PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 20, 1997)
$102,841,606
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1997-1
$31,000,000 Class A-1 Certificates 6.62% Pass-Through Rate
$24,200,000 Class A-2 Certificates 7.01% Pass-Through Rate
$14,500,000 Class A-3 Certificates 7.19% Pass-Through Rate
$12,000,000 Class A-4 Certificates 7.38% Pass-Through Rate
$21,141,606 Class A-5 Certificates 7.55% Pass-Through Rate
EQUITY ONE ABS, INC.
DEPOSITOR
EQUITY ONE, INC.
SERVICER
The Mortgage Pass-Through Certificates, Series 1997-1 will consist of six (6)
classes of certificates (collectively, the "Certificates") designated as (i) the
Class A-1 Certificates, (ii) the Class A-2 Certificates, (iii) the Class A-3
Certificates, (iv) the Class A-4 Certificates, (v) the Class A-5 Certificates
(together with the Class A-1 Certificates, the Class A-2 Certificates, the Class
A-3 Certificates, and the Class A-4 Certificates, the "Class A Certificates")
and (vi) the Class R Certificates (the "Residual Certificates"). The rights of
the holders of the Residual Certificates to receive distributions with respect
to the Loans will be subordinate to the rights of the holders of the Class A
Certificates to the extent described herein and in the Prospectus. 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 mortgage loans secured by first liens on
(A) Residential Properties, (each, a "Residential Loan") and (B) Mixed Use
Properties (each, a "Mixed Use Loan"). "Mixed Use Properties" consist of
multi-family properties and structures which include residential dwelling units
and space used for retail, professional or other commercial uses. "Residential
Properties" means one- to four-family dwellings. Only the Class A Certificates
are offered hereby.
On or before the date of issuance of the Certificates, the Depositor will obtain
from AMBAC Indemnity Corporation (the "Insurer") a Certificate Guaranty
Insurance Policy (the "Policy"), which will, subject to its terms, guarantee
payments to holders of the Class A Certificates as described herein. See
"Description of the Certificates--Certificate Guaranty Insurance Policy."
[ INSERT AMBAC LOGO ]
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S-11 HEREIN AND ON PAGE 14 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 Class A Certificates will be purchased by Salomon Brothers Inc (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
Class A Certificates are expected to be approximately $102,514,821, plus accrued
interest, before deducting issuance expenses payable by the Depositor.
The Class A Certificates are offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to its
right to reject orders in whole or in part. It is expected that delivery of the
Class A Certificates will be made in book-entry form only through the facilities
of The Depository Trust Company on or about July 2, 1997.
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SALOMON BROTHERS INC
- --------------------------------------------------------------------------------
The date of this Prospectus Supplement is June 26, 1997.
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The Loans will be sold to the Depositor by Equity One, Inc., a Delaware
corporation, Equity One, Incorporated, a Pennsylvania corporation, Equity One
Mortgage Company, a North Carolina corporation, Equity One Mortgage, Inc., a
Delaware corporation, Equity One, Inc., a Minnesota corporation, Equity One
Consumer Loan Company, Inc., a New Hampshire corporation, Equity One of West
Virginia, Inc., a West Virginia corporation, and Equity One Mortgage, Inc., a
New York corporation (each, a "Seller" and collectively, the "Sellers").
An election will be made to treat the Trust Fund as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. As
described more fully herein and in the Prospectus, Class A Certificates will
constitute "regular interests" in the REMIC. The Class R Certificates will
constitute the sole class of "residual interest" in the REMIC. See "Federal
Income Tax Consequences" herein and in the Prospectus.
It is a condition of the issuance of the Class A Certificates that they
be rated "AAA" by Standard & Poor's Ratings Services ("Standard & Poor's") and
"Aaa" by Moody's Investors Service, Inc. ("Moody's").
The yield to investors on each class of Class A 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 Class A
Certificates purchased at a discount or premium will be more sensitive to the
rate and timing of payments thereon. Holders of the Class A Certificates should
consider, in the case of any such Certificates purchased at a discount, 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 Class A Certificates purchased at a premium, 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. No representation is made
as to the anticipated rate of prepayments on the Loans, the amount and timing of
Net Interest Shortfalls, or as to the resulting yield to maturity of any class
of Certificates.
Certain persons participating in this offering may engage in
transactions that affect the price of the Class A Certificates. Such
transactions may include the purchase of Class A Certificates to cover syndicate
short positions. For a description of these transactions, see "Underwriting"
herein.
The Underwriter intends to make a secondary market in the classes of
Class A Certificates but has no obligation to do so. There is currently no
secondary market for the Class A 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 Class A 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 Class A Certificates. Additional information is contained in
the Prospectus of the Depositor dated June 20, 1997 (the "Prospectus") and
purchasers are urged to read both this Prospectus Supplement and the Prospectus
in full. Sales of the Class A Certificates may not be consummated unless the
purchaser has received both this Prospectus Supplement and the Prospectus.
The Trustee on behalf of the 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 450 West 33rd Street, 15th Floor, New York, New
York 10001, telephone: (212) 946-3015, facsimile number: (212) 946-8150,
attention: Ms. Norma Katone (the "Corporate Trust Office").
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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.
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Title of Certificates..................... Mortgage Pass-Through Certificates, Series 1997-1 (the
"Certificates").
Designations
Class A Certificates.................... Class A-1, Class A-2, Class A-3, Class A-4, and Class A-5
Certificates (collectively, the "Class A Certificates"). Only the
Class A Certificates are offered hereby.
Regular Certificates.................... Class A Certificates.
Residual Certificates................... Class R Certificates. The Class Certificate Balance of the Class
R Certificates will be zero. The Class R Certificates will not
have a Pass-Through Rate. The Class R Certificates are not being
offered hereby.
Book-Entry Certificates................. Class A Certificates.
Trust Fund................................ The Certificates will represent the entire beneficial interest in a
Trust Fund consisting primarily of (i) a pool of Loans (the "Mortgage
Pool"), (ii) all monies received with respect to the Loans on and after
the Cut-off Date (other than amounts received on and after the Cut-off
Date in respect of principal and interest on the Loans due prior to
the Cut-off Date), (iii) the Policy and (iv) amounts on deposit in
the Certificate Account, the Distribution Account and the Spread
Account, and certain other property.
Pooling and Servicing
Agreement............................... The Certificates will be issued pursuant to a Pooling and
Servicing Agreement dated as of June 1, 1997 (the
"Agreement"), among the Depositor, the Sellers, the Servicer
and the Trustee.
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
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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 Equity One, Inc., a
Delaware corporation, Equity One, Incorporated, a Pennsylvania
corporation, Equity One Mortgage Company, a North Carolina
corporation, Equity One Mortgage, Inc., a Delaware
corporation, Equity One, Inc., a Minnesota corporation, Equity
One Consumer Loan Company, Inc., a New Hampshire
corporation, Equity One of West Virginia, Inc., a West Virginia
corporation, and Equity One Mortgage, Inc., a New York
corporation (each, a "Seller" and collectively, the "Sellers").
Trustee................................... The Chase Manhattan Bank, a banking corporation organized
under the laws of the State of New York (the "Trustee").
Cut-off Date.............................. June 1, 1997.
Closing Date.............................. On or about July 2, 1997.
Determination Date........................ The 21st 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 mortgage loans secured
by first liens on (A) Residential Properties, (each, a "Residential
Loan") and (B) Mixed Use Properties (each, a "Mixed Use Loan").
"Mixed Use Properties" consist of multi-family properties and
structures which include residential dwelling units and space used
for retail, professional or other commercial uses. "Residential
Properties" means one- to four-family dwellings. See "The Mortgage
Pool." Distributions of principal and interest on the Certificates
will be made as described under "Description of the Certificates."
Mortgaged Properties....................... The real properties which secure repayment of the Loans and on
which Sellers have a first lien.
Distribution Date.......................... The 25th day of each month or, if such day is not a business
day, on the first business day thereafter, commencing in August
1997 (each, a "Distribution Date"). Distributions on each
Distribution Date will be made to Certificateholders of record as
of the related Record Date, except that the final distribution on
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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 business day
immediately preceding such Distribution Date.
Priority of Distributions on
the Certificates ....................... On any Distribution Date, the amount available for distribution
to the Class A Certificateholders generally will equal the sum of
(i) Available Funds, (ii) any amount (the "Spread Account
Draw") available from the Spread Account and (iii) any Insured
Amounts (collectively, "Distributable Funds").
Distributions on the Certificates will be made on each
Distribution Date in the following order of priority: (i) to
interest on the Class A Certificates; and (ii) to principal on
the Class A Certificates in the order and subject to the
priorities set forth herein under "Description of the
Certificates--Principal." As described herein, after payment of
such amounts to the Class A Certificateholders, certain amounts
may be distributed on the Class R Certificates. See "Description
of the Certificates--Principal--Residual Certificates."
Distributions of Interest................. To the extent funds are available therefor, the Class A
Certificates will be entitled to receive interest in the amount
of the Interest Distribution Amount for such class. If there is
any shortfall in such amount, each class of the Class A
Certificates will receive its pro rata share (based on the
related Interest Distribution Amount) of funds available for
distribution of interest.
A. Interest Distribution
Amount.................................. For the Class A Certificates, the sum of (i) the amount of
interest accrued during the related Interest Accrual Period at
the applicable Pass-Through Rate on the related Class Certificate
Balance less the amount of Net Interest Shortfalls for the
related Distribution Date, 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").
B. Pass-Through Rate...................... The Pass-Through Rates for the Class A Certificates for each
Distribution Date will be as set forth or described on the cover
page hereof, except that with respect to any Distibution Date
after the date on which the Servicer has the option to purchase,
in whole, the Loans and the REO Property if any, in the Trust Fund
at such time (as described under "Description of the Certificates
--Optional Termination"), the Pass-Through Rate for the Class A-5
Certificates shall be 8.05% per annum.
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With respect to each Distribution Date, the "Interest Accrual
Period" for the Class A Certificates will be the calendar month
preceding the month of such Distribution Date, except with respect
to the first Distribution Date after the Cut-off Date, in which
case the Interest Accrual Period will be the two calendar months
preceding 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 will be made in
the order and subject to the priorities set forth herein under
"Description of the Certificates--Principal."
Credit Enhancement........................ The credit enhancement provided for the benefit of the Class A
Certificateholders consists of the Spread Account and the Policy,
as described below and herein.
The Spread Account. The Trustee shall maintain the Spread Account
for the benefit of the Class A Certificates. See "-- Spread
Account" and "Description of the Certificates."
The Certificate Guaranty Insurance Policy. The Class A
Certificates will be entitled to the benefit of a certificate
guaranty insurance policy (the "Policy") to be issued by AMBAC
Indemnity Corporation (the "Insurer"), discussed more fully under
"--Certificate Guaranty Insurance Policy" and "Description of the
Certificates."
Spread Account............................ Pursuant to the Agreement, there shall be established with the
Trustee a separate trust account (the "Spread Account"), for the
benefit of the Certificateholders and the Insurer. On each
Distribution Date, the Trustee will deposit funds, to the extent
available, into the Spread Account in an amount specified in the
Agreement (the "Spread Account Deposit Amount"). On each
Distribution Date, the amounts, if any, on deposit in the Spread
Account will be used primarily to fund any shortfall between the
available funds for payments to Class A Certificateholders and
the amount of principal and interest due on the Class A
Certificates; however, certain amounts in the Spread Account
may be distributed on the Class R Certificates. The amount
required to be on deposit in the Spread Account at any time, as
specified in the Agreement (the "Specified Spread Account
Requirement"), may be reduced or eliminated at the sole
discretion of the Insurer without the consent of any
Certificateholder, provided that such reduction or elimination
shall not result in the reduction of the rating of the Class A
Certificates. See "Description of the Certificates--Spread
Account."
Certificate Guaranty Insurance Policy.... The Insurer will issue the Policy as a means of providing
additional credit enhancement to the Class A Certificates. Under
the Policy, the Insurer will irrevocably and unconditionally
guarantee payment to the Trustee, for the benefit of the holders
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of the Class A Certificates, on each Distribution Date, as
further described herein, of an amount that will equal the sum of
(i) each class' Interest Distribution Amount for the related
Interest Accrual Period, (ii) the Guaranteed Principal
Distribution Amount for such Distribution Date and (iii) without
duplication of the amount specified in clause (ii), the aggregate
Class Certificate Balance of all classes of Class A Certificates
to the extent unpaid on the Last Scheduled Distribution Date or
earlier termination of the Trust Fund pursuant to the terms of
the Agreement. The "Guaranteed Principal Distribution Amount" for
any Distribution Date shall equal the amount, if any, by which
the aggregate Class Certificate Balance of the Class A
Certificates exceeds the Pool Principal Balance as of such
Distribution Date. The Policy does not cover any specified rate
of payment of principal. A payment by the Insurer under the
Policy is referred to herein as the payment of an "Insured
Amount." See "Description of the Certificates--Certificate
Guaranty Insurance Policy."
Allocation of Losses...................... Neither the Class A Certificates nor the Loans are insured or
guaranteed by any governmental agency or instrumentality or by
the Depositor, the Sellers, the Servicer, the Trustee or any of
their respective affiliates.
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 it has determined that
such Advance will be recoverable and 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."
Prepayment Considerations and
Risks;Reinvestment Risk................. The rate of principal payments on the Class A Certificates, the
aggregate amount of distributions on the Class A Certificates and
the yield to maturity of the Class A Certificates will be related
to the rate and timing of payments of 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 Class A
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 a Class
A Certificate purchased at a discount, a
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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 a Class A 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.
In addition, the yield to investors in the Class A Certificates
will be adversely affected by any allocation thereto of Net
Interest Shortfalls.
Because the Loans may be prepaid at any time (most without
penalty), it is not possible to predict the rate at which
distributions of principal of the Class A Certificates will be
received. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors in the
Class A Certificates will be able to reinvest the distributions
thereon at yields equaling or exceeding the yields on such Class
A Certificates. It is possible that yields on any such
reinvestments will be lower, and may be significantly lower, than
the yields on the Class A Certificates. The rating of the Class A
Certificates will depend primarily on an assessment by the Rating
Agencies of the Loans and upon the claims-paying ability of the
Insurer. Any change in the ratings of the Insurer by Standard &
Poor's or Moody's may result in a change in the ratings of the
Class A 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 (each
such date, an "Optional Termination Date"), the Servicer will
have the option to purchase, in whole, the Loans and the REO
Property, if any, remaining in the Trust Fund. In the event the
Servicer exercises such option, the purchase price distributed
with respect to each Class A Certificate will be 100% of its then
outstanding principal balance plus any unpaid accrued interest
thereon at the applicable Pass-Through Rate. See "Description
of the Certificates--Optional Termination."
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.
Depending on their respective issue prices, certain classes of
Class A Certificates may be issued with original issue discount
("OID") for federal income tax purposes. See "Federal Income Tax
Consequences" herein and in the Prospectus.
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ERISA Considerations...................... The acquisition of a Class A 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").
Any Plan fiduciary considering whether to purchase any Class A
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.......................... 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 Class A 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 Class A Certificates that
they be rated "AAA" by Standard & Poor's and "Aaa" by Moody's
(together with Standard & Poor's, the "Rating Agencies"). See
"Ratings." The ratings of the Class A 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 rating.
withdrawal at any time by the Rating Agency that issued the See
"Risk Factors--Certificate
Rating" and "Ratings."
Risk Factors..................................For a discussion of risks associated with an investment in the
Class A Certificates, see "Risk Factors" on Page S-11 herein
and on Page 14 in the Prospectus.
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RISK FACTORS
Investors should consider the following risks in connection with the
purchase of the Class A Certificates. For a discussion of additional risks
pertaining to the Class A Certificates, see "Risk Factors" in the Prospectus.
Consequences of Owning Book-Entry Certificates
Issuance of the Class A Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market since investors
may be unwilling to purchase Certificates for which they cannot obtain physical
certificates. See "Description of the Certificates--Book-Entry Certificates"
herein and "Risk Factors--Book- Entry Registration" in the Prospectus.
Since transactions in the Class A Certificates can be effected only
through DTC, participating organizations, indirect participants and certain
banks, the ability of a Beneficial Owner to pledge a Class 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 Class A 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, and any Insured Amounts with respect
to, the Class A Certificates since such distributions will be forwarded by the
Trustee to DTC and DTC will credit such distributions to the accounts of 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
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 if the Insurer failed to perform its obligations under
the Policy.
Prepayment Considerations and Risks
All of the Loans may be prepaid in whole or in part at any time, most
without penalty. See "The Mortgage Pool--General" herein and "Prepayment and
Yield 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--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 Class A 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.
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Defaults and Delinquent Payments
In the event that the Spread Account is depleted and the Insurer fails
to pay the required Insured Amounts, the yields to maturity of the Class A
Certificates will be sensitive to defaults and delinquent payments on the Loans.
In this event, if a purchaser of a Class A Certificate calculates its
anticipated yield based on an assumed rate of default and amount of Loan Losses
that is lower than the default rate and amount of Loan Losses actually incurred,
its actual yield to maturity will be lower than that so calculated and, in the
event of substantial Loan Losses, could be negative. In the event that the
Spread Account is depleted and the Insurer fails to pay the required Insured
Amounts, the timing of Loan Losses will also affect an investor's actual yield
to maturity even if the rate of defaults and severity of such Loan Losses are
consistent with an investor's expectations. In general, the earlier a Loan 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 Loan 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 Class A Certificates until the Distribution Date in the following
calendar month. As a result, the monthly distributions to the holders of the
Class A Certificates generally will reflect mortgagor payments during the prior
calendar month. Each Distribution Date will be on the 25th day of each month (or
the next succeeding business day), commencing in August of 1997. Thus, the
effective yield to the holders of all Class A Certificates will be below that
otherwise produced by the related Pass-Through Rate and the price paid for the
Class A Certificates by such holders because distributions on the Class A
Certificates in respect of any given month will not be made until on or about
the 25th day of the following month.
Balloon Loans
Approximately 65.29% of the Loans in the Mortgage Pool are balloon
loans, of which 92.9% have an original term of approximately 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
It is expected that Mixed Use Loans will represent less than 5% 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 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 Residential Properties.
"Residential Properties" means one- to four-family dwellings.
Certificate Rating Subject to Change
The rating of the Class A Certificates will depend primarily on an
assessment by the Rating Agencies of the Loans and upon the claims-paying
ability of the Insurer. Any reduction in a rating assigned to the claims-paying
ability of the Insurer below the rating initially given to the Class A
Certificates may result in a reduction of the rating of the Class A
Certificates. The rating by the Rating Agencies of the Class A Certificates is
not a
S-12
<PAGE>
recommendation to purchase, hold or sell the Class A 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 or Net Interest Shortfalls. The
ratings of the Class A Certificates do not address the possibility of the
imposition of United States withholding tax with respect to non-United States
persons.
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 Sellers to the Depositor, the Loans
would not be part of the related 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 Class A Certificates and result in a reduction of payments due on the
Class A Certificates.
Geographic Concentration
As of the Cut-off Date, approximately 27.28%, 20.32%, 10.33%, 6.50% and
5.20% (by Cut-off Date Pool Principal Balance) of the Mortgaged Properties are
located in the Commonwealth of Pennsylvania, the State of New Jersey, the State
of North Carolina, the Commonwealth of Virginia and the State of Florida,
respectively. The Cutoff Date Pool Principal Balance in each other state
represents not more than approximately 5% of the Mortgaged Properties. If the
Pennsylvania, New Jersey, North Carolina, Virginia or Florida 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.
THE MORTGAGE POOL
General
The Mortgage Pool will consist of the following types of loans
(collectively, the "Loans"): mortgage loans secured by first liens on (A)
Residential Properties, (each, a "Residential Loan") and (B) Mixed Use
Properties (each, a "Mixed Use Loan"). It is expected that Residential Loans
secured by one-family detached dwellings will represent approximately 86% of the
Loans in the Mortgage Pool and that Mixed Use Loans will represent less than 5%
of the Loans in the Mortgage Pool.
The Depositor will purchase the Loans from the Sellers pursuant to the
Pooling and Servicing Agreement dated as of the Cut-off Date among the 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").
S-13
<PAGE>
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 the 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. 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 (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 $102,841,606.25 (the "Cut-off Date
Pool Principal Balance"). Loans with Balloon Payments 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
approximately five to fifteen years. 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 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
grace period (ranging from 10 to 15 days) for monthly payments, as required by
applicable state law. All of the Loans may be prepaid in full or in part at any
time, most without penalty.
Each Loan was originated after February of 1996.
The latest stated maturity date of any Loan is April of 2027. The
earliest stated maturity date of any Loan is July of 2001.
As of the Cut-off Date, no Loan was 60 or more days delinquent.
S-14
<PAGE>
No Loan had a Loan-to-Value Ratio at origination of more than 90%. No
Mixed Use Loan had a Loan-to-Value Ratio at origination of more than 70%. The
weighted average original Loan-to-Value Ratio of the Loans is expected to be
approximately 73%.
The "Loan-to-Value Ratio" of a Loan is equal to (i) the principal
balance of such Loan at the date of origination, divided by (ii) the appraised
value of the related Mortgaged Property based on an appraisal made for the
related Seller by an independent fee appraiser at the time of the origination of
the related Loan.
The following section, "Mortgage Pool Tables," sets forth in tabular
format certain information, as of the Cut-off Date, as to the Mortgage Pool. The
sum of the columns in the tables below may not equal the total indicated due to
rounding.
Mortgage Pool Tables
Mortgage Rates(1)
-----------------
<TABLE>
<CAPTION>
Aggregate Principal Balance Percent of Mortgage Pool
Mortgage Rate (%) Number of Loans Outstanding (by principal balance)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
8.001 to 8.250 35 $ 3,369,471.68 3.28%
8.251 to 8.500 49 4,492,565.50 4.37
8.501 to 8.750 171 14,489,050.25 14.09
8.751 to 9.000 204 17,427,528.11 16.95
9.001 to 9.250 73 7,721,476.97 7.51
9.251 to 9.500 107 10,184,674.15 9.90
9.501 to 9.750 91 8,276,443.67 8.05
9.751 to 10.000 173 13,778,733.51 13.40
10.001 to 10.250 45 3,431,303.49 3.34
10.251 to 10.500 94 7,846,897.27 7.63
10.501 to 10.750 49 4,370,710.78 4.25
10.751 to 11.000 33 2,366,171.11 2.30
11.001 to 11.250 23 2,428,232.02 2.36
11.251 to 11.500 16 983,237.77 0.96
11.501 to 11.750 7 522,890.44 0.51
11.751 to 12.000 11 1,013,419.45 0.99
12.251 to 12.500 3 138,800.08 0.13
----- --------------- ------
Totals 1,184 $102,841,606.25 100.00%
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Loans is
expected to be approximately 9.58%.
S-15
<PAGE>
<TABLE>
<CAPTION>
Current Loan Principal Balances(1)
-------------------------------------------
Aggregate Principal Percent of Mortgage Pool
Current Loan Amounts Number of Loans Balance Outstanding (by principal balance)
- ------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
$ 0.01 - $ 50,000.00 258 $10,647,392.22 10.35%
$ 50,000.01 - $ 100,000.00 613 44,164,936.82 42.94
$100,000.01 - $ 150,000.00 216 25,860,030.43 25.15
$150,000.01 - $ 200,000.00 55 9,518,375.39 9.26
$200,000.01 - $ 250,000.00 17 3,753,521.30 3.65
$250,000.01 - $ 300,000.00 9 2,389,323.65 2.32
$300,000.01 - $ 350,000.00 6 1,906,090.30 1.85
$350,000.01 - $ 400,000.00 3 1,145,817.07 1.11
$400,000.01 - $ 450,000.00 3 1,254,460.42 1.22
$450,000.01 - $ 500,000.00 1 478,477.89 0.47
$500,000.01 - $ 550,000.00 1 524,712.65 0.51
$550,000.01 - $ 600,000.00 1 588,771.86 0.57
$600,000.01 - $ 650,000.00 1 609,696.25 0.59
----- --------------- ------
Totals........................ 1,184 $102,841,606.25 100.00%
</TABLE>
- -------------------
(1) As of the Cut-off Date, the average current Loan principal balance is
expected to be approximately $86,859.46.
S-16
<PAGE>
<TABLE>
<CAPTION>
State Distribution of Mortgaged Properties(1)
---------------------------------------------
Percent of
Aggregate Principal Mortgage Pool (by
State Number of Loans Balance Outstanding principal balance)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alabama 7 $ 433,258.09 0.42%
Connecticut 18 1,443,818.42 1.40
Delaware 23 1,811,113.81 1.76
Florida 62 5,348,550.13 5.20
Georgia 18 1,217,134.76 1.18
Iowa 17 1,665,469.78 1.62
Illinois 21 1,489,164.84 1.45
Indiana 11 671,041.03 0.65
Kentucky 11 585,042.10 0.57
Massachusetts 45 4,774,948.16 4.64
Maryland 27 2,460,798.36 2.39
Maine 17 1,285,883.15 1.25
Michigan 25 1,497,594.33 1.46
Minnesota 5 567,867.11 0.55
Missouri 1 48,675.26 0.05
North Carolina 155 10,624,913.90 10.33
New Hampshire 33 2,498,259.65 2.43
New Jersey 185 20,900,374.70 20.32
New York 22 2,615,445.49 2.54
Ohio 6 540,906.96 0.53
Pennsylvania 308 28,058,008.68 27.28
Rhode Island 5 634,935.95 0.62
South Carolina 39 2,805,412.44 2.73
Tennessee 6 445,132.44 0.43
Utah 8 781,333.87 0.76
Virginia 95 6,684,859.41 6.50
Wisconsin 8 632,620.77 0.62
West Virginia 6 319,042.66 0.31
- -------------------------- ----- --------------- ------
Totals ................... 1,184 $102,841,606.25 100.00%
</TABLE>
- -------------------
(1) No more than approximately 1.63% of the Loans will be secured by Mortgaged
Properties located in any one postal zip code area.
S-17
<PAGE>
<TABLE>
<CAPTION>
Occupancy Types(1)
------------------------
Aggregate Principal Balance Percent of Mortgage Pool
Occupancy Type Number of Loans Outstanding (by principal balance)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-Owner Occupied........... 139 $13,489,854.64 13.12%
Owner Occupied............... 1,045 89,351,751.61 86.88
----- --------------- ------
Totals....................... 1,184 $102,841,606.25 100.00%
</TABLE>
- -------------------
(1) Based upon representations of the related mortgagors at the time of
origination.
<TABLE>
<CAPTION>
Remaining Terms to Maturity(1)
------------------------------------
Remaining Term to Maturity Aggregate Principal Balance Percent of Mortgage Pool
(Months) Number of Loans Outstanding (by principal balance)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
49 - 60.................... 3 $ 475,599.55 0.46%
61 - 72.................... 2 166,817.23 0.16
73 - 84.................... 38 3,979,975.25 3.87
85 - 96.................... 1 48,204.64 0.05
97 - 108.................... 5 220,247.90 0.21
109 - 120.................... 30 2,000,379.77 1.95
133 - 144.................... 1 33,838.43 0.03
145 - 156.................... 2 84,614.81 0.08
157 - 168.................... 48 4,534,922.15 4.41
169 - 180.................... 847 74,088,571.92 72.04
217 - 228.................... 17 1,545,899.82 1.50
229 - 240.................... 184 14,979,679.32 14.57
349 - 360.................... 6 682,855.46 0.66
----- --------------- ------
Totals....................... 1,184 $102,841,606.25 100.00%
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average remaining term to maturity
of the Loans is expected to be approximately 179.21 months.
S-18
<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, 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 to the Trustee 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 are 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 2 years 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 mortgage loans.
Each Seller produces its mortgage loans through its retail origination
network of loan officers and managers. Each Seller also produces mortgage loans
through a wholesale network of mortgage brokers and other entities located
throughout the United States. Prior to the funding of any mortgage loan, each
Seller underwrites the related mortgage 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").
S-19
<PAGE>
The Equity One Standards are primarily intended to evaluate the value
and adequacy of the mortgaged property as collateral for the proposed mortgage
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 mortgage 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. Grade A Credits Loans
will represent 82.61% and Grade B Credits Loans will represent 17.39% 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
Underwriting 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 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. 85.21% of the
Loans in the Mortgage Pool will be underwritten pursuant to the Full Doc program
and 14.79% of such Loans will be underwritten pursuant to the NIV program.
The Equity One Standards require an independent appraisal of each
mortgaged property securing each mortgage loan in excess of $15,000 that
conforms to Federal National Mortgage Corporation ("Fannie Mae") 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. Every independent appraisal
is reviewed by a representative of the related Seller before the mortgage loan
is funded. The maximum loan amount varies depending upon a borrower's credit
grade. Variations in maximum loan amount limits are permitted based on
compensating factors. Maximum loan amounts for mortgage loans underwritten
pursuant to the NIV program generally do not exceed $300,000.
The Equity One Standards permit mortgage loans with Underwriting
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.
Title insurance has been obtained on all Loans in the Mortgage Pool.
Each Mortgaged Property securing a Loan in the Mortgage Pool is covered by fire
and extended coverage casualty insurance in an amount at least equal to the
principal balance or the replacement cost of such Mortgaged Property, whichever
is less.
The "Underwriting 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 "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.
S-20
<PAGE>
SERVICING OF LOANS
General
The Servicer will service the Loans in accordance with the terms set
forth in the Agreement. The Servicer may perform any of its obligations under
the 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 Agreement as if the Servicer alone were
servicing the Loans. As of the Closing Date, the Servicer does not intend to
service the Loans with sub-servicing arrangements.
The information set forth in the following sections 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 wholly
owned operating subsidiary of Banco Popular, FSB, a federal savings bank with
principal offices in Newark, New Jersey, will act as the Servicer of the Loans
pursuant to the Agreement. Equity One is engaged primarily in the mortgage
banking and consumer lending business, and as such, originates, purchases, sells
and services mortgage and consumer loans. Equity One originates loans through a
retail branch system and through loan brokers and correspondents nationwide.
Equity One's loans are principally (i) first- and second-lien, fixed or
adjustable rate mortgage loans secured by Residential Properties or Mixed Use
Properties and (ii) secured or unsecured consumer loans.
As of February 28, 1997, Equity One and its subsidiaries provided
servicing for approximately 17,860 mortgage loans having unpaid principal
balances of approximately $820,633,000 in the aggregate.
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 subsidiaries, from offices throughout the nation.
Loan Servicing
Equity One services substantially all of the mortgage loans originated
or acquired by the Sellers. Equity One has established standard policies for the
servicing and collection of mortgage loans. Servicing includes, but is not
limited to, collecting and remitting mortgage loan payments, accounting for
principal and interest, preparation of tax related information in connection
with the mortgage loans, supervision of delinquent mortgage loans, making
inspections as required of the mortgaged properties, loss mitigation efforts,
foreclosure proceedings and, if applicable, the disposition of mortgaged
properties, and generally administering the mortgage loans, for which it
receives servicing fees.
Collection Procedures
When a mortgagor fails to make a payment on a mortgage loan, the
Servicer attempts to cause the deficiency to be cured by corresponding with the
mortgagor. Pursuant to its servicing procedures, the Servicer generally mails to
the mortgagor a notice of intent to foreclose after the mortgage loan becomes 45
days past due (two payments due but not received) and, within 75 days
thereafter, if the mortgage loan remains delinquent, institutes appropriate
legal action to foreclose on the mortgaged property. Foreclosure proceedings may
be terminated if the delinquency is cured. Mortgage loans to borrowers in
bankruptcy proceedings may be restructured in accordance with law and with a
view to maximizing recovery of such mortgage 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
S-21
<PAGE>
the time frame typical for the state in which the mortgaged property is located.
During the foreclosure proceeding, the Servicer determines the amount of the
foreclosure bid and whether to liquidate the mortgage loan.
After foreclosure, the Servicer may liquidate the mortgaged property
and charge-off the mortgage loan balance which was not recovered as a component
of Liquidation Proceeds. If foreclosed, the mortgaged property is sold at a
public or private sale and may be purchased by the Servicer.
Servicing and charge-off policies and collection practices may change
over time in accordance with, among other things, the business judgment of the
Servicer, 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
mortgage loans owned and serviced by Equity One and its subsidiaries at or for
the years specified therein. A mortgage 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 mortgage loans 60 days or more past
due on a contractual basis and includes mortgage loans where the mortgage loan
is in foreclosure or the borrower has filed for bankruptcy, but excludes
mortgage loans which are real estate owned. 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 first paragraph below the table will be
indicative of such experience on the Loans.
S-22
<PAGE>
<TABLE>
<CAPTION>
Loss and Delinquency Table(1)
(Dollars in Thousands)
At or for the At or for the
Three Months Three Months
Ended Ended
February 29, February 28,
At or for the Year Ended November 30, 1996 1997
---------------------------------------------- ------------- -------------
1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Portfolio Unpaid
Principal Balance(2) $309,139 $500,392 $662,644 $788,478 $681,381 $820,633
Average Portfolio
Unpaid Principal
Balance(3) $211,156 $423,042 $587,136 $726,541 $674,363 $811,850
60 + Days
Delinquent(4) 1.02% 0.90% 1.48% 2.52% 1.74% 2.88%
Real Estate Owned(5) $ 650 $ 35 $241 $ 2,403 $ 1,349 $ 2,938
Total Credit Losses(6) 0.22% 0.29% 0.24% 0.27% 0.35%(7) 0.22%(7)
</TABLE>
(1) This table includes only mortgage loans owned and serviced by Equity
One and its subsidiaries and real estate owned by Equity One and its
subsidiaries.
(2) Portfolio Unpaid Principal Balance is the net amount of principal to be
paid on each mortgage loan, excluding unearned finance charges and
other charges, and excludes the principal balance of each mortgage loan
as to which the related mortgaged property had been acquired through
foreclosure or deed in lieu of foreclosure by such date.
(3) Average Portfolio Unpaid Principal Balances are calculated by summing
monthly Portfolio Unpaid Principal Balances and dividing by the number
of months summed (i.e., twelve (12) in the case of the annual figures
and three (3) in the case of the quarterly figures).
(4) Delinquency percentages are calculated as the dollar amount of mortgage
loan principal delinquent as a percent of the Portfolio Unpaid
Principal Balance. Delinquency percentages do not include the principal
balance of mortgage loans as to which the related mortgaged property
had been acquired through foreclosure or deed in lieu of foreclosure by
such date. Delinquency percentages are only available for mortgage
loans that are delinquent for a period of 60 days or more.
(5) Real estate owned represents the aggregate estimated fair value of the
properties acquired through foreclosure or deed in lieu of foreclosure.
November 30, 1993, balance also includes properties securing mortgage
loans which had been in substance, but not legally, foreclosed by such
date.
(6) Total Credit Losses includes (a) charge-offs of principal, net of
subsequent recoveries, relating to mortgage loans written off as
uncollectible, (b) losses incurred in connection with the acquisition
of properties securing mortgage loans which, in the opinion of
management, liquidation proceeds would not exceed estimated expenses of
liquidation plus the unpaid principal balance, (c) expenses associated
with maintaining, repairing, and selling foreclosed properties and real
estate owned, and (d) losses (gains) on the disposition of real estate
owned.
(7) Annualized.
S-23
<PAGE>
Historically, a variety of factors, including the appreciation of real
estate values, have limited the loss and delinquency experience on mortgage
loans. There can be no assurance that factors beyond the Servicer'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.
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"). The "Servicing Fee Rate" for each Loan will equal
.50% 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 Agreement.
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 initial Prepayment Period,
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 Class A 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
S-24
<PAGE>
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 Class A
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.
The Mortgage Pass-Through Certificates, Series 1997-1 will consist of
the Class A-1, Class A-2, Class A- 3, Class A-4 and Class A-5 Certificates
(collectively, the "Class A Certificates"), and the Class R Certificates
(together with the Class A Certificates, the "Certificates"). Only the Class A
Certificates are offered hereby. The classes of Class A Certificates will have
the respective initial Class Certificate Balances and Pass-Through Rates set
forth or described on the cover hereof except that the Pass-Through Rate for the
Class A-5 Certificates will be subject to an increase as described under
"--Interest." The Residual Certificates, which are not being offered hereby, may
be sold at any time on or after the Closing Date in accordance with the
Agreement.
The "Class Certificate Balance" of any class of Certificates as of any
Distribution Date is the initial Class Certificate Balance thereof reduced by
all amounts previously distributed to holders of Certificates of such class as
payments of principal.
The Class A Certificates will have an initial aggregate principal
balance of approximately $102,841,606 and will initially evidence in the
aggregate a beneficial ownership interest of approximately 100% in the principal
of the Trust Fund. The Class A Certificates will be initially issued in
book-entry form.
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 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. 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.
S-25
<PAGE>
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. Permitted Investments will be specified in
the Agreement and will be limited to the types of investments described in the
Prospectus under "Credit Enhancement-- Reserve Accounts." On or prior to the
business day immediately preceding each Distribution Date, the Servicer will
withdraw from the Certificate Account the amount of Distributable Funds, and
will deposit such Distributable Funds in an account established and maintained
with the Trustee on behalf of the Certificateholders (the "Distribution
Account").
Distributions
Except with respect to certain Distribution Dates following the
depletion of the Spread Account as described below, on each Distribution Date,
the Trustee shall distribute the following amounts from Distributable Funds, to
the extent available, in the priority indicated:
(i) first, the Insurer's Monthly Premium;
(ii) second, to the Trustee, any amounts then due and owing
representing fees of the Trustee;
(iii) third, to the Servicer, an amount equal to the sum of
(i) the Servicing Fee and (ii) any other amounts expended by the Servicer and
reimbursable thereto under the Agreement but not previously reimbursed;
(iv) fourth, to each class of Class A Certificates, the
related Interest Distribution Amount pro rata based on each such class' Interest
Distribution Amount;
(v) fifth, to the Class A Certificates as follows: to the
Class A-1, Class A-2, Class A-3, Class A-4, and Class A-5 Certificates, in that
order, until the Class Certificate Balance of each such class is reduced to
zero, the Certificate Formula Principal Amount;
(vi) sixth, for deposit into the Spread Account, the Spread
Account Deposit Amount; and
(vii) seventh, to the Class R Certificateholders, the sum of
(i) the Spread Account Excess, if any, and (ii) any remaining Available Funds.
Notwithstanding the foregoing, if on any Distribution Date following
the depletion of the Spread Account, the Insurer fails to pay an Insured Amount
when due, the Certificate Formula Principal Amount will be distributed to each
class of Class A Certificates on a pro rata basis in proportion to the
respective Class Certificate Balances for each such class.
Distributions on the Certificates will be made by the Trustee on the
25th day of each month, or if such day is not a business day, on the first
business day thereafter, commencing in August of 1997 (each, a "Distribution
Date"), to the persons in whose names such Certificates are registered at the
close of business on the business day immediately preceding such Distribution
Date (the "Record Date").
S-26
<PAGE>
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 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.
On any Distribution Date, the amount available for distribution
generally will equal the sum of (i) Available Funds, (ii) any amount (the
"Spread Account Draw") available from the Spread Account and (iii) any Insured
Amounts (collectively, "Distributable Funds").
"Available Funds" with respect to any Distribution Date will be equal
to the sum of (i) all scheduled installments of interest and principal due on
the Due Date in the calendar month preceding 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 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 calendar 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.
Priority of Distributions Among Certificates
As more fully described under "Description of the
Certificates--Interest" and "--Principal," distributions will be made on each
Distribution Date in the following order of priority: (i) to interest on the
Class A Certificates and (ii) to principal on the Class A Certificates, in the
order and subject to the priorities set forth herein under "-- Principal." As
described herein, after payment of such amounts to the Class A Certificate
holders, certain amounts may be distributed on the Class R Certificates. See
"Description of the Certificates--Principal--Residual Certificates."
Interest
The Class A Certificates will accrue interest at the respective
Pass-Through Rates set forth or described on the cover hereof, except that with
respect to any Distibution Date after the date on which the Servicer has the
option to purchase, in whole, the Loans and the REO Property if any, in the
Trust Fund at such time (as described under "--Optional Termination"), the
Pass-Through Rate for the Class A-5 Certificates shall be 8.05% per annum.
S-27
<PAGE>
On each Distribution Date, to the extent of funds available therefor,
the Class A Certificates will be entitled to receive interest in an amount equal
to the Interest Distribution Amount with respect to the related Interest Accrual
Period. The "Interest Distribution Amount" for the Class A Certificates will be
equal to the sum of (i) interest at the applicable Pass-Through Rate on the
related Class Certificate Balance less the amount of Net Interest Shortfalls for
the related Distribution Date, as described below, 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").
With respect to each Distribution Date, the "Interest Accrual Period"
will be the calendar month preceding the month of such Distribution Date, except
with respect to the first Distribution Date after the Cut-off Date, in which
case the Interest Accrual Period will be the two calendar months preceding such
Distribution Date.
The interest entitlement described above for the Class A 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
Relief Act Reduction 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 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, net of the Servicing Fee 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.
Subject to the terms of the Policy, any interest losses allocable to
the Class A Certificates (other than Net Interest Shortfalls) will be covered
under the Policy. Notwithstanding the foregoing, if payments are not made as
required under the Policy, any such interest losses may be allocated to the
Class A Certificates.
Accrued interest to be distributed on any Distribution Date will be
calculated, in the case of the Class A Certificates, on the basis of the related
Class Certificate Balance 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, Distributable
Funds are not sufficient to make a full distribution of the interest entitlement
on the Class A Certificates, interest will be distributed on each class of Class
A Certificates 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 Class A 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
Class A Certificates. On each Distribution Date, the Certificate
Formula Principal Amount will be distributed as a payment of principal on the
Class A Certificates, to the extent of the amount of funds available for the
distribution of principal on such respective classes, as follows: to the Class
A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates and Class A-5 Certificates in that order, until the Class
Certificate Balance of each such class is reduced to zero.
S-28
<PAGE>
The "Certificate Formula Principal Amount" for any Distribution Date
will equal the sum 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 during the month preceding the month of such
Distribution Date with respect to such Loan, (f) all partial and full principal
prepayments by borrowers received during the related Prepayment Period and (g)
the principal portion of any Loan Losses incurred during the calendar month
preceding the month of such Distribution Date. A "Liquidated Loan" is a
defaulted Loan as to which the Servicer has determined that all recoverable
liquidation and insurance proceeds have been received.
"Loan Losses" means the aggregate amount, if any, by which (a) the
outstanding principal balance of each Loan that became a Liquidated Loan during
the calendar month preceding the month of the related Distribution Date (such
principal balance determined immediately before such Loan became a Liquidated
Loan) exceeds (b) the Liquidation Proceeds allocable to principal received
during the calendar month preceding the month of the related Distribution Date
in connection with the liquidation of such Loan which have not theretofore been
used to reduce the Stated Principal Balance of such Loan.
"Stated Principal Balance" means as to any Loan and Distribution Date,
the unpaid principal balance of such Loan as of such Distribution 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 allocable to principal received and to the payment of
principal due on such Distribution 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 Distribution Date in the month preceding the month
of such Distribution Date.
Residual Certificates. The Class R Certificates will remain outstanding
for so long as the Trust Fund shall exist, whether or not they are receiving
current distributions. On each Distribution Date, the holders of the Class R
Certificates will be entitled to receive any Distributable Funds remaining after
the payment of the distributions described in "--Distributions." It is not
anticipated that there will be any significant amounts remaining for any such
distribution.
Example of Distributions
The first collection period will begin on the Cut-off Date and will
continue through July 31, 1997. The first Distribution Date will occur on August
25, 1997. Each Interest Accrual Period will consist of the calendar month
immediately preceding the related Distribution Date. The following sets forth an
example of a hypothetical monthly distribution:
<TABLE>
<S> <C>
August 1--August 31....................... Interest Accrual Period. The Servicer and any sub-servicers
remit for deposit into the Certificate Account all amounts
received on account of the Loans (other than amounts of
interest and principal due prior to the Cut-off Date but
received on or after the Cut-off Date).
August 16--September 15................... Prepayment Period. The Servicer and any sub-servicers remit
for deposit into the Certificate Account all amounts received
on account of prepayments of principal on the Loans.
</TABLE>
S-29
<PAGE>
<TABLE>
<S> <C>
September 24.............................. Record Date. Distributions on September 25, 1997 will be
made to Certificateholders of record at the close of business
on September 24, 1997.
September 19.............................. Determination Date. The Trustee determines, based on
information provided by the Servicer, the amount of principal
and interest that will be distributed to Certificateholders on
September 25, 1997.
Not later than September 22............... The Servicer transfers funds, including any Advances, in the
Certificate Account to the Distribution Account.
Not later than 12:00 p.m. on September 23. The Trustee will notify the Servicer and the Insurer of the
Insured Amount, if any, required to be distributed to the Class A
Certificateholders on September 25, 1997.
September 25.............................. Distribution Date. The Trustee or its designee will transfer
funds from the Distribution Account into the Spread Account,
as required, and to Certificateholders the amounts required to
be distributed pursuant to the Agreement and will distribute
the Spread Account Excess to the Class R Certificateholders.
</TABLE>
Certificate Guaranty Insurance Policy
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. A form of
the Policy may be obtained, upon request, from the Depositor.
Simultaneously with the issuance of the Class A Certificates, the
Insurer will deliver the Policy to the Trustee for the benefit of the holders of
the Class A Certificates. Under the Policy, the Insurer will irrevocably and
unconditionally guarantee payment on each Distribution Date to the Trustee for
the benefit of the holders of the Class A Certificates the full and complete
payment of Insured Amounts with respect to the Class A Certificates, calculated
in accordance with the original terms of the Class A Certificates when issued
and without regard to any amendment or modification of the Class A Certificates
or the Agreement except amendments or modifications to which the Insurer has
given its prior written consent. An "Insured Amount" shall equal with respect to
the Class A Certificates as of any Distribution Date (i) any shortfall in
amounts available in the Distribution Account to pay the Interest Distribution
Amounts for the related Interest Accrual Period, (ii) the Guaranteed Principal
Distribution Amount and (iii) without duplication of the amount specified in
clause (ii), the aggregate Class Certificate Balance of all classes of Class A
Certificates to the extent unpaid on the Last Scheduled Distribution Date or
earlier termination of the Trust Fund pursuant to the terms of the Agreement.
The "Guaranteed Principal Distribution Amount" for any Distribution Date shall
equal the amount, if any, by which the aggregate Class Certificate Balance of
the Class A Certificates exceeds the Pool Principal Balance as of such
Distribution Date.
An Insured Amount with respect to any Distribution Date will also
include any Preference Amount which occurs prior to the related Determination
Date. A "Preference Amount" means any amount previously distributed to a
Certificateholder that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the Bankruptcy Code in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Payment of claims under the Policy will be made by the Insurer
following Receipt by the Insurer of the appropriate notice for payment on the
later to occur of (a) 12:00 noon, New York City time, on the Business Day
following Receipt of such notice for payment, and (b) 12:00 noon, New York City
time, on the relevant Distribution Date.
S-30
<PAGE>
The terms "Receipt" and "Received," with respect to the Policy, mean
actual delivery to the Insurer prior to 12:00 p.m., New York City time, on a
Business Day; delivery either on a day that is not a Business Day or after 12:00
p.m., New York City time, shall be deemed to be Received on the next succeeding
Business Day. If any notice or certificate given under the Policy by the Trustee
is not in proper form or is not properly completed, executed or delivered, it
shall be deemed not to have been Received, and the Insurer shall promptly so
advise the Trustee and the Trustee may submit an amended notice.
Under the Policy, "Business Day" means any day other than (i) a
Saturday or Sunday or (ii) a day on which banking institutions in the City of
New York, New York, the State of New York or in the city in which the corporate
trust office of the Trustee or the Insurer is located, are authorized or
obligated by law or executive order to be closed. The Insurer's obligations
under the Policy to pay Insured Amounts shall be discharged to the extent funds
are transferred to the Trustee as provided in the Policy, whether or not such
funds are properly applied by the Trustee.
The Insurer shall be subrogated to the rights of the holders of the
Class A Certificates to receive payments of principal and interest, as
applicable, with respect to distributions on the Class A Certificates to the
extent of any payment by the Insurer under the Policy. To the extent the Insurer
pays Insured Amounts, either directly or indirectly (as by paying through the
Trustee), to the holders of the Class A Certificates, the Insurer will be
subrogated to the rights of the holders of the Class A Certificates, as
applicable, with respect to such Insured Amount and shall be deemed to the
extent of the payments so made to be a registered holder of Class A Certificates
for purposes of payment.
Claims under the Policy constitute direct unsecured and unsubordinated
obligations of the Insurer, and will rank equally with any other unsecured and
unsubordinated obligations of the Insurer except for certain obligations in
respect to tax and other payments to which preference is or may become afforded
by statute. The terms of the Policy cannot be modified, altered or affected by
any other agreement or instrument, or by the merger, consolidation or
dissolution of the Depositor. The Policy by its terms may not be canceled or
revoked prior to distribution in full of all Insured Amounts payable under the
Policy. The Policy is governed by the laws of the State of New York.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
To the fullest extent permitted by applicable law, the Insurer agrees
under the Policy not to assert, and waives, for the benefit of each holder of
Class A Certificates, all its rights whether acquired by subrogation, assignment
or otherwise, to the extent that such rights and defenses may be available to
the Insurer to avoid payment of its obligations under the Policy in accordance
with the express provisions of the Policy.
Pursuant to the terms of the Agreement, unless an Insurer Default
exists, the Insurer will be entitled to exercise the rights of the holders of
the Class A Certificates, without the consent of such Certificateholders, and
the holders of the Class A Certificates may exercise such rights only with the
prior written consent of the Insurer. Either a continuance of any failure by the
Insurer to make a required payment under the Policy or the existence of a
proceeding in bankruptcy by or against the Insurer shall constitute an "Insurer
Default." See "--Voting Rights."
Under the Agreement, on each Distribution Date, the Trustee is required
to pay to the Insurer a premium with respect to the Policy (the "Insurer's
Monthly Premium").
S-31
<PAGE>
Spread Account
The Trustee will establish a trust account (the "Spread Account") for
the benefit of the Certificateholders and the Insurer into which it will deposit
on each Distribution Date funds, to the extent available, in an amount specified
in the Agreement (the "Spread Account Deposit Amount"). The amount required to
be on deposit in the Spread Account at any time as specified in the Agreement
(the "Specified Spread Account Requirement") may be reduced or eliminated at the
sole discretion of the Insurer without the consent of any Certificateholder as
specified in the Agreement, provided that such reduction or elimination shall
not result in the reduction of the rating of the Class A Certificates without
taking into account the Policy.
On each Distribution Date, amounts, if any, on deposit in the Spread
Account will be available to fund any shortfall between the funds available for
distributions to Class A Certificateholders and the amount of principal and
interest due on the Class A Certificates. On each Distribution Date any amounts
in the Spread Account in excess of the Specified Spread Account Requirement (any
such amount, a "Spread Account Excess") will be distributed to the holders of
the Class R Certificates. The holders of the Class R Certificates will not be
required to refund any amounts previously distributed to them properly,
regardless of whether there are sufficient funds on a subsequent Distribution
Date to make full distributions to the Class A Certificateholders of the amounts
required to be distributed to the Class A Certificateholders.
The funding and maintenance of the Spread Account is intended to
enhance the likelihood of timely payment to the Class A Certificateholders of
the amount of principal and interest due on the Class A Certificates and to
afford limited protection against losses in respect of the Loans; however, in
certain circumstances, the Spread Account could be depleted and shortfalls could
result. Notwithstanding the depletion of the Spread Account, the Insurer will be
obligated to pay Insured Amounts on each Distribution Date as may be necessary
to fund the full amount of principal and interest due on the Class A
Certificates on any Distribution Date.
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
4 Loans with the following characteristics:
<TABLE>
<CAPTION>
Remaining
Amortized
Original Term to Remaining Term to Term
Principal Balance Mortgage Rate Maturity (in months) Maturity (in months) (in months)
- ----------------- -------------------- ------------------- ------------------- ----------
<C> <C> <C> <C> <C>
$18,491,524.09 9.396% 173 167 167
$16,525,579.14 9.173 240 234 234
$ 682,855.46 9.428 360 353 353
$67,141,647.56 9.725 173 167 349
</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 or
amortized remaining term, as the case may be, (viii) the initial Class
Certificate
S-32
<PAGE>
Balance of each class of Class A Certificates is as set forth on the cover page
hereof, (ix) interest accrues on the Class A Certificates at the applicable
Pass-Through Rate set forth or described on the cover hereof and as described
under "Description of the Certificates--Interest," (x) distributions in respect
of the Class A Certificates are received in cash on the 25th day of each month
commencing in the calendar month following the Closing Date, (xi) the Closing
Date of the sale of the Class A 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 and (xiii) the Servicer exercises the option to
repurchase the Loans described herein under "--Optional Purchase of Defaulted
Loans" and "--Optional Termination" at the earliest possible date. 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.
The "Net Mortgage Rate" for each Loan is the interest rate thereon (the
"Mortgage Rate") less the sum of the rates for the Servicing Fee, the trustee
fee and the Insurer's Monthly Premium for such Loan.
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 3.2% 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 1.164% (precisely 64/55%) per annum in
each month thereafter (for example, 4.364% per annum in the second month) until
the 12th month. Beginning in the 12th month and in each month thereafter during
the life of such mortgage loans, 100% SPA assumes a constant prepayment rate of
16% per annum. 0% SPA assumes no prepayments. Correspondingly, 125% SPA assumes
prepayment rates equal to 125% of SPA, and so forth. 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 (less the Servicing Fee 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
On any Distribution Date on which the Pool Principal Balance is less
than 5% of the Cut-off Date Pool Principal Balance (each such date, an "Optional
Termination Date"), the Servicer will have the option to purchase, in whole, the
Loans and the REO Property, if any, remaining in the Trust Fund and, thereby,
effect early retirement of the Certificates. 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 unpaid accrued
interest thereon at the applicable Pass-Through Rate. Distributions on the
Certificates in respect of any such optional termination will be paid to the
Certificates as described in "--Principal" and "--Interest."
The Trustee
The Chase Manhattan Bank will be the Trustee under the Agreement. The
Depositor, the Servicer and the Sellers may maintain other banking relationships
in the ordinary course of business with The Chase Manhattan Bank. Class A
Certificates may be surrendered at the Corporate Trust Office of the Trustee
located at 450 West 33rd
S-33
<PAGE>
Street, New York, New York 10001, Attention: Ms. Norma Katone, or at such other
addresses as the Trustee may designate from time to time.
Voting Rights
With respect to any date of determination, the percentage of all the
"Voting Rights" allocated to each class of Certificates shall be the fraction,
expressed as a percentage, the numerator of which is the Class Certificate
Balance of such class then outstanding and the denominator of which is the
aggregate Stated Principal Balance of the Loans then outstanding. The Voting
Rights allocated to each class of Certificates shall be allocated among all
holders of each such class in proportion to the outstanding principal balance of
such Certificates. Unless an Insurer Default exists, the Insurer will be
entitled to exercise the rights of the holders of the Class A Certificates.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
General
The effective yield to the holders of the Class A 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 25th
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), may
adversely affect the yield on the Class A Certificates. If the Insurer fails to
make payments required under the Policy, shortfalls resulting from delinquencies
not so advanced may be borne by the Class A Certificates on a pro rata basis. In
addition, Net Interest Shortfalls are not covered by the Policy and, therefore,
will adversely affect the yields on the Class A Certificates.
Prepayment Considerations and Risks
The rate of principal payments on the Class A Certificates, the
aggregate amount of distributions on the Class A Certificates and the yield to
maturity of the Class A Certificates will be related to the rate and timing of
payments of 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, most 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 Class A Certificates of
principal amounts which would otherwise be distributed over the remaining terms
of the Loans. Since the 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 Class A Certificates may vary from the anticipated yield
will depend upon the degree to which such Class A 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 a Class A 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 a Class
S-34
<PAGE>
A 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.
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.
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 Class A Certificates may not be offset by a subsequent like
decrease (or increase) in the rate of principal payments.
Weighted Average Lives of the Class A Certificates
The weighted average life of a Class A 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 "Prepayment and Yield Considerations" in the Prospectus.
In general, the weighted average lives of the Class A Certificates will
be shortened if the level of prepayments of principal of the Loans increases.
However, the weighted average lives of the Class A Certificates will depend upon
a variety of other factors, including, without limitation, the timing of changes
in the rate of principal payments, changes in the interest rate environment and
delays in realizing on REO Properties.
The interaction of the foregoing factors may have different effects on
various classes of Class A 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 Class A Certificates.
Further, to the extent the prices of the Class A Certificates represent
discounts or premiums to their respective original Class Certificate Balances,
variability in the weighted average lives of such classes of Class A
Certificates will result in variability in the related yields to maturity. For
an example of how the weighted average lives of the classes of Class A
Certificates may be affected at various constant percentages of SPA, see
"--Decrement Tables" below.
Decrement Tables
The following tables indicate the percentages of the initial Class
Certificate Balances of the classes of Class A 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) 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
S-35
<PAGE>
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-36
<PAGE>
CLASS A-1
Percent of Initial Class Certificate
Balances Outstanding*
Various Constant Percentages of SPA
<TABLE>
<CAPTION>
Date 0% 50% 75% 100% 125% 150%
- -------------------------------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Closing Date........... 100% 100% 100% 100% 100% 100%
07/25/98............... 95 69 56 43 30 18
07/25/99............... 90 41 18 0 0 0
07/25/00............... 84 14 0 0 0 0
07/25/01............... 78 0 0 0 0 0
07/25/02............... 71 0 0 0 0 0
07/25/03............... 64 0 0 0 0 0
07/25/04............... 56 0 0 0 0 0
07/25/05............... 46 0 0 0 0 0
07/25/06............... 37 0 0 0 0 0
07/25/07............... 26 0 0 0 0 0
07/25/08............... 14 0 0 0 0 0
07/25/09............... 1 0 0 0 0 0
07/25/10............... 0 0 0 0 0 0
07/25/11............... 0 0 0 0 0 0
07/25/12............... 0 0 0 0 0 0
07/25/13............... 0 0 0 0 0 0
07/25/14............... 0 0 0 0 0 0
---- ---- ---- ---- ---- ----
Weighted Average
Life (in years)**............... 7.21 1.81 1.29 1.00 0.82 0.70
</TABLE>
- --------
* Rounded to the nearest whole percentage.
** Determined as specified under "--Weighted Average Lives of the Class A
Certificates."
S-37
<PAGE>
CLASS A-2
Percent of Initial Class Certificate
Balances Outstanding*
Various Constant Percentages of SPA
<TABLE>
<CAPTION>
Date 0% 50% 75% 100% 125% 150%
- -------------------------------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Closing Date........... 100% 100% 100% 100% 100% 100%
07/25/98............... 100 100 100 100 100 100
07/25/99............... 100 100 100 94 68 42
07/25/00............... 100 100 79 44 11 0
07/25/01............... 100 88 41 1 0 0
07/25/02............... 100 59 8 0 0 0
07/25/03............... 100 33 0 0 0 0
07/25/04............... 100 9 0 0 0 0
07/25/05............... 100 0 0 0 0 0
07/25/06............... 100 0 0 0 0 0
07/25/07............... 100 0 0 0 0 0
07/25/08............... 100 0 0 0 0 0
07/25/09............... 100 0 0 0 0 0
07/25/10............... 82 0 0 0 0 0
07/25/11............... 0 0 0 0 0 0
07/25/12............... 0 0 0 0 0 0
07/25/13............... 0 0 0 0 0 0
07/25/14............... 0 0 0 0 0 0
---- ---- ---- ---- ---- ----
Weighted Average
Life (in years)**............... 13.61 5.49 3.91 3.00 2.42 2.02
</TABLE>
- --------
* Rounded to the nearest whole percentage.
** Determined as specified under "--Weighted Average Lives of the Class A
Certificates."
S-38
<PAGE>
CLASS A-3
Percent of Initial Class Certificate
Balances Outstanding*
Various Constant Percentages of SPA
<TABLE>
<CAPTION>
Date 0% 50% 75% 100% 125% 150%
- -------------------------------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Closing Date........... 100% 100% 100% 100% 100% 100%
07/25/98............... 100 100 100 100 100 100
07/25/99............... 100 100 100 100 100 100
07/25/00............... 100 100 100 100 100 69
07/25/01............... 100 100 100 100 44 0
07/25/02............... 100 100 100 43 0 0
07/25/03............... 100 100 65 0 0 0
07/25/04............... 100 100 23 0 0 0
07/25/05............... 100 77 0 0 0 0
07/25/06............... 100 43 0 0 0 0
07/25/07............... 100 11 0 0 0 0
07/25/08............... 100 0 0 0 0 0
07/25/09............... 100 0 0 0 0 0
07/25/10............... 100 0 0 0 0 0
07/25/11............... 0 0 0 0 0 0
07/25/12............... 0 0 0 0 0 0
07/25/13............... 0 0 0 0 0 0
07/25/14............... 0 0 0 0 0 0
----- ---- ---- ---- ---- ----
Weighted Average
Life (in years)**............... 13.90 8.91 6.48 5.00 4.03 3.35
</TABLE>
- --------
* Rounded to the nearest whole percentage.
** Determined as specified under "--Weighted Average Lives of the Class A
Certificates."
S-39
<PAGE>
CLASS A-4
Percent of Initial Class Certificate
Balances Outstanding*
Various Constant Percentages of SPA
<TABLE>
<CAPTION>
Date 0% 50% 75% 100% 125% 150%
- -------------------------------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Closing Date........... 100% 100% 100% 100% 100% 100%
07/25/98............... 100 100 100 100 100 100
07/25/99............... 100 100 100 100 100 100
07/25/00............... 100 100 100 100 100 100
07/25/01............... 100 100 100 100 100 92
07/25/02............... 100 100 100 100 81 23
07/25/03............... 100 100 100 93 25 0
07/25/04............... 100 100 100 43 0 0
07/25/05............... 100 100 83 2 0 0
07/25/06............... 100 100 44 0 0 0
07/25/07............... 100 100 9 0 0 0
07/25/08............... 100 77 0 0 0 0
07/25/09............... 100 45 0 0 0 0
07/25/10............... 100 14 0 0 0 0
07/25/11............... 0 0 0 0 0 0
07/25/12............... 0 0 0 0 0 0
07/25/13............... 0 0 0 0 0 0
07/25/14............... 0 0 0 0 0 0
----- ---- ---- ---- ---- ----
Weighted Average
Life (in years)**............... 13.90 11.97 8.97 7.00 5.66 4.71
</TABLE>
- --------
* Rounded to the nearest whole percentage.
** Determined as specified under "--Weighted Average Lives of the Class A
Certificates."
S-40
<PAGE>
CLASS A-5
Percent of Initial Class Certificate
Balances Outstanding*
Various Constant Percentages of SPA
<TABLE>
<CAPTION>
Date 0% 50% 75% 100% 125% 150%
- -------------------------------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Closing Date........... 100% 100% 100% 100% 100% 100%
07/25/98............... 100 100 100 100 100 100
07/25/99............... 100 100 100 100 100 100
07/25/00............... 100 100 100 100 100 100
07/25/01............... 100 100 100 100 100 100
07/25/02............... 100 100 100 100 100 100
07/25/03............... 100 100 100 100 100 84
07/25/04............... 100 100 100 100 89 62
07/25/05............... 100 100 100 100 69 46
07/25/06............... 100 100 100 82 53 33
07/25/07............... 100 100 100 66 41 24
07/25/08............... 100 100 88 53 31 0
07/25/09............... 100 100 74 42 0 0
07/25/10............... 100 100 61 33 0 0
07/25/11............... 39 0 0 0 0 0
07/25/12............... 34 0 0 0 0 0
07/25/13............... 28 0 0 0 0 0
07/25/14............... 0 0 0 0 0 0
----- ---- ---- ---- ---- ----
Weighted Average
Life (in years)**............... 14.79 13.89 12.99 11.44 9.53 8.00
</TABLE>
- --------
* Rounded to the nearest whole percentage.
** Determined as specified under "--Weighted Average Lives of the Class A
Certificates."
S-41
<PAGE>
Last Scheduled Distribution Date
The "Last Scheduled Distribution Date" for each class of Class A
Certificates is the Distribution Date in May of 2028, which is the
Distribution Date in the 12th month following the latest scheduled maturity date
for any of the Loans. Since the rate of distributions in reduction of the Class
Certificate Balance of each class of Class A Certificates will depend on the
rate of payment (including prepayments) of the Loans, the Class Certificate
Balance 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 Class A Certificates" herein and "Prepayment
and Yield Considerations" in the Prospectus.
THE INSURER
The following information has been supplied by AMBAC Indemnity
Corporation (the "Insurer") for inclusion in this Prospectus Supplement.
The Insurer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico, and Guam. The Insurer primarily insures newly
issued municipal and structured finance obligations. The Insurer is a wholly
owned subsidiary of AMBAC Inc., a 100% publicly held company. Moody's, Standard
& Poor's and Fitch Investors Service, L.P. have each assigned a triple-A claims
paying ability rating to the Insurer.
The consolidated financial statements of the Insurer and its
subsidiaries as of December 31, 1996 and December 31, 1995, and for the three
years ended December 31, 1996, prepared in accordance with generally accepted
accounting principles, included in the Current Report on Form 8-K of AMBAC Inc.
(which was filed with the Commission on March 12, 1997; Commission File Number
1-10777) and the consolidated financial statements for the Insurer and its
subsidiaries as of March 31, 1997 and for the periods ending March 31, 1997 and
March 31, 1996 included in the Quarterly Report on Form 10-Q of AMBAC Inc. for
the period ended March 31, 1997 (which was filed with the Commission on May 15,
1997), are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be part hereof. Any statement contained in a document
incorporated herein by reference shall be modified or superseded for the
purposes of this Prospectus Supplement to the extent that a statement contained
herein by reference herein also modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus Supplement.
All financial statements of the Insurer and its subsidiaries included
in documents filed by AMBAC Inc. with the Commission pursuant to section 13(a),
13(c), 14 or 15(d) of the Exchange Act, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the Class
A Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and be part hereof from the respective dates of filing
such documents.
The following table sets forth the Insurer's capitalization as of
December 31, 1994, December 31, 1995, and December 31, 1996, and March 31, 1997,
respectively, in conformity with generally accepted accounting principles.
S-42
<PAGE>
AMBAC Indemnity Corporation
Capitalization Table
(Dollars in Millions)
<TABLE>
<CAPTION>
December 31, December 31, December 31, March 31,
1994 1995 1996 1997
------------ ------------ ------------ ---------
(Audited) (Audited) (Audited) (Unaudited)
<S> <C> <C> <C> <C>
Unearned premiums..................................... $ 840 $ 906 $ 995 $1,003
Other liabilities..................................... 136 295 259 243
------ ------ ------ ------
Total liabilities..................................... 976 1,201 1,254 1,246
------ ------ ------ ------
Stockholder's equity:
Common stock................................. 82 82 82 82
Additional paid-in capital................... 444 481 515 519
Unrealized gains (losses) on investments; net
of tax....................................... (46) 87 66 30
Retained earnings............................ 782 907 992 1,034
------ ------ ------ ------
Total stockholder's equity............................ 1,262 1,557 1,655 1,665
------ ------ ------ ------
Total liabilities and stockholder's equity............ $2,238 $2,758 $2,909 $2,911
====== ====== ====== ======
</TABLE>
For additional financial information concerning the Insurer, see the
audited financial statements for the Insurer incorporated by reference herein.
Copies of the financial statements of the Insurer incorporated herein by
reference and copies of the Insurer's annual statement for the year ended
December 31, 1996 prepared in accordance with statutory accounting standards are
available, without charge, from the Insurer. The address of the Insurer's
administrative offices and its telephone number are One State Street Plaza, 17th
Floor, New York, New York 10004 and (212) 668-0340.
The Insurer makes no representation regarding the Class A Certificates
or the advisability of investing in the Class A Certificates and makes no
representation regarding, nor has it participated in the preparation of, this
Prospectus Supplement other than the information supplied by the Insurer and
presented under the headings "The Insurer," "Description of the
Certificates--Certificate Guaranty Insurance Policy" and "Experts," and its
financial statements incorporated herein by reference.
USE OF PROCEEDS
The Depositor will use the net proceeds received by it from the sale of
the Class A Certificates to pay 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 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
S-43
<PAGE>
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.
The 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 Original Issue
Discount ("OID") for federal income tax purposes. For purposes of determining
the amount and rate of accrual of OID and market discount, the Trust Fund
intends to assume that there will be prepayments on the Loans at a rate equal to
100% 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 Class A 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 Class A 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. Mixed Use Loans may not qualify under Section
7701(a)(19) of the Code to the extent of the portion of such Mixed Use Loans
allocable to commercial use. 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 Class A Certificates should consult with its counsel with
respect to the potential consequences under the Employee
S-44
<PAGE>
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. 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 Class A 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 Class A 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 Salomon Brothers Inc. (Prohibited Transaction
Exemption 89-89, Exemption Application No. D-6446, 54 Fed. Reg. 42589 (1989)
(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 Class A 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.
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 Class A Certificates. Moreover, each Plan fiduciary should determine
whether under the general fiduciary standards of investment prudence and
diversification, an investment in any of the Class A 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.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement dated as of June 26, 1997, among 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 all of the Class A
Certificates, if any are purchased. Distribution of the Class A Certificates may
be made by the Underwriter from time to time in one or more
S-45
<PAGE>
negotiated transactions, or otherwise, at varying prices to be determined at the
time of sale. The Underwriter may effect such transactions by selling the Class
A Certificates to or through dealers, and such dealers may receive compensation
in the form of underwriting discounts, concessions or commissions from the
Underwriter. In connection with the sale of the Class A Certificates, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting compensation. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Class A Certificates
may be deemed to be underwriters and any commissions received by them and any
profit on the resale of the Class A Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended (the "Securities Act").
If the Underwriter creates a short position in the Class A Certificates
in connection with the offering, i.e., if it sells more Class A Certificates
than are set forth on the cover page of this Prospectus Supplement, the
Underwriter may reduce that short position by purchasing Class A Certificates in
the open market.
In general, purchase of a security to reduce a short position could
cause the price of the security to be higher than it might be in the absence of
such purchases.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above, if engaged in, may have on the prices of the Class A
Certificates. In addition, neither the Depositor nor the Underwriter makes any
representation that the Underwriter will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The Underwriter intends to make a secondary market in the classes of
Class A Certificates, but the Underwriter has no obligation to do so. There can
be no assurance that a secondary market for the Class A Certificates will
develop or, if it does develop, that it will continue or that it will provide
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.
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, Pennsylvania. Brown & Wood
LLP, New York, New York, will pass upon certain legal matters on behalf of the
Underwriter.
EXPERTS
The consolidated financial statements of the Insurer as of December 31,
1996 and 1995 and for each of the years in the three year period ended December
31, 1996 are incorporated by reference herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
RATINGS
It is a condition to the issuance of the Class A Certificates that they
be rated "AAA" by Standard & Poor's Ratings Services ("Standard & Poor's") and
"Aaa" by Moody's Investors Service, Inc. ("Moody's").
S-46
<PAGE>
The ratings of Moody's and Standard & Poor's assigned to mortgage
pass-through certificates address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. The rating process addresses structural and legal aspects associated
with the Class A Certificates, including the nature of the underlying mortgage
loans. The ratings assigned to mortgage pass-through certificates do not
represent any assessment of the likelihood that principal prepayments will be
made by the mortgagors or the degree to which such prepayments will differ from
that originally anticipated. The rating of the Class A Certificates will depend
primarily on an assessment by the Rating Agencies of the Loans and upon the
claims-paying ability of the Insurer. Any change in the ratings of the Insurer
by Standard & Poor's or Moody's may result in a change in the ratings on the
Class A Certificates. The ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield due to non-credit
events.
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 organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the Class A Certificates are subsequently lowered for any
reason, no person or entity is obligated to provide any additional credit
support or credit enhancement with respect to the Class A Certificates.
The Depositor has not requested that any rating agency rate the Class A
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Class A Certificates, or, if it
does, what rating would be assigned by any such other rating agency. A rating on
the Class A Certificates by another rating agency, if assigned at all, may be
lower than the ratings assigned to the Class A Certificates as stated above.
S-47
<PAGE>
INDEX OF DEFINED TERMS
Page
----
Advance...............................................................S-8, S-24
Agreement.............................................................S-4, S-13
Available Funds............................................................S-27
Beneficial Owner...........................................................S-25
Book-Entry Certificates.....................................................S-4
Business Day...............................................................S-31
Cede.......................................................................S-25
Certificate Account........................................................S-26
Certificate Formula Principal Amount.......................................S-28
Certificateholders.............................................S-11, S-13, S-25
Certificates ....................................................-1-, S-4, S-25
Class A Certificates.............................................-1-, S-4, S-25
Class Certificate Balance..................................................S-25
Code.......................................................................S-10
Collateral Value...........................................................S-20
Corporate Trust Office......................................................S-3
Cut-off Date Pool Principal Balance........................................S-14
Definitive Certificate.....................................................S-25
Deleted Loan...............................................................S-19
Depositor...................................................................S-4
Determination Date..........................................................S-5
Distributable Funds...................................................S-6, S-27
Distribution Account.......................................................S-26
Distribution Date ....................................................S-5, S-26
DTC........................................................................S-25
Due Date...................................................................S-14
Equity One............................................................S-4, S-21
Equity One Standards.......................................................S-19
ERISA................................................................S-10, S-44
Fannie Mae.................................................................S-20
Guaranteed Principal Distribution Amount..............................S-8, S-30
Insurance Proceeds.........................................................S-27
Insured Amount........................................................S-8, S-30
Insurer..........................................................-1-, S-7, S-41
Insurer Default............................................................S-31
Insurer's Monthly Premium..................................................S-31
Interest Accrual Period...............................................S-7, S-28
Interest Distribution Amount...............................................S-27
Last Scheduled Distribution Date...........................................S-41
Liquidated Loan............................................................S-29
Liquidation Proceeds.......................................................S-27
Loan Losses................................................................S-29
Loan-to-Value Ratio........................................................S-15
Loans............................................................-1-, S-5, S-13
Mixed Use Loan...................................................-1-, S-5, S-13
Mixed Use Properties.............................................-1-, S-5, S-12
Moody's...............................................................S-2, S-45
Mortgage...................................................................S-19
S-48
<PAGE>
Page
----
Mortgage File..............................................................S-19
Mortgage Note..............................................................S-19
Mortgage Pool..........................................................-1-, S-4
Mortgage Rate..............................................................S-33
Net Interest Shortfall.....................................................S-28
Net Mortgage Rate .........................................................S-33
Net Prepayment Interest Shortfall..........................................S-28
OID..................................................................S-10, S-43
Optional Termination Date.............................................S-9, S-33
Plan.................................................................S-10, S-44
Policy.................................................................-1-, S-7
Pool Principal Balance.....................................................S-29
Prepayment Assumption......................................................S-43
Prepayment Interest Excess.................................................S-24
Prepayment Interest Shortfall..............................................S-28
Prepayment Period .........................................................S-27
Prospectus..................................................................S-3
Rating Agencies............................................................S-10
Receipt....................................................................S-30
Received...................................................................S-30
Record Date................................................................S-26
Refinance Loan.............................................................S-20
Regular Certificates........................................................S-4
Relief Act Reduction.......................................................S-28
REMIC..................................................................S-2, S-9
REO Property...............................................................S-24
Replacement Loan...........................................................S-19
Residential Loan.................................................-1-, S-5, S-13
Residential Properties...........................................-1-, S-5, S-12
Residual Certificates..................................................-1-, S-4
Scheduled Payments.........................................................S-14
Seller.................................................................S-2, S-5
Sellers................................................................S-2, S-5
Servicer....................................................................S-4
Servicing Fee..............................................................S-24
Servicing Fee Rate.........................................................S-24
SPA........................................................................S-33
Specified Spread Account Requirement..................................S-7, S-32
Spread Account........................................................S-7, S-32
Spread Account Deposit Amount.........................................S-7, S-32
Spread Account Draw...................................................S-6, S-27
Spread Account Excess......................................................S-32
Standard & Poor's ....................................................S-2, S-45
Stated Principal Balance...................................................S-29
Structuring Assumptions....................................................S-32
Substitution Adjustment Amount.............................................S-19
Tax Counsel................................................................S-42
Trustee.....................................................................S-5
Underwriter.................................................................-1-
Underwriter Exemption......................................................S-44
S-49
<PAGE>
Page
----
Underwriting Loan-to-Value Ratio...........................................S-20
Unpaid Interest Amounts...............................................S-6, S-28
Voting Rights..............................................................S-34
S-50
<PAGE>
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.
June 20, 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 Seller, 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 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
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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 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").
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
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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") 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
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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 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."
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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 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
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<PAGE>
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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 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
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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.
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
Administra- tion (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."
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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
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 average lives of such
Securities. See "Risk Factors--Prepayment and
Yield Considerations" and "Yield and
Prepayment Considerations." The foregoing is
subject to the provision
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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.
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
the net operating losses.
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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 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 the 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
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<PAGE>
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.
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 Mortgagees."
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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."
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 Accounts 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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<PAGE>
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.
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."
16
<PAGE>
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.
17
<PAGE>
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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<PAGE>
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 non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
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."
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<PAGE>
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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<PAGE>
THE TRUST FUND
General
The Securities of each Series will represent interests in the assets of
the related Trust Fund, and the Notes of each Series will be secured by the
pledge of the assets of the related Trust Fund. The Trust Fund for each Series
will be held by the Trustee for the benefit of the related Securityholders. Each
Trust Fund will consist of 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.
21
<PAGE>
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
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.
22
<PAGE>
(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 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
23
<PAGE>
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.
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."
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<PAGE>
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. 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."
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, 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
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<PAGE>
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.
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.
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<PAGE>
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.
3. Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform
to the following criteria:
<TABLE>
<CAPTION>
Maximum Combined Maximum Debt-
Loan-to-Value Ratio to-Income Ratio
------------------- ---------------
<S> <C> <C>
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
</TABLE>
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<PAGE>
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.
3. Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform
to the following criteria:
<TABLE>
<CAPTION>
Maximum Combined Maximum Debt-
Loan-to-Value Ratio to-Income Ratio
------------------- ---------------
<S> <C> <C>
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
</TABLE>
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.
28
<PAGE>
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
<TABLE>
<CAPTION>
Maximum Combined Maximum Debt-
Loan-to-Value Ratio to-Income Ratio
------------------- ---------------
Property Type
-------------
<S> <C> <C>
Owner occupied single family
dwellings, townhouses 80% 50%
Owner occupied two- to four-
family dwellings, townhouses,
condominiums 75% 50%
Owner occupied condominiums 70% 50%
True Second Homes 75% 50%
Non-owner occupied one- to four-
family dwellings 70% 50%
</TABLE>
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 insurance
(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.
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<PAGE>
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 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
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<PAGE>
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.
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
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<PAGE>
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 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
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not evidence an interest in or entitlement to distributions allocable to
principal but will be used solely for convenience in expressing the calculation
of interest and for certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the Security were to accrue through the day immediately preceding
such Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Class Security Balance
of such class of Securities on that Distribution Date. Distributions of interest
on any class of Accrual Securities will commence only after the occurrence of
the events specified in such Prospectus Supplement. Prior to such time, the
beneficial ownership interest in the Trust Fund or the principal balance, as
applicable, of such class of 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
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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 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;
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(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;
(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
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Prospectus Supplement for a series of Securities may identify the classes which
comprise such Series by reference to the following categories.
<TABLE>
<CAPTION>
Categories of Classes Definition
PRINCIPAL TYPES
<S> <C>
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
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.
</TABLE>
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<TABLE>
<CAPTION>
Categories of Classes Definition
<S> <C>
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.
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.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
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
continue until some specified event has occurred or until
such Accrual Class is retired.
</TABLE>
Indices Applicable to Floating Rate and Inverse Floating Rate Classes
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
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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 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.
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<PAGE>
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 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.
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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.
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.
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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
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
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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 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.
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CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more classes
of a Series of Securities or with respect to the related Trust Fund Assets.
Credit enhancement may be in the form of a limited financial guaranty policy
issued by an entity named in the related Prospectus Supplement, the
subordination of one or more classes of the Securities of such Series, the
establishment of one or more Reserve Accounts, the use of a
cross-collateralization feature, use of a mortgage pool insurance policy, FHA
Insurance, VA 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. To the
extent described 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 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.
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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.
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
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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 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.
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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 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.
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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 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
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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 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.
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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, 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
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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 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
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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 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
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"--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;
(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.
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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.
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 Sub-Servicer, 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
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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 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.
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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 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.
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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 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.
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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.
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
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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.
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
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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 the principal of and accrued interest, due and unpaid,
on the outstanding Notes of such Series at the date of such sale or (c) the
Trustee determines that such collateral would not be sufficient on an ongoing
basis to make all payments on such Notes as such payments would have become due
if such Notes had not been declared due and payable, and the Trustee obtains the
consent of the holders of 66 2/3% of the Percentage Interests of the Notes of
such Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default for five days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the 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
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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 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.
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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.
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
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(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 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
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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 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
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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.
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
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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, 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.
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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
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.
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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.
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.
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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
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 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.
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Requirements for Title I Loans. The maximum principal amount for Title
I Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I Loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I Loans with respect to multiple properties, and a borrower may
obtain more than one Title I Loan with respect to a single property, in each
case as long as the total outstanding balance of all Title I Loans in the same
property does not exceed the maximum loan amount for the type of Title I Loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have
at least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property. 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.
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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
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 Code section
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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
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with the principal purpose of avoiding the single class REMIC rules. 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
purchased with an issue price equal to its purchase price or, if more than one
stripped interest is purchased, the ratable share of the purchase price
allocable to such stripped interest.
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Servicing fees in excess of reasonable servicing fees ("Excess
Servicing") will be treated under the stripped bond rules. If the Excess
Servicing fee is less than 100 basis points (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.
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Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the Trust Fund should not have OID income. However,
the purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining principal balance of the Loans at the time of purchase. If
so, the Loan will have been acquired at a premium or discount, as the case may
be. (As indicated above, the Trust Fund will make this calculation on an
aggregate basis, but might be required to recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to 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 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.
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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.
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
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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 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.
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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 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
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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 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:
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(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 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
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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.
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
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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 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
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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.......................................................32
Advance..................................................................10
Advances.................................................................34
Agreement................................................................21
Amortizable Bond Premium Regulations.....................................76
APR..................................................................24, 51
Available Funds..........................................................32
Balloon Payment.......................................................5, 23
Bank..................................................................4, 25
Bankruptcy Code...........................................................8
Belgian Cooperative......................................................42
Beneficial Owners .................................................3, 6, 40
BIF......................................................................52
Book-Entry Securities....................................................40
Calculation Agent .......................................................38
Capitalized Interest Account.............................................54
Cash Flow Bond Method....................................................83
Cede...................................................................3, 6
CEDEL....................................................................40
CEDEL Participants.......................................................42
CERCLA...............................................................20, 64
Certificateholders.......................................................15
Certificates.......................................................1, 4, 30
Claimable Amount .......................................................71
Class Security Balance...................................................32
Closing Date.............................................................15
Code.................................................................11, 72
Collateral Value.........................................................24
Combined Loan-to-Value Ratio.............................................24
Commission................................................................2
Companion Class..........................................................37
Component Class..........................................................36
Contingent Regulations...................................................74
Cut-off Date..........................................................4, 21
Cut-off Date Principal Balance...........................................31
DCR......................................................................93
Debt Securities..........................................................73
Debt-to-Income Ratio.....................................................26
Definitive Security......................................................40
Depositor.............................................................1, 25
Detailed Description.....................................................22
Disqualified Organization................................................80
Distribution Date ........................................................7
DOL......................................................................91
DTC............................................................3, 6, 18, 40
DTC Participants ...................................................18, 42
EPA......................................................................64
Equity One............................................................4, 25
Equity One Standards.....................................................25
98
<PAGE>
ERISA....................................................................13
Euroclear................................................................40
Euroclear Operator.......................................................42
Euroclear Participants...................................................42
European Depositaries....................................................40
Events of Default .......................................................59
Excess Servicing.........................................................83
Exchange Act..............................................................2
Fannie Mae...............................................................59
FDIC.....................................................................25
Federal Reserve..........................................................25
FHA.......................................................................9
FHLMC....................................................................58
Financial Intermediary...................................................41
Fitch....................................................................93
Fixed Rate Class .......................................................37
Floating Rate Class......................................................37
FNMA.....................................................................59
Foreign Person...........................................................84
Freddie Mac..............................................................58
Full Doc.................................................................26
Funding Period........................................................5, 15
Garn-St Germain Act......................................................66
HUD......................................................................69
Indenture................................................................30
Insurance Proceeds.......................................................52
Insured Expenses .......................................................52
Interest Only Class......................................................38
Interest Weighted Securities.............................................75
Inverse Floating Rate Class..............................................38
IRS......................................................................74
L/C Bank..............................................................8, 45
L/C Percentage........................................................8, 45
Liquidation Expenses.....................................................52
Liquidation Proceeds.....................................................52
Loan Indices.............................................................40
Loan Rate............................................................23, 32
Loan-to-Value Ratio......................................................24
Loans.....................................................................1
Lockout Periods..........................................................23
Mark-to-Market Regulations...............................................81
Master Servicing Agreement...............................................21
Mixed Use Loan.....................................................1, 5, 22
Moody's..................................................................93
Morgan...................................................................42
Mortgage.................................................................51
Mortgage Loans.....................................................1, 5, 22
Mortgaged Properties.....................................................23
NCUA.....................................................................95
NIV......................................................................26
Noteholders..............................................................15
Notes..............................................................1, 4, 30
Notional Amount Class....................................................36
OID......................................................................73
OID Regulations..........................................................73
OTS......................................................................25
PAC......................................................................36
99
<PAGE>
Partial Accrual Class....................................................38
Parties in Interest......................................................92
Pass-Through Certificates................................................81
Pass-Through Rate .......................................................32
Pay-Through Security.....................................................74
Percentage Interests.....................................................59
Permitted Investments....................................................46
Planned Principal Class..................................................36
Plans....................................................................91
Policy Statement .......................................................95
Pool..................................................................4, 21
Pool Insurance Policy....................................................47
Pool Insurer.............................................................47
Pooling and Servicing Agreement..........................................30
Popular...............................................................4, 25
Pre-Funded Amount ....................................................5, 15
Pre-Funding Account...................................................5, 15
Prepayment Assumption....................................................74
Primary Mortgage Insurance Policy........................................23
Prime Rate...............................................................40
Principal Only Class.....................................................38
Principal Prepayments....................................................33
Property Improvement Loans...............................................69
PTE 83-1.................................................................92
Purchase Agreement.......................................................21
Purchase Price...........................................................30
Rating Agency............................................................96
Ratio Strip Securities...................................................82
RCRA.....................................................................65
Record Date..............................................................31
Reference Banks..........................................................38
Refinance Loan...........................................................24
Regular Interest Securities..............................................73
Relevant Depositary......................................................40
Relief Act...............................................................68
REMIC.................................................................1, 72
Reserve Account.......................................................8, 32
Reserve Interest Rate....................................................39
Residential Loan .................................................1, 5, 22
Residual Interest Security...............................................79
Restricted Group .......................................................94
Retained Interest .......................................................31
Revolving Credit Line Loans........................................1, 5, 22
Riegle Act...............................................................19
Rules....................................................................41
S&P......................................................................93
SAIF.....................................................................52
Scheduled Principal Class................................................36
Secured Creditor Exclusion...............................................64
Securities.........................................................1, 4, 30
Securities Act............................................................2
Securities Index.........................................................40
Security Account.........................................................52
Security Register .......................................................31
Securityholders.......................................................1, 40
Seller....................................................................1
Sellers..................................................................21
100
<PAGE>
Senior Securities ....................................................5, 44
Sequential Pay Class.....................................................37
Series....................................................................1
Servicer..................................................................4
Servicing Fee........................................................57, 81
Short-Term Note..........................................................86
Single Family Properties.................................................23
Single Family Securities.................................................92
SMMEA................................................................11, 94
Strip Class..............................................................37
Stripped Securities......................................................81
Sub-Servicer.............................................................10
Sub-Servicers............................................................21
Sub-Servicing Agreement..................................................54
Subordinated Securities...................................................5
Subsequent Loans......................................................5, 15
Support Class............................................................37
TAC......................................................................37
Targeted Principal Class.................................................37
Terms and Conditions.....................................................42
Thrift Institutions......................................................80
TIN......................................................................84
Title I Loans............................................................69
Title I Program/.........................................................69
Title V..................................................................67
Treasury.................................................................12
Treasury Index...........................................................39
Trust Agreement......................................................21, 30
Trust Fund.........................................................1, 4, 30
Trust Fund Assets .................................................1, 4, 21
Trustee...............................................................4, 30
Underwriter Exemptions...................................................93
United States Person.....................................................84
VA........................................................................9
VA Guaranty..............................................................57
Variable Rate Class......................................................38
101
<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 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............................ S-4
Risk Factors................................ S-11
The Mortgage Pool........................... S-13
Servicing of Loans.......................... S-21
Description of the Certificates............. S-25
Yield, Prepayment and Maturity
Considerations............................ S-34
The Insurer................................. S-41
Use of Proceeds............................. S-42
Federal Income Tax Consequences............. S-42
ERISA Considerations........................ S-43
Underwriting................................ S-44
Legal Matters............................... S-45
Experts..................................... S-45
Ratings..................................... S-45
Index of Defined Terms...................... S-47
PROSPECTUS
Prospectus Supplement or Current Report on
Form 8-K.................................. 2
Available Information....................... 2
Incorporation of Certain Documents by
Reference................................. 2
Reports to Securityholders.................. 3
Summary of Terms............................ 4
Risk Factors................................ 14
The Trust Fund.............................. 21
Use of Proceeds............................. 25
The Depositor............................... 25
Loan Program................................ 25
Description of the Securities............... 30
Credit Enhancement.......................... 44
Yield and Prepayment Considerations......... 48
The Agreements.............................. 50
Certain Legal Aspects of the Loans.......... 62
Federal Income Tax Consequences............. 72
State Tax Considerations.................... 91
ERISA Considerations........................ 91
Legal Investment............................ 94
Method of Distribution...................... 95
Legal Matters............................... 96
Rating...................................... 96
Index of Defined Terms...................... 98
$102,841,606
MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES 1997-1
$31,000,000
CLASS A-1 CERTIFICATES
6.62% PASS-THROUGH RATE
$24,200,000
CLASS A-2 CERTIFICATES
7.01% PASS-THROUGH RATE
$14,500,000
CLASS A-3 CERTIFICATES
7.19% PASS-THROUGH RATE
$12,000,000
CLASS A-4 CERTIFICATES
7.38% PASS-THROUGH RATE
$21,141,606
CLASS A-5 CERTIFICATES
7.55% PASS-THROUGH RATE
EQUITY ONE ABS, INC.
DEPOSITOR
EQUITY ONE, INC.
SERVICER
- --------------------
SALOMON BROTHERS INC
- ---------------------------------------------------------------
PROSPECTUS SUPPLEMENT
DATED JUNE 26, 1997
