mortgaged Properties securing such Loans such
that the Principal Balances of the related Loans could equal or exceed the value
of such Mortgaged Properties. As residential real estate markets are influenced
by many factors, including the general condition of the economy and interest
rates, no assurances may be given that the __________, __________, ___________
and ___________ residential real estate markets will not weaken. If the
__________, ____________, ____________ and ___________ residential real estate
markets should experience an overall decline in property values after the dates
of origination of the Loans, the rates of losses on the Loans would be expected
to increase, and could increase substantially.
Risks of Holding Subordinated Certificates
The subordination of the Subordinated Certificates to the Senior
Certificates, and the further subordination within the Subordinated
Certificates, is intended to increase the likelihood of timely receipt by the
holders of Certificates with higher relative payment priority of the maximum
amount to which they are entitled on any Distribution Date and to provide such
holders protection against losses on the Loans to the extent described under
"Description of the Certificates--Allocation of Losses" and "Credit
Enhancement--Subordination of Certain Classes." However, in certain
circumstances the amount of available subordination (including the limited
subordination provided for certain types of losses) may be exhausted and
shortfalls in distributions on the Certificates could result. Holders of the
Senior Certificates will bear their proportionate share of any losses realized
on the Loans in excess of the available subordination amount.
In addition, the weighted average life of, and the yield to maturity on,
the Subordinated Certificates, in increasing order of their numerical class
designation, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the Loans. If the
actual rate and severity of losses on the Loans is higher than those assumed by
a holder of a Subordinated Certificate, the actual yield to maturity of such
Certificate may be lower than the yield expected by such holder based on such
assumption. The timing of losses on Loans will also affect an investor's actual
yield to maturity, even if the rate of defaults and severity of losses over the
life of the Mortgage Pool are consistent with an investor's expectations.
Realized Losses on the Loans will reduce the Class Certificate Balances of the
applicable class
S-16
<PAGE>
of Subordinated Certificates to the extent of any losses allocated thereto (as
described under "Description of the Certificates--Allocation of Losses,"),
without the receipt of cash attributable to such reduction. As a result of such
reductions, less interest will accrue on such class of Subordinated Certificates
than otherwise would be the case. The yield to maturity of the Subordinated
Certificates will also be affected by the disproportionate allocation of
principal prepayments to the Senior Certificates, Net Interest Shortfalls, other
cash shortfalls in Available Funds and distribution of funds to Class PO
Certificateholders otherwise available for distribution on the Subordinated
Certificates to the extent of reimbursement for Class PO Deferred Amounts. See
"Description of the Certificates--Allocation of Losses" and "Yield, Prepayment
and Maturity Considerations--The Subordinated Certificates."
THE MORTGAGE POOL
General
The Mortgage Pool will consist of the following types of loans
(collectively, the "Loans"): mortgage loans secured by first and/or subordinate
liens on (A) one- to four-family residential properties, (each, a "Residential
Loan") and (B) mixed commercial/residential use properties (each, a "Mixed Use
Loan").
The Depositor will purchase the Loans from Sellers pursuant to the Pooling
and Servicing Agreement dated as of the Cut-off Date among Sellers, the
Servicer, the Depositor and the Trustee (the "Agreement") and will cause the
Loans to be conveyed, without recourse, to the Trustee for the benefit of the
holders of the Certificates (the "Certificateholders").
Under the Agreement, the Sellers will make certain representations,
warranties and covenants to the Depositor relating to, among other things, the
due execution and enforceability of the Agreement and certain characteristics of
the Loans and, subject to the limitations described below under "--Sale of the
Loans," will be obligated to repurchase or substitute a similar mortgage loan
for any Loan as to which there exists deficient documentation or an uncured
material breach of any such representation, warranty or covenant. The Sellers
will represent and warrant to the Depositor in the Agreement that the Loans were
selected from among the outstanding loans in the Sellers' portfolios as to which
the representations and warranties set forth in the Agreement can be made and
that such selection was not made in a manner that would adversely affect the
interests of the Certificateholders. See "Loan Program--Representations by
Sellers; Repurchases" in the Prospectus. Under the Agreement, the Depositor will
convey all its right, title and interest in and to such representations,
warranties and covenants (including the Sellers' repurchase obligation) to the
Trustee for the benefit of Certificateholders. The Depositor will make no
representations or warranties with respect to the Loans and will have no
obligation to repurchase or substitute Loans with deficient documentation or
which are otherwise defective. The Sellers are selling the Loans without
recourse and will have no obligation with respect to the Certificates in their
capacity as Sellers other than the repurchase obligation described above. The
obligations of Equity One, as Servicer, with respect to the Certificates are
limited to the Servicer's contractual servicing obligations under the Agreement.
Certain information with respect to the Loans expected to be included in
the Mortgage Pool is set forth below in the following categories: Residential
Loans and Mixed Use Loans. Prior to the Closing Date, Loans may be removed from
the Mortgage Pool and other Loans may be substituted therefor. The Depositor
believes that the information set forth herein under "The Mortgage Pool" with
respect to the Mortgage Pool as presently constituted is representative of the
characteristics of the Mortgage Pool as it will be constituted at the Closing
Date, although certain characteristics of the Loans in the Mortgage Pool may
vary. Unless otherwise indicated, information presented herein under "The
Mortgage Pool" expressed as a percentage
S-17
<PAGE>
(other than rates of interest) are approximate percentages based on the Stated
Principal Balances of the Loans as of the Cut-off Date.
As of the Cut-off Date, the aggregate of the Stated Principal Balances of
the Loans is expected to be approximately $______ (the "Cut-off Date Pool
Principal Balance"). The Loans provide for payment based on the amortization of
the amount financed over a series of substantially equal monthly payments, with
Balloon Payments due at the stated maturities of (i) 15 years, in the case of
Residential Loans and (ii) seven to ten years, in the case of Mixed Use Loans.
Loans with Balloon Payments may involve a greater degree of risk than loans
which are fully amortizing because the ability of a borrower to make a Balloon
Payment typically will depend upon the ability of the borrower to either timely
refinance the Loan or sell the related Mortgaged Property. All the Loans provide
for payments due on a set day, but not necessarily the first day, of each month
(the "Due Date"). The Loans to be included in the Mortgage Pool were originated
or purchased by the Sellers and were originated substantially in accordance with
the Sellers' underwriting criteria for mortgage loans, described under "The
Mortgage Pool--Underwriting Standards."
Scheduled monthly payments made by the mortgagors on the Loans ("Scheduled
Payments") either earlier or later than the scheduled Due Dates thereof will not
affect the amortization schedule or the relative application of such payments to
principal and interest. [All of the Mortgage Notes provide for a ________ (__)
day grace period for monthly payments. Any Loan may be prepaid in full or in
part at any time; however, approximately ____% of the Loans provide for the
payment by the borrower of a prepayment charge in limited circumstances on full
prepayments made within ____ years from the date of execution of the related
Mortgage Note. The amount of the prepayment charge will generally be equal to
____ months' advance interest calculated on the basis of the rate in effect at
the time of such prepayment on the amount prepaid in excess of __% of the
original balance of such Loan.]
Each Loan was originated after ________________________________.
The latest stated maturity date of any Loan is ____________________. The
earliest stated maturity date of any Loan is __________________________.
As of the Cut-off Date, no Loan was delinquent more than ___ days.
No Loan had a Loan-to-Value Ratio at origination of more than ___%.
Approximately ___% of the Residential Loans had a Loan-to-Value Ratio at
origination of 90%. In general, the Mixed Use Loans had a Loan-to-Value Ratio at
origination of not more than 70%.
The "Loan-to-Value Ratio" of a Loan at any given time is equal to (i) the
principal balance of such Loan at the date of origination, divided by (ii) the
Collateral Value of the related Mortgaged Property. The "Combined Loan-to-Value
Ratio" of a Loan secured by a subordinate lien at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal balance
of such Loan and (b) the outstanding principal balance, at the date of
origination of such 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 senior 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 Mortgaged Property.
The "Collateral Value" of a Mortgaged 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 based
on an appraisal made for the related Seller by an independent fee appraiser at
the time of the origination of the related Loan, and (b) if applicable: (i) if
the Loan was for the purpose of acquiring the Mortgaged Property, the sales
price of such Mortgaged Property at such time of origination
S-18
<PAGE>
or (ii) if the Loan is secured by a lien on a Mortgaged Property purchased by
the borrower within one year of the origination of such Loan, the purchase price
of such Mortgaged Property. In the case of Refinance Loans, the Collateral Value
is the appraised value of the Mortgaged Property based upon the appraisal
obtained at the time of refinancing. No assurance can be given that the values
of the Mortgaged Properties have remained or will remain at their levels as of
the dates of origination of the related Loans. If the residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Loans become equal to or greater than the value of
the Mortgaged Properties, actual losses on the Loans could be higher than losses
now generally experienced in the mortgage lending industry.
The following information sets forth in tabular format certain
information, as of the Cut-off Date, as to the Mortgage Pool. Other than with
respect to rates of interest, percentages (approximate) are stated by Stated
Principal Balance of the Loans as of the Cut-off Date and have been rounded in
order to total 100%.
S-19
<PAGE>
Mortgage Pool Tables
<TABLE>
<CAPTION>
Mortgage Rates(1)
-----------------
Number of Loans Aggregate Principal Balance
Mortgage Rates (%) Outstanding Percent of Mortgage Pool
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
6.250....................... $ %
6.750.......................
6.875.......................
7.000.......................
7.125.......................
7.250.......................
7.375.......................
7.500.......................
7.625.......................
7.750.......................
7.875.......................
8.000.......................
8.125.......................
8.250.......................
8.375.......................
8.500.......................
8.625.......................
8.750.......................
8.875.......................
9.000.......................
9.125.......................
9.250.......................
9.375.......................
9.500.......................
9.875.......................
10.000.......................
-- ----------- -------
Totals....................... $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
-------------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Loans
(as so adjusted) is expected to be approximately ___%. Without such
adjustment, the weighted average Mortgage Rate of the Loans is expected to
be approximately ___% per annum.
S-20
<PAGE>
<TABLE>
<CAPTION>
Original Loan-to-Value Ratios(1)
--------------------------------
Original Loan-to-Value Number of Loans Aggregate Principal Balance
Ratios (%) Outstanding Percent of Mortgage Pool
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
50.00 and below.................. $ %
50.01 to 55.00...................
55.01 to 60.00...................
60.01 to 65.00...................
65.01 to 70.00...................
70.01 to 75.00...................
75.01 to 80.00...................
80.01 to 85.00...................
85.01 to 90.00...................
90.01 to 95.00...................
-- ----------- -------
Totals........................... $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
- ----------
(1) The weighted average original Loan-to-Value Ratio of the Loans is expected
to be approximately ______%.
<TABLE>
<CAPTION>
Current Loan Principal Balances(1)
----------------------------------
Current Loan Amounts Number of Loans Aggregate Principal Balance
Outstanding Percent of Mortgage Pool
- --------------------------------------------------------------------------------------------------------------
<C> <C> <C>
$ 0 - $ 50,000........... $ %
$ 50,001 - $ 100,000..........
$100,001 - $ 150,000..........
$150,001 - $ 200,000..........
$200,001 - $ 250,000..........
$250,001 - $ 300,000..........
$300,001 - $ 350,000..........
$350,001 - $ 400,000..........
$400,001 - $ 450,000..........
$450,001 - $ 500,000..........
$500,001 - $ 550,000..........
$550,001 - $ 600,000..........
$600,001 - $ 650,000..........
$650,001 - $ 750,000..........
$750,001 - $1,000,000.........
-- ----------- -------
Totals........................ $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
- ----------
(1) As of the Cut-off Date, the average current Loan principal balance is
expected to be approximately $________.
S-21
<PAGE>
<TABLE>
<CAPTION>
Documentation Program for Loans
-------------------------------
Type of Program (1) Number of Loans Aggregate Principal Balance
Outstanding Percent of Mortgage Pool
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Full Doc.................... $ %
NIV.........................
-- ----------- -------
Totals...................... $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
- ----------
(1) See "The Mortgage Pool--Underwriting Standards" herein and "Loan
Program--Specific Underwriting Criteria; Underwriting Programs" in the
Prospectus.
<TABLE>
<CAPTION>
Type of Mortgaged Properties
----------------------------
Property Type Number of Loans Aggregate Principal Balance
Outstanding Percent of Mortgage Pool
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Single Family.................. $ %
Condominium....................
Mixed Use......................
Two- to Four- Family...........
Planned Unit Development.......
-- ----------- -------
Totals......................... $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
<TABLE>
<CAPTION>
Occupancy Types(1)
------------------
Occupancy Type Number of Loans Aggregate Principal Balance
Outstanding Percent of Mortgage Pool
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Primary Residence.............. $ %
Investor Property..............
Second Residence...............
-- ----------- -------
Totals......................... $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
- ----------
(1) Based upon representations of the related mortgagors at the time of
origination.
S-22
<PAGE>
<TABLE>
<CAPTION>
State Distribution of Mortgaged Properties(1)
---------------------------------------------
State Number of Loans Aggregate Principal Balance
Outstanding Percent of Mortgage Pool
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$ %
Other (less than [2]%)......
-- ----------- -------
Totals...................... $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
- ----------
(1) Other includes other states with under [2]% concentrations individually.
No more than approximately % of the Loans will be secured by Mortgaged
Properties located in any one postal zip code area.
<TABLE>
<CAPTION>
Purpose of Loans
----------------
Loan Purpose Number of Loans Aggregate Principal Balance
Outstanding Percent of Mortgage Pool
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Purchase.......................... $ %
Refinance (rate/term).............
Refinance (cash out)..............
-- ----------- -------
Totals............................ $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
S-23
<PAGE>
<TABLE>
<CAPTION>
Remaining Terms to Maturity(1)
------------------------------
Remaining Term to Maturity Number of Loans Aggregate Principal Balance
(Months) Outstanding Percent of Mortgage Pool
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
180...............................
179...............................
178...............................
177...............................
176...............................
175...............................
174...............................
173...............................
172...............................
171...............................
170...............................
169...............................
168...............................
167...............................
166...............................
165...............................
164...............................
163...............................
162...............................
161...............................
160...............................
159...............................
158...............................
157...............................
156...............................
155...............................
154...............................
153...............................
152...............................
151...............................
150...............................
149...............................
148...............................
147...............................
146...............................
145...............................
144...............................
-- ----------- -------
Totals............................ $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
- ----------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Loans is expected to be approximately ___ months.
S-24
<PAGE>
Sale of the Loans
Pursuant to the Agreement, the Depositor on the Closing Date will convey
without recourse to the Trustee in trust for the benefit of the
Certificateholders all right, title and interest of the Depositor in and to each
Loan and all right, title and interest in and to all other assets included in
the Trust Fund described under "Credit Enhancement," including all principal and
interest received on or with respect to the Loans, exclusive of principal and
interest due on or prior to the Cut-off Date.
In connection with such conveyance, the Depositor will deliver or cause to
be delivered to the Trustee, or a custodian for the Trustee, among other things,
the original promissory note (the "Mortgage Note") (and any modification or
amendment thereto) endorsed in blank without recourse, the original instrument
creating a first lien on the related Mortgaged Property (the "Mortgage") with
evidence of recording indicated thereon, an assignment in recordable form of the
Mortgage, the title policy with respect to the related Mortgaged Property and,
if applicable, all recorded intervening assignments of the Mortgage and any
riders or modifications to such Mortgage Note and Mortgage (except for any such
documents not returned from the public recording office, which will be delivered
to the Trustee as soon as the same is available to the Depositor) (collectively,
the "Mortgage File").
The Trustee will review each Mortgage File within 90 days of the Closing
Date (or promptly after the Trustee's receipt of any document permitted to be
delivered after the Closing Date) and if any document in a Mortgage File is
found to be missing or defective in a material respect and the related Seller
does not cure such defect within 90 days of notice thereof from the Trustee (or
within such longer period not to exceed ___ days after the Closing Date as
provided in the Agreement in the case of missing documents not returned from the
public recording office), such Seller will be obligated to repurchase the
related Loan from the Trust Fund. Rather than repurchase the Loan as provided
above, a Seller may remove such Loan (a "Deleted Loan") from the Trust Fund and
substitute in its place another mortgage loan (a "Replacement Loan"); however,
such substitution is permitted only within two years of the Closing Date and may
not be made unless an opinion of counsel is provided to the Trustee to the
effect that such substitution will not disqualify the REMIC or result in a
prohibited transaction tax under the Code. Any Replacement Loan generally will,
on the date of substitution, among other characteristics set forth in the
Agreement, (i) have a principal balance, after deduction of all Scheduled
Payments due in the month of substitution, not in excess of, and not more than
10% less than, the Stated Principal Balance of the Deleted Loan (the amount of
any shortfall to be deposited by the related Seller in the Certificate Account
and held for distribution to the Certificateholders on the related Distribution
Date (a "Substitution Adjustment Amount")), (ii) have a Mortgage Rate not lower
than, and not more than 1% per annum higher than, that of the Deleted Loan,
(iii) have a Loan-to-Value Ratio not higher than that of the Deleted Loan, (iv)
have a remaining term to maturity not greater than (and not more than one year
less than) that of the Deleted Loan, and (v) comply with all of the
representations and warranties set forth in the Agreement as of the date of
substitution. This cure, repurchase or substitution obligation constitutes the
sole remedy available to Certificateholders or the Trustee for omission of, or a
material defect in, a Loan document.
Underwriting Standards
The following is a description of the underwriting procedures customarily
employed by Sellers with respect to Loans.
Each Seller produces its Loans through its retail origination network of
loan officers and managers. Each Seller also produces Loans through a wholesale
network of mortgage brokers and other entities located throughout the United
States. Prior to the funding of any Loan, each Seller underwrites the related
Loan
S-25
<PAGE>
in accordance with the underwriting standards that have been established by
Equity One and are consistent with those utilized by mortgage lenders generally
during the period of origination for similar types of loans (the "Equity One
Standards").
The Equity One Standards are primarily intended to evaluate the value and
adequacy of the Mortgaged Property as collateral for the proposed Loan, but also
take into consideration the borrower's credit standing and repayment ability.
The Equity One Standards allow for the origination and purchase of Loans
generally under the following underwriting programs: (i) Grade A Credits, (ii)
Grade B Credits and (iii) Grade C Credits. See "Specific Underwriting Criteria;
Underwriting Programs" and "Summary of Underwriting Requirements by Program" in
the Prospectus. It is expected that Grade A Credits Loans will represent ___%,
Grade B Credits Loans will represent ___% and Grade C Credits Loans will
represent ___% of the Loans in the Mortgage Pool.
On a case by case basis, a Seller may determine that, based upon
compensating factors, a prospective borrower not strictly qualifying under the
specific criteria of Grade A Credits, Grade B Credits or Grade C Credits
warrants an underwriting exception. See "Specific Underwriting Criteria;
Underwriting Programs" in the Prospectus. Compensating factors may include
Loan-to-Value Ratio, Debt-to-Income Ratio, stable employment and time in the
same residence, but the Equity One Standards do not include any specific formula
or assign any specific weights to compensating factors for purposes of such
determinations. It is expected that some of the Loans to be included in the
Mortgage Pool will have been originated based on such underwriting exceptions.
Under the Equity One Standards, Sellers must use either the Full Doc or
the NIV loan documentation program to verify a borrower's income. See "Specific
Underwriting Criteria; Underwriting Programs" in the Prospectus. It is expected
that ___% of the Loans in the Mortgage Pool will be underwritten pursuant to the
Full Doc program and that ___% of such Loans will be underwritten pursuant to
the NIV program.
The Equity One Standards require an independent appraisal of each
Mortgaged Property securing a Loan in excess of $15,000, which conforms to
Federal National Mortgage Corporation ("FNMA") standards. Each appraisal
includes a market data analysis based on recent sales of comparable homes in the
area and, where deemed appropriate, replacement cost analysis based on the
current cost of constructing a similar home and generally is required to have
been made not earlier than ___ days prior to the date of origination of the
mortgage loan. Every independent appraisal is reviewed by a representative of
the related Seller before the loan is funded. The maximum loan amount varies
depending upon a borrower's credit grade but does not generally exceed $500,000.
Variations in maximum loan amount limits are permitted based on compensating
factors. Maximum loan amounts for Loans underwritten pursuant to the NIV program
generally do not exceed $300,000.
The Equity One Standards permit loans with Loan-to-Value Ratios at
origination of up to 90% depending on the program, type and use of the property,
creditworthiness of the borrower and Debt-to-Income Ratio. The maximum Combined
Loan-to-Value Ratio for purchase money mortgage loans, including any subordinate
mortgages or deeds of trust is 90%.
Title insurance is required on all Loans in excess of $15,000. Each Seller
also requires that fire and extended coverage casualty insurance be maintained
on the Mortgaged Property in an amount at least equal to the principal balance
or the replacement cost of the Mortgaged Property, whichever is less.
S-26
<PAGE>
SERVICING OF LOANS
General
The Servicer will service the Loans in accordance with the terms set forth
in the Pooling and Servicing Agreement. The Servicer may perform any of its
obligations under the Pooling and Servicing Agreement through one or more
sub-servicers. Notwithstanding any such sub-servicing arrangement, the Servicer
will remain liable for its servicing duties and obligations under the Pooling
and Servicing Agreement as if the Servicer alone were servicing the Loans. [As
of the Closing Date, the Servicer will service the Loans without sub-servicing
arrangements.]
The information set forth in the following section through and including
the section captioned "Foreclosure, Delinquency and Loss Experience" has been
provided by Sellers.
The Servicer
Equity One, Inc. ("Equity One"), a Delaware corporation and a subsidiary
of [Describe], will act as the Servicer of the Loans pursuant to the Pooling and
Servicing Agreement. Equity One is engaged primarily in the mortgage banking
business, and as such, originates, purchases, sells and services mortgage loans.
Equity One originates Loans through a retail branch system and through mortgage
loan brokers and correspondents nationwide. Equity One's Loans are principally
first-lien, fixed or adjustable rate mortgage loans secured by Single-Family
Properties or Mixed Use Properties.
As of __________, 199_, Equity One provided servicing for approximately
$__________ million in Loans.
The principal executive offices of Equity One are located at 523
Fellowship Road, Suite 230, Mt. Laurel, New Jersey, 08054. Its telephone number
is (609) 273-1119. Equity One conducts operations from its headquarters in Mt.
Laurel and through affiliates, from offices throughout the nation.
Loan Servicing
Equity One services substantially all of the Loans originated or acquired
by the Sellers. Equity One has established standard policies for the servicing
and collection of Loans. Servicing includes, but is not limited to, collecting
and remitting Loan payments, accounting for principal and interest, making
inspections as required of the Mortgaged Properties, preparation of tax related
information in connection with the Loans, supervision of delinquent Loans, loss
mitigation efforts, foreclosure proceedings and, if applicable, the disposition
of Mortgaged Properties, and generally administering the Loans, for which it
receives servicing fees.
Coupon booklets are delivered to borrowers for making monthly payments.
Notice of changes in the applicable loan rate, if applicable, are provided by
Equity One to the mortgagor when appropriate.
S-27
<PAGE>
Collection Procedures
When a mortgagor fails to make a payment on a Loan, each Seller attempts
to cause the deficiency to be cured by corresponding with the mortgagor. In most
cases, deficiencies are cured promptly. Pursuant to each Seller's servicing
procedures, each Seller generally mails to the mortgagor a notice of intent to
foreclose after the Loan becomes 31 days past due (two payments due but not
received) and, within 60 days thereafter, if the Loan remains delinquent,
institutes appropriate legal action to foreclose on the Mortgaged Property.
Foreclosure proceedings may be terminated if the delinquency is cured. Loans to
borrowers in bankruptcy proceedings may be restructured in accordance with law
and with a view to maximizing recovery of such Loans, including any
deficiencies.
Once foreclosure is initiated, a foreclosure tracking system is used to
monitor the progress of the proceedings. The system includes state specific
parameters to monitor whether proceedings are progressing within the time frame
typical for the state in which the Mortgaged Property is located. During the
foreclosure proceeding, the Seller determines the amount of the foreclosure bid
and whether to liquidate the Loan.
After foreclosure, the Seller may liquidate the Mortgaged Property and
charge-off the Loan balance which was not recovered through Liquidation
Proceeds. If foreclosed, the Mortgaged Property is sold at a public or private
sale and may be purchased by the Seller.
Servicing and charge-off policies and collection practices may change over
time in accordance with, among other things, the business judgment of each
Seller, changes in the servicing portfolio and applicable laws and regulations.
Foreclosure, Delinquency and Loss Experience
The following table summarizes the delinquency and loss experience of the
Sellers' Loans at or for the years specified therein. A Loan is characterized as
delinquent if the borrower has not paid the minimum payment due by the due date.
The table below discloses delinquency percentages of Loans 60 days or more past
due on a contractual basis and excludes Loans where the Loan is in foreclosure
or the borrower has filed for bankruptcy. This information should not be
considered as a basis for assessing the likelihood, amount, or severity of
delinquency or losses on the Loans, and no assurances can be given that the
foreclosure experience presented in the second paragraph below the table will be
indicative of such experience on the Loans.
Loss and Delinquency Tables
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Three Months
Ended Ended
At or for the Year Ended November 30, March 31, 1996 March 31, 1997
------------------------------------------- -------------- --------------
1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Portfolio Unpaid
Principal Balance (1) $ $ $ $ $
Average Portfolio
Unpaid $ $ $ $ $
Principal Balance..........
Period of
Delinquency (2)
60+ Days................... % % % % % %
Total Delinquencies............ % % % % % %
Total Credit Losses (3) % % % % %(4) %(4)
</TABLE>
(1) Portfolio Unpaid Principal Balance is the net amount of principal to be
paid on each Loan, excluding unearned finance charges and other charges,
and excludes the principal balance of each Loan as to which the related
Mortgaged Property has been previously acquired through foreclosure.
(2) Delinquency percentages are calculated as the dollar amount of Loan
principal delinquent as a percent of the Portfolio Unpaid Principal
Balance. Delinquency percentages include the principal balance of all Loans
in foreclosure proceedings. Generally, all Loans in foreclosure proceedings
are 90 days or more delinquent. Delinquency percentages do not include the
principal balance of Loans which are real estate owned.
(3) Total Credit Losses includes (a) charge-offs of principal, net of
subsequent recoveries, relating to Loans written off as uncollectible or
charge-offs relating to properties securing any Loans which have been
foreclosed upon and for which, in the opinion of management, liquidation
proceeds would not exceed estimated expenses of liquidation plus the unpaid
principal balance, (b) expenses associated with maintaining, repairing, and
selling foreclosed properties and real estate owned, and (c) losses (gains)
on the disposition of foreclosed properties and real estate owned.
(4) Annualized.
S-28
<PAGE>
[These tables do not include ________ Loans with principal balances
aggregating $_____________ that were sold, but were being serviced on an interim
basis pending transfer of servicing, as of ___________, 199_. As of the date
hereof, servicing with respect to such Loans has been transferred.]
As of _____________, 199_, __________ Loans with an aggregate principal
balance of $______________ were in foreclosure and, there were ___________ Loans
in bankruptcy with a combined loan balance of $______________.
Historically, a variety of factors, including the appreciation of real
estate values, have limited the loss and delinquency experience on Loans. There
can be no assurance that factors beyond each Seller's control, such as national
or local economic conditions or downturn in the real estate markets of its
lending areas, will not result in increased rates of delinquencies and
foreclosure losses in the future.
Over the last several years, there has been a general deterioration of the
real estate market and weakening economy in many regions of the country,
including __________. The general deterioration of the real estate market has
been reflected in increases in delinquencies of loans secured by real estate,
slower absorption rates of real estate into the market and lower sales prices
for real estate. The general weakening of the economy has been reflected in
decreases in the financial strength of borrowers and decreases in the value of
collateral serving as security for loans. If the real estate market and economy
continue to decline, the Seller may experience an increase in delinquencies on
the Loans serviced and higher net losses on liquidated Loans.
Servicing Compensation and Payment of Expenses
The Servicer will be paid a monthly fee from interest collected with
respect to each Loan (as well as from any Liquidation Proceeds from a Liquidated
Loan that are applied to accrued and unpaid interest) equal to one-twelfth of
the Stated Principal Balance thereof multiplied by the Servicing Fee Rate (such
product, the "Servicing Fee Rate"). The Servicing Fee Rate for each Loan will
equal .5% per annum. The amount of the monthly Servicing Fee is subject to
adjustment with respect to prepaid Loans, as described herein under
"--Adjustment to Servicing Fee in Connection with Certain Prepaid Loans." The
Servicer is also entitled to receive, as additional servicing compensation,
amounts in respect of interest paid on Principal Prepayments received from the
first day through the fifteenth day of a month ("Prepayment Interest Excess"),
all late payment fees, assumption fees, prepayment penalties and other similar
charges and all reinvestment income earned on amounts on deposit in the
Certificate Account and Distribution Account. The Servicer is obligated to pay
certain ongoing expenses associated with the Loans and incurred by the Trustee
in connection with its responsibilities under the Pooling and Servicing
Agreement.
S-29
<PAGE>
Adjustment to Servicing Fee in Connection with Certain Prepaid Loans
When a borrower prepays a Loan between Due Dates, the borrower is required
to pay interest on the amount prepaid only to the date of prepayment and not
thereafter. Except with respect to the month of the Cut-off Date, principal
prepayments by borrowers received by the Servicer from the first day through the
fifteenth day of a calendar month will be distributed to Certificateholders on
the Distribution Date in the same month in which such prepayments are received
and, accordingly, no shortfall in the amount of interest to be distributed to
Certificateholders with respect to the prepaid Loan will result. Conversely,
principal prepayments by borrowers received by the Servicer from the sixteenth
day (or, in the case of the first Distribution Date, from the Cut-off Date)
through the last day of a calendar month will be distributed to
Certificateholders on the Distribution Date in the month following the month of
receipt and, accordingly, a shortfall in the amount of interest to be
distributed to Certificateholders with respect to such prepaid Loans would
result. Pursuant to the Agreement, the Servicing Fee for any month will be
reduced, up to the full amount of such Servicing Fee, in order to pass through
to Certificateholders the interest to which they would be entitled in respect of
each such prepaid Loan on the related Distribution Date. If shortfalls in
interest as a result of prepayments exceed an amount equal to the amount of the
Servicing Fee otherwise payable on the related Distribution Date, the amount of
interest available to be distributed to Certificateholders will be reduced by
the amount of such excess. See "Description of the Certificates--Interest."
Advances
Subject to the following limitations, the Servicer will be required to
advance prior to each Distribution Date, from its own funds or funds in the
Certificate Account that do not constitute Available Funds for such Distribution
Date, an amount equal to the aggregate of payments of principal and interest on
the Loans (net of the Servicing Fee with respect to the related Loans) which
were due on the related Due Date and which were delinquent on the related
Determination Date, together with an amount equivalent to interest on each Loan
as to which the related Mortgaged Property has been acquired by the Trust Fund
through foreclosure or deed-in-lieu of foreclosure ("REO Property") (any such
advance, an "Advance").
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Certificates rather than to guarantee or insure
against losses. The Servicer is obligated to make Advances with respect to
delinquent payments of principal of or interest on each Loan to the extent that
such Advances are, in its reasonable judgment, recoverable from future payments
and collections or insurance payments or proceeds of liquidation of the related
Loan. If the Servicer determines on any Determination Date to make an Advance,
such Advance will be included with the distribution to Certificateholders on the
related Distribution Date. Any failure by the Servicer to make an Advance as
required under the Agreement with respect to the Certificates will constitute an
Event of Default thereunder, in which case the Trustee or the successor servicer
will be obligated to make any such Advance, in accordance with the terms of the
Agreement.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Agreement. Set forth below
are descriptions of the material terms and provisions pursuant to which the
Certificates will be issued. When particular provisions or terms used in the
Agreement are referred to, the actual provisions (including definitions of
terms) are incorporated by reference.
S-30
<PAGE>
The Mortgage Pass-Through Certificates, Series 199_ - __ will consist of
the Class A- , Class , Class PO, Class X and Class A-R Certificates
(collectively, the "Senior Certificates") and the Class B- , Class and
Class Certificates (collectively, the "Subordinated Certificates"). The Senior
Certificates and Subordinated Certificates are collectively referred to herein
as the "Certificates." Only the classes of Certificates listed on the cover page
hereof (collectively, the "Offered Certificates") are offered hereby. The
classes of Offered Certificates will have the respective initial Class
Certificate Balances or initial Notional Amounts (subject to the permitted
variance) and Pass-Through Rates set forth or described on the cover hereof.
The "Class Certificate Balance" of any class of Certificates as of any
Distribution Date is the initial Class Certificate Balance thereof (A) reduced
by the sum of (i) all amounts previously distributed to holders of Certificates
of such class as payments of principal, (ii) the amount of Realized Losses
(including Excess Losses) allocated to such class and (iii) in the case of any
class of Subordinated Certificates, any amounts allocated to such class in
reduction of its Class Certificate Balance in respect of payments of Class PO
Deferred Amounts, as described below under "--Allocation of Losses". In
addition, the Class Certificate Balance of the class of Subordinated
Certificates then outstanding with the highest numerical class designation will
be reduced if and to the extent that the aggregate of the Class Certificate
Balances of all classes of Certificates, following all distributions and the
allocation of Realized Losses on a Distribution Date, exceeds the Pool Principal
Balance as of the Due Date occurring in the month of such Distribution Date. The
Notional Amount Certificates do not have principal balances and are not entitled
to any distributions in respect of principal of the Loans.
The "Notional Amount" of the Class X Certificates for any Distribution
Date will be equal to the aggregate of the Stated Principal Balances of the
Non-Discount Loans with respect to such Distribution Date. A "Non-Discount Loan"
is any Loan with a Net Mortgage Rate equal to or greater than __%. The initial
Notional Amount of the Class X Certificates will be equal to the aggregate of
the Stated Principal Balance of the Non-Discount Loans as of the Cut-off Date.
The Senior Certificates will have an initial aggregate principal balance
of approximately $___ and will evidence in the aggregate an initial beneficial
ownership interest of approximately ___% in the Trust Fund. The Class B- ,
Class B- , Class B- , Class B- , Class B- and Class B- Certificates will each
evidence in the aggregate an initial beneficial ownership interest of
approximately ____%, ____%, ____%, ____%, ____%, and ____%, respectively, in the
Trust Fund.
The Book-Entry Certificates will be issuable in book-entry form only. The
Physical Certificates will be issued in fully registered certificated form. The
Physical Certificates (other than Class A-R Certificates) offered hereby will be
issued in minimum dollar denominations of $25,000 and integral multiples of
$1,000 in excess thereof. A single Certificate of each such class may be issued
in an amount different than described above. The Class A-R Certificates will be
issued as a single Certificate in a denomination of $1,000.
Book-Entry Certificates
Each class of Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate initial Class Certificate Balance of each
such class of Certificates and which will be held by a nominee of The Depository
Trust Company ("DTC"). Beneficial interests in the Book-Entry Certificates will
be held indirectly by investors through the book-entry facilities of DTC, as
described herein. Investors may hold such beneficial interests in the Book-Entry
Certificates in minimum denominations representing an original principal amount
of $25,000 and integral multiples of $1,000 in excess thereof. One investor of
each class of Book-Entry Certificates may hold a beneficial interest therein
that is not an integral multiple of $1,000.
S-31
<PAGE>
The Depositor has been informed by DTC that its nominee will be Cede & Co.
("Cede"). Accordingly, Cede is expected to be the holder of record of the
Book-Entry Certificates. Except as described in the Prospectus under
"Description of the Certificates--Book-Entry Certificates," no person acquiring
a Book-Entry Certificate (each, a "Beneficial Owner") will be entitled to
receive a physical certificate representing such Certificate (a "Definitive
Certificate").
Unless and until Definitive Certificates are issued, it is anticipated
that the only Certificateholder of the Book-Entry Certificates will be Cede, as
nominee of DTC. Beneficial Owners of the Book-Entry Certificates will not be
"Certificateholders," as that term is used in the Agreement. Beneficial Owners
are only permitted to exercise the rights of Certificateholders indirectly
through DTC and DTC Participants. Monthly and annual reports on the Trust Fund
provided to Cede, as nominee of DTC, may be made available to Beneficial Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting DTC, and to the DTC Participants to whose accounts the Book-Entry
Certificates of such Beneficial Owners are credited.
For a description of the procedures generally applicable to the Book-Entry
Certificates, see "Description of the Securities--Book-Entry Registration of
Securities" in the Prospectus.
Payments on Loans; Accounts
On or prior to the Closing Date, the Servicer will establish an account
(the "Certificate Account"), which will be maintained in trust for the benefit
of the Certificateholders. Funds credited to the Certificate Account may be
invested for the benefit and at the risk of the Servicer in Permitted
Investments that are scheduled to mature on or prior to the business day
preceding the next Distribution Date. On or prior to the business day
immediately preceding each Distribution Date, the Servicer will withdraw from
the Certificate Account the amount of Available Funds and will deposit such
Available Funds in an account established and maintained with the Trustee on
behalf of the Certificateholders (the "Distribution Account").
"Permitted Investments" will be specified in the Agreement and will be
limited to (i) obligations of the United States or any agency thereof, provided
such obligations are backed by the full faith and credit of the United States;
(ii) general obligations of or obligations guaranteed by any state of the United
States or the District of Columbia receiving the highest long-term debt rating
of each Rating Agency rating the Certificates, or such lower rating as will not
result in the downgrading or withdrawal of the ratings then assigned to the
Certificates by each such Rating Agency; (iii) commercial or finance company
paper which is then receiving the highest commercial or finance company paper
rating of each such Rating Agency, or such lower rating as will not result in
the downgrading or withdrawal of the ratings then assigned to the Certificates
by each such Rating Agency; (iv) certificates of deposit, demand or time
deposits, or bankers' acceptances issued by any depository institution or trust
company incorporated under the laws of the United States or of any state thereof
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 is not a Rating Agency) are then rated one of the two highest
long-term and the highest short-term ratings of each such Rating Agency for such
securities, or such lower ratings as will not result in the downgrading or
withdrawal of the rating then assigned to the Certificates by any such Rating
Agency; (v) 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; (vi) guaranteed reinvestment agreements issued by
any bank, insurance company or other corporation containing, at the time of the
issuance of such agreements, such terms and conditions as will not result in the
downgrading or withdrawal of the rating then assigned to the Certificates by any
such Rating Agency; (vii) repurchase obligations with
S-32
<PAGE>
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; (viii) securities (other than
stripped bonds, stripped coupons or instruments sold at a purchase price in
excess of 115% of the face amount thereof) bearing interest or sold at a
discount issued by any corporation incorporated under the laws of the United
States or any state thereof which, at the time of such investment, have one of
the two highest ratings of each Rating Agency (except if the Rating Agency is
Moody's, such rating shall be the highest commercial paper rating of Moody's for
any such securities), or such lower rating as will not result in the downgrading
or withdrawal of the rating then assigned to the Certificates by any such Rating
Agency, as evidenced by a signed writing delivered by each such Rating Agency;
and (ix) such other investments having a specified stated maturity and bearing
interest or sold at a discount acceptable to each Rating Agency as will not
result in the downgrading or withdrawal of the rating then assigned to the
Certificates by any such Rating Agency, as evidenced by a signed writing
delivered by each such Rating Agency; provided that no such instrument shall be
a Permitted Investment if such instrument evidences the right to receive
interest only payments with respect to the obligations underlying such
instrument.
Distributions
Distributions on the Certificates will be made by the Trustee on the __th
day of each month, or if such day is not a business day, on the first business
day thereafter, commencing in 199 (each, a "Distribution Date"), to the persons
in whose names such Certificates are registered at the close of business on the
last business day of the month preceding the month of such Distribution Date
(the "Record Date").
Distributions on each Distribution Date will be made by check mailed to
the address of the person entitled thereto as it appears on the applicable
certificate register or, in the case of a Certificateholder who holds 100% of a
class of Certificates or who holds Certificates with an aggregate initial
Certificate Balance of $1,000,000 or more or who holds an Interest Only
Certificate and who has so notified the Trustee in writing in accordance with
the Agreement, by wire transfer in immediately available funds to the account of
such Certificateholder at a bank or other depository institution having
appropriate wire transfer facilities; provided, however, that the final
distribution in retirement of the Certificates will be made only upon
presentment and surrender of such Certificates at the Corporate Trust Office of
the Trustee.
Priority of Distributions Among Certificates
As more fully described under "Description of the Certificates--Interest,"
"--Principal" and "--Allocation of Losses," distributions will be made on each
Distribution Date from Available Funds in the following order of priority: (i)
to interest on each interest bearing class of Senior Certificates; (ii) to
principal on the classes of Senior Certificates then entitled to receive
distributions of principal, in the order and subject to the priorities set forth
herein under "--Principal," in each case in an aggregate amount up to the
maximum amount of principal to be distributed on such classes on such
Distribution Date; (iii) to any Class PO Deferred Amounts with respect to the
Class PO Certificates, but only from amounts that would otherwise be distributed
on such Distribution Date as principal of the Subordinated Certificates; and
(iv) to interest on and then principal of each class of Subordinated
Certificates, in the order of their numerical class designations, beginning with
the Class Certificates, in each case subject to the limitations set forth
herein under "Description of the Certificates--Principal."
"Available Funds" with respect to any Distribution Date will be equal to
the sum of (i) all scheduled installments of interest (net of the related
Servicing Fees, trustee fees and credit enhancement fees) and principal due on
the Due Date in the month in which such Distribution Date occurs and received
prior to the related Determination Date, together with any Advances in respect
thereof; (ii) all proceeds of any primary mortgage guaranty insurance policies
and any other insurance policies with respect to the Loans, to the extent
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<PAGE>
such proceeds are not applied to the restoration of the related Mortgaged
Property or released to the mortgagor in accordance with the Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other cash
amounts received and retained in connection with the liquidation of defaulted
Loans, by foreclosure or otherwise ("Liquidation Proceeds") during the calendar
month preceding the month of such Distribution Date (in each case, net of
unreimbursed expenses incurred in connection with a liquidation or foreclosure
and unreimbursed Advances, if any); (iii) all partial or full prepayments
received during the period from the sixteenth day of the month preceding the
month of such Distribution Date (or, in the case of the first Distribution Date,
from the Cut-off Date) through the fifteenth day of the month of such
Distribution Date (the "Prepayment Period"); and (iv) amounts received with
respect to such Distribution Date as the Substitution Adjustment Amount or
purchase price in respect of a Deleted Loan or a Loan repurchased by a Seller or
the Servicer as of such Distribution Date, reduced by amounts in reimbursement
for Advances previously made and other amounts as to which the Servicer is
entitled to be reimbursed from the Certificate Account pursuant to the
Agreement.
With respect to any Distribution Date, the "Class PO Deferred Amount" is
the aggregate of the applicable PO Percentage of each Realized Loss, other than
any Excess Loss, to be allocated to the Class PO Certificates on such
Distribution Date on or prior to the Senior Credit Support Depletion Date or
previously allocated to the Class PO Certificates and not yet paid to the
holders of the Class PO Certificates.
Interest
The classes of Offered Certificates will have the respective Pass-Through
Rates set forth or described on the cover hereof.
The Pass-Through Rate for the Class X Certificates for any Distribution
Date will be equal to the excess of (a) the average of the Net Mortgage Rates of
the Non-Discount Loans, weighted on the basis of the Stated Principal Balances
thereof, over (b) % per annum. The Pass-Through Rate for the Class X
Certificates for the first Distribution Date is expected to be approximately
% per annum. The "Net Mortgage Rate" for each Loan is the interest rate
thereon (the "Mortgage Rate") less the sum of the rates for the Servicing Fees,
trustee fees and credit enhancement fees for such Loan.
On each Distribution Date, to the extent of funds available therefor, each
interest bearing class of Certificates will be entitled to receive an amount
allocable to interest (as to each such class, the "Interest Distribution
Amount") with respect to the related Interest Accrual Period. The "Interest
Distribution Amount" for any interest bearing class will be equal to the sum of
(i) interest at the applicable Pass-Through Rate on the related Class
Certificate Balance or Notional Amount, as the case may be, and (ii) the sum of
the amounts, if any, by which the amount described in clause (i) above on each
prior Distribution Date exceeded the amount actually distributed as interest on
such prior Distribution Dates and not subsequently distributed ("Unpaid Interest
Amounts"). The Class PO Certificates are Principal Only Certificates and will
not bear interest.
With respect to each Distribution Date, the "Interest Accrual Period" for
each interest bearing class of Certificates will be the calendar month preceding
the month of such Distribution Date.
The interest entitlement described above for each class of Certificates
for any Distribution Date will be reduced by the amount of Net Interest
Shortfalls for such Distribution Date. With respect to any Distribution Date,
the "Net Interest Shortfall" is equal to (i) the amount of interest that would
otherwise have been received with respect to any Loan that was the subject of
(a) a Relief Act Reduction or (b) a Special Hazard Loss, Fraud Loss, Debt
Service Reduction or Deficient Valuation, after the exhaustion of the respective
amounts of coverage provided by the Subordinated Certificates for such types of
losses and (ii) any Net Prepayment Interest Shortfalls with respect to such
Distribution Date. A "Relief Act Reduction" is a reduction in the amount of
monthly interest payment on a Loan pursuant to the Soldiers' and Sailors' Civil
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<PAGE>
Relief Act of 1940. See "Certain Legal Aspects of the Loans--Soldiers' and
Sailors' Civil Relief Act" in the Prospectus. With respect to any Distribution
Date, a "Net Prepayment Interest Shortfall" is the amount by which the aggregate
of Prepayment Interest Shortfalls during the calendar month preceding the month
of such Distribution Date exceeds the aggregate amount payable on such
Distribution Date by the Servicer as described under "Servicing of
Loans--Adjustment to Servicing Fee in Connection with Certain Prepaid Loans." A
"Prepayment Interest Shortfall" is the amount by which interest paid by a
borrower in connection with a prepayment of principal on a Loan is less than one
month's interest at the related Mortgage Rate on the Stated Principal Balance of
such Loan. Each class' pro rata share of such Net Interest Shortfalls will be
based on the amount of interest such class otherwise would have been entitled to
receive on such Distribution Date.
Accrued interest to be distributed on any Distribution Date will be
calculated, in the case of each interest bearing class of Certificates, on the
basis of the related Class Certificate Balance or Notional Amount, as
applicable, immediately prior to such Distribution Date. Interest will be
calculated and payable on the basis of a 360-day year divided into twelve 30-day
months.
In the event that, on a particular Distribution Date, Available Funds in
the Certificate Account applied in the order described above under "--Priority
of Distributions Among Certificates" are not sufficient to make a full
distribution of the interest entitlement on the Certificates, interest will be
distributed on each class of Certificates of equal priority based on the amount
of interest each such class would otherwise have been entitled to receive in the
absence of such shortfall. Any Unpaid Interest Amount will be carried forward
and added to the amount holders of each such class of Certificates will be
entitled to receive on the next Distribution Date. Such a shortfall could occur,
for example, if losses realized on the Loans were exceptionally high or were
concentrated in a particular month. Any Unpaid Interest Amount so carried
forward will not bear interest.
Principal
General. All payments and other amounts received in respect of principal
of the Loans will be allocated between (i) the Senior Certificates (other than
the Notional Amount Certificates and the Class PO Certificates) and the
Subordinated Certificates and (ii) the Class PO Certificates, in each case based
on the applicable Non-PO Percentage and the applicable PO Percentage,
respectively, of such amounts.
The "Non-PO Percentage" with respect to any Loan with a Net Mortgage Rate
("NMR") less than ____% (each such Loan, a "Discount Loan") will be equal to NMR
/ ____%. The "Non-PO Percentage" with respect to any Non-Discount Loan will be
100%. The "PO Percentage" with respect to any Discount Loan will be equal to
(____% - NMR) / ____%. The "PO Percentage" with respect to any Non-Discount Loan
will be 0%.
Non-PO Formula Principal Amount. On each Distribution Date, the Non-PO
Formula Principal Amount will be distributed as principal of the Senior
Certificates (other than the Notional Amount Certificates and the Class PO
Certificates) and the Subordinated Certificates, to the extent of the amount
available from Available Funds for the distribution of principal on such
respective classes, as described below.
The "Non-PO Formula Principal Amount" for any Distribution Date will equal
the sum of the applicable Non-PO Percentage of (a) all monthly payments of
principal due on each Loan on the related Due Date, (b) the principal portion of
the purchase price of each Loan that was repurchased by a Seller or another
person pursuant to the Agreement as of such Distribution Date, (c) the
Substitution Adjustment Amount in connection with any Deleted Loan received with
respect to such Distribution Date, (d) any Insurance
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<PAGE>
Proceeds or Liquidation Proceeds allocable to recoveries of principal of Loans
that are not yet Liquidated Loans received during the calendar month preceding
the month of such Distribution Date, (e) with respect to each Loan that became a
Liquidated Loan during the calendar month preceding the month of such
Distribution Date, the amount of the Liquidation Proceeds allocable to principal
received with respect to such Loan and (f) all partial and full principal
prepayments by borrowers received during the related Prepayment Period.
Senior Principal Distribution Amount. On each Distribution Date prior to
the Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount,
up to the amount of the Senior Principal Distribution Amount for such
Distribution Date, will be distributed as principal of the following classes of
Senior Certificates in the following order of priority:
(i) to the Class A-R Certificates until the Class Certificate
Balance thereof has been reduced to zero;
(ii) concurrently, to the Class __ and Class __ Certificates, pro
rata based on their respective Class Certificate Balances, until the Class
Certificate Balances thereof have been reduced to zero;
(iii) sequentially, to the Class __ and Class __ Certificates, in
that order, until the respective Class Certificate Balances thereof have
been reduced to zero;
(iv) sequentially, to the Class __ and Class __ Certificates, in
that order, until the respective Class Certificate Balances thereof have
been reduced to zero; and
(v) to the Class __ Certificates until the Class Certificate Balance
thereof has been reduced to zero.
Notwithstanding the foregoing, on each Distribution Date on and after the
Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount will
be distributed, concurrently as principal of the classes of Senior Certificates
(other than the Notional Amount Certificates and the Class PO Certificates), pro
rata, in accordance with their respective Class Certificate Balances immediately
prior to such Distribution Date.
The "Senior Credit Support Depletion Date" is the date on which the Class
Certificate Balance of each class of Subordinated Certificates has been reduced
to zero.
The "Senior Principal Distribution Amount" for any Distribution Date will
equal the sum of (i) the Senior Percentage of the applicable Non-PO Percentage
of all amounts described in clauses (a) through (d) of the definition of Non-PO
Formula Principal Amount for such Distribution Date, (ii) with respect to each
Loan that became a Liquidated Loan during the calendar month preceding the month
of such Distribution Date, the lesser of (x) the Senior Percentage of the
applicable Non-PO Percentage of the Stated Principal Balance of such Loan and
(y) either (A) the Senior Prepayment Percentage or (B) if an Excess Loss was
sustained with respect to such Liquidated Loan during such preceding calendar
month, the Senior Percentage of the applicable Non-PO Percentage of the amount
of the Liquidation Proceeds allocable to principal received with respect to such
Loan, and (iii) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of amounts described in clause (f) of the definition of Non-PO
Formula Principal Amount for such Distribution Date; provided, however, that if
a Bankruptcy Loss that is an Excess Loss is sustained with respect to a Loan
that is not a Liquidated Loan, the Senior Principal Distribution Amount will be
reduced on the related Distribution Date by the Senior Percentage of the
applicable Non-PO Percentage of the principal portion of such Bankruptcy Loss.
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<PAGE>
"Stated Principal Balance" means as to any Loan and Due Date, the unpaid
principal balance of such Loan as of such Due Date, as specified in the
amortization schedule at the time relating thereto (before any adjustment to
such amortization schedule by reason of any moratorium or similar waiver or
grace period), after giving effect to any previous partial prepayments and
Liquidation Proceeds received and to the payment of principal due on such Due
Date and irrespective of any delinquency in payment by the related mortgagor.
The "Pool Principal Balance" with respect to any Distribution Date equals the
aggregate of the Stated Principal Balances of the Loans outstanding on the Due
Date in the month preceding the month of such Distribution Date.
The "Senior Percentage" for any Distribution Date is the percentage
equivalent of a fraction the numerator of which is the aggregate of the Class
Certificate Balances of each class of Senior Certificates (other than the Class
PO Certificates) immediately prior to such date and the denominator of which is
the aggregate of the Class Certificate Balances of all classes of Certificates,
other than the Class PO Certificates, immediately prior to such date.
The "Senior Prepayment Percentage" for any Distribution Date occurring
during the ____ years beginning on the first Distribution Date will equal 100%.
Thereafter, the Senior Prepayment Percentage will, except as described below, be
subject to gradual reduction as described in the following paragraph. This
disproportionate allocation of certain unscheduled payments in respect of
principal will have the effect of accelerating the amortization of the Senior
Certificates which receive these unscheduled payments of principal (other than
the Class PO Certificates) while, in the absence of Realized Losses, increasing
the interest in the Pool Principal Balance evidenced by the Subordinated
Certificates. Increasing the respective interest of the Subordinated
Certificates relative to that of the Senior Certificates is intended to preserve
the availability of the subordination provided by the Subordinated Certificates.
The "Senior Prepayment Percentage" for any Distribution Date occurring on
or after the _____ anniversary of the first Distribution Date will be as
follows: for any Distribution Date in the _____ year thereafter, the Senior
Percentage plus __% of the Subordinated Percentage for such Distribution Date;
for any Distribution Date in the ______ year thereafter, the Senior Percentage
plus __% of the Subordinated Percentage for such Distribution Date; for any
Distribution Date in the _____ year thereafter, the Senior Percentage plus __%
of the Subordinated Percentage for such Distribution Date; for any Distribution
Date in the ______ year thereafter, the Senior Percentage plus __% of the
Subordinated Percentage for such Distribution Date; and for any Distribution
Date thereafter, the Senior Percentage for such Distribution Date (unless on any
of the foregoing Distribution Dates the Senior Percentage exceeds the initial
Senior Percentage, in which case the Senior Prepayment Percentage for such
Distribution Date will once again equal 100%). Notwithstanding the foregoing, no
decrease in the Senior Prepayment Percentage will occur if (i) the outstanding
principal balance of all Loans delinquent __ days or more (averaged over the
preceding _________ period), as a percentage of the aggregate principal balance
of the Subordinated Certificates (averaged over the preceding _________ period),
is equal to or greater than __%, or (ii) cumulative Realized Losses with respect
to the Loans exceed (a) with respect to the Distribution Date on the _____
anniversary of the first Distribution Date, __% of the aggregate of the
principal balances of the Subordinated Certificates as of the Cut-off Date (the
"Original Subordinated Principal Balance"), (b) with respect to the Distribution
Date on the _____ anniversary of the first Distribution Date, __% of the
Original Subordinated Principal Balance, (c) with respect to the Distribution
Date on the _______ anniversary of the first Distribution Date, __% of the
Original Subordinated Principal Balance, (d) with respect to the Distribution
Date on the ______ anniversary of the first Distribution Date, __% of the
Original Subordinated Principal Balance, and (e) with respect to the
Distribution Date on the _____ anniversary of the first Distribution Date, __%
of the Original Subordinated Principal Balance. The "Subordinated Prepayment
Percentage" as of any Distribution Date will be calculated as the difference
between 100% and the Senior Prepayment Percentage for such date.
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<PAGE>
If on any Distribution Date the allocation to the class of Senior
Certificates then entitled to distributions of principal of full and partial
principal prepayments and other amounts in the percentage required above would
reduce the outstanding Class Certificate Balance of such class below zero, the
distribution to such class of Certificates of the Senior Prepayment Percentage
of such amounts for such Distribution Date will be limited to the percentage
necessary to reduce the related Class Certificate Balance to zero.
Subordinated Principal Distribution Amount. On each Distribution Date, to
the extent of Available Funds therefor, the Non-PO Formula Principal Amount, up
to the amount of the Subordinated Principal Distribution Amount for such
Distribution Date, will be distributed as principal of the Subordinated
Certificates. Except as provided in the next paragraph, each class of
Subordinated Certificates will be entitled to receive its pro rata share of the
Subordinated Principal Distribution Amount (based on its respective Class
Certificate Balance), in each case to the extent of the amount available from
Available Funds for distribution of principal. Distributions of principal of the
Subordinated Certificates will be made sequentially to the classes of
Subordinated Certificates in the order of their numerical class designations,
beginning with the Class ___ Certificates, until the respective Class
Certificate Balances thereof are reduced to zero. The "Subordinated Percentage"
for any Distribution Date will be calculated as the difference between 100% and
the Senior Percentage.
With respect to each class of Subordinated Certificates, if on any
Distribution Date the sum of the related Class Subordination Percentages of such
class and all classes of Subordinated Certificates which have higher numerical
class designations than such class (the "Applicable Credit Support Percentage")
is less than the Applicable Credit Support Percentage for such class on the date
of issuance of the Certificates (the "Original Applicable Credit Support
Percentage"), no distribution of partial principal prepayments and principal
prepayments in full will be made to any such classes (the "Restricted Classes")
and the amount of partial principal prepayments and principal prepayments in
full otherwise distributable to the Restricted Classes will be allocated among
the remaining classes of Subordinated Certificates, pro rata, based upon their
respective Class Certificate Balances, and distributed in the sequential order
described above.
The "Class Subordination Percentage" with respect to any Distribution Date
and each class of Subordinated Certificates, will equal the fraction (expressed
as a percentage) the numerator of which is the Class Certificate Balance of such
class of Subordinated Certificates immediately prior to such Distribution Date
and the denominator of which is the aggregate of the Class Certificate Balances
of all classes of Certificates immediately prior to such Distribution Date.
The approximate Original Applicable Credit Support Percentages for the
Subordinated Certificates on the date of issuance of the Certificates are
expected to be as follows:
Class .......................................... %
Class .......................................... %
Class .......................................... %
Class .......................................... %
Class .......................................... %
Class .......................................... %
The "Subordinated Principal Distribution Amount" for any Distribution Date
will equal (A) the sum of (i) the Subordinated Percentage of the applicable
Non-PO Percentage of all amounts described in clauses (a) through (d) of the
definition of Non-PO Formula Principal Amount for such Distribution Date, (ii)
with respect to each Loan that became a Liquidated Loan during the calendar
month preceding the month of such Distribution Date, the applicable Non-PO
Percentage of the Liquidation Proceeds allocable to principal
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<PAGE>
received with respect to such Loan, after application of such amounts pursuant
to clause (ii) of the definition of Senior Principal Distribution Amount, up to
the Subordinated Percentage of the applicable Non-PO Percentage of the Stated
Principal Balance of such Loan and (iii) the Subordinated Prepayment Percentage
of the applicable Non-PO Percentage of the amounts described in clause (f) of
the definition of Non-PO Formula Principal Amount for such Distribution Date
reduced by (B) the amount of any payments in respect of Class PO Deferred
Amounts on the related Distribution Date.
Residual Certificates. The Class A-R Certificates will remain outstanding
for so long as the Trust Fund shall exist, whether or not they are receiving
current distributions of principal or interest. In addition to distributions of
interest and principal as described above, on each Distribution Date, the
holders of the Class A-R Certificates will be entitled to receive any Available
Funds remaining after payment of interest and principal on the Senior
Certificates and Class PO Deferred Amounts on the Class PO Certificates and
interest and principal on the Subordinated Certificates, as described above. It
is not anticipated that there will be any significant amounts remaining for any
such distribution.
Class PO Principal Distribution Amount. On each Distribution Date,
distributions of principal of the Class PO Certificates will be made in an
amount (the "Class PO Principal Distribution Amount") equal to the lesser of (a)
the PO Formula Principal Amount for such Distribution Date or (b) the product of
(i) Available Funds remaining after distribution of interest on the Senior
Certificates and (ii) a fraction, the numerator of which is the PO Formula
Principal Amount and the denominator of which is the sum of the PO Formula
Principal Amount and the Senior Principal Distribution Amount.
If the Class PO Principal Distribution Amount on a Distribution Date is
calculated as provided in clause (b) above, principal distributions to holders
of the Senior Certificates (other than the Class PO Certificates) will be in an
amount equal to the product of (i) Available Funds remaining after distribution
of interest on the Senior Certificates and (ii) a fraction, the numerator of
which is the Senior Principal Distribution Amount and the denominator of which
is the sum of the Senior Principal Distribution Amount and the PO Formula
Principal Amount.
The "PO Formula Principal Amount" for any Distribution Date will equal the
sum of the applicable PO Percentage of (a) all monthly payments of principal due
on each Loan on the related Due Date, (b) the principal portion of the purchase
price of each Loan that was repurchased by a Seller or another person pursuant
to the Agreement as of such Distribution Date, (c) the Substitution Adjustment
Amount in connection with any Deleted Loan received with respect to such
Distribution Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable
to recoveries of principal of Loans that are not yet Liquidated Loans received
during the calendar month preceding the month of such Distribution Date, (e)
with respect to each Loan that became a Liquidated Loan during the calendar
month preceding the month of such Distribution Date, the amount of Liquidation
Proceeds allocable to principal received with respect to such Loan and (f) all
partial and full principal prepayments by borrowers received during the related
Prepayment Period; provided, however, that if a Bankruptcy Loss that is an
Excess Loss is sustained with respect to a Discount Loan that is not a
Liquidated Loan, the PO Formula Principal Amount will be reduced on the related
Distribution Date by the applicable PO Percentage of the principal portion of
such Bankruptcy Loss.
Allocation of Losses
On each Distribution Date, the applicable PO Percentage of any Realized
Loss, including any Excess Loss, on a Discount Loan will be allocated to the
Class PO Certificates until the Class Certificate Balance thereof is reduced to
zero. The amount of any such Realized Loss, other than an Excess Loss, allocated
on or prior to the Senior Credit Support Depletion Date will be treated as a
Class PO Deferred Amount. To the
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<PAGE>
extent funds are available on such Distribution Date or on any future
Distribution Date from amounts that would otherwise be allocable to the
Subordinated Principal Distribution Amount, Class PO Deferred Amounts will be
paid on the Class PO Certificates prior to distributions of principal on the
Subordinated Certificates. Any distribution of Available Funds in respect of
unpaid Class PO Deferred Amounts will not further reduce the Class Certificate
Balance of the Class PO Certificates. The Class PO Deferred Amounts will not
bear interest. The Class Certificate Balance of the class of Subordinated
Certificates then outstanding with the highest numerical class designation will
be reduced by the amount of any payments in respect of Class PO Deferred
Amounts. After the Senior Credit Support Depletion Date, no new Class PO
Deferred Amounts will be created.
On each Distribution Date, the applicable Non-PO Percentage of any
Realized Loss, other than any Excess Loss, will be allocated first to the
Subordinated Certificates, in the reverse order of their numerical class
designations (beginning with the class of Subordinated Certificates then
outstanding with the highest numerical class designation), in each case until
the class Certificate Balance of the respective class of Certificates has been
reduced to zero, and then to the Senior Certificates (other than the Notional
Amount Certificates and the Class PO Certificates) pro rata, based upon their
respective Class Certificate Balances.
On each Distribution Date, the applicable Non-PO Percentage of Excess
Losses will be allocated pro rata among the classes of Senior Certificates
(other than the Notional Amount Certificates and the Class PO Certificates) and
the Subordinated Certificates based upon their respective Class Certificate
Balances.
Because principal distributions are paid to certain classes of
Certificates (other than the Class PO Certificates) before other classes of
Certificates, holders of such Certificates that are entitled to receive
principal later bear a greater risk of being allocated Realized Losses on the
Loans than holders of classes that are entitled to receive principal earlier.
Realized Losses allocated to a class of Certificates comprised of multiple
payment Components will be allocated pro rata among the Components of such class
of Certificates based on their respective Component balances.
In general, a "Realized Loss" means, with respect to a Liquidated Loan,
the amount by which the remaining unpaid principal balance of the Loan exceeds
the amount of Liquidation Proceeds applied to the principal balance of the
related Loan. "Excess Losses" are (i) Special Hazard Losses in excess of the
Special Hazard Loss Coverage Amount, (ii) Bankruptcy Losses in excess of the
Bankruptcy Loss Coverage Amount and (iii) Fraud Losses in excess of the Fraud
Loss Coverage Amount. "Bankruptcy Losses" are losses that are incurred as a
result of Debt Service Reductions and Deficient Valuations. "Special Hazard
Losses" are Realized Losses in respect of Special Hazard Loans. "Fraud Losses"
are losses sustained on a Liquidated Loan by reason of a default arising from
fraud, dishonesty or misrepresentation. See "Credit Enhancement--Subordination
of Certain Classes."
A "Liquidated Loan" is a defaulted Loan as to which the Servicer has
determined that all recoverable liquidation and insurance proceeds have been
received. A "Special Hazard Loan" is a Liquidated Loan as to which the ability
to recover the full amount due thereunder was substantially impaired by a hazard
not insured against under a standard hazard insurance policy of the type
described in the Prospectus under "Credit Enhancement--Insurance Policies,
Surety Bonds & Guaranties." See "Credit Enhancement--Subordination of Certain
Classes" herein.
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<PAGE>
Structuring Assumptions
Unless otherwise specified, the information in the tables in this
Prospectus Supplement has been prepared on the basis of the following assumed
characteristics of the Loans and the following additional assumptions
(collectively, the "Structuring Assumptions"): (i) the Mortgage Pool consists of
____________ Loans with the following characteristics:
<TABLE>
<CAPTION>
Original Term to Remaining Term to
Principal Balance Mortgage Rate Net Mortgage Rate Maturity (in months) Maturity (in months) Loan Age
- -------------------- ---------------- -------------------- ---------------------- ---------------------- ------------
<S> <C> <C>
$ % %
$ % %
</TABLE>
(ii) the Loans prepay at the specified constant percentages of SPA, (iii) no
defaults in the payment by mortgagors of principal of and interest on the Loans
are experienced, (iv) scheduled payments on the Loans are received on the first
day of each month commencing in the calendar month following the Closing Date
and are computed prior to giving effect to prepayments received on the last day
of the prior month, (v) prepayments are allocated as described herein without
giving effect to loss and delinquency tests, (vi) there are no Net Interest
Shortfalls and prepayments represent prepayments in full of individual Loans and
are received on the last day of each month, commencing in the calendar month of
the Closing Date, (vii) the scheduled monthly payment for each Loan has been
calculated such that each Loan will amortize in amounts sufficient to repay the
current balance of such Loan by its respective remaining term to maturity,
(viii) the initial Class Certificate Balance or Notional Amount, as applicable,
of each class of Certificates is as set forth on the cover page hereof and under
"Summary of Terms--Certificates other than the Offered Certificates", (ix)
interest accrues on each interest bearing class of Certificates at the
applicable interest rate set forth or described on the cover hereof and as
described under "Description of the Certificates--Interest," (x) distributions
in respect of the Certificates are received in cash on the day of each month
commencing in the calendar month following the Closing Date, (xi) the Closing
Date of the sale of the Offered Certificates is the date set forth under
"Summary of Terms--Closing Date," (xii) a Seller is not required to repurchase
or substitute for any Loan, (xiii) the Servicer does not exercise the option to
repurchase the Loans described herein under "--Optional Purchase of Defaulted
Loans" and "--Optional Termination" and (xiv) no class of Certificates becomes a
Restricted Class. While it is assumed that each of the Loans prepays at the
specified constant percentages of SPA, this is not likely to be the case.
Moreover, discrepancies may exist between the characteristics of the actual
Loans which will be delivered to the Trustee and characteristics of the Loans
used in preparing the tables herein.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the Standard Prepayment Assumption ("SPA"), which represents an assumed rate of
prepayment each month of the then outstanding principal balance of a pool of new
mortgage loans. SPA does not purport to be either a historical description of
the prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Loans. 100% SPA assumes prepayment rates of 0.2% per annum of the then unpaid
principal balance of such pool of mortgage loans in the first month of the life
of such mortgage loans and an additional 0.2% per annum in each month thereafter
(for example, 0.4% per annum in the second month) until the 30th month.
Beginning in the 30th month and in each month thereafter during the life of such
mortgage loans, 100% SPA assumes a constant prepayment rate of 6% per annum.
Multiples may be calculated from this prepayment rate sequence. For example,
____% SPA assumes prepayment rates will be ____% per annum in month one, ____%
per annum in month two, and increasing by ____% in each succeeding month until
reaching a rate of ____% per annum in month 30 and remaining constant at ____%
per annum
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<PAGE>
thereafter. 0% SPA assumes no prepayments. There is no assurance that
prepayments will occur at any SPA rate or at any other constant rate.
Optional Purchase of Defaulted Loans
The Servicer may, at its option, purchase from the Trust Fund any Loan
which is delinquent in payment by 91 days or more. Any such purchase shall be at
a price equal to 100% of the Stated Principal Balance of such Loan plus accrued
interest thereon at the applicable Mortgage Rate from the date through which
interest was last paid by the related mortgagor or advanced (and not reimbursed)
to the first day of the month in which such amount is to be distributed.
Optional Termination
The Servicer will have the right to repurchase all remaining Loans and REO
Properties in the Mortgage Pool and thereby effect early retirement of the
Certificates, subject to the Pool Principal Balance of such Loans and REO
Properties at the time of repurchase being less than or equal to 5% of the
Cut-off Date Pool Principal Balance. In the event the Servicer exercises such
option, the purchase price distributed with respect to each Certificate will be
100% of its then outstanding principal balance plus any Class PO Deferred
Amounts in the case of the Class PO Certificates and, in the case of an interest
bearing Certificate, any unpaid accrued interest thereon at the applicable
Pass-Through Rate (in each case subject to reduction as provided in the
Agreement if the purchase price is based in part on the appraised value of any
REO Properties and such appraised value is less than the Stated Principal
Balance of the related Loans). Distributions on the Certificates in respect of
any such optional termination will first be paid to the Senior Certificates and
then to the Subordinated Certificates. The proceeds from any such distribution
may not be sufficient to distribute the full amount to which each class of
Certificates is entitled if the purchase price is based in part on the appraised
value of any REO Property and such appraised value is less than the Stated
Principal Balance of the related Loan.
The Trustee
______________________ will be the Trustee under the Agreement. The
Depositor and the Servicer may maintain other banking relationships in the
ordinary course of business with ___________________. Offered Certificates may
be surrendered at the Corporate Trust Office of the Trustee located at
_______________________________, Attention: _____________________ or at such
other addresses as the Trustee may designate from time to time.
Restrictions on Transfer of the Class A-R Certificates
The Class A-R Certificates will be subject to the restrictions on transfer
described in the Prospectus under "Federal Income Tax Consequences--Taxation of
Holders of Residual Interest Securities--Restrictions on Ownership and Transfer
of Residual Interest Securities" and "--Tax Treatment of Foreign Investors." The
Agreement provides that the Class A-R Certificates (in addition to certain other
classes of Certificates) may not be acquired by an ERISA Plan. See "ERISA
Considerations." Each Class A-R Certificate will contain a legend describing the
foregoing restrictions.
S-42
<PAGE>
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
General
The effective yield to the holders of the interest bearing Certificates
will be lower than the yield otherwise produced by the applicable rate at which
interest is passed through to such holders and the purchase price of such
Certificates because monthly distributions will not be payable to such holders
until the ____ day (or, if such day is not a business day, the following
business day) of the month following the month in which interest accrues on the
Loans (without any additional distribution of interest or earnings thereon in
respect of such delay).
Delinquencies on the Loans which are not advanced by or on behalf of the
Servicer (because amounts, if advanced, would be nonrecoverable), will adversely
affect the yield on the Certificates. Because of the priority of distributions,
shortfalls resulting from delinquencies not so advanced will be borne first by
the Subordinated Certificates, in the reverse order of their numerical class
designations, and then by the Senior Certificates. If, as a result of such
shortfalls, the aggregate of the Class Certificate Balances of all classes of
Certificates exceeds the Pool Principal Balance, the Class Certificate Balance
of the class of Subordinated Certificates then outstanding with the highest
numerical class designation will be reduced by the amount of such excess.
Net Interest Shortfalls will adversely affect the yields on the Offered
Certificates. In addition, although all losses initially will be borne by the
Subordinated Certificates, in the reverse order of their numerical class
designations (either directly or through distributions in respect of Class PO
Deferred Amounts on the Class PO Certificates), Excess Losses will be borne by
all classes of Certificates (other than the Notional Amount Certificates) on a
pro rata basis. Moreover, since the Subordinated Principal Distribution Amount
for each Distribution Date will be reduced by the amount of any distributions on
such Distribution Date in respect of Class PO Deferred Amounts, the amount
distributable as principal on each such Distribution Date to each class of
Subordinated Certificates then entitled to a distribution of principal will be
less than it otherwise would be in the absence of such Class PO Deferred
Amounts. As a result, the yields on the Offered Certificates will depend on the
rate and timing of Realized Losses, including Excess Losses. Excess Losses could
occur at a time when one or more classes of Subordinated Certificates are still
outstanding and otherwise available to absorb other types of Realized Losses.
Prepayment Considerations and Risks
The rate of principal payments on the Offered Certificates, the aggregate
amount of distributions on the Offered Certificates and the yield to maturity of
the Offered Certificates will be related to the rate and timing of payments of
principal on the Loans. The rate of principal payments on the Loans will in turn
be affected by the amortization schedules of the Loans and by the rate of
principal prepayments (including for this purpose prepayments resulting from
refinancing, liquidations of the Loans due to defaults, casualties,
condemnations and repurchases by a Seller or the Servicer). The Loans may be
prepaid by the mortgagors at any time without a prepayment penalty. The Loans
are subject to the due-on-sale provisions included therein. See "The Mortgage
Pool."
Prepayments, liquidations and purchases of the Loans (including any
optional purchase by the Servicer of a defaulted Loan and any optional
repurchase of the remaining Loans in connection with the termination of the
Trust Fund, in each case as described under "Description of the
Certificates--Optional Purchase of Defaulted Loans" and "--Optional
Termination") will result in distributions on the Offered Certificates of
principal amounts which would otherwise be distributed over the remaining terms
of the Loans. Since the
S-43
<PAGE>
rate of payment of principal of the Loans will depend on future events and a
variety of factors, no assurance can be given as to such rate or the rate of
principal prepayments. The extent to which the yield to maturity of a class of
Offered Certificates may vary from the anticipated yield will depend upon the
degree to which such Offered Certificate is purchased at a discount or premium,
and the degree to which the timing of payments thereon is sensitive to
prepayments, liquidations and purchases of the Loans. Further, an investor
should consider the risk that, in the case of the Principal Only Certificates
and any other Offered Certificate purchased at a discount, a slower than
anticipated rate of principal payments (including prepayments) on the Loans
could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of the Interest Only Certificates and any
other Offered Certificate purchased at a premium, a faster than anticipated rate
of principal payments could result in an actual yield to such investor that is
lower than the anticipated yield. Investors in the Interest Only Certificates
should carefully consider the risk that a rapid rate of principal payments on
the Loans could result in the failure of such investors to recover their initial
investments.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the Mortgage Rates on the Loans,
the Loans could be subject to higher prepayment rates than if prevailing
interest rates were to remain at or above the Mortgage Rates on the Loans.
Conversely, if prevailing interest rates were to rise significantly, the rate of
prepayments on the Loans would generally be expected to decrease. No assurances
can be given as to the rate of prepayments on the Loans in stable or changing
interest rate environments.
As described herein under "Description of the Certificates--Principal,"
the Senior Prepayment Percentage of the applicable Non-PO Percentage of all
principal prepayments will be initially distributed to the classes of Senior
Certificates (other than the Class PO Certificates) then entitled to receive
principal prepayment distributions. This may result in all (or a
disproportionate percentage) of such principal prepayments being distributed to
holders of such classes of Senior Certificates and none (or less than their pro
rata share) of such principal prepayments being distributed to holders of the
Subordinated Certificates during the periods of time described in the definition
of Senior Prepayment Percentage.
The timing of changes in the rate of prepayments on the Loans may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the Loans, the greater the
effect on an investor's yield to maturity. The effect on an investor's yield as
a result of principal payments occurring at a rate higher (or lower) than the
rate anticipated by the investor during the period immediately following the
issuance of the Offered Certificates may not be offset by a subsequent like
decrease (or increase) in the rate of principal payments.
The tables below indicate the sensitivity of the pre-tax corporate bond
equivalent yields to maturity of certain classes of Certificates to various
constant percentages of SPA. The yields set forth in the tables were calculated
by determining the monthly discount rates that, when applied to the assumed
streams of cash flows to be paid on the applicable classes of Certificates,
would cause the discounted present value of such assumed streams of cash flows
to equal the assumed aggregate purchase prices of such classes and converting
such monthly rates to corporate bond equivalent rates. Such calculations do not
take into account variations that may occur in the interest rates at which
investors may be able to reinvest funds received by them as distributions on
such Certificates and consequently do not purport to reflect the return on any
investment in any such class of Certificate when such reinvestment rates are
considered.
S-44
<PAGE>
Sensitivity of the Interest Only Certificates
As indicated in the table below, the yield to investors in the Class X
Certificates will be sensitive to the rate of principal payments (including
prepayments) of the Non-Discount Loans (particularly those with high Net
Mortgage Rates), which generally can be prepaid at any time. On the basis of the
assumptions described below, the yield to maturity on the Class X Certificates
would be approximately 0% if prepayments were to occur at a constant rate of
approximately % SPA. If the actual prepayment rate of the Non-Discount Loans
were to exceed the foregoing level for as little as one month while equaling
such level for the remaining months, the investors in the Class X Certificates
would not fully recoup their initial investments.
As described above under "Description of the Certificates--General," the
Pass-Through Rate of the Class X Certificates in effect from time to time is
calculated by reference to the Net Mortgage Rates of the Non-Discount Loans. The
Non-Discount Loans will have higher Net Mortgage Rates (and higher Mortgage
Rates) than the other Loans. In general, mortgage loans with higher mortgage
rates tend to prepay at higher rates than mortgage loans with relatively lower
mortgage rates in response to a given change in market interest rates. As a
result, the Non-Discount Loans may prepay at higher rates, thereby reducing the
Pass-Through Rate and Notional Amount of the Class X Certificates.
The information set forth in the following table has been prepared on the
basis of the Structuring Assumptions and on the assumption that the purchase
price of the Class X Certificates (expressed as a percentage of initial Notional
Amount) is as follows:
Class Price*
------ ------
Class X............... %
- ----------
* The price does not include accrued interest. Accrued interest has been
added to such price in calculating the yields set forth in the table
below.
Sensitivity of the Interest Only Certificates to Prepayments
(Pre-Tax Yields to Maturity)
SPA Prepayment /Assumption
--------------------------
<TABLE>
<CAPTION>
Class 0% % % % % %
- ---------------------- ----------------- ---------------- ---------------- ---------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Class X % % % % % %
</TABLE>
It is unlikely that the Non-Discount Loans will have the precise
characteristics described herein or that the Non-Discount Loans will all prepay
at the same rate until maturity or that all of the Non-Discount Loans will
prepay at the same rate or time. As a result of these factors, the pre-tax
yields on the Class X Certificates are likely to differ from those shown in the
table above, even if all of the Loans prepay at the indicated percentages of
SPA. No representation is made as to the actual rate of principal payments on
the Loans for any period or over the lives of the Class X Certificates or as to
the yield on the Class X Certificates. Investors must make their own decisions
as to the appropriate prepayment assumptions to be used in deciding whether to
purchase the Class X Certificates.
S-45
<PAGE>
Sensitivity of the Principal Only Certificates
The Class PO Certificates will be "principal only" certificates and will
not bear interest. As indicated in the table below, a lower than anticipated
rate of principal payments (including prepayments) on the Discount Loans will
have a negative effect on the yield to investors in the Principal Only
Certificates.
As described above under "Description of the Certificates--Principal," the
Class PO Principal Distribution Amount is calculated by reference to the
principal payments (including prepayments) on the Discount Loans. The Discount
Loans will have lower Net Mortgage Rates (and lower Mortgage Rates) than the
other Loans. In general, mortgage loans with higher mortgage rates tend to
prepay at higher rates than mortgage loans with relatively lower mortgage rates
in response to a given change in market interest rates. As a result, the
Discount Loans may prepay at lower rates, thereby reducing the rate of payment
of principal and the resulting yield of the Class PO Certificates.
The information set forth in the following table has been prepared on the
basis of the Structuring Assumptions and on the assumption that the aggregate
purchase price of the Principal Only Certificates (expressed as a percentage of
initial Class Certificate Balance) is as follows:
Class Price*
------ ------
Class PO............... %
Sensitivity of the Principal Only Certificates to Prepayments
(Pre-Tax Yields to Maturity)
SPA Prepayment /Assumption
--------------------------
<TABLE>
<CAPTION>
Class 0% % % % % %
- ---------------------- ----------------- ---------------- ---------------- ---------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Class PO % % % % % %
Class PO......................... % % % % % %
</TABLE>
It is unlikely that the Discount Loans will have the precise
characteristics described herein or that the Discount Loans will all prepay at
the same rate until maturity or that all of such Discount Loans will prepay at
the same rate or time. As a result of these factors, the pre-tax yield on the
Principal Only Certificates is likely to differ from those shown in the table
above, even if all of the Loans prepay at the indicated percentages of SPA. No
representation is made as to the actual rate of principal payments on the Loans
for any period or over the life of the Principal Only Certificates or as to the
yield on the Principal Only Certificates. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase the Principal Only Certificates.
Additional Information
The Depositor intends to file certain additional yield tables and other
computational materials with respect to one or more classes of Underwritten
Certificates with the Commission in a report on Form 8-K to be dated , 19 .
Such tables and materials were prepared by each Underwriter at the request
of certain prospective investors, based on assumptions provided by, and
satisfying the special requirements of, such
S-46
<PAGE>
prospective investors. Such tables and assumptions may be based on assumptions
that differ from the Structuring Assumptions. Accordingly, such tables and other
materials may not be relevant to or appropriate for investors other than those
specifically requesting them.
Weighted Average Lives of the Offered Certificates
The weighted average life of an Offered Certificate is determined by (a)
multiplying the amount of the net reduction, if any, of the Class Certificate
Balance of such Certificate on each Distribution Date by the number of years
from the date of issuance to such Distribution Date, (b) summing the results and
(c) dividing the sum by the aggregate amount of the net reductions in Class
Certificate Balance of such Certificate referred to in clause (a).
For a discussion of the factors which may influence the rate of payments
(including prepayments) of the Loans, see "--Prepayment Considerations and
Risks" herein and "Yield and Prepayment Considerations" in the Prospectus.
In general, the weighted average lives of the Offered Certificates will be
shortened if the level of prepayments of principal of the Loans increases.
However, the weighted average lives of the Offered Certificates will depend upon
a variety of other factors, including the timing of changes in such rate of
principal payments and the priority sequence of distributions of principal of
the classes of Certificates and the distribution of principal of the Planned
Principal Classes and the Targeted Principal Classes in accordance with the
Principal Balance Schedules herein. In particular, if the amount available for
distribution as principal of the Senior Certificates (other than the Class PO
Certificates) on any Distribution Date exceeds the amount required to reduce the
principal balances of the Planned Principal Classes and the Targeted Principal
Classes then entitled to receive a distribution of principal to their respective
scheduled balances as set forth in the Principal Balance Schedules, such excess
principal will be distributed on the remaining classes of Senior Certificates
(other than the Class PO Certificates) on such Distribution Date. Conversely, if
the amount available for distribution of principal of the Senior Certificates
(other than the Class PO Certificates) on any Distribution Date is less than the
amount so required to reduce the Planned Principal Classes and the Targeted
Principal Classes then entitled to receive a distribution of principal to their
respective scheduled balances, no principal will be distributed on such other
classes of Senior Certificates on such Distribution Date. Accordingly, the rate
of principal payments on the Loans is expected to have a greater effect on the
weighted average life of the Support Classes and under certain prepayment
scenarios, the weighted average lives of the Targeted Principal Classes, than on
the weighted average lives of the Planned Principal Classes.
The interaction of the foregoing factors may have different effects on
various classes of Offered Certificates and the effects on any class may vary at
different times during the life of such class. Accordingly, no assurance can be
given as to the weighted average life of any class of Offered Certificates.
Further, to the extent the prices of the Offered Certificates represent
discounts or premiums to their respective original Class Certificate Balances,
variability in the weighted average lives of such classes of Offered
Certificates will result in variability in the related yields to maturity. For
an example of how the weighted average lives of the classes of Offered
Certificates may be affected at various constant percentages of SPA, see the
Decrement Tables below.
Decrement Tables
The following tables indicate the percentages of the initial Class
Certificate Balances of the classes of Offered Certificates (other than the
Notional Amount Certificates) that would be outstanding after each of the dates
shown at various constant percentages of SPA and the corresponding weighted
average lives of such classes. The tables have been prepared on the basis of the
Structuring Assumptions. It is not likely that (i)
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<PAGE>
the Loans will have the precise characteristics described herein or (ii) all of
the Loans will prepay at a constant percentage of SPA. Moreover, the diverse
remaining terms to maturity of the Loans could produce slower or faster
principal distributions than indicated in the tables, which have been prepared
using the specified constant percentages of SPA, even if the remaining term to
maturity of the Loans is consistent with the remaining terms to maturity of the
Loans specified in the Structuring Assumptions.
S-48
<PAGE>
Percent of Initial Class Certificate
Balances Outstanding*
<TABLE>
<CAPTION>
Class A-
--------
Distribution Date 0% % % % % % %
- ------------------------------------- -------------- -------------- -------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Initial.............................. % % % % % %
19..............................
19..............................
19..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
-- -- -- -- -- --
Weighted Average
Life (in years)**..........
</TABLE>
S-49
<PAGE>
<TABLE>
<CAPTION>
Class
-----
Distribution Date 0% % % % % % %
- ------------------------------------- -------------- -------------- -------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Initial.............................. % % % % % %
19..............................
19..............................
19..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
-- -- -- -- -- --
Weighted Average
Life (in years)**..........
</TABLE>
- ----------
* Rounded to the nearest whole percentage.
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
Last Scheduled Distribution Date
The "Last Scheduled Distribution Date" for each class of Offered
Certificates is the Distribution Date in , 20 , which is the
Distribution Date in the month following the latest scheduled maturity date
for any of the Loans. Since the rate of distributions in reduction of the Class
Certificate Balance or Notional
S-50
<PAGE>
Amount of each class of Offered Certificates will depend on the rate of payment
(including prepayments) of the Loans, the Class Certificate Balance or Notional
Amount of any such class could be reduced to zero significantly earlier or later
than the Last Scheduled Distribution Date. The rate of payments on the Loans
will depend on their particular characteristics, as well as on prevailing
interest rates from time to time and other economic factors, and no assurance
can be given as to the actual payment experience of the Loans. See "Yield,
Prepayment and Maturity Considerations--Prepayment Considerations and Risks" and
"--Weighted Average Lives of the Offered Certificates" herein and "Yield and
Prepayment Considerations" in the Prospectus.
The Subordinated Certificates
The weighted average life of, and the yield to maturity on, the
Subordinated Certificates, in increasing order of their numerical class
designation, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the Loans. If the
actual rate and severity of losses on the Loans is higher than those assumed by
a holder of a Subordinated Certificate, the actual yield to maturity of such
Certificate may be lower than the yield expected by such holder based on such
assumption. The timing of losses on Loans will also affect an investor's actual
yield to maturity, even if the rate of defaults and severity of losses over the
life of the Mortgage Pool are consistent with an investor's expectations. In
general, the earlier a loss occurs, the greater the effect on an investor's
yield to maturity. Realized Losses on the Loans will reduce the Class
Certificate Balances of the applicable class of Subordinated Certificates to the
extent of any losses allocated thereto (as described under "Description of the
Certificates--Allocation of Losses"), without the receipt of cash attributable
to such reduction. In addition, shortfalls in cash available for distributions
on the Subordinated Certificates will result in a reduction in the Class
Certificate Balance of the class of Subordinated Certificates then outstanding
with the highest numerical class designation if and to the extent that the
aggregate of the Class Certificate Balances of all classes of Certificates,
following all distributions and the allocation of Realized Losses on a
Distribution Date, exceeds the Pool Principal Balance as of the Due Date
occurring in the month of such Distribution Date. As a result of such
reductions, less interest will accrue on such class of Subordinated Certificates
than otherwise would be the case. The yield to maturity of the Subordinated
Certificates will also be affected by the disproportionate allocation of
principal prepayments to the Senior Certificates, Net Interest Shortfalls, other
cash shortfalls in Available Funds and distribution of funds to Class PO
Certificateholders otherwise available for distribution on the Subordinated
Certificates to the extent of reimbursement for Class PO Deferred Amounts. See
"Description of the Certificates--Allocation of Losses."
If on any Distribution Date, the Applicable Credit Support Percentage for
any class of Subordinated Certificates is less than its Original Applicable
Credit Support Percentage, all partial principal prepayments and principal
prepayments in full available for distribution on the Subordinated Certificates
will be allocated solely to such class and all other classes of Subordinated
Certificates with lower numerical class designations, thereby accelerating the
amortization thereof relative to that of the Restricted Classes and reducing the
weighted average lives of such classes of Subordinated Certificates receiving
such distributions. Accelerating the amortization of the classes of Subordinated
Certificates with lower numerical class designations relative to the other
classes of Subordinated Certificates is intended to preserve the availability of
the subordination provided by such other classes.
S-51
<PAGE>
CREDIT ENHANCEMENT
Subordination of Certain Classes
The rights of the holders of the Subordinated Certificates to receive
distributions with respect to the Loans will be subordinated to such rights of
the holders of the Senior Certificates and the rights of the holders of each
class of Subordinated Certificates (other than the Class B-1 Certificates) to
receive such distributions will be further subordinated to such rights of the
class or classes of Subordinated Certificates with lower numerical class
designations, in each case only to the extent described herein. The
subordination of the Subordinated Certificates to the Senior Certificates and
the subordination of the classes of Subordinated Certificates with higher
numerical class designations to those with lower numerical class designations is
intended to increase the likelihood of receipt, respectively, by the Senior
Certificateholders and the holders of Subordinated Certificates with lower
numerical class designations of the maximum amount to which they are entitled on
any Distribution Date and to provide such holders protection against Realized
Losses, other than Excess Losses. In addition, the Subordinated Certificates
will provide limited protection against Special Hazard Losses, Bankruptcy Losses
and Fraud Losses up to the Special Hazard Loss Coverage Amount, Bankruptcy Loss
Coverage Amount and Fraud Loss Coverage Amount, respectively, as described
below. The applicable Non-PO Percentage of Realized Losses, other than Excess
Losses, will be allocated to the class of Subordinated Certificates then
outstanding with the highest numerical class designation. In addition, the Class
Certificate Balance of such class of Subordinated Certificates will be reduced
by the amount of distributions on the Class PO Certificates in reimbursement for
Class PO Deferred Amounts.
The Subordinated Certificates will provide limited protection to the
classes of Certificates of higher relative priority against (i) Special Hazard
Losses in an initial amount expected to be up to approximately $______ (the
"Special Hazard Loss Coverage Amount"), (ii) Bankruptcy Losses in an initial
amount expected to be up to approximately $______ (the "Bankruptcy Loss Coverage
Amount") and (iii) Fraud Losses in an initial amount expected to be up to
approximately $______ (the "Fraud Loss Coverage Amount").
The Special Hazard Loss Coverage Amount will be reduced, from time to
time, to be an amount equal on any Distribution Date to the lesser of (a) the
greater of (i) __% of the aggregate of the principal balances of the Loans or
(ii) _____ the principal balance of the largest Loan, or (b) the Special Hazard
Loss Coverage Amount as of the Closing Date less the amount, if any, of losses
attributable to Special Hazard Loans incurred since the Closing Date. All
principal balances for the purpose of this definition will be calculated as of
the first day of the month preceding such Distribution Date after giving effect
to scheduled installments of principal and interest on the Loans then due,
whether or not paid.
The Fraud Loss Coverage Amount will be reduced, from time to time, by the
amount of Fraud Losses allocated to the Certificates. In addition, on each
anniversary of the Cut-off Date, the Fraud Loss Coverage Amount will be reduced
as follows: (a) on the _____, ______, _____ and ______ anniversaries of the
Cut-off Date, to an amount equal to the lesser of (i) __% of the then current
Pool Principal Balance or (ii) the excess of the Fraud Loss Coverage Amount as
of the preceding anniversary of the Cut-off Date over the cumulative amount of
Fraud Losses allocated to the Certificates since such preceding anniversary and
(b) on the _____ anniversary of the Cut-off Date, to zero.
The Bankruptcy Loss Coverage Amount will be reduced, from time to time, by
the amount of Bankruptcy Losses allocated to the Certificates.
S-52
<PAGE>
The amount of coverage provided by the Subordinated Certificates for
Special Hazard Losses, Bankruptcy Losses and Fraud Losses may be canceled or
reduced from time to time for each of the risks covered, provided that the then
current ratings of the Certificates assigned by the Rating Agencies are not
adversely affected thereby. In addition, a reserve fund or other form of credit
enhancement may be substituted for the protection provided by the Subordinated
Certificates for Special Hazard Losses, Bankruptcy Losses and Fraud Losses.
As used herein, a "Deficient Valuation" is a bankruptcy proceeding whereby
the bankruptcy court may establish the value of the Mortgaged Property at an
amount less than the then outstanding principal balance of the Loan secured by
such Mortgaged Property or may reduce the outstanding principal balance of a
Loan. In the case of a reduction in the value of the related Mortgaged Property,
the amount of the secured debt could be reduced to such value, and the holder of
such Loan thus would become an unsecured creditor to the extent the outstanding
principal balance of such Loan exceeds the value so assigned to the Mortgaged
Property by the bankruptcy court. In addition, certain other modifications of
the terms of a Loan can result from a bankruptcy proceeding, including the
reduction (a "Debt Service Reduction") of the amount of the monthly payment on
the related Loan. Notwithstanding the foregoing, no such occurrence shall be
considered a Debt Service Reduction or Deficient Valuation so long as the
Servicer is pursuing any other remedies that may be available with respect to
the related Loan and (i) such Loan is not in default with respect to payment due
thereunder or (ii) scheduled monthly payments of principal and interest are
being advanced by the Servicer without giving effect to any Debt Service
Reduction or Deficient Valuation.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Certificates
against the purchase price of the Loans.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, an election will be made to treat the
Trust Fund as a REMIC. Assuming such an election is timely made and the terms of
the Pooling and Servicing Agreement are complied with, Stradley, Ronon, Stevens
& Young, LLP, special tax counsel to the Depositor ("Tax Counsel") is of the
opinion that the Trust Fund will qualify as a REMIC within the meaning of the
Code. The Regular Certificates will constitute the "regular interests" in the
REMIC. The Residual Certificates will constitute the sole class of "residual
interest" in the REMIC. See "Federal Income Tax Consequences" in the Prospectus.
The Regular Certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on the Regular
Certificates must be reported under an accrual method of accounting.
In the opinion of Tax Counsel, the Principal Only Certificates will be
treated for federal income tax purposes as having been issued with an amount of
Original Issue Discount ("OID") equal to the difference between their principal
balance and their issue price. Although the tax treatment is not entirely
certain, Notional Amount Certificates will be treated as having been issued with
OID for federal income tax purposes equal to the excess of all expected payments
of interest on such Certificates over their issue price. The remaining classes
of Regular Certificates, depending on their respective issue prices (as
described in the Prospectus under "Federal Income Tax Consequences"), may be
treated as having been issued with OID for
S-53
<PAGE>
federal income tax purposes. For purposes of determining the amount and rate of
accrual of OID and market discount, the Trust Fund intends to assume that there
will be prepayments on the Loans at a rate equal to ____% SPA (the "Prepayment
Assumption"). No representation is made as to whether the Loans will prepay at
the foregoing rate or any other rate. See "Yield, Prepayment and Maturity
Considerations" herein and "Federal Income Tax Consequences" in the Prospectus.
Computing accruals of OID in the manner described in the Prospectus may
(depending on the actual rate of prepayments during the accrual period) result
in the accrual of negative amounts of OID on the Certificates issued with OID in
an accrual period. Holders will be entitled to offset negative accruals of OID
only against future OID accrual on such Certificates.
If the holders of any Regular Certificates are treated as holding such
Certificates at a premium, such holders should consult their tax advisors
regarding the election to amortize bond premium and the method to be employed.
As is described more fully under "Federal Income Tax Consequences" in the
Prospectus, the Offered Certificates will represent qualifying assets under
Sections 856(c)(5)(A) and 7701(a)(19)(C) of the Code, and net interest income
attributable to the Offered Certificates will be "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code, to the extent the assets of the Trust Fund are assets
described in such sections. The Regular Certificates will represent qualifying
assets under Section 860G(a)(3) if acquired by a REMIC within the prescribed
time periods of the Code.
The holders of the Residual Certificates must include the taxable income
of the REMIC in their federal taxable income. The resulting tax liability of the
holders may exceed cash distributions to such holders during certain periods.
All or a portion of the taxable income from a Residual Certificate recognized by
a holder may be treated as "excess inclusion" income, which with limited
exceptions, is subject to U.S federal income tax.
Prospective purchasers of a Residual Certificate should consider carefully
the tax consequences of an investment in Residual Certificates discussed in the
Prospectus and should consult their own tax advisors with respect to those
consequences. See "Federal Income Tax Consequences--Taxation of Holders of
Residual Interest Securities" in the Prospectus. Specifically, prospective
holders of Residual Certificates should consult their tax advisors regarding
whether, at the time of acquisition, a Residual Certificate will be treated as a
"noneconomic" residual interest, a "non-significant value" residual interest and
a "tax avoidance potential" residual interest. See "Federal Income Tax
Consequences--Taxation of Holders of Residual Interest Securities--Restrictions
on Ownership and Transfer of Residual Interest Securities," "--Mark to Market
Rules," "--Excess Inclusions" and "--Tax Treatment of Foreign Investors" in the
Prospectus. Additionally, for information regarding prohibited transactions and
treatment of realized losses, see "Federal Income Tax Consequences--Taxation of
the REMIC--Prohibited Transactions and Contributions Tax" and "--Taxation of
Holders of Residual Interest Securities--Limitation on Losses" in the
Prospectus.
ERISA CONSIDERATIONS
Any Plan fiduciary who proposes to cause a Plan (as defined below) to
acquire any of the Offered Certificates should consult with its counsel with
respect to the potential consequences under the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and/or the Code, of the Plan's
acquisition and ownership of such Certificates. See "ERISA Considerations" in
the Prospectus. Section 406 of ERISA prohibits "parties in interest" with
respect to an employee benefit plan subject to ERISA and/or the excise tax
provisions set forth under Section 4975 of the Code (a "Plan") from engaging in
certain transactions involving such Plan and its assets unless a statutory or
administrative exemption applies to the transaction.
S-54
<PAGE>
Section 4975 of the Code imposes certain excise taxes on prohibited transactions
involving Plans and other arrangements (including, but not limited to,
individual retirement accounts) described under that Section; ERISA authorizes
the imposition of civil penalties for prohibited transactions involving Plans
not subject to the requirements of Section 4975 of the Code.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Offered Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan that is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary who decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investment to the rate of
principal payments (including prepayments) on the Loans.
The United States Department of Labor has granted an individual
administrative exemption to (Prohibited Transaction Exemption _______, Exemption
Application No. D-_____, Fed. Reg. ____ (____) (_____) (the "Underwriter
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 Underwriter
Exemption. The Underwriter Exemption applies to mortgage loans such as the Loans
in the Trust Fund.
For a general description of the Underwriter Exemption and the conditions
that must be satisfied for the Underwriter Exemption to apply, see "ERISA
Considerations" in the Prospectus.
It is expected that the Underwriter Exemption will apply to the
acquisition and holding by Plans of the Senior Certificates (other than the
Class _____, Class PO, Class X and Class A-R Certificates) and that all
conditions of the Underwriter Exemption other than those within the control of
the investors will be met. In addition, as of the date hereof, there is no
single mortgagor that is the obligor on five percent (5%) of the Loans included
in the Trust Fund by aggregate unamortized principal balance of the assets of
the Trust Fund. Because the Class _____, Class PO and Class X Certificates are
not being purchased by either Underwriter, such classes of Certificates do not
currently meet the requirements of the Underwriter Exemption or any comparable
individual administrative exemption granted to either Underwriter. Consequently,
the sale or exchange of the Class _____, Class PO and Class X Certificates may
be made only under the conditions set forth for the Class B- , Class B- and
Class B- Certificates below.
Because the characteristics of the Class B- , Class B- , Class B- and
Class A-R Certificates may not meet the requirements of PTE 83-1, the
Underwriter Exemption or any other issued exemption under ERISA, the purchase
and holding of the Class B- , Class B- , Class B- and Class A-R Certificates by
a Plan or by individual retirement accounts or other plans subject to Section
4975 of the Code may result in prohibited transactions or the imposition of
excise taxes or civil penalties. Consequently, transfers of the Class B- , Class
B- , Class B- and Class A-R Certificates will not be registered by the Trustee
unless the Trustee receives: (i) a representation from the transferee of such
Certificate, acceptable to and in form and substance satisfactory to the
Trustee, to the effect that such transferee is not an employee benefit plan
subject to Section 406 of ERISA or a plan or arrangement subject to Section 4975
of the Code, nor a person acting on behalf of any such plan or arrangement nor
using
S-55
<PAGE>
the assets of any such plan or arrangement to effect such transfer; (ii) if the
purchaser is an insurance company, a representation that the purchaser is an
insurance company which is purchasing such Certificates with funds contained in
an "insurance company general account" (as such term is defined in Section V(e)
of Prohibited Transaction Class Exemption 95-60 ("PTE 95-60")) and that the
purchase and holding of such Certificates are covered under PTE 95-60; or (iii)
an opinion of counsel satisfactory to the Trustee that the purchase or holding
of such Certificate by a Plan, any person acting on behalf of a Plan or using
such Plan's assets, will not result in the assets of the Trust Fund being deemed
to be "plan assets" and subject to the prohibited transaction requirements of
ERISA and the Code and will not subject the Trustee to any obligation in
addition to those undertaken in the Agreement. Such representation as described
above shall be deemed to have been made to the Trustee by the transferee's
acceptance of a Class B- , Class B- or Class B- Certificate. In the event that
such representation is violated, or any attempt to transfer to a plan or person
acting on behalf of a Plan or using such Plan's assets is attempted without such
opinion of counsel, such attempted transfer or acquisition shall be void and of
no effect.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTE 83-1
described in the Prospectus and the Underwriter Exemption, and the potential
consequences in their specific circumstances, prior to making an investment in
any of the Offered Certificates. Moreover, each Plan fiduciary should determine
whether under the general fiduciary standards of investment prudence and
diversification, an investment in any of the Offered Certificates is appropriate
for the Plan, taking into account the overall investment policy of the Plan and
the composition of the Plan's investment portfolio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between Equity One, the Depositor and the Underwriter, the Depositor
has agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase from the Depositor the respective classes of Offered Certificates
indicated on the cover page hereof to be purchased by it. Distribution of the
Offered Certificates will be made by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. In connection with the sale of the Offered Certificates, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
The Underwriter intends to make a secondary market in the classes of
Offered Certificates, but the Underwriter has no obligation to do so. There can
be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will continue or that it will provide
Certificateholders with a sufficient level of liquidity of investment.
Equity One and the Depositor have agreed to indemnify the Underwriter
against, or make contributions to the Underwriter with respect to certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Depositor by
Stradley, Ronon, Stevens & Young, LLP, Philadelphia,
S-56
<PAGE>
Pennsylvania. Brown & Wood LLP, New York, New York, will pass upon certain legal
matters on behalf of the Underwriter.
RATINGS
It is a condition to the issuance of the Senior Certificates that they be
rated ____ by _____ ("______") and, by ____ ("_____" and, together with ____,
the "Rating Agencies"). It is a condition to the issuance of the Class B- ,
Class B- and Class B- Certificates that they be rated at least ____, ____ and
____, respectively, by ____.
The ratings assigned by ___ to mortgage pass-through certificates address
the likelihood of the receipt of all distributions on the mortgage loans by
the related certificateholders under the agreements pursuant to which such
certificates are issued. ______'s ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on the mortgage pool is adequate to make the
payments required by such certificates. ______ ratings on such certificates do
not, however, constitute a statement regarding frequency of payments of the
mortgage loans.
The ratings assigned by _______ to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the mortgage loans
by the related certificateholders under the agreements pursuant to which such
certificates are issued. ______'s ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on such mortgage pool is adequate to make payments
required by such certificates. ________'s ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans.
The ratings of the Rating Agencies do not address the possibility that, as
a result of principal prepayments, Certificateholders may receive a lower than
anticipated yield.
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the Rating Agencies.
The Depositor has not requested a rating of the Offered Certificates by
any rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
S-57
<PAGE>
INDEX OF DEFINED TERMS
Page
----
Advance...............................................................S-9, S-30
Agreement.............................................................S-5, S-17
Applicable Credit Support Percentage.......................................S-38
Available Funds............................................................S-33
Bankruptcy Loss Coverage Amount............................................S-52
Bankruptcy Losses..........................................................S-40
Beneficial Owner...........................................................S-32
Book-Entry Certificates.....................................................S-5
Cede.......................................................................S-32
Certificate Account........................................................S-32
Certificateholders.........................................................S-17
Certificates.....................................................-1-, S-4, S-31
Class Certificate Balance..................................................S-31
Class PO Deferred Amount...................................................S-34
Class PO Principal Distribution Amount.....................................S-39
Class Subordination Percentage.............................................S-38
Code.......................................................................S-11
Collateral Value...........................................................S-18
Combined Loan-to-Value Ratio...............................................S-18
Corporate Trust Office......................................................S-3
Cut-off Date Pool Principal Balance........................................S-18
Debt Service Reduction.....................................................S-53
Deficient Valuation........................................................S-53
Definitive Certificate.....................................................S-32
Deleted Loan...............................................................S-25
Depositor...................................................................S-6
Determination Date..........................................................S-6
Discount Loan..............................................................S-35
Distribution Account.......................................................S-32
Distribution Date.....................................................S-6, S-33
DTC........................................................................S-31
Due Date...................................................................S-18
Equity One............................................................S-6, S-27
Equity One Standards.......................................................S-26
ERISA................................................................S-11, S-54
Excess Losses..............................................................S-40
Fixed Rate Certificates.....................................................S-5
FNMA.......................................................................S-26
Fraud Loss Coverage Amount.................................................S-52
Fraud Losses...............................................................S-40
Insurance Proceeds.........................................................S-34
Interest Accrual Period...............................................S-8, S-34
Interest Distribution Amount...............................................S-34
Interest Only Certificates..................................................S-5
Last Scheduled Distribution Date...........................................S-50
Liquidated Loan............................................................S-40
S-58
<PAGE>
Page
----
Liquidation Proceeds.......................................................S-34
Loan-to-Value Ratio........................................................S-18
Loans............................................................-1-, S-6, S-17
Mixed Use Loan...................................................-1-, S-6, S-17
Mixed Use Properties.......................................................S-14
Mortgage...................................................................S-25
Mortgage File..............................................................S-25
Mortgage Note..............................................................S-25
Mortgage Pool..........................................................-1-, S-5
Mortgage Rate..............................................................S-34
Net Interest Shortfall.....................................................S-34
Net Prepayment Interest Shortfall..........................................S-35
NMR........................................................................S-35
Non-Discount Loan..........................................................S-31
Non-PO Formula Principal Amount............................................S-35
Non-PO Percentage..........................................................S-35
Notional Amount............................................................S-31
Notional Amount Certificates................................................S-5
Offered Certificates.............................................-1-, S-4, S-31
OID..................................................................S-11, S-53
Original Applicable Credit Support Percentage..............................S-38
Original Subordinated Principal Balance....................................S-37
Permitted Investments......................................................S-32
Physical Certificates.......................................................S-5
Plan.................................................................S-11, S-55
PO Formula Principal Amount................................................S-39
PO Percentage..............................................................S-35
Pool Principal Balance.....................................................S-37
Prepayment Assumption......................................................S-54
Prepayment Interest Excess.................................................S-29
Prepayment Interest Shortfall..............................................S-35
Prepayment Period..........................................................S-34
Principal Only Certificates.................................................S-5
Prospectus .................................................................S-3
PTE 95-60 ................................................................S-56
Rating Agencies......................................................S-12, S-57
Realized Loss..............................................................S-40
Record Date................................................................S-33
Refinance Loan.............................................................S-18
Regular Certificates........................................................S-5
Relief Act Reduction.......................................................S-34
REMIC.................................................................S-3, S-11
REO Property...............................................................S-30
Replacement Loan...........................................................S-25
Residential Loan.................................................-1-, S-6, S-17
Residual Certificates.......................................................S-5
Restricted Classes.........................................................S-38
Scheduled Payments.........................................................S-18
Seller......................................................................S-3
S-59
<PAGE>
Page
----
Sellers................................................................S-3, S-6
Senior Certificates...................................................S-5, S-31
Senior Credit Support Depletion Date.......................................S-36
Senior Percentage..........................................................S-37
Senior Prepayment Percentage...............................................S-37
Senior Principal Distribution Amount.......................................S-36
Servicer....................................................................S-6
Servicing Fee Rate.........................................................S-29
SMMEA......................................................................S-11
SPA........................................................................S-41
Special Hazard Loan........................................................S-40
Special Hazard Loss Coverage Amount........................................S-52
Special Hazard Losses......................................................S-40
Stated Principal Balance...................................................S-37
Structuring Assumptions....................................................S-41
Subordinated Certificates.............................................S-5, S-31
Subordinated Percentage....................................................S-38
Subordinated Prepayment Percentage.........................................S-37
Subordinated Principal Distribution Amount.................................S-38
Substitution Adjustment Amount.............................................S-25
Tax Counsel................................................................S-53
Trustee.....................................................................S-6
Underwriter.................................................................-1-
Underwriter Exemption......................................................S-55
Unpaid Interest Amounts....................................................S-34
Variable Rate Certificates..................................................S-5
S-60
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus Supplement or the
Prospectus and, if given or made, such information or representations must not
be relied upon. This Prospectus Supplement and the Prospectus do not constitute
an offer to sell or a solicitation of an offer to buy any of the securities
offered hereby, nor an offer of Offered Certificates in any state or
jurisdiction in which, or to any person to whom, such offer would be unlawful.
The delivery of this Prospectus Supplement or the Prospectus at any time does
not imply that the information contained herein or therein is correct as of any
time subsequent to its date; however, if any material change occurs while this
Prospectus Supplement or Prospectus is required by law to be delivered, this
Prospectus Supplement or the Prospectus will be amended or supplemented
accordingly.
_______________
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Summary of Terms...........................................................
Risk Factors...............................................................
The Mortgage Pool..........................................................
Servicing of Loans.........................................................
Description of the Certificates............................................
Yield, Prepayment and Maturity Considerations..............................
Credit Enhancement.........................................................
Use of Proceeds............................................................
Federal Income Tax Consequences............................................
ERISA Considerations.......................................................
Method of Distribution.....................................................
Legal Matters..............................................................
Ratings....................................................................
Index of Defined Terms.....................................................
PROSPECTUS
Prospectus Supplement or Current Report on Form 8-K........................
Available Information......................................................
Incorporation of Certain Document by Reference.............................
Reports to Securityholders.................................................
Summary of Terms...........................................................
Risk Factors...............................................................
The Trust Fund.............................................................
Use of Proceeds............................................................
The Depositor..............................................................
Loan Program...............................................................
Description of the Securities..............................................
Credit Enhancement.........................................................
Yield and Prepayment Considerations........................................
The Agreements.............................................................
Certain Legal Aspects of the Loans.........................................
Federal Income Tax Consequences............................................
State Tax Considerations...................................................
ERISA Considerations.......................................................
Legal Investment...........................................................
Method of Distribution.....................................................
Legal Matters..............................................................
Rating.....................................................................
Index of Defined Terms.....................................................
================================================================================
================================================================================
$[_____________]
(Approximate)
Mortgage Pass-Through
Certificates,
Series 199_ - _
Equity One ABS, Inc.
Depositor
Equity One, Inc.
Servicer
____________________
PROSPECTUS SUPPLEMENT
[_________, 199_]
____________________
================================================================================
S-61
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED [ ], 199[ ]
PROSPECTUS SUPPLEMENT
(To Prospectus dated ___________, 1997)
$-------------
EQUITY ONE MORTGAGE LOAN TRUST 199___
$___________ [] ASSET BACKED NOTES, SERIES 199_-_
$__________ [] ASSET BACKED CERTIFICATES, SERIES 199_-_
The Equity One Mortgage Loan Trust 199__ (the "Trust Fund") will be
formed pursuant to a trust agreement to be dated as of ______, 199_ (the "Trust
Agreement") and entered into by Equity One ABS, Inc., (the "Depositor"),
________________ [and _____________], as owner trustee (the "Owner Trustee").
The Trust Fund will issue $___________ aggregate principal amount of [ ] Asset
Backed Notes (the "Notes"). The Notes will be issued pursuant to an indenture to
be dated as of __________ __, 199_ (the "Indenture"), between the Trust Fund and
____________, as indenture trustee (the "Indenture Trustee"). The Trust Fund
will also issue $______ aggregate principal amount of [ ] Asset Backed
Certificates, Series 199_-_ (the "Certificates" and, together with the Notes,
the "Securities"). See "Index of Defined Terms" on Page [ ] of this Prospectus
Supplement and on Page [ ] of the Prospectus for the location of the definitions
of certain capitalized terms.
The property of the Trust Fund will consist of a pool of the following
types of loans (collectively, the "Loans"): fixed rate and variable rate
mortgage loans secured by first and/or subordinate liens on (A) one- to
four-family residential properties, (each, a "Residential Loan") and (B) mixed
commercial/residential use properties (each, a "Mixed Use Loan"). [In addition,
the Securities will have the benefit of an irrevocable and unconditional limited
financial guaranty insurance policy (the "Policy") issued by ______________ (the
"Certificate Insurer") covering [ ].]
Distributions of principal and interest on the Notes will be made on the
_________ day of each month or, if such date is not a Business Day, then on the
succeeding Business Day (each, a "Distribution Date"), commencing on ________,
199_ to the extent described under "Summary of Terms--Description of the
Securities" and "Description of the Securities" herein. Interest will accrue on
the Notes at a rate (the "Note Rate") equal to ___% per annum from the Closing
Date to the first Distribution Date and at [ ] plus [___% per annum] thereafter.
The Certificates will represent fractional undivided interests in the
Trust Fund. Distribution of principal and interest on the Certificates will be
made on each Distribution Date to the extent described herein. Interest will
accrue on the Certificates at a rate (the "Pass-Through Rate") equal to ___% per
annum from the Closing Date to the first Distribution Date and at [ ] plus [___%
per annum] thereafter.
Payments of interest and principal on the Notes will have equal priority
with (and will be made pro rata with) payments of principal and interest on the
Certificates.
There is currently no market for the Securities offered hereby and there
can be no assurance that such a market will develop or if it does develop that
it will continue. See "Risk Factors" herein.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE [ ] HEREIN AND ON PAGE [ ] IN THE
ACCOMPANYING PROSPECTUS.
--------------------
<PAGE>
THE SECURITIES REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRUST ONLY
AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR,
OWNER TRUSTEE, INDENTURE TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT TO
THE EXTENT PROVIDED HEREIN. THE SECURITIES ARE NOT INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Securities offered hereby will be purchased by [ ] (the
"Underwriter") from the Depositor and will, in each case, be offered by the
Underwriter from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. The aggregate
proceeds to the Depositor from the sale of the Notes are expected to be
$_____________ and from the sale of the Certificates are expected to be
$__________ before deducting expenses payable by the Depositor of $_______.
The Securities are offered subject to prior sale and subject to the
Underwriter's right to reject orders in whole or in part. It is expected that
the Notes will be delivered in book-entry form through the facilities of The
Depository Trust Company, [Centrale de Livraison de Valeurs Mobilieres S.A. and
the Euroclear System] on or about _______, 199_. The Securities will be offered
in the United States [and Europe].
--------------------
Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Securities, whether or not participating
in this distribution, may be required to deliver a Prospectus Supplement and
Prospectus to investors. This is in addition to the obligation of dealers acting
as underwriters to deliver a Prospectus Supplement and Prospectus with respect
to their unsold allotments or subscriptions.
--------------------
Each Series of Securities offered hereby constitutes part of a separate
Series of asset backed securities being offered by the Underwriter from time to
time pursuant to the Prospectus dated ____________, 1997. This Prospectus
Supplement does not contain complete information about the offering of the
Securities. Additional information is contained in the Prospectus and investors
are urged to read both this Prospectus Supplement and the Prospectus in full.
Sales of the Securities may not be consummated unless the purchaser has received
both this Prospectus Supplement and the Prospectus.
The Trustee on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus Supplement is delivered, on the written or
oral request of such person, a copy of any or all of the documents referred to
in the Prospectus under "Incorporation of Certain Documents by Reference" that
have been or may be incorporated by reference in the Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
the Prospectus incorporates). Such requests should be directed to the Corporate
Trust Office of the Trustee at _____________, telephone:_________, facsimile
number:_____________, attention:__________.
--------------------
[UNDERWRITER]
_______________, 199_
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<PAGE>
SUMMARY OF TERMS
This summary of certain pertinent information is qualified in its entirety by
reference to the detailed information appearing elsewhere in this Prospectus
Supplement and in the accompanying Prospectus. Certain capitalized terms used
herein are defined elsewhere in the Prospectus Supplement or in the Prospectus.
See "Index of Defined Terms" on Page [ ] of this Prospectus Supplement and on
Page [ ] of the Prospectus for the location of the definitions of certain
capitalized terms.
<TABLE>
<S> <C>
Title of Securities............................... [] Asset Backed Notes, Series 199__-__(the "Notes") and [ ]
Asset Backed Certificates, Series 199__-__ (the "Certificates"
and, together with the Notes, the "Securities").
Securities Offered............................... All of the Securities, including the Class ___, Class __ and
Class __ Notes and the Class __, Class __ and Class __
Certificates. Each Security represents the right to receive
payments of interest at the [variable] rate described below,
payable monthly, and payments of principal at such time and to
the extent provided below.
Trust Fund....................................... Equity One Mortgage Loan Trust 199_-_ (the "Trust Fund"
or the "Issuer"), a Delaware business trust established pur-
suant to the Trust Agreement (as defined herein), dated as of
___, 199_ (the "Cut-off Date"). The property of the Trust
Fund will consist of a pool of the following types of loans
(collectively, the "Loans"): fixed rate and variable rate
mortgage loans secured by first and/or subordinate liens on
(A) one- to four-family residential properties, (each, a
"Residential Loan") and (B) mixed commercial/residential use
properties (each, a "Mixed Use Loan"); the collections in
respect of the Loans received after the Cut-off Date (exclusive
of payments in respect of accrued interest due on or prior to
the Cut-off Date or due in the month of _____________);
property [and/or other assets] that secured a Loan which has
been acquired by foreclosure, deed in lieu of foreclosure [or
realization upon a purchase money security interest]; [an
irrevocable and unconditional limited financial guaranty
insurance policy (the "Policy")]; an assignment of the
Depositor's rights under the Purchase Agreement (as defined
herein); rights under certain hazard insurance policies
covering the Mortgaged Properties; and certain other
property, as described more fully under "The Trust Fund"
herein.
The Trust Fund will include the unpaid principal balance of
each Loan as of the Cut-off Date (the "Cut-off Date Principal
Balance") plus any additions thereto as a result of new
advances, if any, made pursuant to the applicable Loan
Agreement (the "Additional Balances") during the life of the
Trust Fund. With respect to any date, the "Pool Balance"
will be equal to the aggregate of the Principal Balances of all
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Loans as of such date. The "Principal Balance" of a Loan (other
than a Liquidated Loan) on any day is equal to its Cutoff Date
Principal Balance, plus (i) any Additional Balances in respect
of such Loan, minus (ii) all collections credited against the
Principal Balance of such Loan in accordance with the related
Loan Agreement prior to such day. The Principal Balance of a
Liquidated Loan after the final recovery of related Liquidation
Proceeds shall be zero. A "Liquidated Loan" is a defaulted Loan
as to which the Master Servicer has determined that all
recoverable liquidation and insurance proceeds have been
received.
Indenture........................................ The Notes will be issued pursuant to an indenture dated as of
_________, 199_ (the "Indenture") between the Trust Fund and
the Indenture Trustee. The Indenture Trustee will allocate
distributions of principal and interest to holders of the Notes
(the "Noteholders") in accordance with the Indenture.
Trust Agreement................................... Pursuant to a trust agreement dated as of ________,
199_ (the "Trust Agreement"), among the Depositor, ________ and
the Owner Trustee, the Trust Fund will issue the Certificates
in an initial aggregate amount of $__________. The Certificates
will represent fractional undivided interests in the Trust
Fund.
Depositor........................................ Equity One ABS, Inc. a Delaware corporation and a limited
purpose finance subsidiary of Equity One, Inc., a Delaware
corporation ("Equity One").
Master Servicer.................................. Equity One and, in its capacity as Master Servicer of the
Loans, the "Master Servicer." The Master Servicer will service
the Loans pursuant to a Master Servicing Agreement dated
_________, 199_ between the Issuer and the Master Servicer.
Indenture Trustee................................ _______________ (the "Indenture Trustee").
Owner Trustee.................................... _______________ (the "Owner Trustee").
Cut-off Date..................................... __________, 199__.
Closing Date..................................... On or about __________ __, 199__.
Determination Date............................... The ___ business day, but no later than the ___ calendar day,
of each month (the "Determination Date").
The Loans........................................ The Loans are secured by first and/or subordinate liens on
Mortgaged Properties. The Loans were originated or
acquired in the normal course of business by Equity One, Inc.
and certain of its affiliates (in such capacity, collectively, the
"Sellers"). On the Closing Date, the Sellers will sell the
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Loans to the Depositor, pursuant to a purchase agreement (the
"Purchase Agreement"). The aggregate Principal Balance of the
Loans as of the Cut-off Date is $___________ (the "Cut-off Date
Pool Principal Balance").
The percentage of the Cut-off Date Principal Balance of the
Loans secured by Mortgaged Properties located in the states of
[__________, _________, _________, _______, ______ and
________] is approximately ____%, ____%, ____%, ____%, ____%
and ____%, respectively. The "Combined Loan-to-Value Ratio" of
each Loan is the ratio of (A) the sum of (i) the amount the
borrower borrowed under the applicable Loan Agreement and (ii)
the amounts of any related senior mortgage loans (computed as
of the date of origination of each such Loan) to (B) the lesser
of (i) with respect to Mortgaged Properties, (a) the appraised
value of the Mortgaged Property or (b) in the case of a
Mortgaged Property purchased within one year of the origination
of the related Loan, the purchase price of such Mortgaged
Property. As of the Cut-off Date the Combined Loan-to-Value
Ratios ranged from ____% to ______% and, as of the Cut-off
Date, the weighted average Combined Loan-to-Value Ratio of the
Loans was approximately ____%.
Interest on each Loan is payable monthly and computed on the
related daily outstanding Principal Balance for each day in the
billing cycle at a variable rate per annum (the "Loan Rate")
equal at any time (subject to maximum rates, as described
herein under "Description of the Mortgage Loans--Mortgage Loan
Terms," and further subject to applicable usury limitations) to
the sum of [(i) the highest prime rate published in the "Money
Rates" section of The Wall Street Journal] and (ii) a Margin
within the range of ___% to ___%. As of the Cut-off Date, the
weighted average Margin was approximately ___%. Loan Rates are
adjusted monthly on the first business day of the calendar
month preceding the Due Date. As to each Loan, the "Due Date"
is the ___ day of each month. The Cut-off Date Principal Balances
ranged from zero to $____ and averaged approximately $______ . Each Loan
was originated in the period from __________ __, 19__ to
__________ __, 19__. As of the Cut-off Date, approximately ___% of
the Cut-off Date Principal Balance of the Loans represented
[first liens on the related Mortgaged Properties, while
approximately ___% of the Loans represented subordinate liens.] As
of the Cut-off Date, the Loans had remaining terms to scheduled
maturity ranging from __ months to __ months and had a weighted
average of approximately __ months. See "The Loan Program" and
"Description of the Loans" herein.
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<PAGE>
Mortgaged Properties............................... [The real properties which secure repayment of the Loans and on
which Sellers have a first or subordinate lien.]
Distribution Date................................. The ____ day of each month or, if such day is not a Business
Day, the next succeeding Business Day, commencing with _______,
199_. A "Business Day" is any day other than a Saturday or
Sunday or another day on which banking institutions in New
York, New York [and ____________] are authorized or obligated
by law, regulations or executive order to be closed.
Final Scheduled
Distribution Dates.......................... With respect to the Certificates, ___________________. To the
extent not previously paid, the principal balance (the
"Security Principal Balance") of the Notes will be due on the
Distribution Date in _______, ____. Failure to pay the full
principal balance of Notes on or before the applicable final
scheduled payment dates constitutes an Event of Default under
the Indenture.
Record Date...................................... The last day preceding a Distribution Date or, if the Securities
are no longer Book-Entry Securities, the last day of the month
preceding a Distribution Date.
Collections...................................... All collections on the Loans will be allocated by the Master
Servicer in accordance with the Loan Agreements between
amounts collected in respect of interest ("Interest Collections")
and amounts collected in respect of principal ("Principal
Collections" and collectively with Interest Collections, the
"Collections"). The Master Servicer will generally deposit
Collections distributable to the holders in an account
established for such purpose under the Master Servicing
Agreement (the "Collection Account"). See "Description of
the Master Servicing Agreement--Allocations and Collections"
herein and "The Agreements--Payments on Loans; Deposits
to Security Account" and "--Collection Procedures" in the
Prospectus.
Description of the Securities
A. Distributions......................... On each Distribution Date, collections on the Loans will be
applied in the following order of priority:
(i) to the Master Servicer, the Servicing Fee;
(ii) as payment for the accrued interest due and any overdue
accrued interest (with interest thereon) on the respective
Security Principal Balances of the Notes and the Certificates;
S-6
<PAGE>
(iii) as principal on the Securities, the excess of Principal
Collections over Additional Balances created during the
preceding Collection Period, such amount to be allocated
between the Notes and Certificates, pro rata, based on their
respective Security Principal Balances;
(iv) as principal on the Securities, as payment for any
Liquidation Loss Amounts on the Loans;
(v) as payment for the premium on the Policy;
(vi) to reimburse prior draws made on the Policy; and
(vii) any remaining amounts to the Seller.
As to any Distribution Date, the "Collection Period" is the
calendar month preceding the month of such Distribution Date.
"Liquidation Loss Amount" means with respect to any Liqui-
dated Loan, the unrecovered Principal Balance thereof at the
end of the related Collection Period in which such Loan became
a Liquidated Loan after giving effect to the Net Liquidation
Proceeds in connection therewith.
B. Note Rate............................. Interest will accrue on the unpaid Security Principal Balance
of the Notes at the per annum rate (the "Note Rate") equal to
___% per annum from the Closing Date to the first
Distribution Date and thereafter interest will accrue on the
Notes from and including the preceding Distribution Date to
but excluding such current Distribution Date (each, an
"Interest Accrual Period") at [a floating rate equal to LIBOR
(as defined herein) plus ___%] [___%]. [Interest will be
calculated on the basis of the actual number of days in each
Interest Accrual Period divided by 360.] A failure to pay
interest on any Notes on any Distribution Date that continues
for five days constitutes an Event of Default under the
Indenture.
C. Pass-Through Rate...................... Interest will accrue on the unpaid Principal Balance of the
Certificates at the per annum rate (the "Pass-Through Rate")
equal to ___% per annum from the Closing Date to the first
Distribution Date and thereafter interest will accrue on the
Certificates for each Interest Accrual Period at [a floating
rate equal to LIBOR (as defined herein) plus ___%] [___%].
[Interest will be calculated on the basis of the actual number
of days in each Interest Accrual Period divided by 360.] A
failure to pay interest on any Certificates on any Distribution
Date that continues for five days constitutes an Event of
Default under the Trust Agreement.
S-7
<PAGE>
D. Form and Registration................. The Securities will initially be delivered in book-entry form
("Book-Entry Securities"). Holders of such Securities may elect
to hold their interests through The Depository Trust Company
("DTC"), in the United States [,or Centrale de Livraison de
Valeurs Mobilieres S.A. ("CEDEL") or the Euroclear System
("Euroclear"), in Europe]. Transfers within DTC [, Cedel or
Euroclear, as the case may be,] will be in accordance with the
usual rules and operating procedures of the relevant system. So
long as the Securities are Book-Entry Securities, such
Securities will be evidenced by one or more securities
registered in the name of Cede & Co. ("Cede"), as the nominee
of DTC [or one of the relevant depositories (collectively, the
"European Depositories")]. Cross-market transfers between
persons holding directly or indirectly through DTC[, on the one
hand, and counterparties holding directly or indirectly through
Cedel or Euroclear, on the other,] will be effected in DTC
through Citibank N.A. ("Citibank") or The Chase Manhattan Bank
("Chase") the relevant depositories of Cedel and Euroclear,
respectively, and each a participating member of DTC. The
Securities will initially be registered in the name of Cede.
The interests of such holders will be represented by book
entries on the records of DTC and participating members
thereof. No holder of a Security will be entitled to receive a
definitive Security representing such person's interest
("Definitive Security"), except in the event that Securities in
fully registered, certificated form are issued under the
limited circumstances described in "Description of the
Securities--Book-Entry Registration of Securities" in the
Prospectus. All references in this Prospectus Supplement to
Securities reflect the rights of holders of such Securities
only as such rights may be exercised through DTC and its
participating organizations for so long as such Securities are
held by DTC. See "Risk Factors--Consequences of Owning
Book-Entry Securities" herein.
E. Denominations ........................ The Securities will be issued in minimum denominations of
$[________] and integral multiples thereof.
[Final Payment of Principal;
Termination................................ The Trust Fund will terminate on the Distribution Date
following the earlier of (i) _________________________ and
(ii) the final payment or other liquidation of the last Loan in
the Trust Fund. The Loans will be subject to optional
repurchase by the Master Servicer on any Distribution Date
after the Principal Balance is reduced to an amount less than
or equal to $ (____% of the initial Principal Balance).
The repurchase price will be equal to the sum of the out-
standing Principal Balance and accrued and unpaid interest
thereon at the weighted average of the Loan Rates through the
S-8
<PAGE>
day preceding the final Distribution Date. See "Description
of the Securities--Optional Termination" herein and "The
Agreements--Termination; Optional Termination" in the
Prospectus.
[Letter of Credit]
[Surety Bond]
Issuer.................................... _________________ (the "[Letter of Credit] [Surety Bond]
Issuer"). See "The [Letter of Credit] [Surety Bond] Issuer"
herein.
[Letter of Credit]
[Surety Bond].............................. On the Closing Date, the [Letter of Credit] [Surety Bond]
Issuer will issue a [letter of credit] [surety bond] (the "[Letter
of Credit] [Surety Bond]") in favor of the Owner Trustee on
behalf of the Trust Fund. In the event that, on any
Distribution Date, available amounts on deposit in the
Collection Account with respect to the preceding Collection
Period are insufficient to provide for the payment of the
amount required to be distributed to the holders and the
Master Servicer on such Distribution Date, the Trustee will
draw on the [Letter of Credit] [Surety Bond], to the extent of
the [Letter of Credit] [Surety Bond] Amount for such
Distribution Date, in an amount equal to such deficiency. See
"Description of the Securities--Distributions" herein and
"Credit Enhancement" in the Prospectus.
[[Letter of Credit]
[Surety Bond]
Amount.................................... The amount available under the [Letter of Credit] [Surety
Bond] (the "[Letter of Credit] [Surety Bond] Amount") for the
initial Distribution Date will be $ . For each
Distribution Date thereafter, the [Letter of Credit] [Surety
Bond] Amount will equal the lesser of (i) % of the Pool
Balance as of the first day of the preceding Collection Period
(after giving effect to any amounts distributed with respect to
principal of the Loans on the Distribution Date occurring in
such preceding Collection Period) and (ii) the [Letter of
Credit] [Surety Bond] Amount as of the first day of the
preceding Collection Period, minus any amounts drawn under
the [Letter of Credit] [Surety Bond] during such preceding
Collection Period, plus any amounts paid to the [Letter of
Credit] [Surety Bond] Issuer on the Distribution Date
occurring in such preceding Collection Period up to the
amount of any previous draws on the [Letter of Credit]
[Surety Bond].]
Federal Income Tax
Consequences............................... Stradley, Ronon, Stevens & Young, LLP, special counsel to
the Depositor ("Tax Counsel"), is of the opinion that the
Trust Fund will not be an association (or a publicly traded
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<PAGE>
partnership) taxable as a corporation for federal income tax
purposes. The Trust Fund will agree, and the Noteholders will
agree by their purchase of the Notes, to treat the Notes as
debt for federal income tax purposes. Based on the application
of existing law to the facts as set forth in the Agreement and
other relevant documents and assuming compliance with the terms
of the Agreement as in effect on the date of issuance of the
Notes and Certificates, Tax Counsel is of the opinion that the
Notes will be treated as debt instruments for federal income
tax purposes as of such date.
It is not anticipated that the Notes will be issued with
original issue discount ("OID"). The stated interest thereon
will be taxable to a Noteholder as ordinary interest income
when received or accrued in accordance with such Noteholder's
method of tax accounting.
The Trust Fund and the Master Servicer will agree, and the
Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for
purposes of federal and state income tax, franchise tax and any
other tax measured in whole or in part by income, with the
assets of the partnership being the assets held by the Trust
Fund, the partners of the partnership being the
Certificateholders, and the Notes being 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. See "Federal Income Tax
Consequences" and "State Tax Consequences" herein and "Federal
Income Tax Consequences" and "State Tax Considerations" in the
Prospectus concerning the application of federal, state and
local tax laws.
ERISA Considerations............................. Generally, plans that are subject to the requirements of ERISA
and the Code are permitted to purchase instruments like the
Notes that are debt under applicable state law and have no
"substantial equity features" without reference to the
prohibited transaction requirements of ERISA and the Code. In
the opinion of ERISA Counsel (as defined herein), the Notes
will be classified as indebtedness without substantial equity
features for ERISA purposes. However, if the Notes are deemed
to be equity interests and no statutory, regulatory or
administrative exemption applies, the Trust Fund will hold plan
assets by reason of a Plan's investment in the Notes.
Accordingly, any Plan fiduciary considering whether to purchase
the Notes on behalf of a Plan should consult with its counsel
regarding the applicability of the provisions of ERISA
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<PAGE>
and the Code and the availability of any exemptions. Under
current law the purchase and holding of the Certificates by or
on behalf of any employee benefit plan (a "Plan") subject to
the fiduciary responsibility provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"),
may result in a "prohibited transaction" within the meaning of
ERISA and the Code or other violation of the fiduciary
responsibility provisions of ERISA and Section 4975 of the
Code. [Consequently, Certificates may not be transferred to a
proposed transferee that is a Plan subject to ERISA or that is
described in Section 4975(e)(1) of the Code, or a person acting
on behalf of any such Plan or using the assets of such plan
unless the Owner Trustee and the Depositor receive the opinion
of counsel reasonably satisfactory to the Owner Trustee and the
Depositor to the effect that the purchase and holding of such
Certificate will not result in the assets of the Trust Fund
being deemed to be "plan assets" for ERISA purposes and will
not be a prohibited transaction under ERISA or Section 4975 of
the Code.] See "ERISA Considerations" herein and in the
Prospectus.
Legal Investment................................ The Securities will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended ("SMMEA"), because some of
the liens securing the Loans are not first mortgages.
Accordingly, many institutions with legal authority to invest
in comparably rated securities based solely on first mortgages
may not be legally authorized to invest in the Certificates.
See "Legal Investment Considerations" herein and "Legal
Investment" in the Prospectus.
Rating........................................... It is a condition to the issuance of the Securities that they be
rated _________ by at least ____ nationally recognized
statistical rating organizations (each a "Rating Agency"). In
general, ratings address credit risk and do not address the
likelihood of prepayments. A security rating is not a
recommendation to buy, sell or hold securities.
Risk Factors..................................... For a discussion of risks associated with an investment in the
Securities, see "Risk Factors" on Page [ ] herein and on
Page [ ] in the Prospectus.
</TABLE>
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RISK FACTORS
Investors should consider the following risks in connection with the
purchase of the Securities.
Consequences of Owning Book-Entry Securities
Issuance of the Securities in book-entry form may reduce the liquidity of
such Securities in the secondary trading market since investors may be unwilling
to purchase Securities for which they cannot obtain physical securities. See
"Description of the Securities--Book-Entry Securities" herein and "Risk
Factors--Book-Entry Registration" in the Prospectus.
Since transactions in the Securities can be effected only through DTC[,
CEDEL, Euroclear,] participating organizations, indirect participants and
certain banks, the ability of a Security Owner to pledge a Security to persons
or entities that do not participate in the DTC[, CEDEL or Euroclear] system may
be limited due to lack of a physical security representing the Securities. See
"Description of the Securities--Book-Entry Securities" herein and "Risk
Factors--Book-Entry Registration" in the Prospectus.
Security Owners may experience some delay in their receipt of
distributions of interest and principal on the Securities since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of DTC Participants which will thereafter credit
them to the accounts of Security Owners either directly or indirectly through
indirect participants. Security Owners will not be recognized as Securityholders
as such term is used in the Agreement, and Security owners will be permitted to
exercise the rights of Securityholders only indirectly through DTC and DTC
Participants. See "Description of the Securities--Book-Entry Securities" herein
and "Risk Factors--Book-Entry Registration" in the Prospectus.
Cash Flow Considerations and Risks
Minimum monthly payments will at least equal and may exceed accrued
interest. Even assuming that the Mortgaged Properties provide adequate security
for the Loans, substantial delay could be encountered in connection with the
liquidation of Loans that are delinquent and corresponding delays in the receipt
of related proceeds by holders could occur if the [Letter of Credit] [Surety
Bond] provider were unable to perform on its obligations under the [Letter of
Credit] [Surety Bond]. Further, liquidation expenses (such as legal fees, real
estate taxes, and maintenance and preservation expenses) will reduce the
proceeds payable to holders and thereby reduce the security for the Loans. In
the event any of the Mortgaged Properties fail to provide adequate security for
the related Loans, holders could experience a loss if the [Letter of Credit]
[Surety Bond] provider were unable to perform its obligations under the [Letter
of Credit] [Surety Bond].]
Prepayment Considerations and Risks
Substantially all of the Loans may be prepaid in whole or in part at any
time without penalty. The Trust Fund's prepayment experience may be affected by
a wide variety of factors, including general economic conditions, interest
rates, the availability of alternative financing and homeowner mobility. In
addition, substantially all of the Loans contain due-on-sale provisions and the
Master Servicer intends to enforce such provisions unless (i) such enforcement
is not permitted by applicable law or (ii) the Master Servicer, in a manner
consistent with reasonable commercial practice, permits the purchaser of the
related Mortgaged Property to assume the Loan. To the extent permitted by
applicable law, such assumption will not release the original borrower from its
obligation under any such Loan. See "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses" in the Prospectus for a description of certain
provisions of the Loan Agreements that may affect the prepayment experience on
the Loans. The yield to maturity and weighted average life of the Securities
will be affected primarily by the rate and timing of prepayments on the Loans.
Any reinvestment risks resulting from a faster or slower incidence of prepayment
of Loans will be borne entirely by the Securityholders.
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Certificate Rating Subject to Change
The rating of the Securities will depend primarily on an assessment by
the Rating Agencies of the Loans and upon the claims-paying ability of the
[Letter of Credit] [Surety Bond] provider. Any reduction in a rating assigned to
the claims-paying ability of the [Letter of Credit][Surety Bond] provider below
the rating initially given to the Securities may result in a reduction in the
rating of the Securities. The rating by the Rating Agencies of the Securities is
not a recommendation to purchase, hold or sell the Securities, inasmuch as such
rating does not comment as to the market price or suitability for a particular
investor. There is no assurance that the ratings will remain in place for any
given period of time or that the ratings will not be lowered or withdrawn by the
Rating Agencies. In general, the ratings address credit risk and do not address
the likelihood of prepayments. The ratings of the Securities do not address the
possibility of the imposition of United States withholding tax with respect to
non-United States persons.
Legal Considerations--Lien Priority
The Loans are secured by [deeds of trust or mortgages (which are first
and/or subordinate liens). With respect to Loans that are secured by first
mortgages, the Master Servicer has the power under certain circumstances to
consent to a new mortgage lien on the Mortgaged Property having priority over
such Loan. Loans secured by second mortgages are entitled to proceeds that
remain from the sale of the related Mortgaged Property after any related senior
mortgage loan and prior statutory liens have been satisfied. In the event that
proceeds from realization on the Mortgaged Properties] are insufficient to
satisfy such loans and prior liens in the aggregate [and the [Letter of Credit]
[Surety Bond] provider is unable to perform its obligations under the [Letter of
Credit] [Surety Bond] or if the coverage under the [Letter of Credit] [Surety
Bond] is exhausted] the Trust Fund and, accordingly, the holders, bear (i) the
risk of delay in distributions while a deficiency judgment against the borrower
is obtained and (ii) the risk of loss if the deficiency judgment cannot be
obtained or is not realized upon. See "Certain Legal Aspects of the Loans" in
the Prospectus.
Legal Considerations--Security Interest
Under the terms of the Purchase Agreement, so long as [Equity One's]
long-term senior unsecured debt is rated at least "____" by ____ and "________"
by ______, the Master Servicer will be entitled to maintain possession of the
documentation relating to each Loan sold by it, [including the Loan Agreements]
and the Related Documents or other evidence of indebtedness signed by the
borrower, and the assignments of the related mortgages [and security interests]
to the Trust Fund will be recorded. Failure to deliver the Related Documents to
the Owner Trustee will have the result in most (if not all) of the states in
which the Related Documents will be held, and failure to record the assignments
of the related mortgages [and security interests] to the Owner Trustee will have
the result in certain states in which the Mortgaged Properties are located, of
making the sale of the Cut-off Date Principal Balances, Additional Balances and
Related Documents potentially ineffective against (i) any creditors of a Seller,
who may have been fraudulently or inadvertently induced to rely on the Loans as
assets of a Seller, or (ii) any purchaser of a Loan who had no notice of the
prior conveyance to the Trust Fund if such purchaser perfects his interest in
the Loan by taking possession of the Related Documents or other evidence of
indebtedness or otherwise. In such event, the Trust Fund would be an unsecured
creditor of [such Seller].
Bankruptcy and Insolvency Risks
The sale of the Loans from the Sellers to the Depositor pursuant to the
Purchase Agreement will be treated as a sale of the Loans. Each Seller will
warrant that such transfer is either a sale of its interest in the Loans or a
grant of a first priority perfected security interest therein. In the event of a
bankruptcy or insolvency of a Seller, the bankruptcy trustee, a conservator, the
receiver of such Seller or another person may attempt to recharacterize the sale
of the Loans as a borrowing by such Seller secured by a pledge of the
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Loans. If the bankruptcy trustee, a conservator, the receiver of such Seller or
another person decided to challenge such transfer, delays in payments of the
Securities and possible reductions or eliminations in the amount thereof could
occur. The Depositor will warrant in the Trust Agreement that the sale, transfer
and assignment of its interest in the Loans to the Trust Fund is a valid sale,
transfer and assignment of such interest.
If a conservator, receiver of a Seller or trustee were appointed for a
Seller, or if certain other events relating to the bankruptcy or insolvency of a
Seller were to occur, Additional Balances would not be transferred by such
Seller to the Trust Fund. In such an event, an Event of Default under the Master
Servicing Agreement and Indenture would occur and the Owner Trustee would
attempt to sell the Loans (unless holders holding Securities evidencing
undivided interests aggregating at least 51% of each of the Security Principal
Balance of the Notes and the Certificates instruct otherwise), thereby causing
early payment of the Security Principal Balance of the Notes and the
Certificates.
In the event of a bankruptcy or insolvency of the Master Servicer, the
bankruptcy trustee, a conservator or the receiver of the Master Servicer may
have the power to prevent the applicable Trustee or the holders from appointing
a successor Master Servicer.
Geographic Concentration
As of the Cut-off Date, approximately _____% (by Cut-off Date Pool
Principal Balance) of the Mortgaged Properties are located in the State of
__________, approximately _____% (by Cut-off Date Pool Principal Balance) of the
Mortgaged Properties are located in the State of __________, approximately
_____% (by Cut-off Date Pool Principal Balance) of the Mortgaged Properties are
located in the State of __________ and approximately _____% (by Cut-off Date
Pool Principal Balance) of the Mortgaged Properties are located in the State of
__________. An overall decline in the residential real estate markets of
_____________, ________________, _______________ and _______________ could
adversely affect the values of the Mortgaged Properties securing such Loans such
that the Principal Balances of the related Loans could equal or exceed the value
of such Mortgaged Properties. As residential real estate markets are influenced
by many factors, including the general condition of the economy and interest
rates, no assurances may be given that the __________, __________, ___________
and ___________ residential real estate markets will not weaken. If the
__________, ____________, ____________ and ___________ residential real estate
markets should experience an overall decline in property values after the dates
of origination of the Loans, the rates of losses on the Loans would be expected
to increase, and could increase substantially.
[Master Servicer's Ability to Change the Terms of the Loans
The Master Servicer may agree to changes in the terms of a Loan
Agreement, provided that such changes (i) do not adversely affect the interest
of the holders or the [Letter of Credit] [Surety Bond] provider, and (ii) are
consistent with prudent business practice. There can be no assurance that
changes in applicable law or the marketplace for mortgage loans or prudent
business practice will not result in changes in the terms of the Loans.]
Delinquent Loans
The Trust Fund will include Loans which are __ or fewer days delinquent.
The Cut-off Date Principal Balance of such delinquent Loans was $______________.
For a discussion of additional risks pertaining to the Securities, see
"Risk Factors" in the Prospectus.
S-14
<PAGE>
THE TRUST FUND
General
The Issuer, Equity One Mortgage Loan Trust 199_, is a business trust
formed under the laws of the State of Delaware pursuant to the Trust Agreement
for the transactions described in this Prospectus Supplement. The Trust
Agreement constitutes the "governing instrument" under the laws of the State of
Delaware relating to business trusts. After its formation, the Issuer will not
engage in any activity other than (i) acquiring, holding and managing the Loans
and the other assets of the Trust Fund and proceeds therefrom, (ii) issuing the
Notes and the Certificates, (iii) making payments on the Notes and the
Certificates and (iv) engaging in other activities that are necessary, suitable
or convenient to accomplish the foregoing or are incidental thereto or connected
therewith.
The property of the Trust Fund will consist of the following: (i) each of
the Loans that are _________; (ii) collections on the Loans received after the
Cut-off Date; (iii) Mortgaged Properties pertaining to the related Loans that
are acquired by foreclosure or deed in lieu of foreclosure; (iv) the Collection
Account and the [Distribution Account] (excluding net earnings thereon); (v) the
[Letter of Credit] [Surety Bond]; and (vi) an assignment of the Depositor's
rights under the Purchase Agreement, including all rights of the Depositor to
purchase Additional Balances.
The Trust Fund's principal offices are in __________, Delaware, in care
of ________________________, as Owner Trustee, at [ ].
THE [LETTER OF CREDIT][SURETY BOND] ISSUER
The following information with respect to _________ ("_______") has been
furnished by __________. Accordingly, none of the Issuer, the Depositor or the
Master Servicer makes any representation as to the accuracy and completeness of
such information.
[Description of Letter of Credit/Surety Issuer]
THE MASTER SERVICER
General
The Master Servicer will service the Loans in accordance with the terms
set forth in the Master Servicing Agreement. The Master Servicer may perform any
of its obligations under the Master Servicing Agreement through one or more
sub-servicers. Notwithstanding any such sub-servicing arrangement, the Master
Servicer will remain liable for its servicing duties and obligations under the
Master Servicing Agreement as if the Master Servicer alone were servicing the
Loans. As of the Closing Date, the Master Servicer will service the Loans
without sub-servicing arrangements.
The Master Servicer
Equity One, Inc. ("Equity One"), a Delaware corporation and a wholly
owned operating subsidiary of Banco Popular, FSB, a federal savings bank with
principal offices in Newark, New Jersey, will act as Master Servicer for the
Loans pursuant to the Master Servicing Agreement. Equity One is engaged
primarily in the mortgage banking business, and as such, originates, purchases,
sells and services mortgage loans. Equity One originates mortgage loans through
a retail branch system and through mortgage loan brokers and
S-15
<PAGE>
correspondents nationwide. Equity One's mortgage loans are principally
first-lien, fixed or adjustable rate mortgage loans secured by Single-Family
Properties or Mixed Use Properties.
As of __________, 199_, Equity One provided servicing for approximately
$__________ million in Loans.
The principal executive offices of Equity One are located at 523
Fellowship Road, Suite 230, Mt. Laurel, New Jersey, 08054. Its telephone number
is (609) 273-1119. Equity One conducts operations from its headquarters in Mt.
Laurel and through affiliates, from offices throughout the nation.
THE LOAN PROGRAM
Underwriting Standards
The following is a description of the underwriting procedures customarily
employed by Sellers with respect to Loans.
Each Seller produces its Loans through its retail origination network of
loan officers and managers. Each Seller also produces Loans through a wholesale
network of mortgage brokers and other entities located throughout the United
States. Prior to the funding of any Loan, each Seller underwrites the related
Loan in accordance with the underwriting standards that have been established by
Equity One and are consistent with those utilized by mortgage lenders generally
during the period of origination for similar types of loans (the "Equity One
Standards").
The Equity One Standards are primarily intended to evaluate the value and
adequacy of the Mortgaged Property as collateral for the proposed Loan, but also
take into consideration the borrower's credit standing and repayment ability.
The Equity One Standards allow for the origination and purchase of Loans
generally under the following underwriting programs: (i) Grade A Credits, (ii)
Grade B Credits and (iii) Grade C Credits. See "Specific Underwriting Criteria;
Underwriting Programs" and "Summary of Underwriting Requirements by Program" in
the Prospectus. It is expected that Grade A Credits Loans will represent ___%,
Grade B Credits Loans will represent ___% and Grade C Credits Loans will
represent ___% of the Loans that will be property of the Trust Fund.
On a case by case basis, a Seller may determine that, based upon
compensating factors, a prospective borrower not strictly qualifying under the
specific criteria of Grade A Credits, Grade B Credits or Grade C Credits
warrants an underwriting exception. See "Specific Underwriting Criteria;
Underwriting Programs" in the Prospectus. Compensating factors may include
Loan-to-Value Ratio, Debt-to-Income Ratio, stable employment and time in the
same residence, but the Equity One Standards do not include any specific formula
or assign any specific weight to compensating factors for purposes of such
determinations. It is expected that some of the Loans that will be property of
the Trust Fund will have been originated based on such underwriting exceptions.
Under the Equity One Standards, Sellers must use either the Full Doc or
the NIV loan documentation program to verify a borrower's income. See "Specific
Underwriting Criteria; Underwriting Programs" in the Prospectus. It is expected
that ___% of the Loans that will be property of the Trust Fund will be
underwritten pursuant to the Full Doc program and that ___% of such Loans will
be underwritten pursuant to the NIV program.
The Equity One Standards require an independent appraisal of each
Mortgaged Property securing a Loan in excess of $15,000, which conforms to
Federal National Mortgage Corporation ("FNMA") standards.
S-16
<PAGE>
Each appraisal includes a market data analysis based on recent sales of
comparable homes in the area and, where deemed appropriate, replacement cost
analysis based on the current cost of constructing a similar home and generally
is required to have been made not earlier than ___ days prior to the date of
origination of the mortgage loan. Every independent appraisal is reviewed by a
representative of the related Seller before the loan is funded. The maximum loan
amount varies depending upon a borrower's credit grade but does not generally
exceed $500,000. Variations in maximum loan amount limits are permitted based on
compensating factors. Maximum loan amounts for Loans underwritten pursuant to
the NIV program generally do not exceed $300,000.
The Equity One Standards permit loans with Loan-to-Value Ratios at
origination of up to 90% depending on the program, type and use of the property,
creditworthiness of the borrower and Debt-to-Income Ratio. The maximum Combined
Loan-to-Value Ratio for purchase money mortgage loans, including any subordinate
mortgages or deeds of trust is 90%.
Title insurance is required on all Loans in excess of $15,000. Each
Seller also requires that fire and extended coverage casualty insurance be
maintained on the Mortgaged Property in an amount at least equal to the
principal balance or the replacement cost of the Mortgaged Property, whichever
is less.
Servicing of Loans
General. The Master Servicer will service the Loans in accordance with
the terms set forth in the Master Servicing Agreement. The Master Servicer may
perform any of its obligations under the Master Servicing Agreement through one
or more sub-servicers. Notwithstanding any such sub-servicing arrangement, the
Master Servicer will remain liable for its servicing duties and obligations
under the Master Servicing Agreement as if the Master Servicer alone were
servicing the Loans. [As of the Closing Date, the Master Servicer will service
the Loans without sub-servicing arrangements.]
The information set forth in the following section through and including
the section captioned "Foreclosure, Delinquency and Loss Experience" has been
provided by Sellers.
Loan Servicing. Equity One services substantially all of the Loans
originated or acquired by the Sellers. Equity One has established standard
policies for the servicing and collection of Loans. Servicing includes, but is
not limited to, collecting and remitting Loan payments, accounting for principal
and interest, making inspections as required of the Mortgaged Properties,
preparation of tax related information in connection with the Loans, supervision
of delinquent Loans, loss mitigation efforts, foreclosure proceedings and, if
applicable, the disposition of Mortgaged Properties, and generally administering
the Loans, for which it receives servicing fees.
Coupon booklets are delivered to borrowers for making monthly payments.
Notice of changes in the applicable loan rate, if applicable, are provided by
Equity One to the mortgagor when appropriate.
Collection Procedures
When a mortgagor fails to make a payment on a Loan, each Seller attempts
to cause the deficiency to be cured by corresponding with the mortgagor. In most
cases, deficiencies are cured promptly. Pursuant to each Seller's servicing
procedures, each Seller generally mails to the mortgagor a notice of intent to
foreclose after the Loan becomes 31 days past due (two payments due but not
received) and, within 60 days thereafter, if the Loan remains delinquent,
institutes appropriate legal action to foreclose on the Mortgaged Property.
Foreclosure proceedings may be terminated if the delinquency is cured. Loans to
borrowers in bankruptcy proceedings may be restructured in accordance with law
and with a view to maximizing recovery of such Loans, including any
deficiencies.
S-17
<PAGE>
Once foreclosure is initiated, a foreclosure tracking system is used to
monitor the progress of the proceedings. The system includes state specific
parameters to monitor whether proceedings are progressing within the time frame
typical for the state in which the Mortgaged Property is located. During the
foreclosure proceeding, the Seller determines the amount of the foreclosure bid
and whether to liquidate the Loan.
After foreclosure, the Seller may liquidate the Mortgaged Property and
charge-off the Loan balance which was not recovered through Liquidation
Proceeds. If foreclosed, the Mortgaged Property is sold at a public or private
sale and may be purchased by the Seller.
Servicing and charge-off policies and collection practices may change
over time in accordance with, among other things, the business judgment of each
Seller, changes in the servicing portfolio and applicable laws and regulations.
Foreclosure, Delinquency and Loss Experience
The following table summarizes the delinquency and loss experience of the
Sellers' Loans at or for the years specified therein. A Loan is characterized as
delinquent if the borrower has not paid the minimum payment due by the due date.
The table below discloses delinquency percentages of Loans 60 days or more past
due on a contractual basis and excludes Loans where the Loan is in foreclosure
or the borrower has filed for bankruptcy. This information should not be
considered as a basis for assessing the likelihood, amount, or severity of
delinquency or losses on the Loans, and no assurances can be given that the
foreclosure experience presented in the second paragraph below the table will be
indicative of such experience on the Loans.
S-18
<PAGE>
<TABLE>
<CAPTION>
Loss and Delinquency Tables
At or for the At or for the
Three Months Three Months
At or for the Year Ended November 30, Ended Ended
----------------------------------------------- March 31, March 31,
1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Portfolio Unpaid
Principal Balance (1) $ $ $ $ $
Average Portfolio
Unpaid $ $ $ $ $
Principal Balance
....
Period of
Delinquency (2)
60+ Days .... % % % % % %
Total Delinquencies % % % % % %
%
Total Credit Losses(3) % % % % %(4) %(4)
</TABLE>
(1) Portfolio Unpaid Principal Balance is the net amount of principal to
be paid on each Loan, excluding unearned finance charges and other
charges, and excludes the principal balance of each Loan as to which
the related Mortgaged Property has been previously acquired through
foreclosure.
(2) Delinquency percentages are calculated as the dollar amount of Loan
principal delinquent as a percent of the Portfolio Unpaid Principal
Balance. Delinquency percentages include the principal balance of all
Loans in foreclosure proceedings. Generally, all Loans in foreclosure
proceedings are 90 days or more delinquent. Delinquency percentages
do not include the principal balance of Loans which are real estate
owned.
(3) Total Credit Losses includes (a) charge-offs of principal, net of
subsequent recoveries, relating to Loans written off as uncollectible
or charge-offs relating to properties securing any Loans which have
been foreclosed upon and for which, in the opinion of management,
liquidation proceeds would not exceed estimated expenses of
liquidation plus the unpaid principal balance, (b) expenses
associated with maintaining, repairing, and selling foreclosed
properties and real estate owned, and (c) losses (gains) on the
disposition of foreclosed properties and real estate owned.
(4) Annualized.
[These tables do not include ________ Loans with principal balances
aggregating $_____________ that were sold, but were being serviced on an interim
basis pending transfer of servicing, as of ___________, 199_. As of the date
hereof, servicing with respect to such Loans has been transferred.]
As of ____________, 199_, ________ Loans with an aggregate principal
balance of $______________ were in foreclosure and, there were __________ Loans
in bankruptcy with a combined loan balance of $______________.
Historically, a variety of factors, including the appreciation of real
estate values, have limited the loss and delinquency experience on Loans. There
can be no assurance that factors beyond each Seller's control, such as national
or local economic conditions or downturn in the real estate markets of its
lending areas, will not result in increased rates of delinquencies and
foreclosure losses in the future.
S-19
<PAGE>
Over the last several years, there has been a general deterioration of
the real estate market and weakening economy in many regions of the country,
including __________. The general deterioration of the real estate market has
been reflected in increases in delinquencies of loans secured by real estate,
slower absorption rates of real estate into the market and lower sales prices
for real estate. The general weakening of the economy has been reflected in
decreases in the financial strength of borrowers and decreases in the value of
collateral serving as security for loans. If the real estate market and economy
continue to decline, the Seller may experience an increase in delinquencies on
the Loans serviced and higher net losses on Liquidated Loans.
DESCRIPTION OF THE LOANS
General
The property of the Trust Fund will consist of a pool of the following
types of loans (collectively, the "Loans"): mortgage loans secured by first
and/or subordinate liens on (A) one- to four-family residential properties,
(each, a "Residential Loan") and (B) mixed commercial/residential use properties
(each, a "Mixed Use Loan"). The Loans were originated pursuant to loan
agreements and disclosure statements (the "Loan Agreements"). The Mortgaged
Properties securing the Loans consist of []. See "--Loan Terms" below.
The Cut-off Date Pool Principal Balance is $______________, which is
equal to the aggregate Principal Balance of the Loans as of the Cut-off Date. As
of the Cut-off Date, the Loans were not more than [] days delinquent. The
average Cut-off Date Principal Balance was approximately $____, the minimum
Cut-off Date Principal Balance was zero, the maximum Cut-off Date Principal
Balance was $_____, the minimum Loan Rate and the maximum Loan Rate as of the
Cut-off Date were ___% and ___% per annum, respectively, and the weighted
average Loan Rate as of the Cut-off Date was approximately ___% per annum. The
remaining term to scheduled maturity for the Loans as of the Cut-off Date ranged
from __ months to __ months and the weighted average remaining term to scheduled
maturity was approximately __ months. As of the Cut-off Date, the Combined
Loan-to-Value Ratio of the Loans ranged from ____% to ____% and the weighted
average Combined Loan-to-Value Ratio was __%. The Combined Loan-to-Value Ratio
for a Loan is the ratio (expressed as a percentage) of (A) the sum of (i) the
original principal balance of such Loan and (ii) any outstanding principal
balances of mortgage loans senior to such Loan (calculated at the date of
origination of the Loan) to (B) the lesser of (i) the appraised value of the
related Mortgaged Property as set forth in the loan files at such date of
origination or (ii) in the case of a Mortgaged Property purchased within one
year of the origination of the related Loan, the purchase price of such
Mortgaged Property. As of the Cut-off Date, approximately ___% by Cut-off Date
Principal Balance of the Loans represented first liens on the related Mortgaged
Properties, while approximately ___% of the Loans represented subordinate liens.
As of the Cut-off Date, approximately ___% of the Loans are secured by Mortgaged
Properties which are single-family residences and ___% were owner-occupied. As
of the Cut-off Date, approximately ___%, ____%, ___%, ___%, ___% and ___% by
Cut-off Date Principal Balance are located in [__________, ________, __________,
_______, ______ and ________], respectively.
Loan Terms
As of the Cut-off Date, the aggregate of the Principal Balances of the
Loans is expected to be approximately $_____ (the "Cut-off Date Pool Principal
Balance"). [The Loans provide for payment based on the amortization of the
amount financed over a series of substantially equal monthly payments, with
Balloon Payments due at the stated maturities of (i) 15 years, in the case of
Residential Loans and (ii) seven to ten years, in the case of Mixed Use Loans.
Loans with Balloon Payments may involve a greater degree of risk than loans
which are fully amortizing because the ability of a borrower to make a Balloon
Payment typically will depend upon the ability of the borrower to either timely
refinance the Loan or sell the related Mortgaged Property.] All the Loans
provide for payments due on a set day, but not necessarily the first day, of
each month (the "Due Date"). The Loans to be included in a pool were originated
or purchased by the Sellers and were originated substantially in accordance with
the Sellers' underwriting criteria for mortgage loans, described under "The Loan
Program--Underwriting Standards."
Scheduled monthly payments made by the mortgagors on the Loans either
earlier or later than the scheduled Due Dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest. Any Loan may be prepaid in full or in part at any time without
penalty.
S-20
<PAGE>
Each Loan was originated after ________________________________.
The latest stated maturity date of any Loan is ____________________. The
earliest stated maturity date of any Loan is __________________________.
As of the Cut-off Date, no Loan was delinquent more than ___ days.
No Loan had a Loan-to-Value Ratio at origination of more than ___%.
Approximately __% of the Residential Loans had a Loan-to-Value Ratio at
origination of 90%. In general, the Mixed Use Loans had a Loan-to-Value Ratio at
origination of not more than 70%.
The "Loan-to-Value Ratio" of a Loan at any given time is equal to (i) the
principal balance of such Loan at the date of origination, divided by (ii) the
Collateral Value of the related Mortgaged Property. The "Combined Loan-to-Value
Ratio" of a Loan secured by a subordinate lien at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal balance
of such Loan and (b) the outstanding principal balance, at the date of
origination of such 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 senior 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 Mortgaged Property.
The "Collateral Value" of a Mortgaged 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 based on an appraisal made for the related Seller by an independent fee
appraiser at the time of the origination of the related Loan, and (b) if
applicable: (i) if the Loan was for the purpose of acquiring the Mortgaged
Property, the sales price of such Mortgaged Property at such time of origination
or (ii) if the Loan is secured by a lien on a Mortgaged Property purchased by
the borrower within one year of the origination of such Loan, the purchase price
of such Mortgaged Property. In the case of Refinance Loans, the Collateral Value
is the appraised value of the Mortgaged Property based upon the appraisal
obtained at the time of refinancing. No assurance can be given that the values
of the Mortgaged Properties have remained or will remain at their levels as of
the dates of origination of the related Loans. If the residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Loans become equal to or greater than the value of
the Mortgaged Properties, actual losses on the Loans could be higher than losses
now generally experienced in the mortgage lending industry.
The following information sets forth in tabular format certain
information, as of the Cut-off Date, as to the Loans that will be property of
the Trust Fund. Other than with respect to rates of interest, percentages
(approximate) are stated by Principal Balance of the Loans as of the Cut-off
Date and have been rounded in order to total 100%.
S-21
<PAGE>
<TABLE>
<CAPTION>
Loan Tables
Loan Rates(1)
-----------------------------------
Number of Loans Aggregate Principal Balance
Loan Rates (%) Outstanding Percent of Pool
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
6.250....................... $ %
6.750.......................
6.875.......................
7.000.......................
7.125.......................
7.250.......................
7.375.......................
7.500.......................
7.625.......................
7.750.......................
7.875.......................
8.000.......................
8.125.......................
8.250.......................
8.375.......................
8.500.......................
8.625.......................
8.750.......................
8.875.......................
9.000.......................
9.125.......................
9.250.......................
9.375.......................
9.500.......................
9.875.......................
10.000.......................
-- ----------- ------
Totals....................... $ 100.00%
-- ----------- ------
-- ----------- ------
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average Loan Rate of the Loans
(as so adjusted) is expected to be approximately ___%. Without such
adjustment, the weighted average Loan Rate of the Loans is expected
to be approximately ___% per annum.
S-22
<PAGE>
<TABLE>
<CAPTION>
Original Loan-to-Value Ratios(1)
---------------------------------------
Original Loan-to-Value Number of Loans Aggregate Principal Balance
Ratios (%) Outstanding Percent of Pool
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
50.00 and below.............. $ %
50.01 to 55.00...............
55.01 to 60.00...............
60.01 to 65.00...............
65.01 to 70.00...............
70.01 to 75.00...............
75.01 to 80.00...............
80.01 to 85.00...............
85.01 to 90.00...............
90.01 to 95.00...............
-- ----------- ------
Totals....................... $ 100.00%
-- ----------- ------
-- ----------- ------
</TABLE>
- -------------------
(1) The weighted average original Loan-to-Value Ratio of the Loans is
expected to be approximately ___%.
<TABLE>
<CAPTION>
Current Loan Principal Balances(1)
----------------------------------
Current Loan Amounts Number of Loans Aggregate Principal Balance
Outstanding Percent of Pool
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 0 - $ 50,000........ $ %
$ 50,001 - $ 100,000........
$100,001 - $ 150,000........
$150,001 - $ 200,000........
$200,001 - $ 250,000........
$250,001 - $ 300,000........
$300,001 - $ 350,000........
$350,001 - $ 400,000........
$400,001 - $ 450,000........
$450,001 - $ 500,000........
$500,001 - $ 550,000........
$550,001 - $ 600,000........
$600,001 - $ 650,000........
$650,001 - $ 750,000........
$750,001 - $1,000,000........
-- ----------- ------
Totals....................... $ 100.00%
-- ----------- ------
-- ----------- ------
</TABLE>
- -------------------
(1) As of the Cut-off Date, the average current Loan principal balance is
expected to be approximately $ .
<TABLE>
<CAPTION>
Documentation Program for Loans
---------------------------------------
Type of Program (1) Number of Loans Aggregate Principal Balance
Outstanding Percent of Pool
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Full Doc..................... $ %
NIV..........................
S-23
<PAGE>
-- ----------- ------
Totals....................... $ 100.00%
-- ----------- ------
-- ----------- ------
</TABLE>
- -------------------
(1) See "The Loan Program--Underwriting Standards" herein and "Loan
Program--Specific Underwriting Criteria; Underwriting Programs" in the
Prospectus.
<TABLE>
<CAPTION>
Type of Mortgaged Properties
--------------------------------------
Property Type Number of Loans Aggregate Principal Balance
Outstanding Percent of Pool
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Single Family................ $ %
Condominium..................
Mixed Use....................
Two- to Four-Family..........
Planned Unit Development.....
-- ----------- ------
Totals....................... $ 100.00%
-- ----------- ------
-- ----------- ------
</TABLE>
<TABLE>
<CAPTION>
Occupancy Types(1)
----------------------------------
Occupancy Type Number of Loans Aggregate Principal Balance
Outstanding Percent of Pool
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Primary Residence............ $ %
Investor Property............
Second Residence.............
-- ----------- ------
Totals....................... $ 100.00%
-- ----------- ------
-- ----------- ------
</TABLE>
- -------------------
(1) Based upon representations of the related mortgagors at the time of
origination.
S-24
<PAGE>
<TABLE>
<CAPTION>
State Distribution of Mortgaged Properties(1)
---------------------------------------------
State Number of Loans Aggregate Principal Balance
Outstanding Percent of Pool
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ %
Other (less than [2]%).......
-- ----------- ------
Totals....................... $ 100.00%
-- ----------- ------
-- ----------- ------
</TABLE>
- -------------------
(1) Other includes other states with under [2]% concentrations
individually. No more than approximately ___% of the Loans will be
secured by Mortgaged Properties located in any one postal zip code
area.
<TABLE>
<CAPTION>
Purpose of Loans
----------------------------------
Loan Purpose Number of Loans Aggregate Principal Balance
Outstanding Percent of Pool
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchase..................... $ %
Refinance (rate/term)........
Refinance (cash out).........
-- ----------- ------
Totals....................... $ 100.00%
-- ----------- ------
-- ----------- ------
</TABLE>
S-25
<PAGE>
<TABLE>
<CAPTION>
Remaining Terms to Maturity(1)
-----------------------------------------
Remaining Term to Maturity Number of Loans Aggregate Principal Balance
(Months) Outstanding Percent of Pool
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
180..........................
179..........................
178..........................
177..........................
176..........................
175..........................
174..........................
173..........................
172..........................
171..........................
170..........................
169..........................
168..........................
167..........................
166..........................
165..........................
164..........................
163..........................
162..........................
161..........................
160..........................
159..........................
158..........................
157..........................
156..........................
155..........................
154..........................
153..........................
152..........................
151..........................
150..........................
149..........................
148..........................
147..........................
146..........................
145..........................
144..........................
-- ----------- ------
Totals....................... $ 100.00%
-- ----------- ------
-- ----------- ------
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average remaining term to
maturity of the Loans is expected to be approximately ___ months.
Sale of Loans
At the time of issuance of the Securities, the Depositor will sell,
assign and transfer to the Trust Fund all of its right, title and interest in
and to each Loan (including its right to purchase any Additional Balances
arising in the future), related Loan Agreements, mortgages [, security
agreements] and other related documents (collectively, the "Related Documents"),
without recourse, including all collections received on or with respect to each
such Loan after the Cut-off Date (exclusive of payments in respect of accrued
interest due on or prior to the
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Cut-off Date or due in the month of ______). The Owner Trustee, concurrently
with such transfer, will deliver the Securities. Each Loan sold, transferred and
assigned to the Trust Fund will be identified on a schedule delivered to the
Owner Trustee pursuant to the Purchase Agreement. Such schedule will include
information as to the Cut-off Date Principal Balance of each Loan, as well as
information with respect to the Loan Rate.
The Purchase Agreement will permit each Seller to maintain
possession of the Related Documents and certain other documents relating to the
Loans (the "Mortgage Files") and the sale, transfer and assignment of the Loans
to the Owner Trustee will be filed of public record.
Within 90 days of on Assignment Event the Owner Trustee will review the
Loans and the Related Documents and if any Loan or Related Document is found to
be defective in any material respect and such defect is not cured within 90 days
following notification thereof to the Seller and the Depositor by the Owner
Trustee, the Seller will be obligated to repurchase the Loan and to deposit the
Repurchase Price into the Collection Account. Upon such retransfer, the
Principal Balance of such Loan will be deducted from the Pool Balance. In lieu
of any such repurchase, the Seller may substitute an Eligible Substitute Loan.
Any such repurchase or substitution will be considered a payment in full of such
Loan. The obligation of the Seller to accept a transfer of a Defective Loan is
the sole remedy regarding any defects in the Loans and Related Documents
available to the Owner Trustee or the holders.
With respect to any Loan, the "Repurchase Price" is equal to the
Principal Balance of such Loan at the time of any transfer described above plus
accrued and unpaid interest thereon to the date of repurchase.
An "Eligible Substitute Loan" is a Loan substituted by the Depositor
for a Defective 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
Loan for a Defective Loan, an aggregate outstanding Principal Balance) of not
__% more or less than the Transfer Deficiency relating to such Defective Loan;
(ii) have a Loan Rate not less than the Loan Rate of the Defective Loan and not
more than 1% in excess of the Loan Rate of such Defective Loan; (iii) have a
Loan Rate based on the same Index Rate with adjustments to such Loan Rate made
on the same Interest Rate Adjustment Date as that of the Defective Loan; (iv)
have a mortgage or security interest of the same or higher level of priority as
the mortgage or security interest relating to the Defective Loan; (v) have a
remaining term to maturity not more than ___ months earlier and not more than __
months later than the remaining term to maturity of the Defective Loan; (vi)
comply with each representation and warranty as to the Loans set forth in the
Purchase Agreement (deemed to be made as of the date of substitution); (vii) in
general, have an original Combined Loan-to-Value Ratio not greater than that of
the Defective Loans; and (viii) satisfy certain other conditions specified in
the Purchase Agreement. To the extent the Principal Balance of an Eligible
Substitute Loan is less than the Principal Balance of the related Defective
Loan, the Seller will be required to make a deposit to the Collection Account
equal to such difference.
Each Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the Owner
Trustee with respect to each Loan (e.g., Cut-off Date Principal Balance and the
Loan Rate). In addition, each Seller will represent and warrant on the Closing
Date that at the time of transfer to the Depositor, such Seller has sold,
transferred and assigned all of its right, title and interest in each Loan and
the Related Documents, free of any lien (subject to certain exceptions). Upon
discovery of a breach of any such representation and warranty which materially
and adversely affects the interests of the holders or the [Letter of
Credit][Surety Bond] provider in the related Loan and Related Documents, such
Seller will have a period of 90 days after discovery or notice of the breach to
effect a cure. If the breach cannot be cured within the 90-day period, such
Seller will be obligated to repurchase or substitute the Defective Loan from the
Trust Fund. The same procedure and limitations that are set forth above for the
repurchase or substitution of Defective Loans will apply to the transfer of a
Loan that is required to be repurchased or substituted because of a breach of a
representation or warranty in the Purchase Agreement that materially and
adversely affects the interests of the holders.
Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Loans."
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MATURITY AND PREPAYMENT CONSIDERATIONS
All of the Loans may be prepaid in full or in part at any time. The
prepayment experience with respect to the Loans will affect the weighted average
life of the Securities.
The rate of prepayment on the Loans cannot be predicted. Neither the
Depositor nor the Master Servicer is aware of any publicly available studies or
statistics on the rate of prepayment of loans similar to the Loans. The
prepayment experience of the Trust Fund with respect to the Loans may be
affected by a variety of economic, geographic, social and other factors,
including changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties and servicing decisions. In
general, if prevailing interest rates were to fall significantly below the Loan
Rates on the Loans, the Loans could be subject to higher prepayment rates than
if prevailing interest rates were to remain at or above the Loan Rates on the
Loans. Conversely, if prevailing interest rates were to rise significantly, the
rate of prepayments on the Loans would generally be expected to decrease. No
assurances can be given as to the rate of prepayments on the Loans in stable or
changing interest rate environments. Substantially all of the Loans contain
due-on-sale provisions and the Master Servicer intends to enforce such
provisions, unless such enforcement is not permitted by applicable law. The
enforcement of a due-on-sale provision will have the same effect as a prepayment
of the related Loan. See "Certain Legal Aspects of the Loans--Due-on-Sale
Clauses" in the Prospectus.
The yield to an investor who purchases the Securities in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Loans is actually different than the rate anticipated
by such investor at the time such Securities were purchased.
Collections on the Loans may vary due to, among other things, the
seasonal purchasing and payment habits of borrowers. In addition, It is possible
that borrowers may fail to make scheduled payments.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust Fund and it can be expected that a portion of borrowers
will not prepay their Loans to any significant degree. See "Yield and Prepayment
Considerations" in the Prospectus.
DESCRIPTION OF THE MASTER SERVICING AGREEMENT
The Master Servicer shall establish and maintain on behalf of the Owner
Trustee an account (the "Collection Account") for the benefit of the holders.
The Collection Account will be an Eligible Account (as defined herein). Subject
to the investment provision described in the following paragraphs, upon receipt
by the Master Servicer of amounts in respect of the Loans (excluding amounts
representing administrative charges, annual fees, taxes, assessments, credit
insurance charges, insurance proceeds to be applied to the restoration or repair
of a Mortgaged Property or similar items), the Master Servicer will deposit such
amounts in the Collection Account. Amounts so deposited may be invested in
Eligible Investments (as described in the Master Servicing Agreement) maturing
no later than one Business Day prior to the date on which the amount on deposit
therein is required to be deposited in the [Distribution Account] or on such
Distribution Date if approved by the Rating Agencies. Not later than the _____
Business Day prior to each Distribution Date (the "Determination Date"), the
Master Servicer will notify the Owner Trustee and the Indenture Trustee of the
amount of such deposit to be included in funds available for the related
Distribution Date.
The Owner Trustee and the Indenture Trustee will establish one or more
accounts (each, a "Security Account") into which will be deposited amounts
withdrawn from the Collection Account for distribution to holders on a
Distribution Date. The Security Account will be an Eligible Account. Amounts on
deposit therein will be invested in Eligible Investments maturing on or before
the Business Day prior to the related Distribution Date.
An "Eligible Account" is (i) an account that is maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the highest short-term debt rating by the Rating Agencies, (ii) one or more
accounts with a depository institution having a minimum long-term unsecured debt
rating of "____" by _____ and "____" by _____, which accounts are fully insured
by either the Savings Association Insurance Fund ("SAIF") or the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC") established
by such fund, (iii) a segregated trust account maintained with the Owner Trustee
or an affiliate of the Owner Trustee in its fiduciary capacity or (iv) an
account that is otherwise acceptable to each Rating Agency as evidenced by a
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letter from each Rating Agency to the Owner Trustee, without reduction or
withdrawal of their then current ratings of the Securities.
"Eligible Investments" are specified in the Master Servicing Agreement
and are limited to (i) obligations of the United States or any agency thereof,
provided such obligations are backed by the full faith and credit of the United
States; (ii) general obligations of or obligations guaranteed by any state of
the United States or the District of Columbia receiving the highest long-term
debt rating of each Rating Agency rating the Securities, or such lower rating as
will not result in the downgrading or withdrawal of the ratings then assigned to
the Securities by each such Rating Agency; (iii) commercial or finance company
paper which is then receiving the highest commercial or finance company paper
rating of each such Rating Agency, or such lower rating as will not result in
the downgrading or withdrawal of the ratings then assigned to the Securities by
each such Rating Agency; (iv) certificates of deposit, demand or time deposits,
or bankers' acceptances issued by any depository institution or trust company
incorporated under the laws of the United States or of any state thereof and
subject to supervision and examination by federal and/or state banking
authorities, provided that the commercial paper and/or long term unsecured debt
obligations 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 is not a Rating Agency) are then rated one of the two highest
long-term and the highest short-term ratings of each such Rating Agency for such
securities, or such lower ratings as will not result in the downgrading or
withdrawal of the rating then assigned to the Securities by any such Rating
Agency; (v) 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; (vi) guaranteed reinvestment agreements issued by
any bank, insurance company or other corporation containing, at the time of the
issuance of such agreements, such terms and conditions as will not result in the
downgrading or withdrawal of the rating then assigned to the Securities by any
such Rating Agency; (vii) 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; (viii) securities (other than stripped bonds, stripped
coupons or instruments sold at a purchase price in excess of 115% of the face
amount thereof) bearing interest or sold at a discount issued by any corporation
incorporated under the laws of the United States or any state thereof which, at
the time of such investment, have one of the two highest ratings of each Rating
Agency (except if the Rating Agency is Moody's, such rating shall be the highest
commercial paper rating of Moody's for any such securities), or such lower
rating as will not result in the downgrading or withdrawal of the rating then
assigned to the Securities by any such Rating Agency, as evidenced by a signed
writing delivered by each such Rating Agency; and (ix) such other investments
having a specified stated maturity and bearing interest or sold at a discount
acceptable to each Rating Agency as will not result in the downgrading or
withdrawal of the rating then assigned to the Securities by any such Rating
Agency, as evidenced by a signed writing delivered by each such Rating Agency;
provided that no such instrument shall be an Eligible Investment if such
instrument evidences the right to receive interest only payments with respect to
the obligations underlying such instrument.
Allocations and Collections
All collections on the Loans will generally be allocated in accordance
with the Loan Agreements between amounts collected in respect of interest and
amounts collected in respect of principal. As to any Distribution Date,
"Interest Collections" will be equal to the aggregate of the amounts collected
during the related Collection Period, including Net Liquidation Proceeds (as
defined below), allocated to interest pursuant to the terms of the Loan
Agreements.
As to any Distribution Date, "Principal Collections" will be equal to
the sum of (i) the amounts collected during the related Collection Period,
including Net Liquidation Proceeds, and allocated to principal pursuant to the
terms of the Loan Agreements and (ii) any [Substitution Adjustment Amounts].
"Net Liquidation Proceeds" with respect to a Loan are equal to the aggregate of
all amounts received upon liquidation of such Loan, including, without
limitation, insurance proceeds, reduced by related expenses, but not including
the portion, if any, of such amount that exceeds the Principal Balance of the
Loan at the end of the Collection Period immediately preceding the Collection
Period in which such Loan became a Liquidated Loan plus accrued and unpaid
interest thereon through the date of liquidation.
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With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Loans as of such date. The Principal
Balance of a Loan (other than a Liquidated Loan) on any day is equal to the
Cut-off Date Principal Balance thereof, plus (i) any Additional Balances in
respect of such Loan minus (ii) all collections credited against the Principal
Balance of such Loan in accordance with the related Loan Agreement prior to such
day. The Principal Balance of a Liquidated Loan after final recovery of related
Liquidation Proceeds shall be zero.
Hazard Insurance
The Master Servicing Agreement provides that the Master Servicer
maintain certain hazard insurance on the Mortgaged Properties relating to the
Loans. While the terms of the related Loan Agreements generally require
borrowers to maintain certain hazard insurance, the Master Servicer will not
monitor the maintenance of such insurance.
The Master Servicing Agreement requires the Master Servicer to maintain
for any Mortgaged Property relating to a Loan acquired upon foreclosure of a
Loan, by deed in lieu of such foreclosure [or upon realization of a security
interest], 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 Loan plus the outstanding balance on any mortgage
loan senior to such Loan at the time of foreclosure, deed in lieu of foreclosure
[or realization upon the security interest], plus accrued interest and the
Master Servicer's good faith estimate of the related liquidation expenses to be
incurred in connection therewith. The Master Servicing Agreement provides that
the Master Servicer may satisfy its obligation to cause hazard policies to be
maintained by maintaining a blanket policy insuring against losses on such
Mortgaged Properties. If such blanket policy contains a deductible clause, the
Master Servicer will be obligated to deposit in the Collection Account the sums
which would have been deposited therein but for such clause. The Master Servicer
will satisfy these requirements by maintaining a blanket policy. As set forth
above, all amounts collected by the Master Servicer (net of any reimbursements
to the Master Servicer) under any hazard policy (except for amounts to be
applied to the restoration or repair of the Mortgaged Property) will ultimately
be deposited in the Collection Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and the like, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Loans will be underwritten by
different insurers and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by state laws and most of such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive or an
exact description of the insurance policies relating to the Mortgaged
Properties.
Realization Upon Defaulted Loans
The Master Servicer will foreclose upon or otherwise comparably convert
to ownership Mortgaged Properties securing such of the Loans as come into
default when in accordance with applicable servicing procedures under the Master
Servicing Agreement, no satisfactory arrangements can be made for the collection
of delinquent payments. In connection with such foreclosure or other conversion,
the Master Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general mortgage servicing activities,
provided the Master Servicer will not be required to expend its own funds in
connection with foreclosure or other conversion, correction of default on a
related senior mortgage loan or restoration of any property unless, in its sole
judgment, such foreclosure, correction or restoration will increase net
Liquidation Proceeds. The Master Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Securityholders or the [related Seller].
Servicing Compensation and Payment of Expenses
With respect to each Collection Period, other than the first Collection
Period, the Master Servicer will retain from interest collections in respect of
the Loan a portion of such interest collections as a monthly Servicing
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Fee in the amount equal to ___% per annum ("Servicing Fee Rate") on the
aggregate Principal Balances of the Loans as of the first day of each such
Collection Period. All assumption fees, late payment charges and other fees and
charges, to the extent collected from borrowers, will be retained by the Master
Servicer as additional servicing compensation.
The Master Servicer will pay certain ongoing expenses associated with
the Trust Fund and incurred by it in connection with its responsibilities under
the Master Servicing Agreement, including, without limitation, payment of the
fees and disbursements of the Trustee, any custodian appointed by the Trustee,
the entity maintaining the Security Register relating to the Securities and any
paying agent. In addition, the Master Servicer will be entitled to reimbursement
for certain expenses incurred by it in connection with defaulted Loans and in
connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of holders to receive any related Net
Liquidation Proceeds.
DESCRIPTION OF THE SECURITIES
General
The Notes will be issued pursuant to the Indenture dated as of
___________, 199_, between the Trust Fund and _______________, as Indenture
Trustee. The Certificates will be issued pursuant to the Trust Agreement dated
as of ______________, 199_, among the Depositor, __________, and ______________,
as Owner Trustee. The following is a description of the material provisions of
the Securities, Indenture and Trust Agreement. As used herein, "Agreement" shall
mean either the Trust Agreement or the Indenture, as the context requires.
The Securities will be freely transferrable and exchangeable at the
corporate trust office of the Owner Trustee, with respect to the Certificates or
the Indenture Trustee with respect to the Notes.
Book-Entry Securities
The Securities will be initially issued in book-entry form (the
"Book-Entry Securities"). Persons acquiring beneficial ownership interests in
the Book-Entry Securities ("Beneficial Owners") will hold their Securities
through the Depository Trust Company ("DTC") in the United States[, or CEDEL or
Euroclear (in Europe)] if they are participants of such systems, or indirectly
through organizations which are participants in such systems. The Book-Entry
Securities will be issued in one or more certificates which equal the aggregate
principal balance of the Securities and will initially be registered in the name
of Cede & Co., the nominee of DTC. [CEDEL and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in CEDEL's and Euroclear's names on the books of their respective depositories
which in turn will hold such positions in customers' securities accounts in the
depositories' names on the books of DTC. [Citibank will act as depository for
CEDEL and Chase will act as depository for Euroclear (in such capacities,
individually the "Relevant Depository" and collectively the "European
Depositories").] Investors may hold such beneficial interests in the Book-Entry
Securities in minimum denominations representing Security Principal Balances of
$1,000 and in integral multiples in excess thereof. Except as described below,
no person acquiring a Book-Entry Security 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
"Securityholder" of the Book-Entry Securities will be Cede & Co., as nominee of
DTC. Beneficial Owners will not be Securityholders as that term is used in the
Agreements. Beneficial Owners are only permitted to exercise their rights
indirectly through DTC participants and DTC.
Distributions
On each Distribution Date, collections on the Loans will be applied in
the following order of priority:
(i) to the Master Servicer, the Servicing Fee;
(ii) as payment for the accrued interest due and any overdue accrued
interest on the respective Security Principal Balance of the Notes and the
Certificates;
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(iii) as principal on the Securities, the excess of Principal
Collections over Additional Balances created during the preceding
Collection Period, such amount to be allocated between the Notes and
Certificates pro rata, based on their respective Security Principal
Balances;
(iv) as principal on the Securities, as payment for any Liquidation
Loss Amounts on the Loans;
(v) as payment for the premium for the [Letter of Credit][Surety Bond];
(vi) to reimburse prior draws made on the [Letter of Credit][Surety
Bond]; and
(vii) any remaining amounts to the Seller.
As to any Distribution Date, the "Collection Period" is the calendar
month preceding the month of such Distribution Date.
"Liquidation Loss Amount" means with respect to any Liquidated Loan,
the unrecovered Principal Balance thereof at the end of the Collection Period in
which such Loan became a Liquidated Loan after giving effect to the Net
Liquidation Proceeds in connection therewith.
Interest
Note Rate. Interest will accrue on the unpaid Security Principal
Balance of the Notes at the per annum rate (the "Note Rate") equal to __% per
annum from the Closing Date to the first Distribution Date and thereafter
interest will accrue on the Notes from and including the preceding Distribution
Date to but excluding such current Distribution Date (each, an "Interest Accrual
Period") at [a floating rate equal to LIBOR (as defined herein) plus __%] [__%].
[Interest will be calculated on the basis of the actual number of days in each
Interest Accrual Period by 360.] A failure to pay interest on any Notes on any
Distribution Date that continues for five days constitutes an Event of Default
under the Indenture.
Pass-Through Rate. Interest will accrue on the unpaid Security
Principal Balance of the Certificates at the per annum rate (the "Pass-Through
Rate") equal to __% per annum from the Closing Date to the first Distribution
Date and thereafter interest will accrue on the Certificates for each Interest
Accrual Period at [a floating rate equal to LIBOR (as defined herein) plus __%]
[__%]. [Interest will be calculated on the basis of the actual number of days in
each Interest Accrual Period divided by 360.] A failure to pay interest on any
Certificates on any Distribution Date that continues for five days constitutes
an Event of Default under the Trust Agreement.
Optional Termination
The Trust Fund will terminate on the Distribution Date following the
earlier of (i) _________________________ and (ii) the final payment or other
liquidation of the last Loan in the Trust Fund. The Loans will be subject to
optional repurchase by the Master Servicer on any Distribution Date after the
Principal Balance is reduced to an amount less than or equal to $ (5% of the
initial Principal Balance). The repurchase price will be equal to the sum of the
outstanding Principal Balance and accrued and unpaid interest thereon at the
weighted average of the Loan Rates through the day preceding the final
Distribution Date.
THE DEPOSITOR
Equity One ABS, Inc., the Depositor, is a Delaware corporation
organized in March of 1997 for the limited purpose of acquiring, owning and
transferring Trust Assets and selling interests therein or bonds secured
thereby. The Depositor is a limited purpose wholly owned finance subsidiary of
Equity One. The Depositor maintains its principal office at 103 Springer
Building, 3411 Silverside Road, Wilmington, Delaware 19810. Its telephone number
is (302) 478-6160.
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THE INDENTURE
The following is a description of the material terms of the Indenture.
Whenever particular sections or defined terms of the Indenture are referred to,
such sections or defined terms are thereby incorporated herein by reference. See
"Description of the Securities" herein for a description of certain additional
terms of the Indenture.
Reports to Noteholders
The Indenture Trustee will mail to each Noteholder, at such
Noteholder's request, at its address listed on the note register maintained with
the Indenture Trustee a report setting forth certain amounts relating to the
Notes.
Events of Default; Rights Upon Event of Default
With respect to the Notes, "Events of Default" under the Indenture will
consist of the following: (i) a default for five days or more in the payment of
any interest on any Note; (ii) a default in the payment of the principal of or
any installment of the principal of any Note when the same becomes due and
payable; (iii) a default in the observance or performance of any covenant or
agreement of the Trust Fund made in the Indenture and the continuation of any
such default for a period of 30 days after notice thereof is given to the Trust
Fund by the Indenture Trustee or to the Trust Fund and the Indenture Trustee by
the holders of at least 25% in principal amount of the Notes then outstanding;
(iv) any representation or warranty made by the Trust Fund in the Indenture or
in any certificate delivered pursuant thereto or in connection therewith having
been incorrect in a material respect as of the time made, and such breach not
having been cured within 30 days after notice thereof is given to the Trust Fund
by the Indenture Trustee or to the Trust Fund and the Indenture Trustee by the
holders of at least 25% in principal amount of Notes then outstanding; or (v)
certain events of bankruptcy, insolvency, receivership or liquidation of the
Trust Fund. [The amount of principal required to be paid to Noteholders under
the Indenture will generally be limited to amounts available to be deposited in
the Collection Account. Therefore, the failure to pay principal on the Notes
generally will not result in the occurrence of an Event of Default until the
final scheduled Distribution Date for such Notes.] If there is an Event of
Default with respect to a Note due to late payment or nonpayment of interest due
on a Note, additional interest will accrue on such unpaid interest at the
interest rate on the Note (to the extent lawful) until such interest is paid.
Such additional interest on unpaid interest shall be due at the time such
interest is paid. If there is an Event of Default due to late payment or
nonpayment of principal on a Note, interest will continue to accrue on such
principal at the interest rate on the Note until such principal is paid. If an
Event of Default should occur and be continuing with respect to the Notes, the
Indenture Trustee or holders of a majority in principal amount of Notes then
outstanding may declare the principal of such Notes to be immediately due and
payable. Such declaration may, under certain circumstances, be rescinded by the
holders of a majority in principal amount of the Notes then outstanding. If the
Notes are due and payable following an Event of Default with respect thereto,
the Indenture Trustee may institute proceedings to collect amounts due or
foreclose on Trust Fund property or exercise remedies as a secured party. If an
Event of Default occurs and is continuing with respect to the Notes, the
Indenture Trustee will be under no obligation to exercise any of the rights or
powers under the Indenture at the request or direction of any of the holders of
the Notes, if the Indenture Trustee reasonably believes it will not be
adequately indemnified against the costs, expenses and liabilities which might
be incurred by it in complying with such request. Subject to the provisions for
indemnification and certain limitations contained in the Indenture, the holders
of a majority in principal amount of the outstanding Notes will have the right
to direct the time, method and place of conducting any proceeding or any remedy
available to the Indenture Trustee, and the holders of a majority in principal
amount of the Notes then outstanding may, in certain cases, waive any default
with respect thereto, except a default in the payment of principal or interest
or a default in respect of a covenant or provision of the Indenture that cannot
be modified without the waiver or consent of all the holders of the outstanding
Notes. No holder of a Note will have the right to institute any proceeding with
respect to the Indenture, unless (i) such holder previously has given the
Indenture Trustee written notice of a continuing Event of Default, (ii) the
holders of not less than 25% in principal amount of the outstanding Notes have
made written request to the Indenture Trustee to institute such proceeding in
its own name as Indenture Trustee, (iii) such holder or holders have offered the
Indenture Trustee reasonable indemnity, (iv) the Indenture Trustee has for 60
days failed to institute such proceeding and (v) no direction inconsistent with
such written request has been given to the Indenture Trustee during the 60-day
period by the holders of a majority in principal amount of the Notes. In
addition, the Indenture Trustee and the Noteholders, by accepting the Notes,
will covenant that they will not at any time institute against the Trust Fund
any bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law. With respect to the Trust Fund, neither the Indenture
Trustee nor the Owner Trustee in its individual capacity, nor any
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holder of a Certificate representing an ownership interest in the Trust Fund nor
any of their respective owners, beneficiaries, agents, officers, directors,
employees, affiliates, successors or assigns will, in the absence of an express
agreement to the contrary, be personally liable for the payment of the principal
of or interest on the Notes or for the agreements of the Trust Fund contained in
the Indenture.
Certain Covenants
The Indenture will provide that the Trust Fund may not consolidate with
or merge into any other entity, unless (i) the entity formed by or surviving
such consolidation or merger is organized under the laws of the United States,
any state or the District of Columbia, (ii) such entity expressly assumes the
Trust Fund's obligation to make due and punctual payments upon the Notes and the
performance or observance of any agreement and covenant of the Trust Fund under
the Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trust Fund has been
advised that the ratings of the Securities then in effect would not be reduced
or withdrawn by any Rating Agency as a result of such merger or consolidation
and (v) the Trust Fund has received an opinion of counsel to the effect that
such consolidation or merger would have no material adverse tax consequence to
the Trust Fund or to any Noteholder or Certificateholder. The Trust Fund will
not, among other things, (i) except as expressly permitted by the Indenture,
sell, transfer, exchange or otherwise dispose of any of the assets of the Trust
Fund, (ii) claim any credit on or make any deduction from the principal and
interest payable in respect of the Notes (other than amounts withheld under the
Code or applicable state law) or assert any claim against any present or former
Noteholder because of the payment of taxes levied or assessed upon the Trust
Fund, (iii) dissolve or liquidate in whole or in part, (iv) permit the validity
or effectiveness of the Indenture to be impaired or permit any person to be
released from any covenants or obligations with respect to the Notes under the
Indenture except as may be expressly permitted thereby or (v) permit any lien,
charge excise, claim, security interest, mortgage or other encumbrance to be
created on or extend to or otherwise arise upon or burden the assets of the
Trust Fund or any part thereof, or any interest therein or the proceeds thereof.
The Trust Fund may not engage in any activity other than as specified under "The
Trust Fund" herein. The Trust Fund will not incur, assume or guarantee any
indebtedness other than indebtedness incurred pursuant to the Notes and the
Indenture.
Annual Compliance Statement
The Trust Fund will be required to file annually with the Indenture
Trustee a written statement as to the fulfillment of its obligations under the
Indenture.
Indenture Trustee's Annual Report
The Indenture Trustee will be required to mail each year to all
Noteholders a report relating to any change in its eligibility and qualification
to continue as Indenture Trustee under the Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of any
indebtedness owing by the Trust Fund to the Indenture Trustee in its individual
capacity, any change in the property and funds physically held by the Indenture
Trustee as such and any action taken by it that materially affects the Notes and
that has not been previously reported, but if no such changes have occurred,
then no report shall be required.
Satisfaction and Discharge of Indenture
The Indenture will be discharged with respect to the collateral
securing the Notes upon the delivery to the Indenture Trustee for cancellation
of all the Notes or, with certain limitations, upon deposit with the Indenture
Trustee of funds sufficient for the payment in full of all the Notes.
Modification of Indenture
With the consent of the holders of a majority in principal amount of
the Notes then outstanding, the Trust Fund and the Indenture Trustee may execute
a supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the Indenture, or modify (except as provided below) in any
manner the rights of the Noteholders. Without the consent of the holder of each
outstanding Note affected thereby, however, no supplemental indenture will (i)
change the due date of any installment of principal of or interest on any Note
or reduce the principal amount thereof, the interest rate specified thereon or
the redemption price with respect thereto
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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 Trust
Fund, the Depositor or an affiliate of any of them; (v) decrease the percentage
of the aggregate principal amount of Notes required to amend the sections of the
Indenture which specify the applicable percentage of aggregate principal amount
of the Notes necessary to amend the Indenture or certain other related
agreements; or (vi) permit the creation of any lien ranking prior to or on a
parity with the lien of the Indenture with respect to any of the collateral for
the Notes or, except as otherwise permitted or contemplated in the Indenture,
terminate the lien of the Indenture on any such collateral or deprive the holder
of any Note of the security afforded by the lien of the Indenture. The Trust
Fund and the Indenture Trustee may also enter into supplemental indentures,
without obtaining the consent of the Noteholders, for the purpose of, among
other things, adding any provisions to or changing in any manner or eliminating
any of the provisions of the Indenture or of modifying in any manner the rights
of the Noteholders; provided that such action will not materially and adversely
affect the interest of any Noteholder.
Voting Rights
At all times, the voting rights of Noteholders under the Indenture will
be allocated among the Notes pro rata in accordance with their outstanding
principal balances.
Certain Matters Regarding the Indenture Trustee and the Depositor
Neither the Depositor, the Indenture Trustee nor any director, officer
or employee of the Depositor or the Indenture Trustee will be under any
liability to the Trust Fund or the related Noteholders for any action taken or
for refraining from the taking of any action in good faith pursuant to the
Indenture or for errors in judgment; provided, however, that none of the
Indenture Trustee, the Depositor and any director, officer or employee thereof
will be protected against any liability which would otherwise be imposed by
reason of willful malfeasance, bad faith or gross negligence in the performance
of duties or by reason of reckless disregard of obligations and duties under the
Indenture. Subject to certain limitations set forth in the Indenture, the
Indenture Trustee and any director, officer, employee or agent of the Indenture
Trustee shall be indemnified by the Trust Fund and held harmless against any
loss, liability or expense incurred in connection with investigating, preparing
to defend or defending any legal action, commenced or threatened, relating to
the Indenture other than any loss, liability or expense incurred by reason of
willful malfeasance, bad faith or gross negligence in the performance of its
duties under such Indenture or by reason of reckless disregard of its
obligations and duties under the Indenture. Any such indemnification by the
Trust Fund will reduce the amount distributable to the Noteholders. All persons
into which the Indenture Trustee may be merged or with which it may be
consolidated or any person resulting from such merger or consolidation shall be
the successor of the Indenture Trustee under each Indenture.
THE TRUST AGREEMENT
The following is a description of the material terms of the Trust
Agreement. Whenever particular sections or defined terms of the Trust Agreement
are referred to, such sections or defined terms are thereby incorporated herein
by reference. See "Description of the Securities" herein for a description of
certain additional terms of the Trust Agreement.
Amendment
The Trust Agreement may be amended by the Depositor and the Owner
Trustee, without consent of the holders, to cure any ambiguity, to correct or
supplement any provision or for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions thereof or of
modifying in any manner the rights of such holders; provided, however, that such
action will not, as evidenced by an opinion of counsel satisfactory to the Owner
Trustee, adversely affect in any material respect the interests of any holders.
The Trust Agreement may also be amended by the Depositor and the Owner Trustee
with the consent of the holders of Certificates
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evidencing at least a majority in principal amount of then outstanding
Certificates and holders owning Voting Interests (as herein defined) aggregating
not less than a majority of the aggregate Voting Interests for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Trust Agreement or modifying in any manner the rights of such
holders.
Insolvency Event
"Insolvency Event" means, with respect to any person, any of the
following events or actions; certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings with respect to
such person and certain actions by such person indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations. Upon termination of the Trust Fund, the Owner Trustee shall direct
the Indenture Trustee promptly to sell the assets of the Trust Fund (other than
the Collection Account) in a commercially reasonable manner and on commercially
reasonable terms. The proceeds from any such sale, disposition or liquidation of
the Loans will be treated as collections on the Loans and deposited in the
Collection Account. The Trust Agreement will provide that the Owner Trustee does
not have the power to commence a voluntary proceeding in bankruptcy with respect
to the Trust Fund without the unanimous prior approval of all holders (including
the Depositor) of the Trust Fund and the delivery to the Owner Trustee by each
holder (including the Depositor) of a certificate certifying that the holder
reasonably believes that the Trust Fund is insolvent.
Liability of the Depositor
Under the Trust Agreement, the Depositor will agree to be liable
directly to an injured party for the entire amount of any losses, claims,
damages or liabilities (other than those incurred by a Noteholder or a holder in
the capacity of an investor with respect to the Trust Fund) arising out of or
based on the arrangement created by the Trust Agreement.
Voting Interests
As of any date, the aggregate principal balance of all Certificates
outstanding will constitute the voting interest of the Issuer (the "Voting
Interests"), except that, for purposes of determining Voting Interests,
Certificates owned by the Issuer or its affiliates (other than the Depositor)
will be disregarded and deemed not to be outstanding, and except that, in
determining whether the Owner Trustee is protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Certificates that the Owner Trustee knows to be so owned will be so disregarded.
Certificates so owned that have been pledged in good faith may be regarded as
outstanding if the pledgee establishes to the satisfaction of the Owner Trustee
the pledgor's right so to act with respect to such Certificates and that the
pledgee is not the Issuer or its affiliates.
Certain Matters Regarding the Owner Trustee and the Depositor
Neither the Depositor, the Owner Trustee nor any director, officer or
employee of the Depositor or the Owner Trustee will be under any liability to
the Trust Fund or the related holders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Trust Agreement or
for errors in judgment; provided, however, that none of the Owner Trustee, the
Depositor and any director, officer or employee thereof will be protected
against any liability which would otherwise be imposed by reason of willful
malfeasance, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties under the Trust
Agreement. Subject to certain limitations set forth in the Trust Agreement, the
Owner Trustee and any director, officer, employee or agent of the Owner Trustee
shall be indemnified by the Trust Fund and held harmless against any loss,
liability or expense incurred in connection with investigating, preparing to
defend or defending any legal action, commenced or threatened, relating to the
Trust Agreement other than any loss, liability or expense incurred by reason of
willful malfeasance, bad faith or gross negligence in the performance of its
duties under such Trust Agreement or by reason of reckless disregard of its
obligations and duties under the Trust Agreement. Any such indemnification by
the Trust Fund will reduce the amount distributable to the holders. All persons
into which the Owner Trustee may be merged or with which it may be consolidated
or any person resulting from such merger or consolidation shall be the successor
of the Owner Trustee under each Trust Agreement.
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ADMINISTRATION AGREEMENT
The _________________, in its capacity as "Administrator," will enter
into the "Administration Agreement" with the Trust Fund and the Owner Trustee
pursuant to which the Administrator will agree, to the extent provided in such
Administration Agreement, to provide notices and perform other administrative
obligations required by the Indenture and the Trust Agreement.
THE INDENTURE TRUSTEE
[ ] is the Indenture Trustee under the Indenture. The mailing address
of the Indenture Trustee is [ ], Attention: Corporate Trust Department.
THE OWNER TRUSTEE
[ ] is the Owner Trustee under the Trust Agreement. The mailing address
of the Owner Trustee is [ ], Attention: Corporate Trust Administration.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be applied by the
Depositor towards the purchase price of the Loans.
FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion, which summarizes the material United States
federal income tax aspects of the purchase, ownership and disposition of the
Notes and Certificates, is based on the provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), the Treasury regulations promulgated
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 United States federal income tax
laws which may be relevant to Noteholders and Certificateholders in light of
their personal investment circumstances or to certain types of
Certificateholders subject to special treatment under the United States federal
income tax laws (for example, tax exempt investors, banks and life insurance
companies). Accordingly, investors should consult their tax advisors regarding
United States federal, state, local, foreign and any other tax consequences to
them of investing in the Notes and Certificates.
Tax Characterization of the Trust Fund as a Partnership
Stradley, Ronon, Stevens & Young, LLP, special counsel to the Depositor
("Tax Counsel"), is of the opinion that the Trust Fund will not be an
association (or a publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion is based on the assumption that the
terms of the Trust Agreement and related documents will be complied with, and on
Tax Counsel's conclusions that (1) the Trust Fund will not have certain
characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) the nature of the income of the
Trust Fund exempts it from the rule that certain publicly traded partnerships
are taxable as corporations, so that the Trust Fund will not be characterized as
a publicly traded partnership taxable as a corporation.
If the Trust Fund was 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
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reduce cash available to make payments on the Notes and distributions on the
Certificates, and Certificateholders could be liable for any such tax that is
unpaid by the Trust Fund.
Tax Consequences to Holders of the Notes
The Trust Fund will agree, and the Noteholders will agree by their
purchase of the Notes, to treat the Notes as debt for federal income tax
purposes. Based on the application of existing law to the facts as set forth in
the Agreement and other relevant documents and assuming compliance with the
terms of the Agreement as in effect on the date of issuance of the Notes and
Certificates, Tax Counsel is of the opinion that the Notes will be treated as
debt instruments for federal income tax purposes as of such date. See "Federal
Income Tax Consequences--Tax Consequences to Holders of the Notes" in the
Prospectus.
It is not anticipated that the Notes will be issued with original issue
discount ("OID"). The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
Tax Consequences to Holders of the Certificates
The Trust Fund and the Master Servicer will agree, and the
Certificateholders will agree by their purchase of Certificates, to treat the
Trust Fund as 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 Certificateholders, and the Notes being debt of the
partnership. However, the proper characterization of the arrangement involving
the Trust Fund, the Certificates, the Notes, and the Master Servicer is not
clear because there is no authority on transactions closely comparable to that
contemplated herein. For example, because the Certificates have certain features
characteristic of debt, the Certificates might be considered debt of the Trust
Fund. Any such characterization would not result in materially adverse tax
consequences to Certificateholders as compared to the consequences from
treatment of the Certificates as equity in a partnership.
As a partnership, the Trust Fund will not be subject to federal income
tax. Rather, each Certificateholder will be required to separately take into
account such holder's allocated share of income, gains, losses, deductions and
credits of the Trust Fund. The Trust Fund's income will consist primarily of
interest and finance charges earned on the Loans (including appropriate
adjustments for market discount, OID and bond premium) and any gain upon
collection or disposition of Loans. The Trust Fund's deductions will consist
primarily of interest accruing with respect to the Notes, servicing and other
fees, and losses or deductions upon collection or disposition of Loans. See
"Federal Income Tax Consequences--Tax Consequences to Holders of the
Certificates" in the Prospectus.
The Trust Fund expects to withhold on the portion of its taxable income
that is allocable to foreign Certificateholders pursuant to Section 1446 of the
Code, as if such income were effectively connected to a United States trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures. See "Federal Income Tax
Consequences--Tax Consequences to Holders of the Certificates--Tax Consequences
to Foreign Certificateholders" in the Prospectus.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences" herein, potential investors should consider
the state income tax consequences of the acquisition, ownership, and disposition
of the Securities offered hereunder. State income tax law may differ
substantially from the
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corresponding federal tax law, and this discussion does not purport to describe
any aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Securities offered hereunder.
ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") and Section 4975 of the Code impose certain restrictions on employee
benefit plans subject to ERISA or plans or arrangements subject to Section 4975
of the Code ("Plans") and on persons who are parties in interest or disqualified
persons ("Parties in Interest") with respect to such Plans. 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. Any Plan fiduciary which proposes to cause a
Plan to acquire any of the Securities should consult with its counsel with
respect to the potential consequences under ERISA, and the Code, of the Plan's
acquisition and ownership of the Securities. See "ERISA Considerations" in the
Prospectus. Investments by Plans are also subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Prohibited Transactions
General
Section 406 of ERISA prohibits Parties in Interest with respect to a
Plan from engaging in certain transactions (including loans) involving a Plan
and its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in some
cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA) on
Parties in Interest which engage in non-exempt prohibited transactions.
Plan Asset Regulation
The United States Department of Labor ("DOL") has issued final
regulations concerning the definition of what constitutes the assets of a Plan
for purposes of ERISA and the prohibited transaction provisions of the Code (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" (as defined therein) nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan investor unless
certain exceptions apply. If the [Notes/Certificates] were deemed to be equity
interests and no statutory, regulatory or administrative exemption applies, the
Trust Fund could be considered to hold plan assets by reason of a Plan's
investment in the Notes. 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 Title I of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA, and Section 4975 of the Code
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, 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, DOL
declined to provide a precise
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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. Stradley, Ronon, Stevens & Young, LLP ("ERISA Counsel") has rendered
its opinion that the Notes will be classified as indebtedness without
substantial equity features for ERISA purposes. ERISA Counsel's opinion is based
upon the terms of the Notes, the opinion of Tax Counsel that the Notes will be
classified as debt instruments for federal income tax purposes and the ratings
which have been assigned to the Notes. However, if contrary to ERISA Counsel's
opinion the Notes are deemed to be equity interests in the Trust Fund and no
statutory, regulatory or administrative exemption applies, the Trust Fund could
be considered to hold plan assets by reason of a Plan's investment in the Notes.
The Underwriter's Exemption
DOL has granted to [ ] (the "Underwriter") an administrative exemption
(Prohibited Transaction Exemption _____ (the "Exemption")) which exempts from
the application of the prohibited transaction rules of ERISA and the related
excise tax provisions of Section 4975 of the Code transactions relating to (i)
the acquisition, sale and holding by Plans of certificates representing an
undivided interest in certain asset backed pass-through trusts with respect to
which the Underwriter or any of its affiliates is the sole underwriter or the
manager or co-manager of the underwriting syndicate; and (ii) the servicing,
operation and management of such asset backed pass-through trusts, provided that
the general conditions and certain other conditions set forth in the Exemption
are satisfied. The Exemption will apply to the acquisition, holding and resale
of the Certificates by a Plan provided that certain conditions (some of which
are described below) are met.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the Certificates by a Plan is on terms
(including the price for the Certificates) that are at least as favorable
to the Plan as they would be in an arm's length transaction with an
unrelated party;
(2) the rights and interest evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other Certificates of the trust;
(3) the Certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories from either Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Moody's Investors Service, Inc, Duff & Phelps Credit
Rating Co. or Fitch Investors Service, Inc.;
(4) the trustee must not be an affiliate of the Underwriter, the
Trustee, any Master Servicer, any obligor with respect to assets held in
the Trust Fund constituting more than five percent of the aggregate
unamortized principal balance of the assets in the Trust Fund;
(5) the sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Certificates represents not more
than reasonable compensation for underwriting the Certificates; the sum of
all payments made to and retain by the Issuer pursuant to the assignment of
the Loans to the Trust Fund represents not more than the fair market value
of such Loans; the sum of all payments made to and retained by the servicer
represents not more than reasonable compensation for such person's services
under a master agreement and reimbursements of such person's reasonable
expenses in connection therewith; and
(6) the Plan investing in the Certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933, as amended.
The Underwriter believes that the Exemption will apply to the
acquisition and holding of the Certificates by Plans and that all conditions of
the Exemption other than those within the control of the investors will be met.
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Review by Plan Fiduciaries
Any Plan fiduciary considering whether to purchase any Securities on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any
Securities, a fiduciary of a Plan should make its own determination as to
whether the Trust Fund, as obligor on the Securities, is a party in interest
with respect to the Plan, the availability of the exemptive relief provided in
the Plan Asset Regulations and the availability of any other prohibited
transaction exemptions. Purchasers should analyze whether the decision may have
an impact with respect to purchases of the Securities.
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the Securities under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Securities, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether, and
to what extent, the Securities will constitute legal investments for them. The
Depositor makes no representation as to the proper characterization of the
Securities for legal investment or financial institution regulatory purposes, or
as to the ability of particular investors to purchase Securities under
applicable legal investment restrictions. The uncertainties described above (and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Securities) may adversely affect
the liquidity of the Securities.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and [ ] (the "Underwriting Agreement"), the
Depositor has agreed to sell to [ ] (the "Underwriter"), and the Underwriter has
agreed to purchase from the Depositor, the Securities. The Underwriter is
obligated to purchase all the Securities offered hereby if any are purchased.
Distribution of the Securities will be made by the Underwriter from time to time
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the Depositor are expected to be $________________
from the sale of the Notes and $___________ from the sale of the Certificates,
before deducting expenses payable by the Depositor of $_________. In connection
with the purchase and sale of the Securities, the Underwriter may be deemed to
have received compensation from the Depositor in the form of underwriting
discounts, concessions or commissions.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute payments the Underwriter may be required
to make in respect thereof. The Depositor is an affiliate of the Underwriter.
The Underwriter is an affiliate of the Depositor.
LEGAL MATTERS
Certain legal matters with respect to the Securities will be passed
upon for the Depositor by Stradley, Ronon, Stevens & Young, LLP, Philadelphia,
Pennsylvania and for the Underwriter by
- -----------------------------.
RATINGS
It is a condition to issuance that each class of the Notes be rated be
rated not lower than "_________" by [ ] and _______ by [ ]. It is a condition to
issuance that the Certificates be rated at least "___" by [ ] and "___" by [ ].
A securities rating addresses the likelihood of the receipt by
Certificateholders and Noteholders of distributions on the Loans. The rating
takes into consideration the structural, legal and tax aspects associated with
the Certificates and Notes. The ratings on the Securities do not, however,
constitute statements regarding the possibility that Certificateholders or
Noteholders might realize a lower than anticipated yield. A securities rating
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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.
[The ratings assigned by Duff & Phelps Credit Rating Co. ("DCR") to
securities address the likelihood of the receipt by the holders of such
securities of all distributions to which they are entitled under the transaction
structure. DCR's ratings reflect its analysis of the riskiness of the mortgages
and its analysis of the structure of the transaction as set forth in the
operative documents. DCR's ratings do not address the effect on yield on the
securities attributable to prepayments or recoveries on the underlying assets.]
[The ratings assigned by Fitch Investors Service, L.P. ("Fitch") to
securities address the likelihood of the receipt of all distributions on the
assets by the related holders of securities under the agreements pursuant to
which such securities are issued. Fitch's ratings take into consideration the
credit quality of the related pool, including any credit support providers,
structural and legal aspects associated with such securities, and the extent to
which the payment stream on the pool is adequate to make the payments required
by such securities. Fitch ratings on such securities do not, however, constitute
a statement regarding frequency of prepayments of the assets.]
[The ratings assigned by Moody's Investors Service, Inc. ("Moody's") to
securities address the likelihood of the receipt by holders of securities of all
distributions to which such holders of securities are entitled. Moody's ratings
on securities do not represent any assessment of the likelihood or rate of
principal prepayments. The ratings do not address the possibility that holders
of securities might suffer a lower than anticipated yield as a result of
prepayments.]
[The ratings assigned by Standard & Poor's Ratings Group, a Division of
The McGraw-Hill Companies ("Standard & Poor's"), to securities address the
likelihood of the receipt of all distributions on the assets by the related
holders of securities under the agreements pursuant to which such securities are
issued. Standard & Poor's ratings take into consideration the credit quality of
the related pool, including any credit support providers, structural and legal
aspects associated with such securities, and the extent to which the payment
stream on such pool is adequate to make payments required by such securities.
Standard & Poor's ratings on such certificates do not, however, constitute a
statement regarding frequency of prepayments on the related assets. The letter
"r" attached to a Standard & Poor's rating highlights derivative, hybrid and
certain other types of securities that Standard & Poor's believes may experience
high volatility or high variability in expected returns due to non-credit risks.
The absence of an "r" symbol in the rating of a class of securities should not
be taken as an indication that such securities will exhibit no volatility or
variability in total return.]
The Depositor has not requested a rating of the Certificates by any
rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Certificates or, if
it does, what rating would be assigned by such other rating agency. The rating
assigned by such other rating agency to the Certificates could be lower than the
respective ratings assigned by the Rating Agencies.
S-42
<PAGE>
INDEX OF DEFINED TERMS
Page
----
Additional Balances.....................................................S-3
Administrator..........................................................S-37
Agreement..............................................................S-31
Beneficial Owners......................................................S-31
BIF....................................................................S-28
Book-Entry Securities.............................................S-8, S-31
Business Day............................................................S-6
Cede....................................................................S-8
CEDEL...................................................................S-8
Certificate Insurer.....................................................S-1
Certificates.......................................................S-1, S-3
Chase...................................................................S-8
Citibank................................................................S-8
Code...................................................................S-37
Collateral Value.......................................................S-21
Collection Account................................................S-6, S-28
Collection Period.................................................S-7, S-32
Collections.............................................................S-6
Combined Loan-to-Value Ratio......................................S-5, S-21
Cut-off Date............................................................S-3
Cut-off Date Pool Principal Balance...............................S-5, S-20
Cut-off Date Principal Balance..........................................S-3
DCR....................................................................S-42
Defective Loans........................................................S-27
Definitive Security...............................................S-8, S-31
Depositor...............................................................S-1
Determination Date................................................S-4, S-28
Distribution Date.......................................................S-1
DTC...............................................................S-8, S-31
Due Date..........................................................S-5, S-20
Eligible Account.......................................................S-28
Eligible Investments...................................................S-29
Eligible Substitute Loan...............................................S-27
Equity One.............................................................S-15
Equity One Standards...................................................S-16
ERISA............................................................S-11, S-39
ERISA Counsel..........................................................S-40
Euroclear...............................................................S-8
European Depositories..................................................S-31
Events of Default......................................................S-33
Exemption..............................................................S-40
Fitch..................................................................S-42
FNMA...................................................................S-16
Indenture..........................................................S-1, S-4
Indenture Trustee..................................................S-1, S-4
Insolvency Event.......................................................S-36
Interest Accrual Period...........................................S-7, S-32
Interest Collections....................................................S-6
Issuer..................................................................S-3
Liquidated Loan.........................................................S-4
Liquidation Loss Amount.................................................S-7
Loan Agreements........................................................S-20
Loan Rate...............................................................S-5
S-43
<PAGE>
Page
----
Loan-to-Value Ratio....................................................S-21
Loans .......................................................S-1, S-3, S-20
Master Servicer.........................................................S-4
Mixed Use Loan...............................................S-1, S-3, S-20
Moody's................................................................S-42
Mortgage Files.........................................................S-27
Net Liquidation Proceeds...............................................S-29
Note Rate....................................................S-1, S-7, S-32
Noteholders.............................................................S-4
Notes..............................................................S-1, S-3
OID..............................................................S-10, S-38
Owner Trustee .....................................................S-1, S-4
Pass-Through Rate............................................S-1, S-7, S-32
Plan.............................................................S-11, S-39
Plan Asset Regulation..................................................S-39
Policy.............................................................S-1, S-3
Pool Balance......................................................S-3, S-30
Principal Balance.......................................................S-4
Principal Collections.............................................S-6, S-29
Purchase Agreement......................................................S-5
Rating Agency .........................................................S-11
Refinance Loan.........................................................S-21
Related Documents......................................................S-26
Relevant Depository....................................................S-31
Repurchase Price.......................................................S-27
Residential Loan.............................................S-1, S-3, S-20
SAIF...................................................................S-28
Securities.........................................................S-1, S-3
Security Account.......................................................S-28
Security Principal Balance..............................................S-6
Sellers.................................................................S-4
Servicing Fee Rate.....................................................S-31
SMMEA..................................................................S-11
Standard & Poor's......................................................S-42
Tax Counsel.......................................................S-9, S-37
Trust Agreement....................................................S-1, S-4
Trust Fund.........................................................S-1, S-3
Underwriter.................................................S-2, S-40, S-41
Underwriting Agreement.................................................S-41
Voting Interests.......................................................S-36
S-44
<PAGE>
Page
----
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR OR THE UNDERWRITER. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR RESPECTIVE DATES.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
[to be completed]
PROSPECTUS
[to be completed]
$______________
EQUITY ONE MORTGAGE
LOAN
TRUST 199___
$______ [] ASSET BACKED
NOTES
$______ [] ASSET BACKED
CERTIFICATES
EQUITY ONE ABS, INC.
(Depositor)
S-45
<PAGE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JUNE 16, 1997
PROSPECTUS
EQUITY ONE ABS, INC.
Depositor
$325,000,000
(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 Equity One ABS, 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
certain assets (the "Trust Fund Assets") which will consist of the following
types of loans (the "Loans"): (i) mortgage loans secured by first and/or
subordinate liens on (A) one- to four-family residential properties (each, a
"Residential Loan") and (B) mixed commercial/residential use properties and
other multi-family residential properties (each, a "Mixed Use Loan" and,
together with the Residential Loans, the "Mortgage Loans") and (ii) revolving
home equity loans or certain balances thereof (the "Revolving Credit Line
Loans") secured by first and/or subordinate liens on one- to four-family
residential properties. 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. Trust Fund Assets 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 100 of this Prospectus for the location of the
definitions of certain capitalized terms.
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 or the Loans
underlying such Series of Securities. The only obligations of the Depositor with
respect to a Series of Securities will be to obtain certain representations and
warranties from each Seller 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 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 "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."
------------
FOR A DISCUSSION OF RISKS ASSOCIATED WITH AN INVESTMENT IN THE SECURITIES,
SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 14.
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,
THE 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.
------------
It is not expected that the Securities for any transaction contemplated
under this Prospectus will be listed on a national securities exchange or that
such Securities would be quoted on an automated quotation system of a registered
securities association. In addition, prior to issuance there will have been no
market for the Securities of any Series. Accordingly, 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. This Prospectus may not be used to consummate sales of
Securities of any Series unless accompanied by a Prospectus Supplement. Offers
of the Securities may be made through one or more different methods, including
offerings through underwriters, as more fully described under "Method of
Distribution" herein and in the related Prospectus Supplement.
[ ], 1997
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things, set
forth with respect to such Securities, as appropriate: (i) the aggregate
principal amount, interest rate and authorized denominations of each class of
such Series of Securities; (ii) information as to the assets comprising the
Trust Fund, including the general characteristics of the related Trust Fund
Assets included therein and, if applicable, the insurance policies, surety
bonds, guaranties, letters of credit or other instruments or agreements included
in the Trust Fund or otherwise, and the amount and source of any reserve account
or other cash account; (iii) the circumstances, if any, under which the Trust
Fund may be subject to early termination; (iv) the circumstances, if any, under
which the Notes of such Series are subject to redemption; (v) the method used to
calculate the amount of principal to be distributed or paid with respect to each
class of Securities; (vi) the order of application of distributions or payments
to each of the classes within such Series, whether sequential, pro rata, or
otherwise; (vii) the Distribution Dates with respect to such Series;
(viii) additional information with respect to the method of distribution of
such Securities; (ix) whether one or more REMIC elections will be made with
respect to the Trust Fund and, if so, the designation of the regular interests
and the residual interests; (x) the aggregate original percentage ownership
interest in the Trust Fund to be evidenced by each class of Certificates; (xi)
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 Sellers, the 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 (the "Securities Act"), 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
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
2
<PAGE>
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 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). Additionally, the Trustee will provide a copy of
the Agreement (without exhibits) relating to any Series without charge upon
written request of a holder of record of a Security of such Series. Such
requests should be directed to the corporate trust office of the Trustee or the
address of such other entity specified in the accompanying Prospectus
Supplement. Included in the accompanying Prospectus Supplement is the name,
address, telephone number, and, if available, facsimile number of the office or
contact person at the corporate trust office of the Trustee or such other
entity.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities will be forwarded to Securityholders. Unless and until the
Securities are issued in definitive certificated form, periodic reports
concerning the assets of the related Trust Fund for a Series of Securities will
be forwarded to Cede & Co. ("Cede") as nominee of The Depository Trust Company
("DTC") and registered Securityholder of such Securities. Cede will make such
reports available to the persons holding beneficial ownership of such Securities
("Beneficial Owners") upon request. See "Description of the Securities--Reports
to Securityholders." Any reports forwarded to Securityholders will not contain
financial information that has been examined and reported upon by, with an
opinion expressed by, an independent public or certified public accountant. The
Depositor will file with the Commission such periodic reports with respect to
the related Trust Fund as are required under the Exchange Act, as amended, and
the rules and regulations of the Commission thereunder.
3
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF TERMS
This summary of certain pertinent information 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 100 of this
Prospectus for the location of the definitions of certain capitalized terms.
Title of Securities... Asset Backed Certificates (the "Certificates") and Asset
Backed Notes (the "Notes" and, together with the
Certificates, the "Securities"), which are issuable in
Series.
Issuer................ With respect to each Series of Securities, the trust
("Trust Fund") to be formed pursuant to either a trust
agreement or a pooling and servicing agreement.
Depositor............. Equity One ABS, Inc., a Delaware corporation. Equity One
ABS, Inc. is a limited purpose wholly owned finance
subsidiary of Equity One, Inc., a Delaware Corporation
("Equity One"). Equity One is a wholly owned operating
subsidiary of Banco Popular, FSB, a federal savings bank
with principal offices in Newark, New Jersey (the
"Bank"), which in turn in an indirect wholly owned
subsidiary of Popular, Inc., a diversified, publicly
owned bank holding company incorporated under the
General Corporation Law of Puerto Rico ("Popular").
Trustee............... The trustee(s) (the "Trustee") for each Series of
Securities will be specified in the related Prospectus
Supplement. See "The Agreements" for a description of
the Trustee's rights and obligations.
Servicer.............. The entity or entities named as Servicer (the
"Servicer") in the related Prospectus Supplement, which
may be an affiliate of the Depositor. See "The
Agreements--Certain Matters Regarding the Servicer and
the Depositor."
Trust Fund Assets..... Assets of the Trust Fund for a Series of Securities will
include certain assets (the "Trust Fund Assets") which
will consist of the Loans, together with payments in
respect of such Trust Fund Assets, as specified in the
related Prospectus Supplement. At the time of issuance
of the Securities of the Series, the Depositor will
cause the Loans comprising the related Trust Fund to be
conveyed to the Trustee, without recourse. The Loans
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").
Trust Fund Assets 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 "Credit
Enhancement." In addition, if the related Prospectus
Supplement so provides, the related Trust Fund Assets
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."
Pre-Funding Account... If so provided in the related Prospectus Supplement, on
the Closing Date the Depositor will deposit cash in an
amount (the "Pre-Funded Amount") specified in such
Prospectus Supplement into the Pre-Funding Account. The
Pre-Funded Amount may comprise up to 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 one year after such
Closing Date (such period, the "Funding Period") from
the Depositor. See "Risk Factors--Pre-Funding Account
and Possibility of Prepayment" and "The Agreements--
Pre-Funding Account."
Loans................. The Loans will consist of (i) mortgage loans secured by
first and/or subordinate liens on (A) one- to
four-family residential properties (each, a "Residential
Loan") and (B) mixed commercial/residential use
properties and other multi-family residential properties
(each, a "Mixed Use Loan" and, together with the
Residential Loans, the "Mortgage Loans") and
(ii) revolving home equity loans or certain balances
thereof (the "Revolving Credit Line Loans")
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
secured by first and/or subordinate liens on one- to
four-family residential properties. All Loans will
have been purchased by the Depositor, either directly or
through an affiliate, from one or more Sellers. The
Sellers will have either originated the Loans or
purchased the Loans from other lenders.
As specified in the related Prospectus Supplement, the
Revolving Credit Line Loans will be secured by mortgages
or deeds of trust or other similar security instruments
creating a lien on a Mortgaged Property, as described in
the related Prospectus Supplement.
Balloon 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
at their stated maturity ("Balloon Payments"). See "Risk
Factors--Balloon Payments and Risk of Losses."
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 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 subordinated 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; (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 fixed rate or a rate that is subject to
change from time to time; and (vii) as to Securities
entitled to distributions allocable
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
to interest, may be entitled to distributions allocable
to interest only after the occurrence of events
specified in the related Prospectus Supplement and may
accrue interest until such events occur, in each case as
specified in the related Prospectus Supplement. The
timing and amounts of such distributions may vary among
classes or over time, as specified in the related
Prospectus Supplement.
No Exchange Listing... It is not expected that the Securities for any
transaction contemplated under this Prospectus will be
listed on a national securities exchange or that such
Securities would be quoted on an automated quotation
system of a registered securities association.
Form and Registration
of the Securities..... If so specified in the related Prospectus Supplement,
the Securities will be available in book-entry form.
Persons acquiring beneficial ownership interest in the
Securities ("Beneficial Owners") will hold such
Securities through the book-entry facilities of The
Depository Trust Company ("DTC"). Transfers within DTC
will be made in accordance with the usual rules and
operating procedures of DTC. So long as each class of
Securities is in book-entry form, each such class will
be evidenced by one or more certificates registered in
the name of Cede & Co. ("Cede"), the nominee of DTC. The
interests of the Beneficial Owners will be represented
by book-entries on the records of DTC and participating
members thereof. No Beneficial Owner will be entitled to
receive a definitive certificate representing such
person's interest, except in the event that Definitive
Securities are issued under the limited circumstances
described herein. All references in this Prospectus to
any class of Securities reflect the rights of the
Beneficial Owners of such class only as such rights may
be exercised through DTC and its participating members
so long as such class of Securities is held by DTC. See
"Risk Factors--Book Entry Registration" and "Description
of the Securities--Book Entry Registration of
Securities."
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 for
allocating distributions among Securities of different
classes as well as the method for allocating
distributions among Securities for any particular class.
The Securities will have an aggregate original principal
balance and will bear interest at such interest rate as
may be specified in the related Prospectus Supplement.
The rate at which interest will be passed through or
paid to holders of each class of Securities entitled
thereto may be a fixed rate or a rate that is subject to
change from time to time from the time and for the
periods, in each case, as specified in the related
Prospectus Supplement. Any such rate may be calculated
on a loan-by-loan, weighted average or notional amount,
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
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will be determined based on the characteristics of the
Loans comprising the Trust Fund Assets and will be
established on the basis of requirements of each Rating
Agency rating the Securities of such Series. See "Credit
Enhancement."
A. Subordination...... A Series of Securities may consist of one or more
classes of Senior Securities and one or more classes of
Subordinated Securities. The rights of the holders of
the Subordinated Securities of a Series to receive
distributions with respect to the assets in the related
Trust Fund will be subordinated to such rights of the
holders of the Senior Securities of the same Series to
the extent described in the related Prospectus
Supplement. This subordination is intended to enhance
the likelihood of regular receipt by holders of Senior
Securities of the full amount of monthly payments of
principal and interest due them. The protection afforded
to the holders of Senior Securities of a Series by means
of the subordination feature will be accomplished by
(i) the preferential right of such holders to receive,
prior to any distribution being made in respect of the
related Subordinated Securities, the amounts of interest
and/or principal due them on each Distribution Date out
of the funds available for distribution on such date in
the related Security Account and, to the extent
described in the related Prospectus Supplement, by the
right of such holders to receive future distributions on
the assets in the related Trust Fund that would
otherwise have been payable to the holders of
Subordinated Securities; (ii) reducing the ownership
interest (if applicable) of the related Subordinated
Securities; or (iii) a combination of clauses (i) and
(ii) above. 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 losses resulting
from delinquent payments on the Loans in the related
Trust Fund, losses from risks not covered by standard
hazard insurance policies, losses due to bankruptcy
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of a borrower and application of certain provisions of
the Bankruptcy Reform Act of 1978, as amended, and
related rules promulgated thereunder (the "Bankruptcy
Code"), and losses due to denial of insurance coverage
due to misrepresentations made in connection with the
origination or sale of a Loan. The issuer of the letter
of credit (the "L/C Bank") will be obligated to honor
demands with respect to such letter of credit, to the
extent of the amount available thereunder to provide
funds under the circumstances and subject to such
conditions as are specified in the related Prospectus
Supplement. The liability of the L/C Bank under its
letter of credit will be reduced by the amount of
unreimbursed payments thereunder.
The maximum liability of a L/C Bank under its letter of
credit will be an amount equal to a percentage specified
in the related Prospectus Supplement of the initial
aggregate outstanding principal balance of the Loans in
the related Trust Fund or one or more Classes of
Securities of the related Series (the "L/C Percentage").
The maximum amount available at any time to be paid
under a letter of credit will be determined in the
manner specified therein and in the related Prospectus
Supplement.
D. Insurance Policies;
Surety Bonds and
Guarantees......... If so specified in the related Prospectus Supplement,
credit support for a Series may be provided by an
insurance policy and/or a surety bond issued by one or
more insurance companies or sureties. Such certificate
guarantee insurance or surety bond will guarantee timely
distributions of interest and/or full distributions of
principal on the basis of a schedule of principal
distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. If
specified in the related Prospectus Supplement, one or
more bankruptcy bonds, special hazard insurance
policies, other insurance or third-party guarantees may
be used to provide coverage for the risks of default or
types of losses set forth in such Prospectus Supplement.
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.
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G. FHA Insurance....... If specified in the related Prospectus Supplement, all
or a portion of the Loans in a Pool may be (i) insured
by the Federal Housing Administration (the "FHA")
and/or (ii) partially guaranteed by the Department of
Veterans Affairs (the "VA"). See "Certain Legal Aspects
of the Loans--The Title I Program."
H. Cross-
Collateralization.. If specified in the related Prospectus Supplement,
separate classes of a Series of Securities may evidence
the beneficial ownership of, or be secured by, separate
groups of assets included in a Trust Fund. In such case,
credit support may be provided by a
cross-collateralization feature which requires that
distributions be made with respect to Securities
evidencing a beneficial ownership interest in, or
secured by, one or more asset groups prior to
distributions to Subordinated Securities evidencing a
beneficial ownership interest in, or secured by, other
asset groups within the same Trust Fund. See "Credit
Enhancement--Cross-Collateralization."
If specified in the related Prospectus Supplement, the
coverage provided by one or more of the forms of credit
enhancement described in this Prospectus may apply
concurrently to two or more separate Trust Funds. If
applicable, the related Prospectus Supplement will
identify the Trust Funds to which such credit
enhancement relates and the manner of determining the
amount of coverage provided to such Trust Funds thereby
and of the application of such coverage to the
identified Trust Funds. See "Credit
Enhancement--Cross-Collateralization."
Advances.............. The Servicer and, if applicable, each mortgage servicing
institution that services a Loan in a Pool on behalf of
the 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 until the date, as specified in the related
Prospectus Supplement, following the date on which the
related Mortgaged 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 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 Servicer or Sub-Servicer. See "Description of the
Securities--Advances."
Optional Termination.. The 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
Servicer will
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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 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 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 5% of the
aggregate principal balance of the Trust Fund Assets at
the Cut-off Date for the Series. The early retirement of
a Series of Securities will result in premature
distributions of principal amounts on such Securities
and, as such, may reduce the yields to maturity and
weighted averaged lives of such Securities. See "Risk
Factors--Prepayment and Yield Considerations" and "Yield
and Prepayment Considerations." The foregoing is subject
to the provision that if a REMIC election is made with
respect to a Trust Fund, any such purchase will be made
only in connection with a "qualified liquidation" of the
REMIC within the meaning of Section 860F(a)(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, as amended ("SMMEA"). Classes
of Securities that qualify as "mortgage related
securities" will be legal investments for certain types
of institutional investors to the extent provided in
SMMEA, subject, in any case, to any other regulations
which may govern investments by such institutional
investors. Institutions whose investment activities are
subject to review by federal or state authorities should
consult with their counsel or the applicable authorities
to determine whether an investment in a particular class
of Securities (whether or not such class constitutes a
"mortgage related security") complies with applicable
guidelines, policy statements or restrictions. See
"Legal Investment."
Federal Income Tax
Consequences........ The federal income tax consequences to Securityholders
will vary depending on whether one or more elections are
made to treat the Trust Fund or specified portions
thereof as a REMIC under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"). The
Prospectus Supplement for each Series of Securities will
specify whether such an election will be made.
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In the opinion of Stradley, Ronon, Stevens & Young, LLP,
if a REMIC election is made with respect to a Series of
Securities, then 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. Securities will be
designated as "regular interests" or "residual
interests" in a REMIC. 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.
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. The portion of the REMIC taxable income
consisting of "excess inclusions" may not be offset
against other deductions or losses of the holder,
including net operating losses.
In the opinion of Stradley, Ronon, Stevens & Young, LLP,
if a REMIC or a partnership election is not made with
respect to a Series of Securities, then 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, there will be no separation of the
principal and interest payments on the Loans. In such
circumstances, the holder will be considered to have
purchased a pro rata undivided interest in each of the
Loans. In other cases, 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.
In the opinion of Stradley, Ronon, Stevens & Young, LLP,
if a partnership election is made, 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
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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.
Certain classes of Securities may be issued with OID. A
holder should be aware that the Code and the regulations
promulgated by the United States Department of the
Treasury (the "Treasury") under the Code do not
adequately address certain issues relevant to prepayable
securities, such as the Securities.
The Securities will be, or, in the case of Certificates
issued by a Trust Fund electing to be treated as a
partnership, should be treated as assets described in
section 7701(a)(19)(C) of the Code and as real estate
assets described in section 856(c) of the Code.
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."
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
and related consent of Stradley, Ronon, Stevens & Young,
LLP with respect to the validity of the information set
forth under "Federal Income Tax Consequences" herein and
in the related Prospectus Supplement.
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.
See "ERISA Considerations." 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 of ERISA and the Code
and will not subject the Trustee, the Depositor or the
Servicer to additional obligations. See "Description of
the Securities--General" and "ERISA Considerations."
Risk Factors.......... For a discussion of risks associated with an investment
in the Securities, see "Risk Factors" on Page 14 herein
and in the related Prospectus Supplement.
Ratings............... It is a condition precedent to the issuance of any class
of Securities sold under this Prospectus that they be
rated in one of the four highest rating categories
(within which there may be subcategories or gradations
indicating relative standing) of at least one nationally
recognized statistical rating organization. A security
rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal
at any time by the assigning rating agency.
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Ratings of the Securities address the likelihood of the
receipt of all distributions on the Loans by the related
Securityholders under the agreements pursuant to which
such Securities are issued. The ratings take into
consideration the credit quality of the related Trust
Fund Assets, including any credit enhancement,
structural and legal aspects associated with such
Securities, and the extent to which the payment stream
on such Trust Fund Assets is adequate to make payments
required by such Securities. The ratings on such
Securities do not, however, constitute a statement
regarding frequency of prepayments on the related Loans.
See "Risk Factors--Rating of the Securities Subject to
Change" and "Rating."
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RISK FACTORS
Investors should consider the following factors in connection with the
purchase of the Securities.
Nature of Mortgages
Possible Effect of Property Values on Securities. There are several
factors that could adversely affect the value of Mortgaged Properties such that
the outstanding balance of the related Loans, together with any senior financing
on the Mortgaged Properties, if applicable, would equal or exceed the value of
the Mortgaged Properties. Among the factors that could adversely affect the
value of the Mortgaged Properties are an overall decline in the real estate
market in the areas in which the Mortgaged Properties are located or a decline
in the general condition of the Mortgaged Properties as a result of failure of
borrowers to maintain adequately the Mortgaged Properties or of natural
disasters that are not necessarily covered by insurance, such as earthquakes and
floods. In the case of Loans secured by subordinate liens, such decline could
extinguish the value of the interest of a junior mortgagee in the Mortgaged
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 holder of one or more
classes of Securities of the related Series. See "The Trust Fund--The
Loans--Additional Information."
Delays Due to Liquidation. Even assuming that the Mortgaged 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 Mortgaged 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, or can be restricted, following a nonjudicial or judicial sale
of a Mortgaged Property. In the event of a default by a borrower, these
restrictions, among other things, may impede the ability of the Servicer to
foreclose on or sell the Mortgaged Property or to obtain Liquidation Proceeds
sufficient to repay all amounts due on the related Loan. In addition, the
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. See "Yield and Prepayment Considerations."
Disproportionate Effect of Liquidation Expenses. 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. See "Yield and Prepayment Considerations."
Junior Liens. Since the mortgages and deeds of trust securing Loans may be
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 liens 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 Mortgaged Property. See
"Certain Legal Aspects of the Loans--Junior Mortgages; Rights of Senior
Mortgages."
Mixed Use Loans. Due to the limited market for Mixed Use Properties, in
the event of a foreclosure, it is expected that the time it takes to recover
Liquidation Proceeds may be longer than with Single Family Properties and may
have a higher risk of loss. See "The Trust Fund--The Loans--General."
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Balloon Payments and Risk of Losses
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 the ability of the
borrower either to timely refinance the Loan or to timely sell the related
Mortgaged 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 Mortgaged 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.
Pre-Funding Account and Possibility of Prepayment
If so provided in the related Prospectus Supplement, on the date of the
related conveyance of Loans by the Depositor to the Trust (the "Closing Date")
the Depositor will deposit cash 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 earliest to occur of: (i) the date the amount on deposit in the
Pre-Funding Account is less than the minimum dollar amount specified in the
related Agreement; (ii) the date on which an Event of Default occurs under the
related Agreement; or (iii) the date which is the later of three months or 90
days after the related 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). Subsequent Loans will
be required to conform to the requirements set forth in the related Agreement
and described 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 holders of Certificates
and/or Notes (respectively "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.
Limits on Credit Enhancement
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, if any, 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 will not cover all potential
losses or risks. 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."
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Market Value of Trust Fund Assets May Fluctuate
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" 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 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.
Limited Source of Payments--No Recourse to Sellers, Depositor or Servicer
The Depositor does not have, nor is it expected to have, any significant
assets. 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,
the Sellers 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 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 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 pursuant to certain 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 Loan, 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 Loan 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.
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The only obligations of the Servicer, other than its servicing
obligations, with respect to the Trust Fund Assets or the Securities of any
Series will be pursuant to certain representations and warranties. The Servicer
may be required to repurchase or substitute for any Loan with respect to which
such representations and warranties are breached. There is no assurance,
however, that the Servicer will have the financial ability to effect any such
repurchase or substitution.
The only obligations of any Seller (and Equity One, where the Seller is a
subsidiary of Equity One) 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 (and Equity One, where the
Seller is a subsidiary of Equity One) may be required to repurchase or
substitute for any Loan with respect to which such representations and
warranties or document delivery requirements are breached. There is no
assurance, however, that such Seller (and Equity One, where the Seller is a
subsidiary of Equity One) will have the financial ability to effect such
repurchase or substitution. See "Loan Program--Representations by Sellers;
Repurchases."
Bankruptcy and Insolvency Risks
Sellers. The Servicer, the Sellers and the Depositor each intend that each
conveyance of Loans by the Sellers to the Depositor constitutes a sale, rather
than a pledge of the Loans to secure indebtedness of the Sellers. As a sale of
the Loans by the Sellers to the Depositor, the Loans would not be part of a
Seller's bankruptcy estate and would not be available to a Seller's creditors.
However, in the event of the bankruptcy or insolvency of a Seller, it is
possible that the bankruptcy trustee, a conservator or receiver of the Seller or
another person may attempt to recharacterize the sale of the Loans as a
borrowing by the Seller, secured by a pledge of the Loans. 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.
In addition, it is anticipated that the Trustee will hold original
promissory notes for each of the Loans, together with assignments of each of the
Mortgages, and the assignments of Mortgages will be filed of public record.
Depositor. The Depositor intends that each conveyance of Loans from the
Depositor to the Trust Fund constitutes a sale, rather than a pledge of the
Loans to secure indebtedness of the Depositor. As a sale of the Loans by the
Depositor to the Trust Fund, the Loans would not be part of the Depositor's
bankruptcy estate and would not be available to the Depositor's creditors.
However, in the event of the bankruptcy or insolvency of the Depositor, it is
possible that the bankruptcy trustee, a conservator or receiver of the Depositor
or another person may attempt to recharacterize the sale of the Loans as a
borrowing by the Depositor, secured by a pledge of the Loans. 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.
In addition, it is anticipated that the Trustee will hold original
promissory notes for each of the Loans, together with assignments of each of the
Mortgages, and the assignments of Mortgages will be filed of public record.
Servicer. In the event of a bankruptcy or insolvency of the Servicer, the
bankruptcy trustee or a conservator or receiver of the Servicer may have the
power to prevent the Trustee or the Securityholders from appointing a successor
servicer.
Bank. In the event of an insolvency, receivership or conservatorship of the
Bank, the FDIC or another agency in its capacity as receiver or conservator has
extensive powers under federal banking laws in the administration of the assets
of a failed insured depository institution and its subsidiaries. In the event of
a receivership or conservatorship for the Bank, the FDIC would also have the
power to exercise all of the rights of a shareholder of Equity One and, through
Equity One, of the Depositor.
Mortgagor Debtor. In addition, federal and state statutory provisions,
including the Bankruptcy Code 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 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/or alter the mortgage loan repayment
schedule. The effect of any such proceedings under the 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, or eliminations of, the aggregate amount of such payments.
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Prepayment and Yield Considerations
The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the 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 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 the Depositor, a Seller (and Equity One,
where the Seller is a subsidiary of Equity One) or the Servicer may result from
repurchases of Trust Fund Assets due to material breaches of the Depositor's,
Equity One's, a Seller's or the Servicer's representations and warranties, as
applicable. See "Loan Program--Representations by Sellers; Repurchases." 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. In addition, the yields to maturity and weighted average lives of
the Securities will be affected by the distribution of amounts remaining in any
Pre-Funding Account following the end of the related Funding Period. 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. See "Yield and Prepayment
Considerations" and "The Agreements--Pre-Funding Account."
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the Securities were to accrue through the day immediately preceding
each Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate. See "Description of the
Securities--Distributions on Securities--Distributions of Interest."
Book-Entry Registration
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 ("DTC
Participants"), 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. Beneficial Owners will not be
recognized as "Noteholders" or "Certificateholders" as such terms are used in
the related Agreement, and Beneficial Owners will be permitted to exercise the
rights of Securityholders only indirectly through DTC and DTC 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 DTC
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."
Consequences of Owning Original Issue Discount Securities
Debt Securities that are Accrual Securities will be, and certain of the
other Debt Securities may be, issued with OID for federal income tax purposes. A
holder of Debt Securities issued with OID will be required to include OID 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 Debt Securities that are Accrual Securities generally will be treated as OID
for this purpose. See "Federal Income Tax Consequences--Taxation of Debt
Securities--Interest and Acquisition Discount" and "--Market Discount."
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Limited 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.
Certain Other Legal Aspects of the Loans
Consumer Protection Laws. 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 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 Servicer to damages and
administrative sanctions. See "Certain Legal Aspects of the Loans."
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.
The Riegle Act. Certain 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 nonpurchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
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Violations of certain provisions of these federal laws may limit the
ability of the 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 applicable 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."
Environmental Risks
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of cleanup.
In several states, such a lien has priority over the lien of an existing
mortgage against such property. In addition under the laws of some states and
under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), and the Asset Conservation, Lender
Liability and Deposit Insurance Protection Act of 1996, 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. Such costs could result in a loss to the holders of one
or more classes of Securities of the related Series. A lender also risks such
liability on foreclosure of the related property. See "Certain Legal Aspects of
the Loans--Environmental Risks."
Rating of the Securities Subject to Change
It will be a condition to the issuance of a class of Securities offered
hereby that they be rated in one of the four highest rating categories by the
Rating Agency identified in the related Prospectus Supplement. Any such rating
would be based on, among other things, the adequacy of the value of the related
Trust Fund Assets and any credit enhancement with respect to such class and will
represent such Rating Agency's assessment solely of the likelihood that holders
of such class of Securities will receive payments to which such Securityholders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ from
that originally anticipated or the likelihood of early optional termination of
the Series of Securities. Such rating shall not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor purchasing a Security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series of Securities, such rating might also be lowered or
withdrawn because of, among other reasons, an adverse change in the financial or
other condition of a credit enhancement provider or a change in the rating of
such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a class of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
similar loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future experience
nor any assurance that the data derived from a large pool of similar loans
accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of Loans. No assurance can be given that the values of any
Mortgaged 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 Mortgaged Properties become equal to or
greater than the value of the Mortgaged 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."
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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 certain assets (the "Trust Fund Assets") consisting
of a pool (each, a "Pool") comprised of Loans as specified in the related
Prospectus Supplement, together with payments in respect of such Loans, 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 originators or sellers which may be affiliates of the
Depositor (collectively, the "Sellers") pursuant to a Pooling and Servicing
Agreement with respect to a Series consisting solely of Certificates, or a
purchase agreement (each, a "Purchase Agreement") with respect to a Series
consisting of Certificates and Notes, and conveyed without recourse by the
Depositor to the related Trust Fund. Loans acquired by the Depositor will have
been originated in accordance with the underwriting criteria specified below
under "Loan Program--Underwriting Standards," "--Specific Underwriting Criteria;
Underwriting Programs" and "--Summary of Underwriting Requirements by Program."
See "Loan Program--Underwriting Standards," "--Specific Underwriting Criteria;
Underwriting Programs" and "--Summary of Underwriting Requirements by Program."
The Depositor will cause the Trust Fund Assets to be conveyed to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series. The Servicer will service the
Trust Fund Assets, either directly or through other servicing institutions
(each, a "Sub-Servicer"), pursuant to a Pooling and Servicing Agreement with
respect to a Series consisting solely of Certificates, or a master servicing
agreement (each, a "Master Servicing Agreement") between the Trustee and the
Servicer with respect to a Series consisting of Certificates and Notes, and will
receive a fee for such services. See "Loan Program" and "The Agreements." With
respect to Loans serviced by the Servicer through a Sub-Servicer, the Servicer
will remain liable for its servicing obligations under the related Agreement as
if the Servicer alone were servicing such Loans.
As used herein, "Agreement" means, with respect to a Series consisting
solely of Certificates, the Pooling and Servicing Agreement, and with respect to
a Series consisting of Certificates and Notes, the Purchase Agreement, 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 purchasing,
- ----------
* 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 in such Pool. Similarly, the term "Pass-Through Rate" will refer to the
Pass-Through Rate borne by the Certificates and the term "interest rate" will
refer to the interest rate borne by the Notes of one specific Series, as
applicable, and the term "Trust Fund" will refer to one specific Trust Fund.
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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.
The only obligations of the Depositor with respect to a Series of
Securities will be to obtain certain representations and warranties from Equity
One and the Sellers and to assign to the Trustee for such Series of Securities
the Depositor's rights with respect to such representations and warranties. See
"Loan Program--Representations by Sellers; Repurchases" and "The
Agreements--Assignment of the Trust Fund Assets." The obligations of the
Servicer with respect to the Loans will consist principally of its contractual
servicing obligations under the related Agreement (including its obligation to
enforce the obligations of the Sub-Servicers or Sellers, or both, as more fully
described herein under "Loan Program--Representations by Sellers; 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 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 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
relating to such Series will be attached to the Agreement delivered to the
Trustee upon delivery of the Securities.
The Loans
General. The Loans will consist of (i) fixed rate and variable rate
mortgage loans secured by first and/or subordinate liens on (A) one- to
four-family residential properties (each, a "Residential Loan") and (B) mixed
commercial/residential use properties and other multi-family residential
properties (each, a "Mixed Use Loan" and, together with the Residential Loans,
the "Mortgage Loans") and (ii) revolving home equity loans or certain balances
thereof (the "Revolving Credit Line Loans") secured by first and/or subordinate
liens on one- to four-family residential properties. All Loans will have been
purchased by the Depositor, either directly or through an affiliate, from one or
more Sellers. The Sellers will have either originated the Loans or purchased the
Loans from other lenders. 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.
All of the Loans in a Pool will have monthly payments due on a set day,
but not necessarily 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. Accrued interest may
be deferred and added to the principal of a Loan for such periods
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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 specified interest rate borne by such Loan (the "Loan Rate") for
a period of time or for the life of the Loan, and the amount of any
difference may be contributed from funds supplied by the seller of the
Mortgaged 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 Mortgaged Property. Other Loans may be assumable by persons
meeting the then applicable underwriting standards of the related Seller.
The real properties which secure repayment of the Loans are referred to as
the "Mortgaged Properties." The 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 Revolving Credit Line 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.
The Mortgaged Properties relating to Residential Loans and Revolving
Credit Line Loans will consist 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 (the
"Single Family Properties"). The Mortgaged Properties relating to Mixed Use
Loans will consist of other multi-family properties and structures which include
residential dwelling units and space used for retail, professional or other
commercial uses (the "Mixed Use Properties"). The Mortgaged Properties may
include vacation and second homes and investment properties and may be located
in any one of the fifty states, the District of Columbia, Puerto Rico or any
territory of the United States.
Loans with certain Loan-to-Value Ratios and/or certain principal balances
may be covered wholly or partially by primary mortgage guaranty insurance
policies (each, a "Primary Mortgage Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the applicable Prospectus
Supplement.
The aggregate principal balance of Loans secured by Mortgaged Properties
that are owner-occupied will be disclosed 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 the making
of a representation by the borrower at origination of the Loan either that
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the underlying Mortgaged 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 Mortgaged
Property as a primary residence.
Home Equity Loans. Certain of the Loans are non-purchase money loans
secured by the borrower's equity in his or her home. The full amount of these
Loans 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 these Loans will
not exceed 360 months. Under certain circumstances, a borrower under one of
these Loans 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.
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
Properties, Mixed Use Properties, or other real property), (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 APRs borne by
the Loans, (viii) the maximum and minimum per annum Loan Rates, and (ix) the
geographical location of the Mortgaged Properties. 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 secured by a first lien on a Mortgaged
Property, at any given time, is equal to (i) the principal balance of such Loan
at the date of origination divided by (ii) the Collateral Value of the related
Mortgaged Property. The "Combined Loan-to-Value Ratio" of a Loan secured by a
subordinate lien on a Mortgaged Property, 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 Mortgaged Property. The "Collateral Value" of the Mortgaged
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
Mortgaged Property. In the case of Refinance Loans, the "Collateral Value" of
the related Mortgaged Property is the appraised value thereof determined in an
appraisal obtained at the time of refinancing.
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No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related 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
Mortgaged Properties, as applicable, in a particular Pool become equal to or
greater than the value of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry. In addition, adverse economic
conditions and other factors (which may or may not affect real property values),
including without limitation, loss of employment, illness or other personal
difficulties suffered by obligors on the Loans, 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.
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. Substituted Trust Fund Assets generally will comply with
all of the representations and warranties and satisfy the criteria set forth in
the related Agreement and described in the related Prospectus Supplement as of
the date of substitution. See "Loan Program--Representations By Sellers;
Repurchases" and "The Agreements--Assignment of the Trust Fund Assets."
USE OF PROCEEDS
The Depositor will use 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 Reserve
Accounts described in the related Prospectus Supplement, (iii) to pay costs of
structuring and issuing such Securities, including the costs of obtaining Credit
Enhancement, if any, and (iv) to serve any other corporate purpose specifically
permitted by its Certificate of Incorporation. 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
Equity One ABS, Inc., a Delaware corporation (the "Depositor"), was
incorporated in March of 1997 for the limited purpose of acquiring, owning and
transferring Trust Fund Assets and selling interests therein or bonds secured
thereby. The Depositor is a limited purpose wholly owned finance subsidiary of
Equity One, Inc., a Delaware corporation ("Equity One"). Equity One is a wholly
owned operating subsidiary of Banco Popular, FSB, a federal savings bank with
principal offices in Newark, New Jersey (the "Bank"), which in turn is an
indirect wholly owned subsidiary of Popular, Inc., a diversified, publicly owned
bank holding company incorporated under the General Corporation Law of Puerto
Rico ("Popular"). As such, the Depositor and Equity One are subject to
comprehensive regulation by the Board of Governors of the Federal Reserve System
("Federal Reserve"), the Office of Thrift Supervision ("OTS") and the Federal
Deposit Insurance Corporation ("FDIC"). No obligations of the Depositor are
insured by any governmental agency. The Depositor maintains its principal office
at 103 Springer Building, 3411 Silverside Road, Wilmington, Delaware 19810. Its
telephone number is (302) 478-6160.
Neither the Depositor nor any of the Depositor's affiliates will insure or
guarantee distributions on the Securities of any Series.
LOAN PROGRAM
The Loans will have been purchased by the Depositor, either directly or
through affiliates, from the Sellers. The Loans so purchased by the Depositor
will have been originated in accordance with the underwriting criteria specified
below under "Underwriting Standards," "Specific Underwriting Criteria;
Underwriting Programs" and "Summary of Underwriting Requirements by Program."
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Underwriting Standards
Each Seller operates under certain underwriting standards that have been
approved by Equity One and are consistent with those utilized by mortgage
lenders generally during the period of origination for similar types of loans
(the "Equity One Standards"). Equity One and each Seller will represent and
warrant that all Loans conveyed by it to the Depositor or one of its affiliates
will have been underwritten in accordance with the Equity One Standards. As to
any Loan insured by the FHA or partially guaranteed by the VA, each Seller will
represent that it has complied with underwriting policies of the FHA or the VA,
as the case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Mortgaged Property 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 information with
respect to the applicant's liabilities, income, credit history, including the
principal balance and payment history with respect to any senior mortgage, and
employment history, as well as certain other personal information, which, to the
extent specified in the related Prospectus Supplement, will have been verified
by the related Seller. In addition, to the extent specified in the related
Prospectus Supplement, each Seller, as part of its quality control system, will
have reverified information with respect to the foregoing matters that has been
provided by a mortgage brokerage company prior to funding a loan and
periodically audits files based on a random sample of closed loans. Each
borrower is generally required to provide an authorization to apply for a credit
report which summarizes the borrower's credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcies, repossessions, suits or judgments. In most cases, an employment
verification is obtained either in writing or verbally from 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.
In determining the adequacy of the property to be used as collateral, an
appraisal will generally be made of each property considered for financing in an
amount in excess of $15,000. 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 homes, the estimated rental income (if considered applicable
by the appraiser) and the cost of replacing the home. 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.
Once all applicable employment, credit and property information is
received, a determination generally is made, with the assistance of a
Debt-to-Income Ratio, as to whether the prospective borrower has sufficient
monthly income available (i) to meet the borrower's monthly obligations on the
proposed mortgage loan (generally determined on the basis of the monthly
payments due in the year of origination) and other expenses related to the
property (such as property taxes and hazard insurance) and (ii) to meet other
financial obligations and monthly living expenses. 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 varies depending upon a
borrower's credit grade and loan documentation level (as described below) but
does not generally exceed 50%. Variations in the monthly Debt-to-Income Ratios
limit are permitted based on compensating factors. The underwriting standards
applied by Sellers, particularly with respect to the level of loan documentation
and the borrower's income and credit history, may be varied in appropriate cases
where factors such as low Combined Loan-to-Value Ratios or other favorable
credit exist.
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 may provide for
escalating or variable payments by the borrower. These types of Loans are
underwritten on the basis of a judgment that the borrowers have the ability to
make the monthly payments required initially. In some instances, 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.
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Specific Underwriting Criteria; Underwriting Programs
The Equity One Standards allow for the origination and purchase of Loans
generally under three underwriting programs, known as Grade A Credits, Grade B
Credits and Grade C Credits, all of which are summarized below. These programs
and their underwriting criteria may change from time to time. Deviations from
the specific criteria of an underwriting program are permitted to reflect local
economic trends and real estate valuations, as well as other credit factors
specific to each Loan application and/or each portfolio acquired. Some Loans may
be to borrowers whose creditworthiness may not coincide with program criteria.
Overall, the goal is to maintain the integrity of these programs and
simultaneously provide lending officers and correspondent networks with the
flexibility to consider the specific circumstances of each Loan.
Under the Equity One Standards, the following two types of income
documentation programs are used: (i) full income documentation ("Full Doc") and
(ii) no income verification ("NIV"). Under the Full Doc program, income is
verified by reviewing the borrower's W-2s for the past two years and two of the
borrower's current paystubs. Under the NIV program, the borrower must submit
bank statements for the past three months, and a current profit and loss
statement to review cash flow and verify the validity of the business. Tax
returns are generally not required under either income documentation program,
however, each lender always has the right to require tax returns if that is the
only means of verifying income/cash flow.
Underwriting with the NIV program is reserved for Grade A Credits and
Grade B Credits Loans, and offers an alternative for self-employed and employed
applicants with supplemental income, who are either unable to or do not wish to
produce income documentation to substantiate all of their income. For Loans
underwritten pursuant to the NIV program, the Debt-to-Income Ratio is based on a
maximum of 45% of stated income as disclosed on the Loan application.
Summary of Underwriting Requirements by Program
Grade A Credits. For Grade A Credits, the following criteria generally
apply:
1. An in-file credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history is required.
Typically, a good to excellent credit history of at least one year is required,
and prior credit history may be rated on a case-by-case basis. The credit
history should reflect that existing and previous debts were paid in a timely
manner. A Chapter 7 bankruptcy is not acceptable. A Chapter 13 bankruptcy that
has been discharged for a minimum of two years is acceptable if the borrower has
since established a payment history, notwithstanding such bankruptcy, consistent
with this underwriting program. No unpaid collections, liens or judgments are
allowed under this credit grade. During the most recent 12 month period, the
borrower may not have more than (i) one 30 day delinquency in his or her
mortgage payment history, (ii) three major credit cards with a maximum of one 30
day delinquency and (iii) three retail credit cards with a maximum of two 30 day
delinquencies.
2. Generally, the borrower must have (i) been employed for not less than
three years with the same employer or (ii) established comparable stability in a
particular field of work.
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3. Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform to
the following criteria:
Maximum Combined Maximum Debt-
Loan-to-Value Ratio to-Income Ratio
------------------- ---------------
Property Type
-------------
Owner occupied one- to four-
family dwellings, townhouses,
condominiums 90% 45%
or
80% 50%
True Second Homes 80% 50%
Non-owner occupied single
family dwellings, townhouses,
condominiums 75% 50%
Non-owner occupied two- to four-
family dwellings, townhouses 70% 50%
Mixed use: Purchase 70% Minimum Debt
Refinance 65% Service Coverage 1.30
Grade B Credits. For Grade B Credits, the following criteria generally
apply:
1. An in-file credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history is required.
Typically, a satisfactory to good credit history of at least one year is
required, and prior credit history may be rated on a case-by-case basis. The
credit history should reflect that existing and previous debts were paid in a
predominately timely manner. A Chapter 7 bankruptcy, if discharged for two
years, is acceptable if there are two years of re-established credit and a
satisfactory written explanation. A Chapter 13 bankruptcy with a minimum of a
three year satisfactory payment plan and one year of re-established credit is
acceptable. All unpaid charge-offs, liens or judgments in the last two years
must be paid in full. During the most recent twelve month period, the borrower
may not have (i) more than two 30 day delinquencies in his or her mortgage
payment history (consecutive 30 day delinquencies are treated as one 30 day
account), (ii) more than four major credit cards or installment debts with a
maximum of two 30 day delinquencies, (iii) any retail credit cards with more
than three 30 day delinquencies and (iv) more than two retail credit cards with
a maximum of one 60 day delinquency.
2. Generally, the borrower must have (i) been employed for not less than
three years with the same employer or (ii) established comparable stability in a
particular field of work.
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3. Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform to
the following criteria:
Maximum Combined Maximum Debt-
Loan-to-Value Ratio to-Income Ratio
------------------- ---------------
Property Type
-------------
Owner occupied one- to four-
family dwellings, townhouses,
condominiums 90% 45%
or
80% 50%
True Second Homes 80% 50%
Non-owner occupied single
family dwellings, townhouses,
condominiums 75% 50%
Non-owner occupied two- to four-
family dwellings, townhouses 70% 50%
Mixed use: Purchase 70% Minimum Debt
Refinance 65% Service Coverage 1.30
Grade C Credits. For Grade C Credits, the following criteria generally
apply:
1. An in-file credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history is required.
Typically, a fair to satisfactory credit history of at least one year is
required. A discharged Chapter 7 bankruptcy is acceptable with one year of
re-established credit. A non-discharged Chapter 13 bankruptcy will be considered
with a minimum of a two year satisfactory payment plan, one year of
re-established credit and trustee permission. A written explanation of
derogatory credit is required. Mortgage payment history may not reflect any more
than three 30 day delinquencies and one 60 day delinquency during the most
recent 12 months (consecutive 30 day delinquencies are treated as one 30 day
account). In addition, all accounts that are delinquent for 60 days or longer
must be paid from proceeds.
2. Generally, the borrower must have (i) been employed for not less than
one year with the same employer or (ii) established comparable stability in a
particular field of work.
3. Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform to
the following criteria:
Maximum Combined Maximum Debt-
Loan-to-Value Ratio to-Income Ratio
------------------- ---------------
Property Type
-------------
Owner occupied single family
dwellings, townhouses 80% 50%
Owner occupied two- to four-
family dwellings, townhouses,
condominiums 75% 50%
Owner occupied condominiums 70% 50%
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True Second Homes 75% 50%
Non-owner occupied one- to four-
family dwellings 70% 50%
Qualifications of Sellers
Each Seller is required to satisfy the following qualifications. Each
Seller is an institution experienced in originating loans of the type contained
in the related Pool in accordance with accepted practices and prudent guidelines
and must maintain satisfactory facilities to originate those loans. The Servicer
is an institution experienced in originating and servicing loans of the type
contained in the related Pool in accordance with accepted practices and prudent
guidelines and must maintain satisfactory facilities to originate and service
those loans. Each Seller has all of the licenses necessary for the conduct of
its business.
Representations by Sellers; Repurchases
Each Seller (and Equity One, where a Seller is a subsidiary of Equity One)
will have made representations and warranties in respect of the Loans sold by
such Seller and evidenced by all, or a part, of a Series of Securities. Such
representations and warranties may include, among other things: (i) that (except
for Loans in amounts less than $15,000) title insurance (or in the case of
Mortgaged Properties located in areas where such policies are generally not
available, an attorney's certificate of title) and any required hazard insurance
policy were effective at origination of each Loan and that the title insurace
(or certificate of title as applicable) remained in effect on the date of
purchase of the Loan from Seller by or on behalf of the Depositor; (ii) that
Seller had good title to each such Loan and that 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 Mortgaged Property (subject only to permissible liens
disclosed, if applicable, title insurance exceptions, if applicable, and certain
other exceptions described in the Agreement) and that the Mortgaged Property was
free from damage and was in acceptable condition; (iv) that there were no
delinquent tax or assessment liens against the Mortgaged 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 all applicable local, state and federal laws and regulations in
all material respects.
The Servicer or the Trustee, if the Servicer is the Seller, will promptly
notify the relevant Seller (and Equity One, if it is not the Servicer or the
Seller) of any breach of any representation or warranty made by it in respect of
a Loan which materially and adversely affects the interests of the
Securityholders in such Loan. If such Seller cannot cure such breach within 90
days following notice from the Servicer or the Trustee, as the case may be, then
such Seller will be obligated either to (i) 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 is the Servicer) or (ii) substitute for such Loan a replacement loan that
satisfies the criteria specified in the related Agreement and described in the
related Prospectus Supplement. If a REMIC election is to be made with respect to
a Trust Fund, the 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 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
Servicer is the Seller, the 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
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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.
If Equity One makes a representation or warranty on behalf of a Seller,
Equity One will be obligated to purchase or substitute a Loan if a Seller
defaults on its obligation to do so, but no assurance can be given that Equity
One will carry out its purchase or substitution obligations with respect to
Loans. Neither the Depositor nor the Servicer (unless the Servicer is a Seller)
will be obligated to purchase or substitute a Loan if a Seller defaults on its
obligation to do so, and no assurance can be given that Sellers will carry out
their respective repurchase or substitution obligations with respect to Loans.
However, to the extent that a breach of a representation and warranty of a
Seller may also constitute a breach of a representation made by the Servicer,
the Servicer may have a repurchase or substitution obligation as described below
under "The Agreements--Assignment of Trust Fund Assets."
DESCRIPTION OF THE SECURITIES
Each Series of Asset Backed Certificates (the "Certificates") will be
issued pursuant to either (i) a pooling and servicing agreement (a "Pooling and
Servicing Agreement") among the Depositor, the Servicer, the trustee(s) named in
the related Prospectus Supplement (the "Trustee") and the Sellers or (ii) a
trust agreement (a "Trust Agreement") between the Depositor 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 Asset Backed Notes (the "Notes" and, together with the
Certificates, the "Securities") will be issued pursuant to an indenture (an
"Indenture") between the related trust fund established by the Depositor (a
"Trust Fund") and the Trustee, and the related Loans will be serviced by the
Servicer pursuant to a Master Servicing Agreement. A form of Indenture and
Master Servicing Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. A Series of Securities may
consist of both Notes and Certificates. Each Agreement, dated as of the related
Cut-off Date, will be among the Depositor, the Servicer, the Sellers 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 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
The Securities of each Series will be issued in book-entry or fully
registered form as specified in the related Prospectus Supplement, in the
authorized denominations specified in the related Prospectus Supplement, and
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. 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.
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<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, and each class of Notes of a Series will be secured by, the related
Trust Fund Assets. A Series of Securities may include one or more classes that
are senior in right to payment to one or more other classes of Securities of
such Series. Certain Series or classes of Securities may be covered by insurance
policies, surety bonds or other forms of credit enhancement, in each case as
described under "Credit Enhancement" herein and in the related Prospectus
Supplement. One or more classes of Securities of a Series may be entitled to
receive distributions of principal, interest or any combination thereof.
Distributions on one or more classes of a Series of Securities may be made prior
to one or more other classes, after the occurrence of specified events, in
accordance with a schedule or formula or on the basis of collections from
designated portions of the related Trust Fund Assets, in each case as specified
in the related Prospectus Supplement. The timing and amounts of such
distributions may vary among classes or over time as specified in the related
Prospectus Supplement.
Distributions of principal and interest (or, where applicable, of
principal only or interest only) on the related Securities will be made by the
Trustee on each Distribution Date (i.e., monthly, quarterly, semi-annually or at
such other intervals and on the dates as are specified in the related Prospectus
Supplement) in proportion to the percentages specified in the related Prospectus
Supplement. Distributions will be made to the persons in whose names the
Securities are registered at the close of business on the dates specified in the
related Prospectus Supplement (each, a "Record Date"). Distributions will be
made in the manner specified in the related Prospectus Supplement to the persons
entitled thereto at the address appearing in the register maintained for holders
of Securities (the "Security Register"); provided, however, that the final
distribution in retirement of the Securities will be made only upon presentation
and surrender of the Securities at the office or agency of the Trustee or other
person specified in the notice to Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
corporate trust office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series, but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of either interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee benefit
plan or other retirement arrangement (including individual retirement accounts
and annuities, Keogh plans and collective investment funds in which such plans,
accounts or arrangements are invested) subject to provisions of ERISA or the
Code, may result in prohibited transactions, within the meaning of ERISA and the
Code. See "ERISA Considerations." The transfer of Securities of such a class
will not be registered unless the transferee (i) represents that it is not, and
is not purchasing on behalf of, any such plan, account or arrangement or (ii)
provides an opinion of counsel satisfactory to the Trustee and the Depositor
that the purchase of Securities of such a class by or on behalf of such plan,
account or arrangement is permissible under applicable law and will not subject
the Trustee, the Servicer, the Sellers 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 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 Servicer or a holder of the related residual certificate will be
obligated to take all actions required in order
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<PAGE>
to comply with applicable laws and regulations and will be obligated to pay any
prohibited transaction taxes. The 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.
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 or
other cash account established and available therefore (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 distributions among Securities of a particular class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. "Available Funds" for each Distribution Date will
generally equal the amount on deposit in the related Security Account on such
Distribution Date (net of related fees and expenses payable by the related Trust
Fund) other than amounts to be held therein for distribution on future
Distribution Dates.
Distributions of Interest. Interest will accrue on the aggregate principal
balance of the Securities (or, in the case of Securities entitled only to
distributions allocable to interest, the aggregate notional amount) of each
class of Securities (the "Class Security Balance") entitled to interest from the
date, at the Pass-Through Rate or interest rate, as applicable (which in either
case may be a fixed rate or rate adjustable as specified in such Prospectus
Supplement), and for the periods specified in such Prospectus Supplement.
"Pass-Through Rate" means 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. 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
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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 Accrual Securities, as reflected in the aggregate Class Security
Balance of such class of Accrual Securities, will increase on each Distribution
Date by the amount of interest that accrued on such class of Accrual Securities
during the preceding interest accrual period but that was not required to be
distributed to such class on such Distribution Date. Any such class of Accrual
Securities will thereafter accrue interest on its outstanding Class Security
Balance as so adjusted.
Distributions of Principal. The 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,
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 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
Prepayments to such class or classes of Securities will have the effect of
accelerating the amortization of such Securities while increasing the interests
evidenced by one or more other classes of Securities in the Trust Fund.
Increasing the interests of the other classes of Securities relative to that of
certain Securities is intended to preserve the availability of the subordination
provided by such other Securities. See "Credit Enhancement--Subordination."
Unscheduled Distributions. If specified in the related Prospectus
Supplement, the Securities will be subject to receipt of distributions before
the next scheduled Distribution Date under the circumstances and in the manner
described below and in such Prospectus Supplement. If applicable, the Trustee
will be required to make such unscheduled distributions on the day and in the
amount specified in the related Prospectus Supplement if, due to substantial
payments of principal (including Principal Prepayments) on the Trust Fund
Assets, the Trustee or the 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. 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. 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 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), subject to the Servicer's determination that
such advances may be recoverable out of late payments by borrowers, Liquidation
Proceeds, Insurance Proceeds or otherwise ("Advances").
In making Advances, the 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
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made by the Servicer from cash being held for future distribution to
Securityholders, the 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. Each Advance will be
reimbursable to the 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 also will be reimbursable to the
Servicer from cash otherwise distributable to Securityholders (including the
holders of Senior Securities) to the extent that the 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 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. Such
Advances are reimbursable to the Servicer to the extent permitted by the related
Agreement. The obligations of the Servicer to make Advances may be supported by
a cash advance reserve fund, a surety bond or other arrangement of the type
described herein under "Credit Enhancement," in each case as described in the
related Prospectus Supplement.
In the event the 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 Servicer is entitled to be
reimbursed for Advances. See "Description of the Securities--Distributions on
Securities."
Reports to Securityholders
Prior to or concurrently with each distribution on a Distribution Date the
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 Securities on such Distribution Date, and (b) withdrawn from
the Reserve Account, if any, that is included in the amounts distributed
to the Senior Securities;
(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
Principal 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 Servicer, and the amount of
additional servicing compensation received by the Servicer attributable to
penalties, fees, excess Liquidation Proceeds and other similar charges and
items;
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(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 1 to 30 days, (2) 31 to
60 days, (3) 61 to 90 days and (4) 91 or more days and (B) in foreclosure
and delinquent (1) 1 to 30 days, (2) 31 to 60 days, (3) 61 to 90 days and
(4) 91 or more days, as of the close of business on the last day of the
calendar month preceding such Distribution Date;
(x) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
(xi) the Pass-Through Rate or interest rate, as applicable, if
adjusted from the date of the last statement, of any such class expected
to be applicable to the next distribution to such class;
(xii) if applicable, the amount remaining in any Reserve Account at
the close of business on the Distribution Date;
(xiii) the Pass-Through Rate or interest rate, as applicable, as of
the day prior to the immediately preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, pool policies
or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Security of the relevant class having the Percentage Interest
specified in the related Prospectus Supplement. The report to Securityholders
for any Series of Securities may include additional or other information of a
similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer or the Trustee will mail to each Securityholder of
record at any time during such calendar year a report (a) as to the aggregate of
amounts reported pursuant to (i) and (ii) above for such calendar year or, in
the event such person was a Securityholder of record during a portion of such
calendar year, for the applicable portion of such year and (b) such other
customary information as may be deemed necessary or desirable for
Securityholders to prepare their tax returns.
Categories of Classes of Securities
The Securities of any Series may be comprised of one or more classes. Such
classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
Prospectus Supplement for a series of Securities may identify the classes which
comprise such Series by reference to the following categories.
Categories of Classes Definition
PRINCIPAL TYPES
Accretion Directed Class.......... 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 Class................... A class consisting of "components." The
components of a Component Class may have
different principal and/or interest payment
characteristics but together constitute a
single class. Each component of a Component
Class may
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Categories of Classes Definition
be identified as falling into one or more of
the categories in this chart.
Notional Amount Class............. 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 a "PAC")......... 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. The Prospectus Supplement
relating to each Planned Principal Class
will disclose the principal balance schedule
pertaining to such class and the pricing and
prepayment assumptions based upon which the
schedule will have been prepared, including
the actual characteristics of the underlying
Loans, the assumptions with respect to
original terms to maturity, the remaining
terms to maturity, and interest rates with
respect to the underlying Loans, and the
assumptions with respect to the rate of
prepayment on the underlying Loans.
Scheduled Principal Class......... A class that is designed to receive
principal payments using a predetermined
principal balance schedule but is not
designated as a Planned Principal Class or
Targeted Principal Class. In many cases, the
schedule is derived by assuming two constant
prepayment rates for the underlying Trust
Fund Assets. These two rates are the
endpoints for the "structuring range" for
the Scheduled Principal Class.
Sequential Pay Class.............. Classes that receive principal payments in a
prescribed sequence, that do not have
predetermined principal balance schedules
and that under all circumstances receive
payments of principal continuously from the
first Distribution Date on which they
receive principal until they are retired. A
single class that receives principal
payments before or after all other classes
in the same Series of Securities may be
identified as a Sequential Pay Class.
Strip Class....................... 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 a "Companion Class")......... A class that receives principal payments on
any Distribution Date only if scheduled
payments have been made on specified Planned
Principal Classes, Targeted Principal
Classes and/or Scheduled Principal Classes.
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Categories of Classes Definition
Targeted Principal Class
(also sometimes
referred to as a "TAC")......... 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. The
Prospectus Supplement relating to each
Targeted Principal Class will disclose the
principal balance schedule pertaining to
such class and the pricing and prepayment
assumptions based upon which the schedule
will have been prepared, including the
actual characteristics of the underlying
Loans, the assumptions with respect to
original terms to maturity, the remaining
terms to maturity, and interest rates with
respect to the underlying Loans, and the
assumptions with respect to the rate of
prepayment on the underlying Loans.
INTEREST TYPES
Fixed Rate Class.................. A class with an interest rate that is fixed
throughout the life of the class.
Floating Rate Class............... A class with an interest rate that resets
periodically based upon a designated index
and that varies with changes in such index.
Inverse Floating Rate Class....... A class with an interest rate that resets
periodically based upon a designated index
and that varies inversely with changes in
such index.
Variable Rate Class............... A class with an interest rate that resets
periodically and is calculated by reference
to the rate or rates of interest applicable
to specified assets or instruments (e.g.,
the Loan Rates borne by the underlying
Loans).
Interest Only Class............... A class that receives some or all of the
interest payments made on the underlying
Trust Fund Assets 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 Class.............. A class that does not bear interest and is
entitled to receive only distributions in
respect of principal.
Partial Accrual Class............. A class that accretes a portion of the
amount of accrued interest thereon, which
amount will be added to the principal
balance of such class on each applicable
Distribution Date, with the remainder of
such accrued interest to be distributed
currently as interest on such class. Such
accretion may continue until a specified
event has occurred or until such Partial
Accrual Class is retired.
Accrual Class..................... 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
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Categories of Classes Definition
continue until some specified event has
occurred or until such Accrual Class is
retired.
Indices Applicable to Floating Rate and Inverse Floating Rate Classes
General. Except as otherwise specified in the related Prospectus
Supplement, the indices applicable to Floating Rate and Inverse Floating Rate
Classes will be limited to the indices described below.
LIBOR. 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 or Pass-Through 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 Telerate Screen Page 3750, offered by the
principal London office of each of the designated reference banks meeting the
criteria set forth below (the "Reference Banks") for making one-month United
States dollar deposits in leading banks in the London Interbank market, as of
11:00 a.m. (London time) on such LIBOR Determination Date. In lieu of relying on
the quotations for those Reference Banks that appear at such time on the
Telerate Screen Page 3750, the Calculation Agent will request each of the
Reference Banks to provide such offered quotations at such time. "Telerate
Screen Page 3750" means the display page currently so designated on the Dow
Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices).
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 shall be the arithmetic mean of such offered quotations (rounded
upwards if necessary to the nearest whole multiple of 1/32%).
(b) If on any LIBOR Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next
Interest Accrual Period (as such term is defined in the related Prospectus
Supplement) shall be whichever is the higher of (i) LIBOR as determined on
the previous LIBOR Determination Date or (ii) the Reserve Interest Rate.
The "Reserve Interest Rate" shall be the rate per annum which the
Calculation Agent determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 1/32%) of the
one-month United States dollar lending rates that New York City banks
selected by the Calculation Agent are quoting, on the relevant LIBOR
Determination Date, to the principal London offices of at least two of the
Reference Banks to which such quotations are, in the opinion of the
Calculation Agent, being so made, or (ii) in the event that the
Calculation Agent can determine no such arithmetic mean, the lowest
one-month United States dollar lending rate which New York City banks
selected by the Calculation Agent are quoting on such LIBOR Determination
Date to leading European banks.
(c) If on any LIBOR Determination Date for a class specified in the
related Prospectus Supplement, the Calculation Agent is required but is
unable to determine the Reserve Interest Rate in the manner provided in
paragraph (b) above, LIBOR for the next Interest Accrual Period shall be
LIBOR as determined on the preceding LIBOR Determination Date, or, in the
case of the first LIBOR Determination Date, LIBOR shall be deemed to be
the per annum rate specified as such in the related Prospectus Supplement.
Each Reference Bank (i) shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; (ii) shall not
control, be controlled by, or be under common control with the Calculation
Agent; and (iii) shall have an established place of business in London. If any
such Reference Bank
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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.
Treasury Index. 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. 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, United States 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 United States Treasury securities at "constant maturity" are
derived from the United States 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 United States government securities dealers to the
Federal Reserve Bank of New York. This method provides a yield for a given
maturity even if no security with that exact maturity is outstanding. In the
event that the Treasury Index is no longer published, a new index based upon
comparable data and methodology will be designated in accordance with the
Agreement relating to the particular Series of Securities. The Calculation
Agent's determination of the Treasury Index, and its calculation of the rates of
interest for the applicable classes for the related Interest Accrual Period
shall (in the absence of manifest error) be final and binding.
Prime Rate. 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. 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.
The interest rate index or indices applicable to floating rate and inverse
floating rate classes of any Series (the "Securities Index") may not reflect the
actual index or indices employed under applicable Loan documents in calculating
the interest rates on Loans in such class or classes of Securities (the "Loan
Indices"). To this extent, the amounts available for payment of interest on such
class or classes of Securities may increase or decrease depending upon
divergences between performance of the applicable Securities Index and the
composite performance of the applicable Loan Indices. While it might be
possible, through the use of a reserve account, interest rate swaps, financial
derivative contracts or other means, to hedge against the risk that divergences
between the
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Securities Index and the Loan Indices might result in insufficient interest
payments being generated from Loans backing such class or classes of Securities
to pay the interest accruing on such class or classes of Securities, the
availability of interest rate hedging protection, if any, shall only be as
disclosed in the related Prospectus Supplement.
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
securities (the "Book-Entry Securities"). Persons acquiring beneficial ownership
interests in the Securities ("Beneficial Owners") will hold their Securities
through the Depository Trust Company ("DTC") in the United States, or Cedel
Bank, Societe Anonyme ("CEDEL") or Euroclear System ("Euroclear") in Europe, if
they are participants of such systems, or indirectly through organizations which
are participants in such systems. The Book-Entry Securities will be issued in
one or more certificates which equal the aggregate principal balance of the
Securities and will 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 depositories which in turn
will hold such positions in customers' securities accounts in the depositories'
names on the books of DTC. Citibank, N.A., will act as depository for CEDEL and
The Chase Manhattan Bank will act as depository for Euroclear (in such
capacities, individually the "Relevant Depository" and collectively the
"European Depositories"). Except as described below, no 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. Beneficial Owners are only permitted to exercise their
rights indirectly through DTC 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).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and DTC Participants.
While the Securities are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among DTC 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. DTC Participants and indirect participants with
whom Beneficial 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 Beneficial Owners. Accordingly,
although Beneficial Owners will not possess physical certificates, the Rules
provide a mechanism by which Beneficial Owners will receive distributions and
will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive physical
certificates representing their respective interests in the Securities, except
under the limited circumstances described below. Unless and until Definitive
Securities are issued, Beneficial Owners who are not DTC Participants may
transfer ownership of Securities only through DTC Participants and indirect
participants by instructing such DTC 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
DTC 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 DTC Participants will be debited and
credited. Similarly, the DTC Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing Beneficial Owners.
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Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a DTC 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
or Euroclear Participant 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 DTC 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 the Rules on behalf of the relevant European international
clearing system by the Relevant Depository; 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 Depository 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 Depositories.
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 Exchange Act. DTC
holds securities that its participants (the "DTC Participants") deposit with
DTC. DTC also facilitates the settlement among DTC Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in DTC Participants' accounts,
thereby eliminating the need for physical movement of certificates. DTC
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations, and certain other organizations. DTC is owned by a number
of DTC Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as Financial Intermediaries
that clear through or maintain a custodial relationship with a DTC Participant,
either directly or indirectly. The Rules are on file with the Commission.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
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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 Federal Reserve 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 Depository. 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, 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 Depository to
effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related DTC Participants, with respect to some Securities which
conflict with actions taken with respect to other Securities.
Definitive Securities will be issued to Securityholders only if (i) the
Servicer advises the applicable Trustee in writing that DTC is no longer willing
or able to discharge properly its responsibilities as depository with respect to
such Securities and such Trustee is unable to locate a qualified successor, (ii)
the Servicer at its option, elects to terminate the book-entry system through
DTC or (iii) after the occurrence of an Event of Default or the
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resignation or removal of the Servicer with respect to such Securities, holders
representing at least a majority of the outstanding principal amount of the
related Securities of such series advise DTC, either directly or through DTC
Participants, in writing (with instructions to notify the applicable Trustee in
writing) that the continuation of a book-entry system through DTC (or a
successor thereto) with respect to such Securities is no longer in the best
interest of the holders of such 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 Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more classes of
a Series of Securities or with respect to the related Trust Fund Assets. Credit
enhancement may be in the form of a limited financial guaranty policy issued by
an entity named in the related Prospectus Supplement, the subordination of one
or more classes of the Securities of such Series, the establishment of one or
more Reserve Accounts, the use of a cross-collateralization feature, use of a
mortgage pool insurance policy, FHA Insurance, VA Guaranty, bankruptcy bond,
special hazard insurance policy, surety bond, letter of credit, guaranteed
investment contract, overcollateralization, 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
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 further
described in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, delays in receipt of scheduled payments on the Loans and
losses on defaulted Loans may be borne first by the various classes of
Subordinated Securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the limitations
specified in such Prospectus Supplement. The aggregate distributions in respect
of delinquent payments on the Loans over the lives of the Securities or at any
time, the aggregate losses in respect of defaulted Loans which must be borne by
the Subordinated Securities by virtue of subordination and the amount of the
distributions otherwise distributable to the
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holders of Subordinated Securities that will be distributable to holders of
Senior Securities 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.
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 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.
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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.
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 holders of Subordinated Securities, 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 is not a Rating Agency) are then rated one of the two highest long-term
and the highest short-term ratings of each such Rating Agency for such
securities, or such lower ratings as will not result
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in the downgrading or withdrawal of the rating then assigned to such
Securities by any such Rating Agency; (v) 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; (vi)
guaranteed reinvestment agreements issued by any bank, insurance company or
other corporation containing, at the time of the issuance of such agreements,
such terms and conditions as will not result in the downgrading or withdrawal of
the rating then assigned to such Securities by any such Rating Agency; (vii)
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; (viii) securities
(other than stripped bonds, stripped coupons or instruments sold at a purchase
price in excess of 115% of the face amount thereof) bearing interest or sold at
a discount issued by any corporation incorporated under the laws of the United
States or any state thereof which, at the time of such investment, have one of
the two highest ratings of each Rating Agency (except if the Rating Agency is
Moody's, such rating shall be the highest commercial paper rating of Moody's for
any such securities), or such lower rating as will not result in the downgrading
or withdrawal of the rating then assigned to such Securities by any such Rating
Agency, as evidenced by a signed writing delivered by each such Rating Agency;
(ix) 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; (x) 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; and (xi) such other investments having a
specified stated maturity and bearing interest or sold at a discount acceptable
to each Rating Agency as will not result in the downgrading or withdrawal of the
rating then assigned to such Securities by any such Rating Agency, as evidenced
by a signed writing delivered by each such Rating Agency; provided that no such
instrument shall be a Permitted Investment if such instrument evidences the
right to receive interest only payments with respect to the obligations
underlying such instrument; and provided, further that no investment specified
in clause (ix) or clause (x) above shall be a Permitted Investment for any
Pre-Funding Account or any related Capitalized Interest Account. If a letter of
credit is deposited with the Trustee, such letter of credit will be irrevocable.
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 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. 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.
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
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the defaulted Loan and a claim thereunder has been submitted and settled; (ii)
hazard insurance on the related Mortgaged 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 Mortgaged 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 Mortgaged 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 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 Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under the related Primary
Mortgage Insurance Policy. If any Mortgaged 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 Mortgaged Property to a condition sufficient to permit recovery under
the Pool Insurance Policy, the Servicer will not be required to expend its own
funds to restore the damaged Mortgaged Property unless it determines that (i)
such restoration will increase the proceeds to Securityholders on liquidation of
the Loan after reimbursement of the Servicer for its expenses and (ii) such
expenses will be recoverable by it through proceeds of the sale of the Mortgaged
Property or proceeds of the related Pool Insurance Policy or any related Primary
Mortgage Insurance Policy.
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 any
building or structure located on a Mortgaged Property in accordance with plans
and specifications. A failure of coverage attributable to one of the foregoing
events might result in a breach of the related Seller's representations
described above, and, in such events might give rise to an obligation on the
part of such Seller to repurchase the defaulted Loan if the breach cannot be
cured by such Seller. No Pool Insurance Policy will cover (and many Primary
Mortgage Insurance Policies do not cover) a claim in respect of a defaulted Loan
occurring when the servicer of such Loan, at the time of default or thereafter,
was not approved by the applicable insurer.
The original amount of coverage under each Pool Insurance Policy 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 Servicer as well as accrued
interest on delinquent Loans to the date of payment of the claim. 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 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
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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 of the forms of credit enhancement described in this Prospectus
may apply concurrently to two or more separate Trust Funds. If applicable, the
related Prospectus Supplement will identify the Trust Funds to which such credit
enhancement relates and the manner of determining the amount of coverage
provided to such Trust Funds thereby and of the application of such coverage to
the identified Trust Funds.
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. The Depositor is
not aware of any publicly available studies or statistics on the rate of
prepayment of mortgage loans of the types generated by the Sellers. 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 and homeowner mobility.
Other factors that might be expected to affect the prepayment rate of a pool of
Revolving Credit Line Loans 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, such 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 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.
To the extent specified in the related Prospectus Supplement, 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 Mortgaged Property. Loans insured by the FHA, and Loans on Single Family
Properties partially guaranteed by the VA, are assumable with the consent of the
FHA and the VA, respectively. Thus, the rate of prepayments on such Loans may be
lower than that of conventional Loans bearing comparable interest rates. The
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 Mortgaged Property
and reasonably believes that it is entitled to do so under applicable law;
provided, however, that the Servicer will not take any enforcement action that
would impair or threaten to impair any recovery under any related
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insurance policy. See "The Agreements--Collection Procedures" and "Certain Legal
Aspects of the Loans" for a description of certain provisions of each Agreement
and certain legal developments that may affect the prepayment experience on the
Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above such Loan Rates. Conversely, if prevailing interest
rates rise appreciably above the Loan Rates borne by the Loans, such Loans are
more likely to experience a lower prepayment rate than if prevailing rates
remain at or below such Loan Rates. However, there can be no assurance that such
will be the case.
When a full prepayment is made on a Loan, the borrower is charged interest
on the principal amount of the Loan so prepaid only for the number of days in
the month actually elapsed up to the date of the prepayment, rather than for a
full month. The effect of prepayments in full will be to reduce the amount of
interest passed through or paid in the following month to holders of Securities
because interest on the principal amount of any Loan so prepaid will generally
be paid only to the date of prepayment. Partial prepayments in a given month may
be applied to the outstanding principal balances of the Loans so prepaid on the
first day of the month of receipt or the month following receipt. In the latter
case, partial prepayments will not reduce the amount of interest passed through
or paid in such month. Prepayments will be passed through or paid as described
in the related Prospectus Supplement.
Even assuming that the Mortgaged 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
Mortgaged 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 Servicer to foreclose on or sell the Mortgaged Property or to obtain
Liquidation Proceeds sufficient to repay all amounts due on the related Loan. In
addition, the 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 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 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 in each month,
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the distribution of such interest will not be made earlier than the
month following the month of accrual.
Under certain circumstances, the 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
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
Conveyance of the Loans. At the time of issuance of the Securities of a
Series, the Depositor will cause the Loans comprising the related Trust Fund to
be conveyed 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 conveyance,
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 Annual
Percentage Rate ("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.
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 Revolving
Credit Line 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, (iv) such other assignments deemed necessary by
the Trustee, including assignments of title insurance policies covering the
Mortgaged Properties and (v) such other security documents, including those
relating to any senior interests in the Mortgaged Property, as may be specified
in the related Prospectus Supplement or the related Agreement.
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. If any such document is
found to be missing or defective in any material respect, the Trustee (or such
custodian) will notify the Servicer and the Depositor, and the Servicer will
notify the related Seller. If such Seller
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cannot cure the omission or defect within the time period specified in the
related Prospectus Supplement after receipt of such notice, such Seller 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 in the related Agreement
and described in the related Prospectus Supplement. There can be no assurance
that a Seller will fulfill this purchase or substitution obligation. Although
the Servicer may be obligated to enforce such obligation to the extent described
above under "Loan Program--Representations by Sellers; Repurchases," neither the
Servicer nor the Depositor will be obligated to purchase or replace such Loan if
the Seller defaults on its obligation, unless such breach also constitutes a
breach of the representations or warranties of the Servicer or the Depositor, as
the case may be. 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 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 Servicer which
materially and adversely affects the interests of the Securityholders in a Loan,
the 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. 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
Servicer.
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC election is to be made, no purchase or substitution of a Loan will
be made if such purchase or substitution would result in a prohibited
transaction tax under the Code.
No Recourse to Sellers; Depositor or Servicer. As described above under
"--Conveyance of the Loans," the Depositor will cause the Loans comprising the
related Trust Fund to be conveyed to the Trustee, without recourse. However,
each Seller (and Equity One, where the Seller is a subsidiary of Equity One)
will be obligated to repurchase or substitute for any Loan as to which certain
representations and warranties are breached or for failure to deliver certain
documents relating to the Loans as described herein under "--Conveyance of the
Loans" and "Loan Program--Representations by Sellers; Repurchases." In addition,
the Servicer and the Depositor will be obligated to purchase or substitute for
any Loan as to which certain representations and warranties are breached as
described herein under "--Conveyance of the Loans." 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 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 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 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 (the "SAIF")), (iii) an account or accounts the deposits
in which are insured by the BIF or the 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
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Agency. The collateral eligible to secure amounts in the Security Account is
limited to Permitted Investments. A Security Account may be maintained as an
interest bearing account or the funds held therein may be invested pending each
succeeding Distribution Date in Permitted Investments. The 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 Servicer or with a
depository institution that is an affiliate of the Servicer, provided it meets
the standards set forth above.
The Servicer will deposit or cause to be deposited in the Security Account
for each Trust Fund, to the extent applicable 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 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 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 Servicer, if any) received and retained in
connection with the liquidation of defaulted Loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds
received on a monthly basis with respect to any properties acquired on
behalf of the Securityholders by foreclosure or deed in lieu of
foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Servicer, the Depositor or any Seller as described under
"Loan Program--Representations by Sellers; Repurchases" or "--Assignment
of the Trust Fund Assets" and all proceeds of any Loan repurchased as
described under "--Termination; Optional Termination;"
(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;"
(vi) any amount required to be deposited by the Servicer in
connection with losses realized on investments for the benefit of the
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 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 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 Servicer the servicing fees described in the
related Prospectus Supplement, the 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;
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(ii) to reimburse the 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 Servicer for any Advances previously made
which the Servicer has determined to be nonrecoverable;
(iv) to reimburse the Servicer from Insurance Proceeds for expenses
incurred by the Servicer and covered by the related insurance policies;
(v) to reimburse the Servicer for unpaid Servicing Fees and
unreimbursed out-of-pocket costs and expenses incurred by the 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 Servicer, with respect to each Loan or property
acquired in respect thereof that has been purchased by the 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 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, on or prior to the business day immediately preceding each
Distribution Date, the Servicer shall withdraw from the Security Account the
amount of Available Funds, to the extent on deposit, for deposit in an account
maintained by the Trustee for the related Series of Securities.
Pre-Funding Account
If so provided in the related Prospectus Supplement, the 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 in an amount equal to the Pre-Funded Amount on the related Closing Date.
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. Subsequent Loans will be required to conform to the
requirements set forth in the related Agreement and described in the related
Prospectus Supplement. 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 not exceed 25% of the initial aggregate principal amount of the
Certificates and Notes of the related Series. 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. 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 the earliest to occur of: (i) the date the amount on deposit in the
Pre-Funding Account is less than the minimum dollar amount specified in the
related Agreement; (ii) the date on which an Event of Default occurs under the
related Agreement; or (iii) the date which is the later of three months or 90
days 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. 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.
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In addition, if so provided in the related Prospectus Supplement, on the
related Closing Date the Depositor will deposit in an account (the "Capitalized
Interest Account") cash in such amount as is necessary to cover shortfalls in
interest on the related Series of Securities that may arise as a result of
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. To the extent
that the entire amount on deposit in the Capitalized Interest Account has not
been applied to cover shortfalls in interest on the related Series of Securities
by the end of the Funding Period, any amounts remaining in the Capitalized
Interest Account will be paid to the Depositor.
Sub-Servicing by Sellers
Each Seller of a Loan or any other servicing entity may act as the
Sub-Servicer for such Loan pursuant to an agreement (each, a "Sub-Servicing
Agreement"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely between
the Servicer and the SubServicer, the Agreement pursuant to which a Series of
Securities is issued will provide that, if for any reason the Servicer for such
Series of Securities is no longer the Servicer of the related Loans, the Trustee
or any successor Servicer must recognize the Sub-Servicer's rights and
obligations under such Sub-Servicing Agreement. Notwithstanding any such
sub-servicing arrangement, unless otherwise provided in the related Prospectus
Supplement, the Servicer will remain liable for its servicing duties and
obligations under the Master Servicing Agreement as if the Servicer alone were
servicing the Loans.
Collection Procedures
The 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 Servicer
may, in its discretion, (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. To the extent the Servicer is obligated to make or cause to be
made Advances, such obligation will remain during any period of such an
arrangement.
In any case in which property securing a Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the 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 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 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 Servicer for entering into an assumption agreement will be
retained by or on behalf of the 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.
Hazard Insurance
Except as otherwise specified in the related Prospectus Supplement, the
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
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standard form of fire insurance policy with extended coverage customary for the
type of Mortgaged Property in the state in which such Mortgaged 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 (a) the outstanding principal balance of the Loan and (b) 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 Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor or
obligor in accordance with the Servicer's normal servicing procedures) will be
deposited in the related Security Account. In the event that the 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 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 Mortgaged Property securing a Loan is located in a federally designated
special flood area at the time of origination, the Servicer will require the
mortgagor or obligor to obtain and maintain flood insurance.
The hazard insurance policy covering each Mortgaged Property securing each
Loan typically contains a clause which in effect requires the insured at all
times to carry insurance in an amount which is the lesser of (i) the replacement
value of the Mortgaged Property or (ii) the principal amount of the Loan. Most
insurance policies provide that if the insured's coverage falls below a
specified percentage (usually 80% to 90%), 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 Servicer may cause to be maintained on the improvements
securing the Loans declines as the principal balances owing thereon decrease,
and since improved real estate generally has appreciated in value over time in
the past, the effect of this requirement in the event of partial loss may be
that hazard insurance proceeds will be insufficient to restore fully the damaged
property. If specified in the related Prospectus Supplement, a special hazard
insurance policy will be obtained to insure against certain of the uninsured
risks described above. See "Credit Enhancement."
If the Mortgaged Property securing a defaulted Loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged Mortgaged Property, the Servicer is not required to expend
its own funds to restore the damaged Mortgaged Property unless it determines (i)
that such restoration will increase the proceeds to Securityholders on
liquidation of the Loan after reimbursement of the 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 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 Mortgaged 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
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 Servicer of its
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expenses, in excess of the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Servicer will be entitled to
withdraw or retain from the Security Account amounts representing its normal
servicing compensation with respect to such Loan and, 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.
If the Servicer or its designee recovers Insurance Proceeds which, when
added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Servicer, exceed the principal balance of such Loan
plus interest accrued thereon that is payable to Securityholders, the 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 Servicer has expended its own funds to restore the damaged
Mortgaged 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 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."
The proceeds from any liquidation of a Loan will be applied in the
following order of priority: first, to reimburse the Servicer for any
unreimbursed expenses incurred by it to restore the related Mortgaged Property
and any unreimbursed servicing compensation payable to the Servicer with respect
to such Loan; second, to reimburse the 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
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--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.
Primary Mortgage Insurance Policies. If so specified in the related
Prospectus Supplement, the 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. The 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
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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.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the Servicer in respect
of its 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 "Servicing Fee"). As compensation
for its servicing duties, a Sub-Servicer or, if there is no Sub-Servicer, the
Servicer will be entitled to a monthly servicing fee as described in the related
Prospectus Supplement. In addition, the 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.
The 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 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 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 the Federal Home Loan Mortgage Corporation
("FHLMC" or "Freddie Mac"), 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 Servicer to the effect that the 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 Servicer may be obtained by Securityholders of the related Series without
charge upon written request to the Servicer at the address set forth in the
related Prospectus Supplement.
Certain Matters Regarding the Servicer and the Depositor
The Servicer under each Pooling and Servicing Agreement or Master
Servicing Agreement, as applicable, will be named in the related Prospectus
Supplement. The entity serving as Servicer may have normal business
relationships with the Depositor or the Depositor's affiliates.
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Each Agreement will provide that the 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 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 Servicer's obligations and duties under the
Agreement.
Each Agreement will further provide that neither the Servicer, the
Depositor nor any director, officer, employee, or agent of the 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 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 Servicer, the
Depositor and any director, officer, employee or agent of the Servicer or the
Depositor will be entitled to indemnification by the related Trust Fund and will
be held harmless against any loss, liability or expense incurred in connection
with any legal action relating to the Agreement or the Securities, other than
any loss, liability or expense related to any specific Loan or Loans (except any
such loss, liability or expense otherwise reimbursable pursuant to the
Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Agreement will provide that neither the 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 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 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 Servicer may be merged or consolidated, or any person
resulting from any merger or consolidation to which the Servicer is a party, or
any person succeeding to the business of the Servicer, will be the successor of
the Servicer under each Agreement, provided that such person is qualified to
sell mortgage loans to, and service mortgage loans on behalf of, the Federal
National Mortgage Association ("FNMA" or "Fannie Mae") 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 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 Servicer by the
Trustee or the Depositor, or to the 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 Servicer to make an Advance as required under the Agreement,
unless cured as specified therein; (iii) any failure by the 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 Servicer by the Trustee or the
Depositor, or to the 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 Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
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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 provided 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
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 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 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 Servicer under the Agreement.
Unless otherwise provided 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 shall
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 Notes 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
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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
662/3% 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 holders of Notes 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 holders of Notes after the occurrence of such an Event of Default.
Except as otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee shall be under no obligation to exercise any
of the rights or powers under the Indenture at the request or direction of any
of the holders of Notes of such Series, unless such holders offered to the
Trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
Amendment
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the 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
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
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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 Certificates will
terminate upon the payment to the related holders of Certificates of all amounts
held in the Security Account or by the 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 or (ii) the purchase by the Servicer or, if
REMIC treatment has been elected and if specified in the related Prospectus
Supplement, by the holder of the residual interest in the REMIC (see "Federal
Income Tax Consequences") from the related Trust Fund of all of the remaining
Trust Fund Assets and all property acquired in respect of such Trust Fund
Assets.
Unless otherwise specified by the related Prospectus Supplement, any such
purchase of Trust Fund Assets and property acquired in respect of Trust Fund
Assets evidenced by a Series of Certificates will be made at the option of the
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 Certificates of that
Series, but the right of the 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 5% of the
aggregate principal balance of the Trust Fund Assets at the Cut-off Date for the
Series. The foregoing is subject to the provision that if a REMIC election is
made with respect to a Trust Fund, any purchase pursuant to clause (ii) above
will be made only in connection with a "qualified liquidation" of the REMIC
within the meaning of Section 860F(a)(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 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.
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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 Servicer and any
of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Loans. Because such legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the descriptions do not, except as expressly provided below,
reflect the laws of any particular jurisdiction, or encompass the laws of all
jurisdictions 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 jurisdictions 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. 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.
Foreclosure/Repossession
Deeds of Trust and Security Deeds. Foreclosure of a deed of trust or a
security deed is generally accomplished by a non-judicial sale under a specific
provision in the deed of trust or security deed which authorizes the trustee or
grantee to sell the property at public auction upon any default by borrower
under the terms of the note, deed of trust or security deed. In certain states,
such foreclosure also may be accomplished by judicial sale in the manner
provided for foreclosure of mortgages.
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.
Actions prior to Commencement of Foreclosure. Many states require notices,
sometimes in prescribed form, be given to borrowers prior to commencement of
foreclosure proceedings in addition to any notice requirements contained in the
mortgage or deed of trust. In some states, a notice of default must be recorded
and a copy sent to the borrower and any other party with an interest in the
property. In some states, the borrower has the right to reinstate the loan at
any time following default until shortly before the sale. If a deed of trust,
security deed or mortgage is not reinstated within any applicable cure period, a
notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some state
laws
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require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest of record in the real property.
Foreclosure Proceedings. In the case of foreclosure of a security deed,
deed of trust or mortgage, 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, but when
the mortgagee's right to foreclose is contested, the legal proceedings necessary
to resolve the issue can be time consuming. After completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
the court either appoints or directs a referee, sheriff, 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. Deeds of trust and security deeds are generally foreclosed by the
Trustee or Grantee in a non-judicial sale.
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, referee, sheriff, or other court officer, 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. However, the lender may purchase for a lesser amount in some
jurisdictions which only require a minimum bid, or, in states where a deficiency
judgment is available, in order to preserve its right to seek such judgment.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burden of
ownership, including obtaining hazard insurance and making such repairs at its
own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
Courts have imposed equitable principles upon foreclosure, which are
generally designed to mitigate the legal consequences to the borrower of the
borrower's default 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.
Right of Redemption. In many states, 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.
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."
Environmental Risks
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment
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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, as amended ("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, it is conceivable that a
secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
Mortgaged Property, even though the environmental damage or threat was caused by
a prior or current owner or operator. CERCLA imposes liability for such costs on
any and all "responsible parties," including owners or operators. However,
CERCLA (as amended, as to lender liability, by the Asset Conservation, Lender
Liability and Deposit Insurance Protection Act of 1996), 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 Mortgaged
Property. Thus, if a lender's activities begin to encroach on the actual
management of a contaminated facility or property, the lender may incur
liability as an "owner or operator" under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or property as an investment (including leasing
the facility or property to third party), or fails to market the property in a
timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the secured creditor exemption unavailable to a lender has been a matter
of judicial interpretation of the statutory language, and court decisions have
been inconsistent. In United States v. Fleet Factors Corp., 901 F.2d 1550 (11th
Cir. 1990), the United States Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the secured creditor exemption to the lender.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which was signed into law by President Clinton on September 30, 1996. The new
legislation provides that in order to be deemed to have participated in the
management of a mortgaged property, a lender must actually participate in the
operational affairs of the property or the borrower. The legislation also
provides that participation in the management of the property does not include
"merely having the capacity to influence, or unexercised right to control"
operations. Rather, a lender will lose the protection of the secured creditor
exemption only if it exercises decision-making control over the borrower's
environmental compliance and hazardous substance handling and disposal
practices, or assumes control or responsibility for (including day-to-day
management of) all operational functions of the mortgaged property. However,
such amendments do not affect the potential for liability under other federal or
state laws which impose liability on "owners or operators" but do not provide
any protection for secured creditors.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment proof. The costs associated with environmental
cleanup may be substantial. It is conceivable that such costs arising from the
circumstances set forth above would result in a loss to Securityholders.
CERCLA does not apply to petroleum products, and the Secured Creditor
Exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. It should be noted, however, that liability for cleanup of petroleum
contamination may be governed by state law, which may not provide for any
specific protection for secured creditors.
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In the case of the Residential Loans, at the time of origination, no
environmental assessment was conducted. In the case of the Mixed Use Loans,
except as otherwise specified in the related Prospectus Supplement, at the time
of origination, no environmental assessment of the Mortgaged 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, 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.
Anti-Deficiency Legislation; Bankruptcy Laws; Tax Liens
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes 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
Servicer will utilize the non-judicial foreclosure remedy and will not seek
deficiency judgments against defaulting borrowers.
Some state statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. In some states, exceptions to the anti-deficiency
statutes are provided for in certain instances where the value of the lender's
security has been impaired by acts or omissions of the borrower, for example, in
the event of waste of the property. Finally, other statutory provisions limit
any deficiency judgment against the former borrower following a foreclosure sale
to the excess of the outstanding debt over the fair market value of the property
at the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
and state laws affording relief to 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 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 Bankruptcy Code,
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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
To the extent specified in the related Prospectus Supplement,
conventional Loans will contain due-on-sale clauses which will generally
provide that if the mortgagor or obligor sells, transfers or conveys the
Mortgaged 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.
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. The 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 thereunder
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 Mortgaged 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 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 Mortgaged 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.
Equitable Limitations on Remedies
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In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate a borrower suffering from temporary financial disability. In other
cases, courts have limited the right of a lender to realize upon the lender's
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in some cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protection to the borrower.
Applicability of Usury Laws
Each Mortgage Loan jurisdiction has usury laws which limit the interest
and other amounts that may be charged under certain loans. Title V of the
Depository Institutions Deregulation and Monetary Control Act of 1980, enacted
in March 1980, as amended ("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 OTS, 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 was not so rejected, any
state is authorized by the law to adopt a provision limiting discount points or
other charges on mortgage loans covered by Title V. Certain states have taken
action to reimpose interest rate limits and/or to limit discount points or other
charges.
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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 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 Servicer to foreclose on an affected Loan during the borrower's
period of active duty status. Moreover, the Relief Act permits the extension of
a Loan's maturity and the re-adjustment of its payment schedule beyond the
completion of military service. Thus, in the event that such a Loan goes into
default, there may be delays and losses occasioned by the inability to realize
upon the Mortgaged 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, 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 Title I Program
General. Certain of the Loans contained in a Trust Fund may be loans
insured under the 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 Secretary of the Department of Housing and Urban
Development ("HUD") is authorized and empowered to insure qualified lending
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institutions against losses on eligible loans. The Title I Program operates
as a coinsurance program in which the Secretary of HUD 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 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 Secretary of HUD
under the Title I Program include property improvement loans ("Property
Improvement Loans" or "Title I Loans"). A Property Improvement Loan or Title I
Loan means a loan made to finance actions or items that substantially protect or
improve the basic livability or utility of a property and includes single family
improvement loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan." With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from lender and the lender may distribute proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties. With
respect to a dealer Title I Loan, a dealer may include a seller, a contractor or
supplier of goods or services.
Loans insured under the Title I Program are required to have fixed interest
rates and, generally, provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually in order to correspond with the borrower's irregular flow of
income. The first or last payments (or both) may vary in amount but may not
exceed 150% of the regular installment payment, and the first payment may be due
no later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
must be negotiated and agreed to by the borrower and 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 Secretary of HUD 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
Secretary of HUD. 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 misstatement of fact or misuse
of loan proceeds was caused by (or was knowingly sanctioned by) the lender or
its employees.
Requirements for Title I Loans. The maximum principal amount for Title I
Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I Loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I Loans with respect to multiple properties, and a borrower may
obtain more than one Title I Loan with respect to a single property, in each
case as long as the total outstanding
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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. 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.
HUD Insurance Coverage. Under the Title I Program the Secretary of HUD
establishes an insurance coverage reserve account for each lender which has been
granted a Title I insurance contract. The amount of insurance coverage in this
account is 10% of the amount disbursed, advanced or expended by the lender in
originating or purchasing eligible loans registered with the Secretary of HUD
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 Secretary of HUD 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 Secretary of HUD of a timely filed loan report on the
prescribed form pursuant to the Title I regulations. The Secretary of HUD
charges a fee of 0.50% of the loan amount multiplied by the number of years in
the loan term for any eligible loan so reported and acknowledged for insurance.
For loans with maturities of 25 months or less, payment of the entire insurance
premium is due 25 days after the Secretary of HUD acknowledges the loan report.
For loans with a term longer than 25 months, payment of the insurance premium is
made in annual installments beginning 25 days after the Secretary of HUD
acknowledges the loan report. If an insured loan is prepaid during the year, FHA
will not refund or abate portions of the insurance premium already paid. Refunds
and abatements are allowed only in limited circumstances.
Under the Title I Program the Secretary of HUD will reduce the insurance
coverage available in the lender's insurance coverage reserve account with
respect to loans insured under the lender's contract of insurance by (i) the
amount of 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. The balance of the lender's insurance coverage reserve account will
be further adjusted as required under Title I or by the Secretary of HUD.
Originations 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 Secretary of HUD 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
of HUD's interest to do so.
The lender may transfer insured loans and loans reported for insurance only
to another qualified lender under a valid Title I contract of insurance (except
as collateral in a bona fide transaction). Unless an insured loan is transferred
with recourse or with a guaranty or repurchase agreement, the Secretary of HUD,
upon receipt of the loan report required upon transfer in accordance with the
Title I regulations, will transfer from the transferor's
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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 Secretary of HUD under the
Title I Program, the Secretary of HUD reviews the claim, the complete loan file
and documentation of the lender's efforts to obtain recourse against any dealer
who has agreed thereto, certification of compliance with applicable state and
local laws in carrying out any foreclosure or repossession, and evidence that
the lender has properly filed proofs of claims, where the borrower is bankrupt
or deceased. Generally, a claim for reimbursement for loss on any Property
Improvement Loan must be filed with the Secretary of HUD 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 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 the Secretary
of HUD has reason to believe that the note is not valid or enforceable against
the borrower, the Secretary of HUD may deny the claim and reassign the note to
the lender. If either such defect is discovered after the Secretary of HUD has
paid a claim, the Secretary of HUD 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 Secretary
of HUD 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 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.
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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, the
Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act and
Regulation B promulgated thereunder, the Fair Credit Billing Act, the 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 cases their assignees to damages and
administrative enforcement.
FEDERAL INCOME TAX CONSEQUENCES
General
The following is a summary of the anticipated material federal income tax
consequences of the purchase, ownership, and disposition of the Securities and
represents the opinion of Stradley, Ronon, Stevens & Young, LLP, special
counsel to the Depositor. The summary is based upon the provisions of the Code,
the regulations promulgated thereunder, including, where applicable, proposed
regulations, and the judicial and administrative rulings and decisions now in
effect, all of which are subject to change or possible differing
interpretations. The statutory provisions, regulations, and interpretations on
which this interpretation is based are subject to change, and such a change
could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily upon investors
who will hold Securities as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Prospective investors are
advised to consult their own tax advisers concerning the federal, state, local
and any other tax consequences to them of the purchase, ownership and
disposition of the Securities.
The federal income tax consequences to holders 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) an election is made to treat the Trust Fund
relating to a particular Series of Certificates 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 and related
consent of Stradley, Ronon, Stevens & Young, LLP 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
Status as Real Property Loans. Except to the extent otherwise provided in
the related Prospectus Supplement, Stradley, Ronon, Stevens & Young, LLP
is of the opinion that (i) Securities held by a domestic building and
loan association will or, in the case of Certificates issued by a Trust Fund
electing to be taxed as a partnership, should constitute "loans... secured by an
interest in real property" within the meaning of
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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)(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).
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for Thrift Institutions, repealed the application of
Code section 593(d) to any taxable year beginning after December 31, 1995.
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities will be referred to hereinafter collectively as
"Debt Securities."
Debt Securities that are Accrual Securities 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 January 27, 1994, as amended on June 11, 1996 (the "OID
Regulations"). A holder 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
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be included in the stated redemption price at maturity and tested under the de
minimis rule described below. In the case of a Debt Security with a long first
period which has non-de minimis OID, all stated interest in excess of interest
payable at the effective interest rate for the long first period will be
included in the stated redemption price at maturity and the Debt Security will
generally have OID. Holders of Debt Securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Accrual 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 Security. Additionally, the
OID Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the Trustee
intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in this Prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), there can be no
assurance that 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 OID. The amount of OID
includible in income by a holder will be computed by allocating to each day
during a taxable year a pro rata portion of the 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 Loans, the amount of
OID includible in income of a holder 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, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals or OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, 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 of the Pay-Through
Security,
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over the adjusted issue price of the Pay-Through Security at the beginning of
the accrual period. The present value of the remaining payments is to be
determined on the basis of three factors: (i) the original yield to maturity of
the Pay-Through Security (determined on the basis of compounding at the end of
each accrual period and properly adjusted for the length of the accrual period),
(ii) events which have occurred before the end of the accrual period and (iii)
the assumption that the remaining payments will be made in accordance with the
original Prepayment Assumption. The effect of this method is to increase the
portions of OID required to be included in income by a holder 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 that
Loans will be prepaid at that rate or at any other rate.
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 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 Loans, except possibly to the extent that it can
be established that any accrual of interest on a security is uncollectible. The
IRS, in a recent Technical Advice Memorandum, has ruled that holders of a debt
instrument having OID must continue to accrue OID, as distinguished from the
accrual of interest, even when the issuer's financial condition is such that
there is no reasonable expectation that the instrument will be redeemed
according to its terms. 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 reduced as a result of a Loan 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") 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 Certificates
(the "Interest Weighted Securities"). The Issuer 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 an Accrual 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 Certificates."
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
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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 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 Certificate (as defined herein), as
set forth below, the Loans underlying such Security) not originally issued with
OID, stated interest payable in the relevant period to total stated interest
remaining to be paid at the beginning of the period or (b) in the case of
Securities (or, in the case of a Pass-Through Certificate, 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 Certificate, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Certificate, 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 Certificate, 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 Code 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. Premium on a Pay-Through
Security that is not amortized pursuant to an election under Code Section 171 is
allocated among the principal payments to be made on the Pay-Through Security
and is allowed as an interest offset (or possibly as a loss deduction). If a
holder makes an election to amortize premium on a Debt Security, such election
will apply to all taxable debt instruments (including all REMIC regular
interests and all pass-through certificates representing ownership interests in
a trust holding debt obligations) held by the holder at the beginning of the
taxable year in which the election is made, and to all taxable debt instruments
acquired thereafter by such holder, and will be irrevocable without the consent
of the IRS. Purchasers who pay a premium for the Securities should consult their
tax advisers regarding the election to amortize premium and the method to be
employed.
On June 27, 1996 the IRS issued proposed regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6) such as the Securities. Absent further guidance from the
IRS, the Trustee intends to account for amortizable bond premium in the manner
described above. Prospective purchasers of the Securities should consult their
tax advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
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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. In the opinion of Stradley, Ronon, Stevens & Young, LLP, special
counsel to the Depositor, if a REMIC election is made with respect to a Series
of Securities, then the arrangement by which the Securities of that Series are
issued will be treated as a REMIC as long as all of the provisions of the
applicable Agreement are complied with and the statutory and regulatory
requirements are satisfied. Securities will be designated as "regular interests"
or "residual interests" in a REMIC, as specified in the related Prospectus
Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a domestic building and loan association will constitute "a regular or a
residual interest in a REMIC" within the meaning of Code Section
7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's assets consist of
cash, government securities, "loans secured by an interest in real property,"
and other types of assets described in Code Section 7701(a)(19)(C)); and (ii)
Securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code Section 856(c)(6)(B), and income with respect
to the Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B) (assuming, for both purposes, that at least 95% of
the REMIC's assets are qualifying assets). 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) and (ii) in the proportion that
such REMIC assets are qualifying assets.
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for Thrift Institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
REMIC Expenses; Single Class REMICs
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Securities. In the case of a "single
class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities (as defined herein) on a daily basis
in proportion to the relative amounts of income accruing to each holder on that
day. In the case of a holder of a Regular Interest Security who is an individual
or a "pass-through interest holder" (including certain pass-through entities but
not 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, 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.
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The expenses of the REMIC will be allocated to holders of the related residual
interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any OID or market discount
on loans and other assets, and (ii) deductions, including stated interest and
OID accrued on Regular Interest Securities, amortization of any premium with
respect to Loans, and servicing fees and other expenses of the REMIC. A holder
of a Residual Interest Security that is an individual or a "pass-through
interest holder" (including certain pass-through entities, but not including
real estate investment trusts) will be unable to deduct servicing fees payable
on the loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with such holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
such holder's adjusted gross income.
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 (i.e., the day on which the REMIC issues all of its regular and residual
interests). 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 "--Taxation of Debt Securities." 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
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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 be greater or less than the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Security will initially equal such holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
Security. If the amount of such payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
Sale or Exchange. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder of
a Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating
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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 (e.g., an organization described
under Code Section 401(a) or 501(c), with certain limited exceptions), such
holder's excess inclusion income will be treated as unrelated business taxable
income of such holder. In addition, under Treasury regulations yet to be issued,
if a real estate investment trust, a regulated investment company, a common
trust fund, or certain cooperatives were to own a Residual Interest Security, a
portion of dividends (or other distributions) paid by the real estate investment
trust (or other entity) would be treated as excess inclusion income. If a
Residual Security is owned by a Foreign Person excess inclusion income is
subject to tax at a rate of 30% which may not be reduced by treaty, is not
eligible for treatment as "portfolio interest" and is subject to certain
additional limitations. See "--Tax Treatment of Foreign Investors." The Small
Business Job Protection Act of 1996 has eliminated the special rule permitting
Section 593 institutions ("Thrift Institutions") to use net operating losses and
other allowable deductions to offset their excess inclusion income from REMIC
residual certificates that have "significant value" within the meaning of the
REMIC Regulations, effective for taxable years beginning after December 31,
1995, except with respect to residual certificates continuously held by a Thrift
Institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, 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 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, is an interest rate that is based on the average market yield
of outstanding marketable obligations of the United States government having
remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors."
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax (other than a farmers' cooperative
described in Code Section 521) imposed by Sections 1-1399 of the Code, if such
entity is not subject to tax on its unrelated business income. Accordingly, the
applicable Pooling and Servicing 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-
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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 is disregarded, the transferor would be liable
for any federal income tax imposed upon taxable income derived by the transferee
from the REMIC. The REMIC Regulations provide no guidance as to how to determine
if a significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain transfers of
residual interests by Foreign Persons to United States Persons. See "--Tax
Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that the Treasury recently issued final regulations
(the "Mark-to-Market Regulations") which provide that a REMIC Residual Interest
Security acquired after January 3, 1995 cannot be marked-to-market. The
Mark-to-Market Regulations replace the temporary regulations which allowed a
REMIC Residual Interest Security to be marked-to-market provided that it was not
a negative value residual interest and did not have the same economic effect as
a negative value residual interest. Prospective purchasers of a REMIC Residual
Interest Security should consult their tax advisors regarding the application of
the Mark-to-Market Regulations.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
Tax Status as a Grantor Trust
General. As specified in the related Prospectus Supplement if a REMIC or
partnership election is not made, in the opinion of Stradley, Ronon, Stevens &
Young, LLP, special counsel to the Depositor, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part I of Subchapter J of the Code and not as an
association taxable as a corporation (the Securities of such Series, the
"Pass-Through Certificates"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases (the "Stripped Securities"), sale of the Securities
will produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
Each holder must report on its federal income tax return its share of the
gross income derived from the Loans (not reduced by the amount payable as 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 Certificates 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
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of a Security will generally be entitled to deduct such Servicing Fees under
Section 162 or Section 212 of the Code to the extent that such Servicing Fees
represent "reasonable" compensation for the services rendered by the Trustee and
the Servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, Servicing Fees (to the
extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing such holder's regular tax
liability only to the extent that such fees, when added to other miscellaneous
itemized deductions, exceed 2% of adjusted gross income and may not be
deductible to any extent in computing such holder's alternative minimum tax
liability. In addition, 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 Certificates. The holder's purchase
price of a Pass-Through Certificate 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. To the extent that the portion of the purchase
price of a Pass-Through Certificate 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 Certificate, the interest in the Loan allocable to the
Pass-Through Certificate 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 Certificates, market discount is calculated
with respect to the Loans underlying the Certificate, rather than with respect
to the Certificate. A holder that acquires an interest in a Loan originated
after July 18, 1984 with more than a de minimis amount of market discount
(generally, the excess of the principal amount of the Loan over the purchaser's
allocable purchase price) will be required to include accrued market discount in
income in the manner set forth above. See "--Taxation of Debt Securities--Market
Discount" and "--Premium."
In the case of market discount on a Pass-Through Certificate attributable
to Loans originated on or before July 18, 1984, the holder generally will be
required to allocate (e.g., on a ratable or straight line basis) 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 initially at a faster 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 (the "Ratio Strip
Securities") may represent a right to receive differing percentages of both the
interest and principal on each Loan. Pursuant to Section 1286 of the Code, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments results in the creation of "stripped bonds" with respect
to principal payments and "stripped coupons" with respect to interest payments.
Section 1286 of the Code applies the OID rules to stripped bonds and stripped
coupons. For purposes of computing OID, a stripped bond or a stripped coupon is
treated as a debt instrument issued on the date that such stripped interest is
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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 (1%) (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 Certificates. 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 Code does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments "secured by" those loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis. In
applying the calculation to Pass-Through Certificates, the Trustee will treat
all payments to be received by a holder with respect to the underlying Loans as
payments on a single installment obligation. The IRS could, however, assert that
OID must be calculated separately for each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the Trustee intends, absent contrary authority, to report income to Security
holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that (i) in certain Series, each non-Interest Weighted Security is composed of
an unstripped undivided ownership interest in Loans and an installment
obligation consisting of stripped principal payments; (ii) the non-Interest
Weighted Securities are subject to the contingent payment provisions of the
Contingent Regulations; or (iii) each Interest Weighted Stripped Security is
composed of an unstripped undivided ownership interest in Loans and an
installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities, there
is no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans' character is not carried over to the
Securities in such circumstances. Pass-Through Certificates will be, and,
although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of Section
856(c)(6)(B) of the Code and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; and 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.
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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 (ii) the amount of ordinary
income actually recognized by the holder with respect to such Regular Interest
Security. For taxable years beginning after December 31, 1992, the maximum tax
rate on ordinary income for individual taxpayers is 39.6% and the maximum tax
rate on long-term capital gains reported after December 31, 1990 for such
taxpayers is 28%. The maximum tax rate on both ordinary income and long-term
capital gains of corporate taxpayers is 35%.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a holder, 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 OID 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, including payments to certain
exempt recipients (such as exempt organizations) and to certain Foreign Persons
(as defined below) who provide appropriate ownership statements as to status as
a Foreign Person. Holders should consult their tax advisers as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the holders and to the 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
The term "United States Person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof, or an
estate whose income is subject to United States federal income tax regardless of
its source of income, or a trust if a court within the United States is able to
exercise primary supervision of the administration of the trust and one or more
United States fiduciaries have the authority to control all substantial
decisions of the trust. A "Foreign Person" is any person that is not a United
States Person.
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 Foreign Person, 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
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receipt of appropriate ownership statements as to status as a Foreign Person,
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 Foreign Persons. Holders of
Pass-Through Certificates and Stripped Securities, including Ratio Strip
Securities, however, may be subject to withholding to the extent that the Loans
were originated on or before July 18, 1984.
Interest and OID of holders who are Foreign Persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder. They will, however, generally be subject to the regular
United States income tax.
Payments to holders of Residual Interest Securities who are Foreign
Persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders should assume that 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 Foreign Person will be disregarded for all federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Foreign Person 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 Residential Securities--Excess
Inclusions."
Tax Characterization of the Trust Fund as a Partnership
In the opinion of Stradley, Ronon, Stevens & Young, LLP, special counsel
to the Depositor, a Trust Fund for which a partnership election is made will not
be an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion is based on the assumption that the
terms of the Trust Agreement and related documents, including the requirement
that the Trust Fund file with the IRS a protective election to be classified as
a partnership, will be complied with, and on counsel's conclusions that (i) the
Trust Fund will be eligible to be classified as a partnership and (ii) 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.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
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Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders 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.
Assumptions Regarding the Notes. The discussion below assumes that all
payments on the Notes are denominated in United States dollars, and that the
Notes are not Stripped Securities. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a Short-Term Note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
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 Noteholder who
is a Foreign Person generally will be considered "portfolio interest," and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the Foreign Person and the
Foreign Person (i) is not actually or constructively a "10 percent shareholder"
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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 Owner Trustee or other person who is otherwise required to
withhold United States tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the Beneficial Owner of the Note is a Foreign Person and
providing the Foreign Person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the Foreign Person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a Foreign Person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the Foreign Person and (ii) in the case of an individual Foreign
Person, the Foreign Person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or Foreign Person who
provides certification as to status as a Foreign Person) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust 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 Company, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust Fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on Notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
Depositor, the Trust Fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income," income to foreign holders
generally would be subject to United States tax and United States tax return
filing and withholding requirements, and individual holders might be subject to
certain limitations on their ability to deduct their share of the Trust Fund's
expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the 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
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
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Assumptions Regarding the Certificates. The following discussion assumes
that all payments on the Certificates are denominated in United States dollars,
none of the Certificates are 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 Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the 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 Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
Fund of premium on Loans that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Company. 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 Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Trust 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 Certificateholders 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 Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Trust Fund.
The taxable income allocated to a Certificateholder that is a pension,
profit sharing or employee benefit plan or other tax-exempt entity (including an
individual retirement account) will constitute "unrelated business taxable
income" generally taxable to such a holder under the Code to the extent that
such Certificateholder's share of the taxable income is derived from, or on
account of, debt financed securities. The Notes will constitute acquisition
indebtedness of the Trust Fund for this purpose under Code Section 514.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the 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 Certificateholders 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 Certificateholders.
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
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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 Certificateholders.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust Fund. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Loans would generally be treated
as ordinary income to the holder and would give rise to special tax reporting
requirements. The Trust Fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust Fund will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, 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 Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of 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 Certificateholders. 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 Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the
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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,
Certificateholders 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 Trustee 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 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 Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-l information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the Beneficial Owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the Beneficial
Owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
Beneficial Owner (a) the name, address and identification number of such person,
(b) 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 (c) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder 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 Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. 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 Foreign
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 Certificateholders who are not Foreign Persons
pursuant to Section 1446 of the Code, as if such income were effectively
connected to a United States trade or business, at a rate of 35% for holders
that are Foreign Persons taxable as corporations and 39.6% for all other holders
who are Foreign Persons. 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 foreign status signed under penalties of perjury.
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Each holder who is a Foreign Person might be required to file a United
States 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 holder who is a Foreign Person 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 holder who is a Foreign
Person 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 United States trade or
business. However, interest payments made (or accrued) to a Certificateholder
who is a Foreign Person generally will be considered guaranteed payments to the
extent such payments are determined without regard to the income of the Trust
Fund. If these interest payments are properly characterized as guaranteed
payments, then the interest will not be considered "portfolio interest." As a
result, Certificateholders will be subject to United States federal income tax
and withholding tax at a rate of 30 percent, unless reduced or eliminated
pursuant to an applicable treaty. In such case, a holder who is a Foreign Person
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition of
the Securities. State and local income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into subclasses.
If Securities are divided into subclasses the related Prospectus Supplement will
contain information concerning considerations relating to ERISA and the Code
that are applicable to such Securities.
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts in
which such plans, accounts or arrangements are invested) (collectively, "Plans")
subject to ERISA and on persons who are fiduciaries with respect to such Plans.
Generally, ERISA applies to investments made by Plans. Among other things, ERISA
requires that the assets of Plans be held in trust and that the trustee, or
other duly authorized fiduciary, have exclusive authority and discretion to
manage and control the assets of such Plans. ERISA also imposes certain duties
on persons who 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). Certain employee benefit plans, such as
governmental plans (as defined in ERISA Section 3(32)) and, if no election has
been made under Section 410(d) of the Code, church plans (as defined in ERISA
Section 3(33)), are not subject to ERISA requirements. Accordingly, assets of
such plans may be invested in Securities without regard to the ERISA
considerations described above and below, subject to the provisions of
applicable state law. Any such plan which is qualified and exempt from taxation
under Code Sections 401(a) and 501(a), however, is subject to the prohibited
transaction rules set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain other
entities in which a
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Plan makes an "equity" investment could be deemed for purposes of ERISA to be
assets of the investing Plan in certain circumstances. However, the regulation
provides that, generally, the assets of a corporation or partnership in which a
Plan invests will not be deemed for purposes of ERISA to be assets of such Plan
if the equity interest acquired by the investing Plan is a publicly-offered
security. A publicly-offered security, as defined in the Labor Reg. Section
2510.3-101, is a security that is widely held, freely transferable and
registered under the Exchange Act.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
involving Plan assets and persons ("Parties in Interest") having certain
specified relationships to a Plan and imposes additional prohibitions where
Parties in Interest are fiduciaries with respect to such Plan. Because the Loans
may be deemed Plan assets of each Plan that purchases Securities, an investment
in the Securities by a Plan might be a prohibited transaction under ERISA
Sections 406 and 407 and subject to an excise tax under Code Section 4975 unless
a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's prohibited
transaction rules certain transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of "mortgage
pool pass-through certificates" in the initial issuance of such certificates.
PTE 83-1 permits, subject to certain conditions, transactions which might
otherwise be prohibited between Plans and Parties in Interest with respect to
those Plans related to the origination, maintenance and termination of mortgage
pools consisting of mortgage loans secured by first or second mortgages or deeds
of trust on single-family residential property, and the acquisition and holding
of certain mortgage pool pass-through certificates representing an interest in
such mortgage pools by Plans. If the general conditions (discussed below) of PTE
83-1 are satisfied, investments by a Plan in Securities that represent interests
in a Pool consisting of Loans ("Single Family Securities") will be exempt from
the prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt 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 Subordinated Securities.
Accordingly, unless otherwise provided in the related Prospectus Supplement, no
transfer of a Subordinated Security or a Security which is not a Single Family
Security may be made to a Plan.
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 pass-through certificate" would include (i) Securities issued
in a Series consisting of only a single class of Securities; and (ii) Securities
issued in a Series in which there is only one class of such Securities; provided
that the Securities in the case of clause (i), or the Securities in the case of
clause (ii), evidence the beneficial ownership of both a specified percentage of
future interest payments (greater than 0%) and a specified percentage (greater
than 0%) of future principal payments 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
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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 issued without a subordination feature, or the
Securities only in a Series issued with a subordination feature, provided that
the subordination and Reserve Account, subordination by shifting of interests,
the pool insurance or other form of credit enhancement described under "Credit
Enhancement" herein (such subordination, pool insurance or other form of credit
enhancement being the system of insurance or other protection referred to above)
with respect to a Series of 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."
In the absence of a ruling that the system of insurance or other protection with
respect to a Series of Securities satisfies the first general condition referred
to above, there can be no assurance that these features will be so viewed by the
DOL. The Trustee will not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Securities
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraph, of PTE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Securities is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
The DOL has granted to certain underwriters individual administrative
exemptions (the "Underwriter Exemptions") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Underwriter Exemptions. The Underwriter Exemptions contain
several requirements, some of which differ from those in PTE 83-l. The
Underwriter Exemptions contain an expanded definition of "certificate" which
includes an interest which entitles the holder to pass-through payments of
principal, interest and/or other payments. The Underwriter Exemptions contain an
expanded definition of "trust" which permits the trust corpus to consist of
secured consumer receivables.
While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter Exemptions are substantially the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) the rights and interest evidenced by the certificates acquired
by the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust fund;
(3) the certificates required by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from Standard & Poor's Ratings Group, a Division of The
McGraw-Hill Companies ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Rating Co. ("DCR") or Fitch Investors
Service, Inc. ("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 underwriters
in connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting the certificates; the
sum of all payments made to and retained by the seller pursuant to the
assignment of the loans to the trust fund represents not more than the
fair market value of such loans; the sum of all payments made to and
retained by the servicer and any other servicer represents not more than
reasonable
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compensation for such person's services under the agreement pursuant to
which the loans are pooled and reimbursements of such person's reasonable
expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission
under the Securities Act.
The Underwriter Exemptions provide that the term "trust" does not include
any investment pool unless, among other things, it meets 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 in such other investment pools must have been rated in
one of the three highest rating categories of S&P, Moody's, Fitch or DCR for at
least one year prior to the Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one year
prior to any Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions generally provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust as to which
the fiduciary (or its affiliate) is an obligor on the receivables held in the
trust provided that, among other requirements, (i) in the case of an acquisition
in connection with the initial issuance of certificates, at least fifty percent
(50%) of each class of certificates in which Plans have invested is acquired by
persons independent of the Restricted Group; (ii) such fiduciary (or its
affiliate) is an obligor with respect to five percent (5%) or less of the fair
market value of the obligations contained in the trust; (iii) the Plan's
investment in certificates of any class does not exceed twenty-five percent
(25%) of all of the certificates of that class outstanding at the time of the
acquisition; and (iv) immediately after the acquisition, no more than
twenty-five percent (25%) of the assets of the Plan with respect to which such
person is a fiduciary is invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
Underwriter Exemptions do not apply to Plans sponsored by the Seller, the
related Underwriter, the Trustee, the Servicer, any insurer with respect to the
Loans, any obligor with respect to Loans included in the Trust Fund constituting
more than five percent (5%) of the aggregate unamortized principal balance of
the assets in the Trust Fund, or any affiliate of such parties (the "Restricted
Group").
The Prospectus Supplement for each Series of Securities will indicate the
classes of Securities, if any, offered thereby as to which it is expected that
an Underwriter Exemption will apply.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of PTE 83-1 and the Underwriter Exemptions, and the potential
consequences in their specific circumstances, prior to making such investment.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
LEGAL INVESTMENT
The related 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 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
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legal investment authority of any such entities with respect to "mortgage
related securities," securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Approximately
twenty-one states adopted such legislation prior to the October 4, 1991
deadline. SMMEA provides, however, that in no event will the enactment of any
such legislation affect the validity of any contractual commitment to purchase,
hold or invest in securities, or require the sale or other disposition of
securities, so long as such contractual commitment was made or such securities
were acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration ("NCUA") Letter to Credit Unions No.
96, as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage related
securities and the NCUA's regulation "Investment and Deposit Activities" (12
C.F.R. Part 703), which sets forth certain restrictions on investment by federal
credit unions in mortgage related securities (in each case whether or not the
class of Securities under consideration for purchase constituted a "mortgage
related security").
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities," which are
"high-risk mortgage securities" as defined in the Policy Statement. According to
the Policy Statement, such "high-risk mortgage securities" include securities
such as Securities not entitled to distributions allocated to principal or
interest, or Subordinated Securities. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security," and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the Securities constitute legal investments for such
investors.
METHOD OF DISTRIBUTION
Securities are being offered hereby in Series from time to time through
any of the following methods:
1. By negotiated firm commitment underwriting and public reoffering
by underwriters;
2. By agency placements through one or more placement agents
primarily with institutional investors and dealers; and
3. By placement directly by the Depositor with institutional
investors.
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A Prospectus Supplement will be prepared for each Series which will
describe the method of offering being used for that Series and will set forth
the identity of any underwriters thereof and either the price at which such
Series is being offered, the nature and amount of any underwriting discounts or
additional compensation to such underwriters and the proceeds of the offering to
the Depositor, or the method by which the price at which the underwriters will
sell the Securities will be determined. Each Prospectus Supplement for an
underwritten offering will also contain information regarding the nature of the
underwriters' obligations, any material relationship between the Depositor and
any underwriter and, where appropriate, information regarding any discounts or
concessions to be allowed or reallowed to dealers or others and any arrangements
to stabilize the market for the Securities so offered. In firm commitment
underwritten offerings, the underwriters will be obligated to purchase all of
the Securities of such Series if any such Securities are purchased. Securities
may be acquired by the underwriters for their own accounts and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale.
Underwriters and agents may be entitled under agreements entered into with
the Depositor to indemnification by the Depositor against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which such underwriters or agents may be required to
make in respect thereof.
If a Series is offered other than through underwriters, the Prospectus
Supplement relating thereto will contain information regarding the nature of
such offering and any agreements to be entered into between the Depositor and
purchasers of Securities of such Series.
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 Stradley, Ronon, Stevens & Young, LLP, 2600 One Commerce Square,
Philadelphia, PA 19103.
RATING
It is a condition to the issuance of the Securities of each Series offered
hereby and by the related Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies (each, a "Rating Agency") specified in the
related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Trust Fund Assets and any credit enhancement with respect to such
class and will reflect such Rating Agency's assessment solely of the likelihood
that holders of a class of Securities of such class will receive payments to
which such Securityholders are entitled under the related Agreement. Such rating
will not constitute an assessment of the likelihood that principal prepayments
on the related Loans will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood of
early optional termination of the Series of Securities. Such rating should not
be deemed a recommendation to purchase, hold or sell Securities, inasmuch as it
does not address market price or suitability for a particular investor. Each
security rating should be evaluated independently of any other security rating.
Such rating will not address the possibility that prepayment at higher or lower
rates than anticipated by an investor may cause such investor to experience a
lower than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn among other
reasons, because of an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such
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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 Mortgaged 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 Mortgaged Properties
become equal to or greater than the value of the Mortgaged 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 the Securities of the related Series.
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INDEX OF DEFINED TERMS
Term Page
Accretion Directed Class....................................................36
Accrual Class...............................................................38
Accrual Securities..........................................................33
Advance......................................................................9
Advances....................................................................34
Agreement...................................................................21
Amortizable Bond Premium Regulations........................................79
APR.....................................................................24, 51
Available Funds.............................................................33
Balloon Payment..........................................................5, 23
Bank.....................................................................4, 25
Bankruptcy Code..............................................................8
Belgian Cooperative.........................................................43
Beneficial Owners.....................................................3, 6, 41
BIF.........................................................................52
Book-Entry Securities.......................................................41
Calculation Agent...........................................................39
Capitalized Interest Account................................................55
Cash Flow Bond Method.......................................................85
Cede.................................................................. 3, 6
CEDEL.......................................................................41
CEDEL Participants..........................................................42
CERCLA..................................................................17, 65
Certificateholders..........................................................19
Certificates..........................................................1, 4, 31
Claimable Amount............................................................73
Class Security Balance......................................................33
Closing Date................................................................19
Code....................................................................10, 74
Collateral Value............................................................24
Combined Loan-to-Value Ratio................................................24
Commission .................................................................2
Companion Class.............................................................37
Component Class.............................................................36
Contingent Regulations......................................................76
Cut-off Date.............................................................4, 21
Cut-off Date Principal Balance..............................................31
DCR.........................................................................96
Debt Securities.............................................................75
Debt-to-Income Ratio........................................................26
Definitive Security.........................................................41
Depositor................................................................1, 25
Detailed Description........................................................22
Disqualified Organization...................................................82
Distribution Date............................................................6
DOL.........................................................................94
DTC...............................................................3, 6, 18, 41
DTC Participants........................................................18, 42
EPA.........................................................................65
Equity One...............................................................4, 25
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Equity One Standards........................................................26
ERISA.......................................................................12
Euroclear...................................................................41
Euroclear Operator..........................................................43
Euroclear Participants......................................................42
European Depositaries.......................................................41
Events of Default...........................................................59
Excess Servicing............................................................85
Exchange Act.................................................................2
Fannie Mae..................................................................59
FDIC........................................................................25
Federal Reserve.............................................................25
FHA..........................................................................9
FHLMC.......................................................................58
Financial Intermediary......................................................41
Fitch.......................................................................96
Fixed Rate Class............................................................38
Floating Rate Class.........................................................38
FNMA........................................................................59
Foreign Person..............................................................87
Freddie Mac.................................................................58
Full Doc....................................................................27
Funding Period...........................................................4, 19
Garn-St Germain Act.........................................................67
HUD.........................................................................69
Indenture...................................................................31
Insurance Proceeds..........................................................53
Insured Expenses............................................................53
Interest Only Class.........................................................38
Interest Weighted Securities................................................77
Inverse Floating Rate Class.................................................38
IRS.........................................................................76
L/C Bank.................................................................8, 45
L/C Percentage...........................................................8, 45
Liquidation Expenses........................................................53
Liquidation Proceeds........................................................53
Loan Indices................................................................40
Loan Rate...............................................................23, 33
Loan-to-Value Ratio.........................................................24
Loans........................................................................1
Lockout Periods.............................................................23
Mark-to-Market Regulations..................................................83
Master Servicing Agreement..................................................21
Mixed Use Loan........................................................1, 4, 22
Moody's.....................................................................96
Morgan......................................................................43
Mortgage....................................................................51
Mortgage Loans........................................................1, 4, 22
Mortgaged Properties........................................................23
NCUA........................................................................97
NIV.........................................................................27
Noteholders ................................................................19
Notes.................................................................1, 4, 31
Notional Amount Class.......................................................37
OID.....................................................................10, 75
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OID Regulations.............................................................75
OTS.........................................................................25
PAC.........................................................................37
Partial Accrual Class.......................................................38
Parties in Interest.........................................................94
Pass-Through Certificates...................................................83
Pass-Through Rate...........................................................33
Pay-Through Security........................................................76
Percentage Interests........................................................59
Permitted Investments.......................................................46
Planned Principal Class.....................................................37
Plans.......................................................................94
Policy Statement............................................................97
Pool.....................................................................4, 21
Pool Insurance Policy.......................................................47
Pool Insurer................................................................47
Pooling and Servicing Agreement.............................................31
Popular..................................................................4, 25
Pre-Funded Amount........................................................4, 19
Pre-Funding Account......................................................4, 19
Prepayment Assumption.......................................................76
Primary Mortgage Insurance Policy...........................................23
Prime Rate..................................................................40
Principal Only Class........................................................38
Principal Prepayments.......................................................34
Property Improvement Loans..................................................71
PTE 83-1....................................................................94
Purchase Agreement..........................................................21
Purchase Price..............................................................30
Rating Agency...............................................................98
Ratio Strip Securities......................................................84
RCRA........................................................................65
Record Date ................................................................32
Reference Banks.............................................................39
Refinance Loan..............................................................24
Regular Interest Securities.................................................75
Relevant Depositary.........................................................41
Relief Act..................................................................70
REMIC....................................................................1, 74
Reserve Account..........................................................7, 33
Reserve Interest Rate.......................................................39
Residential Loan......................................................1, 4, 22
Residual Interest Security..................................................81
Restricted Group............................................................96
Retained Interest...........................................................31
Revolving Credit Line Loans...........................................1, 4, 22
Riegle Act..................................................................17
Rules.......................................................................41
S&P.........................................................................96
SAIF........................................................................52
Scheduled Principal Class...................................................37
Secured Creditor Exclusion..................................................65
Securities............................................................1, 4, 31
Securities Act...............................................................2
Securities Index............................................................40
Security Account............................................................52
Security Register...........................................................32
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Securityholders..........................................................1, 41
Seller.......................................................................1
Sellers.....................................................................21
Senior Securities........................................................5, 44
Sequential Pay Class........................................................37
Series.......................................................................1
Servicer.....................................................................4
Servicing Fee...........................................................58, 84
Short-Term Note.............................................................88
Single Family Properties....................................................23
Single Family Securities....................................................94
SMMEA...................................................................10, 97
Strip Class ................................................................37
Stripped Securities.........................................................83
Sub-Servicer.................................................................9
Sub-Servicers...............................................................21
Sub-Servicing Agreement.....................................................55
Subordinated Securities......................................................5
Subsequent Loans.........................................................4, 19
Support Class...............................................................37
TAC.........................................................................38
Targeted Principal Class....................................................38
Terms and Conditions........................................................43
Thrift Institutions.........................................................82
TIN.........................................................................86
Title I Loans...............................................................71
Title I Program.............................................................70
Title V.................................................................68, 69
Treasury....................................................................11
Treasury Index..............................................................40
Trust Agreement.........................................................21, 31
Trust Fund...............................................................1, 31
Trust Fund Assets.....................................................1, 4, 21
Trustee..................................................................4, 31
Underwriter Exemptions......................................................95
United States Person........................................................87
VA...........................................................................9
VA Guaranty.................................................................57
Variable Rate Class.........................................................38
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution*
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Securities being registered under this
Registration Statement, other than underwriting discounts and commissions:
SEC Registration Fee......................................... $ 98,484.85
Printing and Engraving Expenses ............................. 35,000.00
Legal Fees and Expenses...................................... 140,000.00
Trustee Fees and Expenses.................................... 40,000.00
Accounting Fees and Expenses................................. 45,000.00
Blue Sky Fees and Expenses................................... 10,000.00
Rating Agency Fees........................................... 66,000.00
Miscellaneous................................................ 2,500.00
===============
Total........................................................ $ 436,984.85
===============
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* All amounts except the SEC Registration Fee are estimates of expenses
incurred in connection with the issuance and distribution of a Series of
Securities in an aggregate principal amount assumed for these purposes to
be equal to $100,000,000.00 of Securities registered hereby.
Item 15. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of Delaware empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that he or she is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise. Depending on the character of the proceeding, a corporation may
indemnify against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if the person indemnified acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no cause to believe his or her conduct was unlawful. In the case
of an action by or in the right of the corporation, no indemnification may be
made in respect to any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
further provides that to the extent a director or officer of a corporation has
been successful in the defense of any action, suit or proceeding referred to
above or in the defense of any claim, issue or matter therein, he or she shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection therewith.
The Certificate of Incorporation of the Registrant provides, in effect,
that, to the extent and under the circumstances permitted by Section 145 of the
General Corporation Law of Delaware, the Registrant shall indemnify any person
who was or is a party or is threatened to be made a party to any action, suit or
proceeding of the type
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described above by reason of the fact that he or she (i) is or was a director or
officer of the Registrant or (ii) is or was serving at the request of the
Registrant as a director or officer (or its equivalent) of another enterprise,
except as to any action, suit or proceeding brought by or on behalf of a
director or officer without prior approval of the Board of Directors of the
Registrant. The Registrant does not maintain liability insurance coverage for
its directors, officers or other persons; however, such persons are covered by a
liability insurance policy maintained by Popular, Inc. for itself and its
subsidiaries.
Item 16. Exhibits.
3.1 Restated Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1 Form of Pooling and Servicing Agreement.
4.2 Form of Trust Agreement.
4.3 Form of Indenture.
5.1 Opinion of Stradley, Ronon, Stevens & Young, LLP as to legality of the
Securities.
8.1 Opinion of Stradley, Ronon, Stevens & Young, LLP as to certain tax
matters (included in Exhibit 5.1).
23.1 Consent of Stradley, Ronon, Stevens & Young, LLP (included in Exhibits
5.1 and 8.1 hereof).
24.1 Power of Attorney.
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Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most
recent post-effective amendment hereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in this Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section
do not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the Registrant pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
II-2
<PAGE>
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of a Trust Fund's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in this Registration Statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned Registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939 in accordance
with the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Trust Indenture Act of 1939.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that (i) it reasonably believes that the security rating
requirement of Transaction Requirement B.5 of Form S-3 will be met by the time
of sale of each Series of Securities to which this Registration Statement
relates and (ii) it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Wilmington, State of Delaware on the 16th day of
June, 1997.
Equity One ABS, Inc.
By: /s/ Thomas J. Fitzpatrick
---------------------------
Thomas J. Fitzpatrick
President
Each person whose signature appears below hereby constitutes and appoints
Thomas J. Fitzpatrick and Dennis Kildea, and each of them, with full power to
act without the other, his or her true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for her or him and in her or
his name, place and stead in any and all capacities (until revoked in writing)
to sign all amendments (including post-effective amendments) to this
Registration Statement on Form S-3 of Equity One ABS, Inc., and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary fully to all
intents and purposes as she or he might or could do in person thereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their or her or his substitute, may lawfully do or cause to be done, by virtue
hereof. Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Thomas J. Fitzpatrick
- ------------------------- Director and President
Thomas J. Fitzpatrick (Chief Executive Officer) June 16, 1997
/s/ Dennis Kildea*
- ------------------------- Director, Vice President,
Dennis Kildea Treasurer and Assistant June 16, 1997
Secretary (Chief Financial/
Accounting Officer)
/s/ John N. Martella*
- ------------------------- Director, Vice President,
John N. Martella Secretary and Assistant June 16, 1997
Treasurer
II-4
<PAGE>
/s/ George P. Warren, Jr.*
- -------------------------- Director, Vice President
George P. Warren, Jr. and Assistant Secretary June 16, 1997
/s/ Joseph Corvaia*
- ------------------------- Director
Joseph Corvaia June 16, 1997
* By: /s/ Thomas J. Fitzpatrick
---------------------------
Thomas J. Fitzpatrick June 16, 1997
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
Exhibit Page
No. Description of Exhibit Number
- ------- ---------------------- ------
** 3.1 -- Restated Certificate of Incorporation of the Registrant.
** 3.2 -- Bylaws of the Registrant.
** 4.1 -- Form of Pooling and Servicing Agreement.
** 4.2 -- Form of Trust Agreement.
** 4.3 -- Form of Indenture.
** 5.1 -- Opinion of Stradley, Ronon, Stevens & Young, LLP as to
legality of the Securities.
8.1 -- Opinion of Stradley, Ronon, Stevens & Young, LLP as to
certain tax matters (included in Exhibit 5.1).
23.1 -- Consent of Stradley, Ronon, Stevens & Young, LLP (included in
Exhibits 5.1 and 8.1).
24.1 -- Power of Attorney (see Page II-4 and II-5).
- ----------
** Previously filed with this Registration Statement.
