================================================================================
As Filed with the Securities and Exchange Commission on June 21, 1999
Registration No. _________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
EQUITY ONE ABS, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 52-2029487
- -------------------------------------------------------------- ------------------------------------
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
103 SPRINGER BUILDING
3411 SILVERSIDE ROAD
WILMINGTON, DELAWARE 19810
(302) 478-6160
-------------------------------------------------------------
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
DENNIS KILDEA
EQUITY ONE ABS, INC.
103 SPRINGER BUILDING
3411 SILVERSIDE ROAD
WILMINGTON, DELAWARE 19810
(302) 478-6160
---------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With a copy to:
KEVIN P. KUNDRA, ESQUIRE
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 ONE COMMERCE SQUARE
PHILADELPHIA, PA 19103-7098
Approximate date of commencement of proposed sale to the public:
FROM TIME TO TIME ON OR AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT,
AS DETERMINED BY MARKET CONDITIONS.
---------------
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. |_|
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than Securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.|_|____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.|_|____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.|_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================
TITLE OF EACH CLASS OF AMOUNT PROPOSED PROPOSED AMOUNT OF
SECURITIES TO BE REGISTERED TO BE MAXIMUM MAXIMUM REGISTRATION
REGISTERED OFFERING PRICE AGGREGATE FEE(2)
PER UNIT(1) OFFERING PRICE(1)
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<S> <C> <C> <C> <C>
Asset Backed Notes and Asset Backed $98,128,056 100% $98,128,056 $27,279.60
Certificates.............................
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</TABLE>
(1) Estimated for the purpose of calculating the registration fee.
(2) $97,128,056 in securities are being carried forward and $27,001.60 of the
filing fee is associated with the securities being carried forward and was
previously paid with Registrant's previous Registration Statement on Form S-3
(File No. 333-24599).
Pursuant to Rule 429 of the Securities and Exchange Commission's Rules and
Regulations under the Securities Act of 1933, as amended, the prospectuses and
prospectus supplements contained in this Registration Statement also relate to
the Registrant's previous Registration Statement on Form S-3 (File No.
333-24599).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes a basic prospectus and two
illustrative forms of prospectus supplement for use in an offering of
asset-backed securities: one for an offering of certificates and one for an
offering of certificates and notes. The description of credit enhancement
mechanisms or other features in the forms of prospectus supplement is intended
merely as an illustration of the principal features of a possible series of
asset-backed securities; the features applicable to any actual series of
asset-backed securities may include some, all or none of the features so
illustrated and may include any features specified in the prospectus.
(ii)
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED JUNE 18, 1999
Prospectus Supplement dated _________, ____
To Prospectus dated __________, ____
$ ________________
EQUITY ONE MORTGAGE PASS-THROUGH TRUST -
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES -
EQUITY ONE, INC. EQUITY ONE ABS, INC.
as Servicer as Depositor
<TABLE>
<CAPTION>
Principal Balance Pass-Through Rate Payment Dates Net Proceeds
----------------- ----------------- ------------- to Depositor(1)
<S> <C> <C> <C> <C>
Class A - 1 $ % $
Class A - 2 $ % $
- -------------------------------------------------------------------------------------------------------------------
Total $ N/A $
</TABLE>
- ------------
(1) Before deducting expenses, payable by the Depositor, estimated to be
$______________.
- -----------------------------
BEFORE BUYING CERTIFICATES,
CONSIDER CAREFULLY THE RISK THE CERTIFICATES--
FACTORS BEGINNING ON PAGE
S-9 IN THIS DOCUMENT AND ON o represent an interest in a trust fund
PAGE 5 IN THE PROSPECTUS. consisting primarily of a pool of fixed
rate mortgage loans divided into two groups,
Group I and Group II. The Class A-1
Certificates will represent primarily an
interest in the mortgage loans in Group I
and the Class A-2 Certificates will
represent primarily an interest in the
mortgage loans in Group II.
The certificates will o currently have no trading market.
represent interests in the
trust fund only and will not CREDIT ENHANCEMENT FOR THE CERTIFICATES--
represent interests in or be
obligations of any other o will include a spread account, with an
entity. initial balance of $______________. On each
distribution date, the trustee may deposit
additional funds into the spread account
after making required distributions to the
certificates and paying certain other
expenses. Amounts in the spread account will
This prospectus supplement be available to fund shortfalls between
may be used to offer and sell required distributions on the certificates
the certificates only if it and funds available to pay them.
is accompanied by the
prospectus. o will also include a certificate guaranty
insurance policy from _______________. This
policy will guarantee current payments of
interest and ultimate payment of principal
to holders of the certificates on the terms
described in this document.
[CERTIFICATE INSURER'S LOGO]
- -----------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[UNDERWRITER'S LOGO]
__________________, as underwriter of the certificates, has agreed to purchase
the certificates and the certificates will be offered by the underwriter from
time to time as provided herein in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. 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 _________,
___________.
<PAGE>
Information about the certificates is presented in two
separate documents that progressively provide more detail:
o the accompanying prospectus which provides general
information, some of which may not apply to your
certificates, and
o this prospectus supplement, which describes the specific
terms of your certificates.
We strongly encourage you to read both this prospectus
supplement and the prospectus in full. You should rely only on the information
contained or incorporated by reference in this prospectus supplement and the
accompanying prospectus. We have not authorized anyone to provide you with
different information.
If the description of the terms of your certificates varies
between this prospectus supplement and the accompanying prospectus, you should
rely on the information in this prospectus supplement.
We have made cross-references to captions in this prospectus
supplement and the accompanying prospectus under which you can find further
related discussions. The table of contents that follows on the next page and the
table of contents in the accompanying prospectus indicate where these captions
are located.
We are not offering the certificates in any state where the
offer is not permitted.
We do not claim that the information in this prospectus
supplement and the accompanying prospectus is accurate as of any date other than
the dates stated on the cover of each document.
Dealers will deliver a prospectus supplement and prospectus
when acting as underwriters of the Mortgage Pass-Through Certificates, Series
__________-__ and with respect to their unsold allotments or subscriptions. In
addition, all dealers selling the Mortgage Pass-Through Certificates, Series
__________-__ will be required to deliver a prospectus supplement and prospectus
for ninety days following the date of this prospectus supplement.
Subject to certain limitations, you can get a copy of any of
the documents referred to in the accompanying prospectus under the caption
"Incorporation of Certain Documents by Reference" free of charge from the
trustee. You should direct any requests for these documents to the Corporate
Trust Office of the Trustee at ________________, telephone: _________________,
facsimile number: __________________, Attention: ________________.
This prospectus supplement and the accompanying prospectus
contain forward-looking statements relating to future economic performance or
projections and other financial items. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the depositor notes that these
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause actual results or performance to differ
materially from these forward-looking statements. Those risks, uncertainties and
other factors include, among others, general economic and business conditions,
competition, changes in political and social conditions, regulatory initiatives
and compliance with government regulations, customer preference and various
other matters, many of which are beyond the depositor's control. These
forward-looking statements, together with related qualifying language and
assumptions, are found in the material, including each of the tables, set forth
under the captions "Risk Factors," Yield, Prepayment and Maturity
Considerations," and "Yield and Prepayment Considerations." Forward-looking
statements are also found elsewhere in this prospectus supplement and the
accompanying prospectus, and may be identified by, among other things, the use
of forward-looking words such as "expects," "intends," "anticipates,"
"estimates", "believes", "may" or other comparable words. These forward-looking
statements speak only as of the date of this prospectus supplement. The
depositor expressly disclaims any obligation or undertaking to update or revise
forward-looking statements to reflect any change in the depositor's expectations
or any change in events, conditions or circumstances on which any
forward-looking statement is based.
S-2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
Summary of Terms.........................................................S-4
Risk Factors.............................................................S-11
The Mortgage Pool........................................................S-16
Servicing of Loans.......................................................S-31
Description of the Certificates..........................................S-37
Yield, Prepayment and Maturity Considerations............................S-48
The Insurer..............................................................S-54
Use of Proceeds..........................................................S-55
Federal Income Tax Consequences..........................................S-56
ERISA Considerations.....................................................S-57
Legal Investment.........................................................S-58
Underwriting.............................................................S-58
Legal Matters............................................................S-59
Experts..................................................................S-59
Ratings..................................................................S-59
Index of Defined Terms...................................................S-60
PROSPECTUS
Risk Factors................................................................
The Trust Fund..............................................................
Use of Proceeds.............................................................
The Depositor...............................................................
Loan Program................................................................
Description of the Securities...............................................
Credit Enhancement..........................................................
Yield and Prepayment Considerations.........................................
The Agreements..............................................................
Legal Aspects of the Loans..................................................
Federal Income Tax Consequences.............................................
State Tax Considerations....................................................
ERISA Considerations........................................................
Legal Investment............................................................
Method of Distribution......................................................
Legal Matters...............................................................
Rating......................................................................
Available Information.......................................................
Incorporation of Certain Documents by Reference.............................
Index of Defined Terms......................................................
S-3
<PAGE>
SUMMARY OF TERMS
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making your
investment decision. You should read this entire prospectus supplement and the
accompanying prospectus carefully before you decide whether to purchase
certificates.
This summary provides an overview of certain calculations, cash flows
and other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
THE TRUST FUND
Equity One Mortgage Pass-Through Trust ________-____ will be formed on
________, ____by Equity One ABS, Inc., as depositor, Equity One, Inc.,
as servicer, and ___________,as trustee. ___________, ____________, and
__________, as sellers, will sell the mortgage loans to Equity One ABS,
Inc. Equity One ABS, Inc. will deposit the mortgage loans with the
trust fund.
THE CERTIFICATES
On the closing date, _______________, _____, the trust fund will issue
the certificates. This document discusses three classes of
certificates, the Class A-1 Certificates, Class A-2 Certificates and
Class R Certificates, all of which will represent interests in the
trust fund. The Class A- 1 and Class A-2 Certificates, sometimes
referred to collectively as the Class A Certificates, are being offered
to you by this prospectus supplement and the accompanying prospectus.
We are not offering the Class R Certificates for sale to investors. The
Class R Certificates will not have a pass-through rate.
Generally, we will offer the Class A Certificates for purchase in
denominations of $25,000 and integral multiples of $1 thereof.
REGISTRATION OF CERTIFICATES
We will issue the Class A Certificates in book-entry form. You will
hold your interests through a depository. While the Class A
Certificates are book-entry they will be registered in the name of the
depository. The limited circumstances under which definitive
certificates will replace the book entry certificates are described in
this prospectus supplement.
TRUST PROPERTY
The trustee will hold the trust property for the benefit of the
certificateholders. The trust property includes:
o a pool of first and second lien mortgage loans split into two
groups
o payments on the mortgage loans received 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
mortgage loans due prior to the [cut-off date])
o the deed of trust or mortgage related to each mortgage loan
o property that once secured a mortgage loan that the trust fund
has acquired through foreclosure or deed in lieu of foreclosure
o the benefits of the Certificate Guaranty Insurance Policy
S-4
<PAGE>
o amounts on deposit in the various accounts maintained by the
servicer and the trustee for the benefit of the
certificateholders
o rights of the depositor under the agreement pursuant to which
the depositor purchased the mortgage loans from the sellers,
including the right to require the sellers to repurchase
mortgage loans for breaches of representations and warranties
o rights of the sellers under any hazard insurance policies
covering the mortgaged properties
THE MORTGAGE POOL
On [the closing date] the trust fund will acquire a pool of mortgage
loans, which will consist of two groups, Group I and Group II. Both
groups will include fixed rate mortgage loans secured by first or
second liens on one- to four-family dwellings. Group II will also
include fixed rate mortgage loans secured by first liens on
multi-family properties and structures which contain both residential
dwelling units and space used for retail, professional or other
commercial uses. The principal balance at origination of each mortgage
loan in Group I may not exceed certain maximum amounts as provided
under the guidelines of Fannie Mae and the Federal Home Loan Mortgage
Corporation.
We refer you to "The Mortgage Pool" in this prospectus supplement.
Subject to certain cross-collateralization provisions, the Class A- 1
Certificates will represent an interest in the mortgage loans in Group
I and the Class A-2 Certificates will represent an interest in the
mortgage loans in Group II.
The information below is based on the pool as it existed on [the
cut-off date] of $_______. The mortgage loans have the following
characteristics as of [the cut-off date]:
o number of mortgage loans: ______
o aggregate principal balance: ________$
o mortgaged property location: __states; other than __% of
mortgaged properties located in [state], no state represents
more than ____% of the mortgage loans, by loan balance
o maximum combined loan to value ratio at origination: __% (based
on credit limit)
o weighted average combined loan-to-value ratio: __%
(approximate)
o combined loan-to-value ratio range: __% to __% (approximate)
o loan balance range: $___________ to $ ________ (approximate)
o credit limit range: $ __________ to __________ (approximate)
o mortgage loan origination range from __________ to __________,
____
o weighted average loan utilization rate: __% (approximate)
o average loan balance: $____________
S-5
<PAGE>
o interest rates range: __% to __%
o weighted average interest rate: __% (approximate)
o weighted average remaining term to stated maturity, based on
principal balance: ___ months (approximate)
o term to stated maturity range: __ months to __ months
o last maturity date: _________
o average credit limit: $____________
o use and type of each mortgaged property: __% owner occupied;
__% second vacation home;
o __% first priority and __% second priority lien
We refer you to "The Mortgage Pool" in this prospectus supplement.
SERVICER AND SERVICING
Equity One, Inc. will service, manage and make collections on the
mortgage loans. In exchange for these services, Equity One, Inc. will
receive an annual servicing fee, payable monthly, of __% of the total
principal balance of the mortgage loans. The servicer will also be
entitled to certain other amounts as servicing compensation from the
trust fund.
We refer you to "Servicing of Loans--The Servicer" and "--Servicing
Compensation and Payment of Expenses" in this prospectus supplement.
DISTRIBUTIONS TO CERTIFICATEHOLDERS--GENERAL
On the distribution date the trustee will make a payment on each of the
Class A Certificates. The distribution date will be the ____ day of
each month or, if the ___ day is not a business day, the next business
day, starting with __________, ____.
Payments on the Class A-1 Certificates will be funded:
o from a percentage of the payments received with respect to the
mortgage loans in Group I;
o or, if the amount described in the above bullet is
insufficient, from any excess funds available after making
certain required distributions for the Class A-2 Certificates;
o or, if the amount described in the above two bullets is
insufficient, from draws on the spread account;
o or, if the amount described in the above three bullets is
insufficient, from draws on the certificate guaranty insurance
policy.
Payments on the Class A-2 Certificates will be funded:
o from a percentage of the payments received with respect to the
mortgage loans in Group II;
S-6
<PAGE>
o or, if the amount described in the above bullet is
insufficient, from any excess funds available after making
certain required distributions for the Class A-I Certificates;
o or, if the amount described in the above two bullets is
insufficient, from draws on the spread account;
o or, if the amount described in the above three bullets is
insufficient, from draws on the certificate guaranty insurance
policy.
Payments will be made on each distribution date in the following order
of priority:
o to interest on the Class A Certificates; and
o to principal on the Class A Certificates, subject to certain
priorities described under the caption "Description of the
Certificates--Principal" in this prospectus supplement.
After payment of the above amounts to the holders of Class A
Certificates, certain amounts may be distributed on the Class R
Certificates.
We refer you to "Description of the Certificates--Principal--Residual
Certificates" in this prospectus supplement.
On the ___ day of such month or, if the ___ day is not a business day,
the prior business day, but no later than two business days prior to
that month's distribution date, the servicer will calculate, and
instruct the trustee regarding, the amounts to be paid to you on that
month's distribution date.
DISTRIBUTIONS OF INTEREST
On each distribution date, you will be entitled to receive interest
earned during the prior calendar month on your certificate at the
applicable pass-through rate. You will also be entitled to receive any
interest that you earned previously but did not receive. There are
certain circumstances which could reduce the amount of interest paid to
you.
We refer you to "Description of the Certificates--Distributions" and
"--Interest" in this prospectus supplement.
The pass-through rate for each class of Class A Certificates will be
the per annum rate set forth on the cover page hereof However, the
pass-through rates for the Class A-1 and Class A-2 Certificates will
increase to ___% per annum and ___% per annum, respectively, with
respect to any distribution date after the date on which the servicer
has the option to purchase the mortgage loans in the trust fund and
properties acquired by the trust fund in satisfaction of mortgage
loans, if any.
We refer you to "Description of the Certificates--Optional Termination"
in this prospectus supplement.
DISTRIBUTIONS OF PRINCIPAL
On each distribution date, the trustee will make a payment of principal
on your certificate if there is cash available for the payment on that
date. Principal payments to the Class A- I Certificates will generally
be made out of amounts received on the mortgage loans in Group 1.
Principal payments to the Class A-2 Certificates will generally be made
out of amounts received on the mortgage loans in Group II.
We refer you to "Description of the Certificates--Distributions" and
"--Principal" in this prospectus for a discussion of the priorities of
payment.
S-7
<PAGE>
CREDIT ENHANCEMENT--GENERAL
Credit enhancements reduce the harm caused to holders of certificates
by shortfalls in payments received on the mortgage loans. They reduce
the effect of shortfalls on all classes of certificates
proportionately. The credit enhancement provided for the benefit of
certificateholders consists of the spread account and the certificate
guaranty insurance policy, as described below and elsewhere in this
prospectus supplement.
SPREAD ACCOUNT
The spread account will be established as a separate trust account with
the trustee for the benefit of the certificateholders and the insurer.
On each distribution date, the trustee will deposit funds derived from
both groups of mortgage loans, to the extent available, into the spread
account.
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 on Class A Certificates and the amount of
principal and interest due on the Class A Certificates prior to any
draws on the certificate guaranty insurance policy. Certain amounts in
the spread account may be distributed on the Class R Certificates.
We refer you to "Description of the Certificates--Spread Account" in
this prospectus supplement.
CERTIFICATE GUARANTY INSURANCE POLICY
______________, the insurer, will issue the certificate guaranty
insurance policy to provide additional credit enhancement to the Class
A Certificates. Generally, under the certificate guaranty insurance
policy, the insurer will guarantee payment on each distribution date to
the trustee, for the benefit of the holders of the Class A
Certificates, of an amount sufficient to cover any shortfalls in funds
available to pay interest and principal to those certificateholders on
that distribution date. The certificate guaranty insurance policy does
not cover any specified rate of payment of principal.
We refer you to "Description of the Certificates--Certificate Guaranty
Insurance Policy" in this prospectus supplement.
ALLOCATION OF LOSSES
Neither the Class A Certificates nor the underlying mortgage loans are
insured or guaranteed by any governmental agency or instrumentality, or
by any other entity.
ADVANCES
Subject to certain exceptions, the servicer will have to make cash
advances to cover delinquent scheduled payments of principal of and
interest on any mortgage loan in the trust fund. Under certain
circumstances, the trustee will have to make a required advance if the
Servicer fails to do so.
We refer you to "Servicing of Loans--Advances" in this prospectus
supplement.
S-8
<PAGE>
OPTIONAL TERMINATION
The servicer has the option to purchase all the mortgage loans and any
properties that the trustee acquired in satisfaction of any of the
mortgage loans. The servicer may exercise this option only when the
aggregate principal balance of all mortgage loans in the trust fund,
including the mortgage loans related to properties which the trustee
has acquired, is less than ___% of the aggregate principal balance of
all mortgage loans in the trust fund as of __________, _____. If the
servicer exercises this option, your certificate will be retired early
and you will be entitled to:
o the outstanding principal balance of your certificate; and
o any unpaid accrued interest on your certificate at the
applicable pass-through rate.
We refer you to "Description of the Certificates--Optional Termination"
in this prospectus supplement.
FEDERAL INCOME TAX CONSEQUENCES
The trustee will elect to treat the trust fund as a "real estate
mortgage investment conduit," or REMIC, for federal income tax
purposes. The Class A Certificates will constitute "regular interests"
in the REMIC and the Class R 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 for federal income tax purposes.
We refer you to "Federal Income Tax Consequences" in this prospectus
supplement and in the accompanying prospectus.
ERISA CONSIDERATIONS
If you are a fiduciary of any pension or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as
amended, or Section 4975 of the Internal Revenue Code of 1986, as
amended, you should review carefully with your counsel whether you are
permitted to buy or hold any of the certificates.
We refer you to "ERISA Considerations" in this prospectus supplement.
LEGAL INVESTMENT
You should consult with your counsel to see if you are permitted to buy
any of the certificates since the legal investment rules vary depending
on what kind of entity you are and which other entities regulate you.
The Class A Certificates will not be "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984
because certain of the mortgage loans in the trust fund will be secured
by second liens on the related mortgaged properties.
We refer you to "Legal Investment" in this prospectus supplement and in
the accompanying prospectus.
S-9
<PAGE>
RATINGS
The Trust Fund will not issue the Certificates unless the Class A
Certificates are rated:
o __________ by ____________; and
o __________ by ____________.
The ratings address credit risk. When evaluating credit risk, the
rating agencies look at the likelihood of whether or not you will
receive your interest and principal payments. Credit risk does not
relate to the likelihood of prepayments on the mortgage loans.
Prepayments affect the timing of your payments and, as a result, could
cause your actual return to differ substantially from your anticipated
return on your investment.
We refer you to "Ratings" and "Risk Factors-Certificate Rating Subject
to Change" in this prospectus supplement.
S-10
<PAGE>
RISK FACTORS
o The certificates are not suitable investments for all investors.
o You should not purchase any class of the certificates unless you understand
and are able to bear the prepayment, credit, liquidity and market risks
associated with that class.
o The certificates are complex securities and it is important that you possess,
either alone or together with an investment advisor, the expertise necessary
to evaluate the information contained in this prospectus supplement and the
accompanying prospectus in the context of your financial situation.
o In addition to the matters described elsewhere in this prospectus supplement
and the accompanying prospectus, you should carefully consider the following
risk factors before deciding to purchase a certificate. For a discussion of
additional risks pertaining to the certificates, we refer you to "Risk
Factors" in the accompanying prospectus.
BOOK-ENTRY CERTIFICATES MAY BE ILLIQUID.
Issuance of the Class A Certificates in book-entry form may adversely
affect your ability to sell your certificate in the secondary trading market
since investors may be unwilling to purchase certificates for which they cannot
obtain physical certificates.
We refer you to "Description of the Certificates--Book-Entry
Certificates" in this prospectus supplement and "Risk Factors--Book-Entry
Registration" in the accompanying prospectus.
BOOK-ENTRY CERTIFICATES MAY NOT BE ABLE TO BE PLEDGED.
Since transactions in the Class A Certificates can be effected only
through DTC, participating organizations, indirect participants and certain
banks, your ability to pledge your certificate to persons or entities that do
not participate in the DTC system may be limited due to lack of a physical
certificate representing your certificate.
We refer you to "Description of the Certificates--Book-Entry
Certificates" in this prospectus supplement and "Risk Factors--Book-Entry
Registration" in the accompanying prospectus.
BOOK-ENTRY CERTIFICATES MAY RESULT IN DELAYED RECEIPT OF DISTRIBUTIONS.
As a beneficial owner, you may experience some delay in receiving
distributions of interest and principal on your certificate since these
distributions will be:
o forwarded by the trustee to DTC;
o credited by DTC to the accounts of DTC participants; and
o ultimately credited to your account by a DTC participant.
We refer you to "Description of the Certificates--Book-Entry
Certificates" in this prospectus supplement and "Risk Factors--Book-Entry
Registration" in the accompanying prospectus.
S-11
<PAGE>
LIQUIDATIONS COULD RESULT IN DELAYS AND LOSSES.
Even if the mortgaged properties provide adequate security for the
mortgage loans, substantial delays could be encountered in connection with the
liquidation of mortgage loans that are delinquent and resulting shortfalls in
distributions on your certificate could occur. Corresponding delays in your
receipt of related proceeds could occur if the spread account is depleted and
the insurer fails to perform its obligations under the certificate guaranty
insurance policy. Also, liquidation expenses (such as legal fees, real estate
taxes, and maintenance and preservation expenses) will be paid first, thereby
reducing the proceeds payable on your certificate and thereby reducing the
security for the mortgage loans. Mortgage loans secured by second liens on the
related properties will also generally be subject to the prior payment of loans
secured by first liens on such properties. If any of the mortgaged properties
fail to provide adequate security for the related mortgage loans, you could
experience a loss if the spread account is depleted and the insurer fails to
perform its obligations under the certificate guaranty insurance policy.
We refer you to "Yield, Prepayment and Maturity
Considerations--Prepayment Considerations and Risks" in this prospectus
supplement and "Prepayment and Yield Considerations" in the accompanying
prospectus.
WE HAVE LIMITED INFORMATION REGARDING PREPAYMENT HISTORY.
The yield to maturity and weighted average life of your certificate
will be affected primarily by the rate and timing of prepayments on the mortgage
loans in Group I if you hold a Class A- I Certificate and Group II if you hold a
Class A-2 Certificate. The mortgage loans may be prepaid in whole or in part at
any time, most without penalty. The trust's prepayment experience may be
affected by a wide variety of factors, including general economic conditions,
interest rates, the availability of alternative financing and homeowner
mobility. In addition, substantially all of the mortgage loans contain
due-on-sale provisions, and the servicer intends to enforce such provisions
unless (1) enforcement is not permitted by applicable law or (2) the servicer,
in a manner consistent with reasonable commercial practice, permits the
purchaser of the related mortgaged property to assume the mortgage loan. To the
extent permitted by applicable law, such assumption will not release the
original borrower from its obligation under the mortgage loan. Enforcement of a
due-on-sale provision would result in repayment in full of the mortgage loan,
which would be treated as a prepayment.
You will bear any reinvestment risks resulting from a faster or slower
incidence of prepayments of the mortgage loans.
Consider carefully the discussion under "Yield, Prepayment and Maturity
Considerations--Prepayment Considerations and Risks" in this prospectus
supplement and under "Prepayment and Yield Considerations" and "Certain Legal
Aspects of the Loans--Due-on-Sale Clauses" in the accompanying prospectus.
DEFAULTS AND DELINQUENT PAYMENTS ON THE MORTGAGE LOANS COULD AFFECT YOUR YIELD.
If the spread account is depleted and the insurer fails to pay amounts
required under the certificate guaranty insurance policy, the yield to maturity
on your certificate will be sensitive to defaults and delinquent payments on the
mortgage loans in the applicable group. If the actual rate of defaults on the
mortgage loans in the applicable group and the actual amount of losses to the
trust fund upon liquidation of those mortgage loans is greater than the amounts
assumed by you in estimating the yield to maturity on your certificate, the
actual yield will be lower than your estimate. If the trust fund experiences
substantial losses, you may experience a loss. If the spread account is depleted
and the insurer fails to pay amounts required under the certificate guaranty
insurance policy, the timing of losses to the trust fund in connection with
liquidations of mortgage loans in the relevant group will affect the yield to
maturity on your certificate even if the rate of defaults and severity of such
losses are consistent with your expectations. In general, the earlier a loss
occurs, the greater effect it will have on the yield to maturity. There can be
no assurance as to the delinquency, foreclosure or loss experience with respect
to the mortgage loans.
S-12
<PAGE>
PAYMENT DELAY LOWERS YOUR EFFECTIVE YIELD.
Generally, payments of principal and interest on the mortgage loans
received in any calendar month will not be passed through as payments on your
certificate until the distribution date in the following calendar month. As a
result, the monthly distributions on your certificate generally will reflect
mortgagor payments during the prior calendar month. The distribution date will
be the ____ day of each month (or the next succeeding business day), commencing
in _______________, ___. Thus, the effective yield to you will be below that
otherwise produced by the related pass-through rate and the price paid by you
for your Certificate because distributions on your certificate in respect of any
given month will not be made until on or about the _____ day of the following
month.
BALLOON LOANS ARE LIKELY TO BE PREPAID.
Approximately ____% of the mortgage loans in Group I and approximately
___% of the mortgage loans in Group II are balloon loans, which generally
provide for equal monthly payments and a final monthly payment substantially
greater than the preceding monthly payments. The balloon loans in the Trust Fund
generally have original terms of __ to __ years and provide for monthly payments
based on a __ to __ year amortization schedule. The mortgagor on a balloon loan
will generally attempt to refinance a balloon loan or sell the underlying
mortgaged property on or prior to the stated maturity date in order to avoid
payment of the final balloon payment. A mortgagor's ability 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 mortgage loan.
PROCEEDS OF LIQUIDATION OF MIXED USE LOANS MAY TAKE LONGER TO RECOVER.
Mixed use loans are mortgage loans secured by multi-family properties
and structures that include both residential dwelling units and space used for
retail, professional or other commercial uses. We expect that mixed use loans
will represent less than __ % of the mortgage loans in Group II. Group I will
not contain mixed use loans. Due to the limited market for the type of
properties securing mixed use loans, in the event of a foreclosure, we expect
that it will take longer to recover proceeds from the liquidation of a mixed use
loan than it would for a mortgage loan secured by a one- to four-family
dwelling.
SECOND LIENS MAY RESULT IN LOSSES IN FORECLOSURE PROCEEDINGS.
Mortgage loans representing approximately __% of the of the aggregate
outstanding principal balance of the mortgage loans in Group I and __% of the
aggregate outstanding principal balance of the mortgage loans in Group II on
[the cut-off date] are secured by second liens on the related mortgaged
properties. In most cases, the first lien mortgage related to a loan secured by
a second lien will not be included in the mortgage pool.
The proceeds from any liquidation, insurance or condemnation
proceedings in connection with the underlying mortgaged property will be
available to satisfy the outstanding balance of the related second mortgage only
to the extent that the claim of the related first mortgagee has been satisfied
in full, including any related foreclosure costs. In addition, the servicer, as
second mortgagee on the loans in its portfolio, may not foreclose on the
property securing a second mortgage unless it forecloses subject to the first
mortgage, in which case it must either pay the entire amount due on the first
mortgage to the first mortgagee at or prior to the foreclosure sale or advance
funds to keep the first mortgage current in the event the mortgagor is in
default thereunder. The servicer may, but is under no obligation to, advance
funds in these circumstances. The trust fund will not have any source of funds
to satisfy related first mortgages or make payments due to the first mortgagees.
DECREASE IN VALUE OF MORTGAGED PROPERTY WOULD DISPROPORTIONATELY AFFECT SECOND
LIENHOLDERS.
There are several factors that could adversely affect the value of
properties such that the outstanding balance of the related loan, together with
any senior financing on the properties, would equal or exceed the value of the
properties. Among the factors that could adversely affect the value of the
properties area an overall decline in
S-13
<PAGE>
the residential real estate market in the areas in which the properties are
located or a decline in the general condition of the properties as a result of
failure of borrowers to maintain adequately the properties or of nature
disasters that are not necessarily covered by insurance, such as earthquakes and
floods. Any such decline could extinguish the value of a second interest in
property before having any effect on the related first interest therein. If such
a decline occurs, the actual rates of delinquencies, foreclosure and losses on
the loans secured by second liens could be higher than those currently
experienced in the mortgage lending industry in general.
RATINGS OF THE CERTIFICATES RELATE TO CREDIT RISK ONLY.
The ratings of the certificates would be based on, among other things,
the adequacy of the value of the mortgage loans, the spread account and the
certificate guaranty insurance policy. These ratings should not be deemed a
recommendation to purchase, hold or sell certificates, since they do not address
market price or suitability for a particular investor. There is also no
assurance that these ratings will remain in effect for any given period of time
or may not be lowered or withdrawn entirely by the rating agency 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 mortgage loans
and the spread account, these ratings might also be lowered or withdrawn, among
other reasons, because of an adverse change in the financial or other condition
of the insurer or a change in the rating of the insurer's long term debt. Any
reduction or withdrawal of a rating will have an adverse effect on the value of
the certificates.
BANKRUPTCY OR INSOLVENCY OF SELLERS OR DEPOSITOR; RECLASSIFICATION OF SALE OF
MORTGAGE LOANS AS FINANCING.
The servicer, the sellers and the depositor will treat each conveyance
of mortgage loans by the sellers to the depositor as a sale of those mortgage
loans. The depositor will treat each conveyance of mortgage loans from the
depositor to the trust fund as a sale of those mortgage loans. If the conveyance
of the mortgage loans by the sellers to the depositor is treated as a sale,
those mortgage loans would not be part of the related seller's bankruptcy estate
and would not be available to that seller's creditors. In the event of the
bankruptcy or insolvency of a seller, however, the bankruptcy trustee, a
conservator or a receiver of the seller or another person may attempt to
recharacterize the sale of the mortgage loans as a borrowing by the seller,
secured by a pledge of the mortgage loans. Similarly, if the conveyance of the
mortgage loans by the depositor to the trust fund is treated as a sale, those
mortgage loans would not be part of the depositor's bankruptcy estate and would
not be available to the depositor's creditors. In the event of the bankruptcy or
insolvency of the depositor, however, the bankruptcy trustee, a conservator or a
receiver of the depositor or another person may attempt to recharacterize the
sale of the mortgage loans as a borrowing by the depositor, secured by a pledge
of the mortgage loans. In either case, this position, if argued before or
accepted by a court, could prevent timely payments of amounts due on your
certificate and result in a reduction of payments due on your certificate.
MOST OF THE MORTGAGE LOANS ARE SECURED BY PROPERTIES LOCATED IN ONLY A FEW
STATES.
As of [the cut-off date]:
o approximately __%, __% and __% (by outstanding principal
balance) of the mortgage loans in Group I are secured by
properties located in the State of __________, the Commonwealth
of __________ and the State of __________ respectively; and
o approximately __%, __% and __% (by outstanding principal
balance) of the mortgage loans in Group II are secured by
properties located in the State of _____________, the
Commonwealth of __________________ and the Commonwealth of
_________________ respectively; and
o the aggregate outstanding principal balance of the mortgage
loans secured by properties in each other state represents not
more than approximately ___% of the mortgage loans in either
group.
S-14
<PAGE>
If the ____________, ____________, ____________, or ____________ residential
real estate markets should experience an overall decline in property values
after the dates of origination of the mortgage loans, the rates of losses on the
mortgage loans would be expected to increase, and could increase substantially.
S-15
<PAGE>
THE MORTGAGE POOL
GENERAL
The mortgage pool will consist of fixed rate mortgage loans
(collectively, the "Loans") divided into two groups, Group I and Group II. Both
groups will include mortgage loans secured by first or second liens on one-to
four-family dwellings (each, a "Residential Loan") and Group II will also
include mortgage loans secured by first liens on multi-family properties and
structures which include both residential dwelling units and space used for
retail, professional or other commercial uses (each, a "Mixed Use Loan"). We
expect that Residential Loans secured by one-family detached dwellings will
represent approximately ___% of the Loans in Group I and approximately ___% of
the Loans in Group II. We expect that Mixed Use Loans will represent less than
___% of the Loans in Group II.
In addition, the Loans in Group I will conform to the following
guidelines of Fannie Mae and the Federal Home Loan Mortgage Corporation
("FHLMC"): at origination
o each Loan in a first lien position had a principal balance not
exceeding $ _________ (or, in the case of a two-or more family
dwelling, $__________ and
o each Loan in a second lien position
o had a principal balance not exceeding $ __________ and
o had a principal balance which, when added to the principal
balance of the related senior loan at such time, did not
exceed $__________ in the aggregate.
Equity One ABS, Inc. (the "Depositor") will purchase the Loans from
___________, __________, and ____________ (each a "Seller" and, collectively,
the "Sellers") pursuant to the Pooling and Servicing Agreement (the "Agreement")
dated as of __________, ____ (the "Cut-off Date") among the Sellers, Equity One,
Inc. (the "Servicer"), the Depositor and ______________ (the "Trustee"). The
Depositor will then convey the Loans in Group I and Group II, without recourse,
to the Trustee for the benefit of the holders of the Mortgage Pass-Through
Certificates, Series _______-____ (the "Certificates").
The Certificates will consist of the Class A-1 Certificates and the
Class A-2 Certificates (collectively, the "Class A Certificates") , and the
Class R Certificates. We are offering the Class A Certificates pursuant to this
Prospectus Supplement; we are not offering the Class R Certificates for sale to
investors. Subject to certain cross-collateralization provisions, the Class A- I
Certificates will represent an interest in the Group I Loans and the Class A-2
Certificates will represent an interest in the Group II Loans.
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. Subject to the limitations described below under "--Sale of the
Loans," the Sellers 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 they
selected the Loans from among the outstanding loans in their portfolios as to
which the representations and warranties set forth in the Agreement can be made
and that they did not make this selection in a manner that would adversely
affect the interests of _______________ (the "Insurer") or the
certificateholders. See "Loan Program--Representations by Sellers; Repurchases"
in the accompanying Prospectus. Under the Agreement, the Depositor will convey
all its right, title and interest in and to the Sellers' representations,
warranties and covenants, including the Sellers' repurchase obligation, to the
Trustee for the benefit of the Insurer and 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
S-16
<PAGE>
obligations of Equity One, Inc., 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 in each of Group I and Group II as of the Cut-off Date.
As of the close of business on the Cut-off Date,
o the aggregate of the Stated Principal Balances of the Loans in
both groups was $ ____________ (the "Cut-off Date Pool
Principal Balance"),
o the aggregate of the Stated Principal Balances of the Loans in
Group I was $_______________ (the "Cut-off Date Group I
Principal Balance") and
o the aggregate of the Stated Principal Balances of the Loans in
Group II was $______________ (the "Cut-off Date Group II
Principal Balance").
Loans with balloon payments ("Balloon Loans") provide for payment based on the
amortization of the amount financed over a series of substantially equal monthly
payments, with a significantly greater payment due at the stated maturity of
approximately __ to __ years. As of the Cut-off Date, approximately __% of the
Group I Loans and approximately __% of the Group II Loans were Balloon Loans.
Balloon Loans may involve a greater degree of risk than loans which are fully
amortizing because the ability of a borrower to make a balloon payment typically
will depend upon the ability of the borrower to either timely refinance the Loan
or sell the related mortgaged property. All the Loans provide for payments due
on a set day, but not necessarily the first day, of each month (the "Due Date").
The Loans to be included in the mortgage pool were originated or acquired by the
Sellers substantially in accordance with the Sellers' underwriting criteria for
mortgage loans, described herein under "The Mortgage Pool--Underwriting
Standards" and under "Loan Program" in the Prospectus.
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 Loans provide for a grace
period of ___ days for monthly payments, as required by applicable law. All of
the Loans may be prepaid in full or in part at any time, most without penalty.
Each Loan in Group I was originated after __________, ____ and each
Loan in Group II was originated after __________, ____.
The latest stated maturity date of any Loan in Group I is __________,
____ and in Group II is __________, ____. The earliest stated maturity date of
any Loan in Group I is __________, ____ and in Group II is __________, ____.
As of the Cut-off Date, no Loan was ___ or more days delinquent.
No Loan had a Loan-to-Value Ratio at origination of more than __ %. The
weighted average Loan-to-Value Ratio of the Loans in Group I at the Cut-off Date
was approximately __% and in Group II at the Cut-off Date was approximately __%.
S-17
<PAGE>
The "Loan-to-Value Ratio" of a Loan is the fraction, expressed as a
percentage, the numerator of which is the principal balance of the Loan at the
date of origination plus, in the case of a Loan secured by a second lien, the
outstanding principal balance of the related first lien mortgage loan on the
date of origination of the second lien loan, and the denominator of which is 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
o the appraised value based on an appraisal obtained by the originator
from an independent fee appraiser at the time of the origination of
the related Loan, and
o if the Loan was originated either in connection with the acquisition
of the mortgaged property by the borrower or within one year after
acquisition of the mortgaged property by the borrower, the purchase
price paid by the borrower for the 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.
The following section, "Mortgage Pool Tables," sets forth in tabular
format certain information, as of the Cut-off Date, as to the Loans in each of
Group I and Group II. The sum of the columns in the tables below may not equal
the total indicated due to rounding.
S-18
<PAGE>
MORTGAGE POOL TABLES FOR GROUP I
GROUP I MORTGAGE RATES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF GROUP I
MORTGAGE RATE (%) LOANS BALANCE OUTSTANDING (BY PRINCIPAL BALANCE)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
7.250 or less
7.251 - 7.500
7.501 - 7.750
7.751 - 8.000
8.001 - 8.250
8.251 - 8.500
8.501 - 8.750
8.751 - 9.000
9.001 - 9.250
9.251 - 9.500
9.501 - 9.750
9.751 - 10.000
10.001 - 10.250
10.251 - 10.500
10.501 - 10.750
10.751 - 11.000
11.001 - 11.250
11.251 - 11.500
11.751 - 12.000
12.001 or more
Totals 100%
===
</TABLE>
(1) As of the Cut-off Date, the weighted average mortgage rate of the Loans in
Group I was approximately ___%.
S-19
<PAGE>
GROUP I CURRENT LOAN PRINCIPAL BALANCES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF GROUP I
CURRENT LOAN AMOUNTS LOANS BALANCE OUTSTANDING (BY PRINCIPAL BALANCE)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 50,000.00 or less
$ 50,000.01 - $ 100,000.00
$100,000.01 - $ 150,000.00
$150,000.01 - $ 200,000.00
$200,000.01 - $ 250,000.00
$250,000.01 or more
Totals 100%
===
</TABLE>
- ------------------
(1) As of the Cut-off Date, the average current Loan principal balance in Group
I was $______________.
S-20
<PAGE>
GROUP I STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF CLASS I
STATE LOANS BALANCE OUTSTANDING (BY PRINCIPAL BALANCE)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Totals 100.00%
======
</TABLE>
- ----------------
(1) No more than approximately __% of the Loans in Group I will be secured by
mortgaged properties located in any one postal zip code area.
S-21
<PAGE>
GROUP I OCCUPANCY TYPES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF GROUP I
OCCUPANCY TYPE LOANS BALANCE OUTSTANDING (BY PRINCIPAL BALANCE)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-Owner Occupied......
Owner Occupied..........
Totals 100.00%
======
</TABLE>
- ----------------
(1) Based upon representations of the related mortgagors at the time of
origination.
GROUP I REMAINING TERMS TO MATURITY(1)
<TABLE>
<CAPTION>
REMAINING TERM TO
MATURITY NUMBER OF AGGREGATE PRINCIPAL PERCENT OF GROUP I
(MONTHS) LOANS BALANCE OUTSTANDING (BY PRINCIPAL BALANCE)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
24 or less...........
25 - 36.............
37 - 48.............
49 - 60.............
61 - 72.............
73 - 84.............
85 - 96.............
97 - 108.............
109 - 120.............
121 - 132.............
133 - 144.............
145 - 156.............
157 - 168.............
169 - 180.............
217 - 228.............
229 - 240.............
289 - 300.............
337 - 348.............
349 or more...........
Totals................ 100.00%
======
</TABLE>
- ----------------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Loans in Group I was ______ months.
S-22
<PAGE>
GROUP I LIEN PRIORITIES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE UNPAID PERCENT OF GROUP I
LIEN PRIORITY MORTGAGE LOANS PRINCIPAL BALANCE (BY PRINCIPAL BALANCE)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First.........................
Second........................
Totals 100.00%
======
</TABLE>
GROUP I DOCUMENTATION TYPE
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE UNPAID PERCENT OF GROUP I
DOCUMENTATION MORTGAGE LOANS PRINCIPAL BALANCE (BY PRINCIPAL BALANCE)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Full.....................
Alternative Income
Verification
No Income Verification
Totals 100.00%
======
</TABLE>
GROUP I LOAN-TO-VALUE RATIO
<TABLE>
<CAPTION>
LOAN-TO-VALUE RATIO NUMBER OF AGGREGATE UNPAID PERCENT OF GROUP I
MORTGAGE LOANS PRINCIPAL BALANCE (BY PRINCIPAL BALANCE)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
20.00 or less..........
20.01- 30.00...........
30.01- 40.00...........
40.01- 50.00...........
50.01- 60.00...........
60.01- 70.00...........
70.01- 80.00...........
80.01- 90.00...........
90.01 or more
Totals 100.00%
======
</TABLE>
GROUP I CREDIT GRADES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE UNPAID PERCENT OF GROUP I
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE (BY PRINCIPAL BALANCE)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A..................
B..................
Totals 100.00%
======
</TABLE>
S-23
<PAGE>
MORTGAGE POOL TABLES FOR GROUP II
GROUP II MORTGAGE RATES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF GROUP II
MORTGAGE RATE (%) LOANS BALANCE OUTSTANDING (BY PRINCIPAL BALANCE)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
7.500 or less
7.501 - 7.750
7.751 - 8.000
8.001 - 8.250
8.251 - 8.500
8.501 - 8.750
8.751 - 9.000
9.001 - 9.250
9.251 - 9.500
9.501 - 9.750
9.751 - 10.000
10.001 - 10.250
10.251 - 10.500
10.501 - 10.750
10.751 - 11.000
11.001 - 11.250
11.251 - 11.500
11.751 or more
Totals 100.00%
======
</TABLE>
(1) As of the Cut-off Date, the weighted average mortgage rate of the Loans in
Group II was approximately ___%.
S-24
<PAGE>
GROUP II CURRENT LOAN PRINCIPAL BALANCES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF GROUP II
CURRENT LOAN AMOUNTS LOANS BALANCE OUTSTANDING (BY PRINCIPAL BALANCE)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 50,000.00 or less
$ 50,000.01 - $ 100,000.00
$100,000.01 - $ 150,000.00
$150,000.01 - $ 200,000.00
$200,000.01 - $ 250,000.00
$250,000.01 - $ 300,000.00
$300,000.01 - $ 350,000.00
$350,000.01 - $ 400,000.00
$400,000.01 - $ 450,000.00
$450,000.01 - $ 500,000-00
$500,000.01 - $ 550,000.00
$550,000.01 - $ 600,000.00
$600,000.01 - $ 650,000.00
$650,000.01 - $ 700,000.00
$700,000.01 - $ 750,000.00
$800,000.01 or more
Totals 100.00%
======
</TABLE>
- ------------------
(1) As of the Cut-off Date, the average current Loan principal balance in Group
II was $______________.
S-25
<PAGE>
GROUP II STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF GROUP II
STATE LOANS BALANCE OUTSTANDING (BY PRINCIPAL BALANCE)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Totals 100.00%
======
</TABLE>
- ----------------
(1) No more than approximately __% of the Loans in Group II will be secured by
mortgaged properties located in any one postal zip code area.
S-26
<PAGE>
GROUP II OCCUPANCY TYPES(1)
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF GROUP II
OCCUPANCY TYPE LOANS BALANCE OUTSTANDING (BY PRINCIPAL BALANCE)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-Owner Occupied......
Owner Occupied..........
Totals 100.00%
======
</TABLE>
- ----------------
(1) Based upon representations of the related mortgagors at the time of
origination.
GROUP II REMAINING TERMS TO MATURITY(1)
<TABLE>
<CAPTION>
REMAINING TERM TO MATURITY NUMBER OF AGGREGATE PRINCIPAL PERCENT OF GROUP II
(MONTHS) LOANS BALANCE OUTSTANDING (BY PRINCIPAL BALANCE)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
24 or less........
25 - 36..........
37 - 48..........
49 - 60..........
61 - 72..........
73 - 84..........
85 - 96..........
97 - 108..........
109 - 120..........
157 - 168..........
169 - 180..........
229 - 240..........
277 - 288..........
289 - 300..........
337 - 348..........
349 or more........
Totals............. 100.00%
======
</TABLE>
- ----------------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Loans in Group II was ______ months.
S-27
<PAGE>
GROUP II LIEN PRIORITIES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE UNPAID PERCENT OF GROUP II
LIEN PRIORITY MORTGAGE LOANS PRINCIPAL BALANCE (BY PRINCIPAL BALANCE)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First...............
Second..............
Totals 100.00%
======
</TABLE>
GROUP II DOCUMENTATION TYPE
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE UNPAID PERCENT OF GROUP II
DOCUMENTATION MORTGAGE LOANS PRINCIPAL BALANCE (BY PRINCIPAL BALANCE)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Full.....................
Alternative Income
Verification
No Income Verification
Totals 100.00%
======
</TABLE>
GROUP II LOAN-TO-VALUE RATIO
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE UNPAID PERCENT OF GROUP II
LOAN-TO-VALUE RATIO MORTGAGE LOANS PRINCIPAL BALANCE (BY PRINCIPAL BALANCE)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
30.00 or less.........
30.01- 40.00..........
40.01- 50.00..........
50.01- 60.00..........
60.01- 70.00..........
70.01- 80.00..........
80.01 or more.........
Totals 100.00%
======
</TABLE>
GROUP II CREDIT GRADES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE UNPAID PERCENT OF GROUP II
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE (BY PRINCIPAL BALANCE)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A.......................
B.......................
Totals 100.00%
======
</TABLE>
S-28
<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 and pursuant to the requirements of
the Agreement, the Depositor will deliver or cause to be delivered to the
Trustee, or a custodian for the Trustee, among other things,
o the original promissory note (the "Mortgage Note") (and any
modification or amendment thereto) endorsed to the Trustee without
recourse,
o the original instrument creating a first or second lien on the
related mortgaged property (the "Mortgage") with evidence of
recording indicated thereon,
o the title policy with respect to the related mortgaged property,
o 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), and
o an original recorded assignment of the Mortgage to the Trustee,
once returned from the public recording office (the items listed
in this bullet and the four bullets above are collectively
referred to as 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. 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 the 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, that 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 the Loan (a "Deleted Loan") from the Trust Fund and substitute
in its place another mortgage loan (a "Replacement Loan"). However, 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 the
substitution will not disqualify the REMIC or result in a prohibited transaction
tax under the Internal Revenue Code of 1986, as amended (the "Code").
Any Replacement Loan generally will, on the date of substitution, among
other characteristics set forth in the Agreement,
o have a Stated Principal Balance not in excess of, and not more
than 10% less than, the Stated Principal Balance of the Deleted
Loan (the Stated Principal Balances to be measured as of the
respective Due Dates in the month of substitution, and 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")),
o have a mortgage rate not lower than, and not more than 1% per
annum higher than, that of the Deleted Loan,
o have a Loan-to-Value Ratio not higher than that of the Deleted
Loan,
o have a debt-to-income ratio no higher than that of the Deleted
Loan,
S-29
<PAGE>
o have been originated pursuant to the same underwriting standards
as the Deleted Loan,
o have a remaining term to maturity not greater than (and not more
than one year less than) that of the Deleted Loan and
o 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").
[Through its bulk purchase program, each Seller also purchases mortgage
loans that have been originated and closed by other lenders. Sellers purchase
mortgage loans in blocks ranging from $1,000,000 to $20,000,000. Prior to
funding any bulk purchase, each loan package is underwritten in accordance with
the Equity One Standards. Bulk purchased loans represent approximately __% of
the Loans in Group I and __% of the Loans in Group II as of the Cut-off Date.]
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 generally allow for the origination and
purchase of mortgage loans under underwriting programs designated as Grade A
Credits, Grade B Credits or Grade C Credits. See "Specific Underwriting
Criteria; Underwriting Programs" and "Summary of Underwriting Requirements by
Program" in the Prospectus.
Grade A Credits Loans represent approximately
o __% of the Loans in Group I and
o __% of the Loans in Group II as of the Cut-off Date.
Grade B Credits Loans represent approximately
o __% of the Loans in Group I and
o __% of the Loans in Group II as of the Cut-off Date.
These underwriting programs and their underwriting criteria may change
from time to time. In addition, on a case-by-case basis, certain loans may be
made to borrowers not strictly qualifying under the specific criteria of an
underwriting program. Deviations from the specific criteria of an underwriting
program are permitted to reflect compensating factors such as local economic
trends, real estate valuations and other credit factors specific to each
S-30
<PAGE>
loan application and/or each portfolio acquired, but the Equity One Standards do
not include any specific formula or assign any specific weight to compensating
factors for purposes of these determinations. We expect that some of the Loans
included in the mortgage pool will have been originated based on such
underwriting exceptions. Overall, the Sellers' goal is to maintain the integrity
of these underwriting programs while simultaneously providing lending officers
and corresponding networks with the flexibility to consider the specific
circumstances of each loan.
Under the Equity One Standards, Sellers must use the Full Doc, the NIV
or the AIV loan documentation program to verify a borrower's income. See
"Specific Underwriting Criteria; Underwriting Programs" in the Prospectus.
o Approximately __% of the Loans in Group I and __% of the Loans in
Group II will be underwritten pursuant to the Full Doc program.
o Approximately __ % of the Loans in Group I and __% of the Loans
in Group II will be underwritten pursuant to the NIV program.
o Approximately __ % of the Loans in Group I and __% of the Loans
in Group II will be underwritten pursuant to the AIV 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 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 [, except appraisals
relating to mortgages acquired through bulk purchases.] 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 or AIV program generally do
not exceed $500,000.
Title insurance has been obtained on all Loans in the mortgage pool.
The improvements on each mortgaged property securing a Loan in the mortgage pool
are covered by hazard insurance with extended coverage in an amount at least
equal to the lesser of (1) the principal balance of the Loan or, if the loan is
secured by a second lien, the aggregate principal balance of such Loan and the
prior loan, and (2) the maximum insurable value of the improvements on the
mortgaged property.
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
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 Sellers have provided the information set forth in the following
sections through and including the section captioned "Foreclosure, Delinquency
and Loss Experience."
THE SERVICER
Equity One, Inc. ("Equity One"), a Delaware corporation and a
wholly-owned operating subsidiary of Popular North America, Inc., a Delaware
corporation, 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
S-31
<PAGE>
a retail branch system and through loan brokers and correspondents nationwide.
Equity One's loans are principally
o first- and second-lien, fixed or adjustable rate mortgage loans
secured by
o one- to four-family dwellings or
o multi-family properties and structures which include both
residential dwelling units and space used for retail,
professional or other commercial uses, and
o secured or unsecured consumer loans.
As of ______________, _____, Equity One and its subsidiaries provided
servicing for approximately mortgage loans (including mortgage loans serviced
for third parties) having an aggregate unpaid principal balance of approximately
$______________.
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, and also services mortgage loans for
third parties such as the Trust Fund to which the Sellers transfer mortgage
loans originated or acquired by them from time to time. 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 contacts the mortgagor in an attempt to get the mortgagor to cure
the deficiency. 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). Within 45 days
thereafter, if the mortgage loan remains delinquent, the Servicer will institute
appropriate legal action to foreclose on the mortgaged property. The Servicer
may terminate these foreclosure proceedings if the mortgagor cures the
delinquency. Mortgage loans to borrowers in bankruptcy proceedings may be
restructured in accordance with law and with a view to maximizing recovery on
these mortgage loans, including any deficiencies.
Once foreclosure is initiated, the Servicer uses a foreclosure
tracking system to monitor the progress of the proceedings. The system includes
state specific parameters to monitor whether proceedings are progressing within
the time frame typical for the state in which the mortgaged property is located.
During the foreclosure proceeding, the 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 portion of the mortgage loan balance that was not
recovered as part of Liquidation Proceeds. If foreclosed, the mortgaged property
is sold at a public or private sale and may be purchased by the Servicer.
S-32
<PAGE>
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. You should
not consider this information 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 the actual foreclosure experience on the Loans.
S-33
<PAGE>
LOSS AND DELINQUENCY TABLE(1)
(Dollars in Thousands)
<TABLE>
<CAPTION>
At or for the At or for the
At or for the Year Ended Eleven Months Eleven Months
November 30, Ended October 31, Ended October 31,
____ ____
--------------------------------------------------------------------------------------
<S> <C> <C>
Portfolio Unpaid
Principal Balance(2)
Average Portfolio
Unpaid Principal
Balance(3)
60+ Days Delinquent(4)
Real Estate Owned(5)
Total Credit Losses(6) (7) (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 percentage 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.
The ____, _____ balance also includes properties securing mortgage
loans which had been in substance, but not legally, foreclosed by such
date.
(6) Total Credit Losses includes charge-offs of principal, net of
subsequent recoveries, relating to mortgage loans written off as
uncollectible. It does not include (a) losses incurred upon transfer of
mortgage loans to real estate owned and subsequent write downs of real
estate owned balances, (b) expenses associated with maintaining,
repairing, and selling foreclosed properties and real estate owned and
(c) losses (gains) on the disposition of real estate owned.
(7) Annualized.
- ------------------------------
S-34
<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.
IMPACT OF THE YEAR 2000
The Year 2000 issue is the result of many computer programs
that were written using two digits rather than four to define the applicable
year. Any information technology ("IT") systems or non-IT systems (primarily
embedded systems and components) used by the Servicer, its affiliates or any of
their suppliers or outside service providers may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations, causing disruption of operations including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
The Servicer and its affiliates have assigned certain
individuals to identify and correct Year 2000 compliance issues. IT systems with
non-compliant code are expected to be modified or replaced with systems that are
Year 2000 compliant. Similar actions are being taken with respect to non-IT
systems. These individuals are also responsible for investigating the readiness
of suppliers, service providers and other third parties along with the
development of contingency plans where necessary.
All IT systems have been inventoried and assessed for
compliance, and detailed plans are in place for required system modifications or
replacements. Remediation and testing activities are underway with approximately
___% of the systems already compliant. These systems are expected to be fully
compliant by __________________. Progress of the Year 2000 compliance program is
continuously being monitored by senior management.
The Servicer has identified critical suppliers, service
providers and other third parties and has surveyed their Year 2000 compliance
programs. Risk assessments and contingency plans, where necessary, will be
finalized in _________________.
Incremental costs of the Servicer directly related to Year
2000 issues are estimated to be insignificant to the overall operating expenses
of the company between 1998 and 2000. Approximately ___% of the total estimated
spending for the Year 2000 represents costs to modify existing systems. This
estimate assumes that the Servicer will not incur significant Year 2000 related
costs on behalf of suppliers, service providers or other third parties.
The Servicer's Year 2000 efforts are ongoing and its overall
plan, as well as the consideration of contingency plans, will continue to evolve
as new information becomes available. While the Servicer anticipates no major
interruption of its business activities, that will be dependent in part on the
ability of third parties to properly remediate their IT and non-IT systems in a
timely manner. Although the Servicer has implemented the actions described above
to address third party issues, it has no ability to influence the compliance
actions of those parties. Accordingly, while the Servicer believes its actions
in this regard should have the effect of reducing Year 2000 risks, it is unable
to eliminate them or estimate the ultimate effect Year 2000 risks will have on
its operating results.
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 the Loan multiplied by the Servicing
Fee Rate (such product, the "Servicing Fee"). The "Servicing Fee Rate" for each
Loan will equal ___% per annum. Notwithstanding the foregoing, on each
Distribution Date after the Optional Termination Date, the Servicer will reduce
its Servicing Fee to the extent necessary to maintain the weighted average of
the Adjusted Net Mortgage Rates on the Loans in
S-35
<PAGE>
Group I at least equal to ____% and the weighted average of the Adjusted Net
Mortgage Rates on the Loans in Group II at least equal to ____%.
The "Adjusted Net Mortgage Rate" of any Loan is its mortgage
rate, less the sum of the Servicing Fee Rate, the per annum rate on each Loan
payable to the Trustee and the rate at which the Insurer's Monthly Premium
accrues. The amount of the monthly Servicing Fee may also be adjusted 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
only has to pay interest on the amount prepaid through the date of prepayment
and not thereafter. Except with respect to the initial Prepayment Period,
principal prepayments by borrowers on Loans in a particular Group received by
the Servicer from the first day through the fifteenth day of a calendar month
will be distributed to certificateholders of the related class of Certificates
on the Distribution Date in the same month in which such prepayments are
received. Accordingly, there will be no shortfall in the amount of interest to
be distributed to those certificateholders with respect to those prepaid Loans.
Conversely, principal prepayments by borrowers on Loans in a
particular Group 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 of the related
class on the Distribution Date in the month following the month of receipt.
Accordingly, there will be a shortfall in the amount of interest to be
distributed to those certificateholders with respect to those prepaid Loans.
Pursuant to the Agreement, the Servicing Fee for any month
will be reduced, up to the full amount of the Servicing Fee, in order to pass
through to certificateholders the interest to which they would be entitled in
respect of each prepaid Loan on the related Distribution Date. If the amount of
shortfalls in interest resulting from prepayments exceeds the amount of the
Servicing Fee otherwise payable on the related Distribution Date, the amount of
interest to which certificateholders will be entitled 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 (any such advance, an "Advance") prior to each Distribution
Date, from its own funds or funds in the Certificate Account that are not
Available Funds for that Distribution Date, an amount equal to
o the aggregate of payments of principal and interest on
the Loans, net of the Servicing Fee with respect to
those Loans, which were due on the Due Date in the
calendar month preceding the month of that Distribution
Date and which were still delinquent on the
Determination Date in the month of such Distribution
Date, plus
o interest on each Loan as to which the Trust Fund has
acquired the related mortgaged property through
foreclosure or deed-in-lieu of foreclosure ("REO
Property").
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 only has to make Advances
S-36
<PAGE>
with respect to delinquent payments of principal of or interest on each Loan to
the extent that the Advances are, in its reasonable judgment, recoverable from
future payments and collections or insurance payments or proceeds of liquidation
of the related Loan.
If the Servicer decides on any Determination Date to make an
Advance on a Loan, that Advance will be included with the distribution on the
related Distribution Date to holders of Class A- 1 Certificates, if the Advance
was made on a Group I Loan, or holders of Class A-2 Certificates, if the Advance
was made on a Group II Loan. Failure by the Servicer to make an Advance required
under the Agreement with respect to the Class A Certificates will be an Event of
Default thereunder, in which case the Trustee or the successor servicer will be
obligated to make that Advance, in accordance with the terms of the Agreement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Trust Fund will issue the Certificates pursuant to the
Agreement. Set forth below are descriptions of the material terms and provisions
pertaining to the issuance of the Certificates. When this document refers to
particular provisions or terms used in the Agreement, the actual provisions,
including definitions of terms, are incorporated in this document by reference.
The Mortgage Pass-Through Certificates, Series ___-__, will
consist of the Class A-1 and Class A-2 Certificates (collectively, the "Class A
Certificates"), and the Class R Certificates (together with the Class A
Certificates, the "Certificates"). This document only offers the Class A
Certificates. The classes of Class A Certificates will have the respective
initial Class Certificate Balances and Pass-Through Rates set fort or described
on the cover page hereof, except that the Pass-Through Rates for the Class A-1
and Class A-2 Certificates will be subject to an increase as described under
"--Interest." The Class R 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 aggregate principal balance thereof
reduced by all amounts previously distributed to holders of Certificates of that
class as payments of principal.
The Class A Certificates will have an initial aggregate
principal balance of approximately $_____________ and will initially evidence in
the aggregate a beneficial ownership interest of approximately 100% in the
principal of the Trust Fund. The Class A-1 Certificates will have an initial
aggregate principal balance of approximately $_____________ and will initially
evidence in the aggregate a beneficial ownership interest of approximately 100%
of the principal of the Group I Loans. The Class A-2 Certificates will have an
initial aggregate principal balance of approximately $_______________ and will
initially evidence in the aggregate a beneficial ownership interest of
approximately 100% of the principal of the Group II Loans. The Trust Fund will
initially issue the Class A Certificates in book-entry form.
BOOK-ENTRY CERTIFICATES
The Trust Fund will issue each class of Class A Certificates
in one or more certificates that equal the aggregate initial Class Certificate
Balance of that class of Certificates and which will be held by a nominee of The
Depository Trust Company ("DTC"). Investors will hold beneficial interests in
the Class A Certificates indirectly through the book-entry facilities of DTC, as
described herein. Investors may hold their beneficial interests in the Class A
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 Class A Certificates may hold a beneficial interest therein that is not
an integral multiple of $1. DTC has informed the Depositor that its nominee will
be Cede & Co. ("Cede"). Accordingly, Cede is expected to be the holder of record
of the Class A Certificates. Except as described in the Prospectus under
"Description of the Certificates--Book-Entry Certificates," no person acquiring
a Class A Certificate (each, a "Beneficial Owner") will be entitled to receive a
physical certificate representing that Certificate (a "Definitive Certificate").
S-37
<PAGE>
Unless and until Definitive Certificates are issued, it is
anticipated that the only certificateholder of the Class A Certificates will be
Cede, as nominee of DTC. Beneficial Owners of the Class A Certificates will not
be "Certificateholders," as that term is used in the Agreement. Beneficial
Owners are only permitted to exercise the rights of certificateholders directly
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 Class A
Certificates of those Beneficial Owners are credited.
For a description of the book-entry procedures generally
applicable to the Class A 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") that will be maintained for the benefit
of the Trustee on behalf of the certificateholders and the Insurer. 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."
All payments in respect of principal and interest, net of the
related Servicing Fee, on the Loans received by the Servicer subsequent to the
Cut-off Date, other than principal and interest due on the Loans on or before
the Cutoff Date, including Insurance Proceeds and Liquidation Proceeds, net of
Liquidation Expenses, are required to be paid into the Certificate Account not
later than the next Business Day following receipt thereof. The Servicer may
retain as additional servicing compensation 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.
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 with respect to each of the Class A-1 Certificates
and Class A-2 Certificates (the "Class A-1 Distributable Funds" and "Class A-2
Distributable Funds," respectively), and will deposit these amounts in an
account established and maintained by the Trustee for the benefit of the
certificateholders and the Insurer (the "Distribution Account").
DISTRIBUTIONS
A. On each Distribution Date, the Trustee will distribute the
following amounts from Class A-1 Distributable Funds (provided that the Trustee
may only use any Spread Account Draw and Insured Amounts for the items listed in
clauses (4) and (5) below and the Trustee may only use any amounts received
pursuant to clause (B)(6) below for the items listed in clauses (1) through (5)
below), to the extent available, to the parties and in the priorities indicated:
(1) first, to the Insurer, the Insurer's Monthly Premium
based upon the Class Certificate Balance of the Group I Loans;
(2) second, to the Trustee, any amounts then due and owing
representing fees of the Trustee based upon the Class Certificate Balance of the
Group I Loans;
(3) third, to the Servicer, an amount equal to the sum of
(a) the Servicing Fee relating to the Group I Loans, except to the extent
previously paid with permitted withdrawals from the Certificate Account, and (b)
any other amounts expended by the Servicer in connection with Group I Loans and
reimbursable thereto under the Agreement but not previously reimbursed;
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(4) fourth, to the Class A-1 Certificates, the related
Interest Distribution Amount;
(5) fifth, to the Class A- 1 Certificates, an amount equal
to the lesser of (a) the Class A-1 Certificate Formula Principal Amount or (b)
the amount necessary to reduce the Class Certificate Balance of the Class A-1
Certificates to zero;
(6) sixth, to the Class A-2 Certificates to fund any Class
A-2 Available Funds Shortfall;
(7) seventh, to the Insurer, any I&I Payments then due and
owing except to the extent previously paid pursuant to clause B(7) below; and
(8) eighth, for deposit into the Spread Account, all
remaining Available Funds with respect to the Class A-1 Certificates.
B. On each Distribution Date, the Trustee will distribute the
following amounts from Class A-2 Distributable Funds (provided that the Trustee
may only use any Spread Account Draw and Insured Amounts for the items listed in
clauses (4) and (5) below and the Trustee may only use any amounts received
pursuant to clause (A)(6) above for the items listed in clauses (1) through (5)
below), to the extent available, to the parties and in the priorities indicated:
(1) first, to the Insurer, the Insurer's Monthly Premium
based upon the Class Certificate Balance of the Group II Loans;
(2) second, to the Trustee, any amounts then due and owing
representing fees of the Trustee based upon the Class Certificate Balance of the
Group II Loans;
(3) third, to the Servicer, an amount equal to the sum of
(a) the Servicing Fee relating to the Group II Loans, except to the extent
previously paid with permitted withdrawals from the Certificate Account, and (b)
any other amounts expended by the Servicer in connection with Group II Loans and
reimbursable thereto under the Agreement but not previously reimbursed;
(4) fourth, to the Class A-2 Certificates, the related
Interest Distribution Amount;
(5) fifth, to the Class A-2 Certificates, an amount equal
to the lesser of (a) the Class A-2 Certificate Formula Principal Amount or (b)
the amount necessary to reduce the Class Certificate Balance of the Class A-2
Certificates to zero;
(6) sixth, to the Class A-1 Certificates to fund any Class
A-1 Available Funds Shortfall;
(7) seventh, to the Insurer, any I&I Payments then due and
owing except to the extent previously paid pursuant to clause A(7) above; and
(8) eighth, for deposit into the Spread Account, all
remaining Available Funds with respect to the Class A-2 Certificates.
C. On each Distribution Date, following all distributions made
pursuant to clauses (A) and (B) above, the Trustee will distribute any Spread
Account Excess in the Spread Account to the Class R certificateholders.
The Trustee will make Distributions on the Certificates on the
____ day of each month, or if such day is not a business day, on the first
business day thereafter, commencing in ________________, ____ (each, a
"Distribution Date"), to the persons in whose names the Certificates are
registered at the close of business
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(1) on the business day immediately preceding that Distribution Date unless and
until any of the Certificates are issued as physical certificates and (2) while
any physical certificates are outstanding, on the last business day of the
calendar month immediately preceding that Distribution Date (the "Record Date").
Distributions on each Distribution Date will be made by check
mailed to the address of the person entitled thereto as it appears on the
applicable certificate register or, in the case of a certificateholder who holds
100% of a class of Certificates or who holds Certificates with an aggregate
initial Certificate Balance of $1,000,000 or more 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 that certificateholder at a bank
or other depository institution having appropriate wire transfer facilities.
However, the final distribution in retirement of the Certificates will be made
only upon presentment and surrender of the Certificates at the Corporate Trust
Office of the Trustee.
On any Distribution Date, the amount available for
distribution to the Class A-1 Certificates generally will equal the sum of
o Available Funds relating to the Class A-1 Certificates,
o any Available Funds relating to the Class A-2 Certificates
remaining after payment of the amounts required to be distributed
pursuant to clauses (B)(1) through (B)(5) above,
o any amount (the "Spread Account Draw") available from the spread
Account for the Class A-1 Certificates and
o any Insured Amounts for the Class A-1 Certificates (collectively,
"Class A-1 Distributable Funds").
On any Distribution Date, the amount available for distribution to the Class A-2
Certificates generally will equal the sum of
o Available Funds relating to the Class A-2 Certificates,
o any Available Funds relating to the Class A-1 Certificates
remaining after payment of the amounts required to be distributed
pursuant to clauses (A)(1) through (A)(5) above,
o any amount (the "Spread Account Draw") available from the spread
Account for the Class A-2 Certificates and
o any Insured Amounts for the Class A-2 Certificates (collectively,
"Class A-2 Distributable Funds").
"Available Funds" with respect to any Distribution Date and
either the Class A-1 Certificates or Class A-2 Certificates will be equal to the
sum of
o all scheduled installments of interest and principal on the Group
I Loans, with respect to the Class A-1 Certificates, or the Group
II Loans, with respect to the Class A-2 Certificates, (each an
"Applicable Group") due on the Due Date in the calendar month
preceding the month in which that Distribution Date occurs and
received prior to the related Determination Date, together with
any Advances in respect thereof;
o all proceeds of any primary mortgage guaranty insurance policies
and any other insurance policies with respect to the Applicable
Group of Loans, to the extent those 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 in the Applicable Group, by
foreclosure or otherwise (together with Insurance Proceeds,
"Liquidation Proceeds")
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during the calendar month preceding the month of that Distribution
Date (in each case, net of unreimbursed expenses incurred in
connection with a liquidation or foreclosure and unreimbursed
Advances, if any);
o all partial or full prepayments received on Loans in the
Applicable Group during the period from the sixteenth day of the
calendar month preceding the month of that Distribution Date, or,
in the case of the first Distribution Date, from the Cut-off
Date, through the fifteenth day of the month of that Distribution
Date (the "Prepayment Period"); and
o amounts received with respect to that Distribution Date as the
Substitution Adjustment Amount or purchase price in respect of a
Deleted Loan in the Applicable Group or a Loan in the Applicable
Group repurchased by a Seller or the Servicer as of that
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.
The "Class A-1 Available Funds Shortfall" with respect to any
Distribution Date will equal the amount, if any, by which Available Funds
relating to the Class A-1 Certificates for that Distribution Date is less than
the aggregate amount required to be distributed pursuant to clauses (A)(1)
through (A)(5) above. The "Class A-2 Available Funds Shortfall" with respect to
any Distribution Date will equal the amount, if any, by which Available Funds
relating to the Class A-2 Certificates for that Distribution Date is less than
the aggregate amount required to be distributed pursuant to clauses (B)(1)
through (B)(5) above.
PRIORITY OF DISTRIBUTION AMONG CERTIFICATES
As more fully described under "Description of the
Certificates--Interest" and "--Principal," the Trustee will make distributions
on the Certificates on each Distribution Date in the following order of
priority: (1) to interest on the Class A Certificates and (2) to principal on
the Class A Certificates, subject to the priorities set forth herein under
"--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."
INTEREST
The Class A Certificates will accrue interest at the
respective Pass-Through Rates set forth on the cover page hereof, except that
with respect to any Distribution 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 that time (as described under "--Optional Termination"), the
Pass-Through Rates for the Class A-1 and Class A-2 Certificates will increase to
___% per annum and ___% per annum, respectively.
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 each class of
Class A Certificates will be equal to the sum of (1) the amount of interest
accrued at the Pass-Through Rate for that class on the related Class Certificate
Balance, less the amount of Net Interest Shortfalls applicable to that class, as
described below, and (2) the sum of the amounts, if any, by which the amount
described in clause (1) above on each prior Distribution Date exceeded the
amount actually distributed to that class as interest on that Distribution Date
and not subsequently distributed ("Class Unpaid Interest Amounts").
With respect to each Distribution Date, the "Interest Accrual
Period" will be the calendar month preceding the month of that Distribution
Date.
The interest entitlement described above for each class of
Class A Certificates for any Distribution Date will be reduced by the amount of
Net Interest Shortfalls applicable to that class. With respect to any
Distribution Date and either the Class A-1 Certificates or Class A-2
Certificates, "Net Interest Shortfalls" is
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an amount equal to the sum of (1) the aggregate amount of interest that would
otherwise have been received with respect to each Loan in the Applicable Group
that was the subject of a Relief Act Reduction during the calendar month
preceding the month of that Distribution Date and (2) any Net Prepayment
Interest Shortfalls with respect to the Applicable Group and that 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 and either the Class A- 1 Certificates or Class A-2 Certificates, a "Net
Prepayment Interest Shortfall" is the amount by which the aggregate of
Prepayment Interest Shortfalls with respect to the Applicable Group during the
calendar month preceding the month of that Distribution Date exceeds the
aggregate amount payable on that Distribution Date by the Servicer with respect
to that Group of Loans 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 that Loan.
Subject to the terms of the Policy, any interest losses
allocable to the Class A Certificates 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 that Distribution Date.
Interest will be calculated and payable on the basis of a 360-day year divided
into twelve 30-day months.
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 in the Applicable Group 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 Trustee
will distribute the Certificate Formula Principal Amount applicable to each of
the Class A-1 Certificates and Class A-2 Certificates (the "Class A-1
Certificate Formula Principal Amount" and "Class A-2 Certificate Formula
Principal Amount," respectively) as a payment of principal on each class of
Certificates, in each case to the extent of the amount of funds available for
the distribution of principal on each class.
The "Certificate Formula Principal Amount" for any
Distribution Date and with respect to either the Class A-1 Certificates or Class
A-2 Certificates will equal the sum of
o the principal portion of each Scheduled Payment due on each Loan
in the Applicable Group on that Loan's Due Date in the calendar
month preceding the month of that Distribution Date,
o the Stated Principal Balance of each Loan in the Applicable Group
that was repurchased by a Seller or another person pursuant to
the Agreement as of that Distribution Date,
o the Substitution Adjustment Amount in connection with any Deleted
Loan from the Applicable Group received with respect to that
Distribution Date,
o any Insurance Proceeds or Liquidation Proceeds allocable to
recoveries of principal of Loans in the Applicable Group that are
not yet Liquidated Loans received during the calendar month
preceding the month of that Distribution Date,
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o with respect to each Loan in the Applicable Group that became a
Liquidated Loan during the calendar month preceding the month of
that Distribution Date, the amount of Liquidation Proceeds
allocable to principal received during the month preceding the
month of that Distribution Date with respect to that Loan,
o all partial and full principal prepayments by borrowers on Loans
in the Applicable Group received during the related Prepayment
Period, and
o the principal portion of any Loan Losses on Loans in the
Applicable Group incurred during the calendar month preceding the
month of that Distribution Date.
"Liquidated Loan" means, with respect to any Distribution
Date, a defaulted Loan, including any REO Property, which was liquidated in the
calendar month preceding the month of that Distribution Date and as to which the
Servicer has determined, in accordance with the Agreement, that it has received
all amounts it expects to receive in connection with the liquidation of that
Loan, including the final disposition of an REO Property.
"Loan Losses" means the aggregate amount, if any, by which (1)
the outstanding principal balance of each Loan that became a Liquidated Loan
during the calendar month preceding the month of the related Distribution Date
(that principal balance determined immediately before that Loan became a
Liquidated Loan) exceeds (2) 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 that Loan which have not
theretofore been used to reduce the Stated Principal Balance of that Loan.
"Stated Principal Balance" means as to any Loan and Due Date,
the unpaid principal balance of that Loan as of that Due Date, as specified in
the amortization schedule at the time relating thereto, before any adjustment to
that 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, other than with respect to any
Liquidated Loan, received and to the payment of principal due on such
Distribution Date and irrespective of any delinquency in payment by the related
mortgagor. The "Group Principal Balance" of either the Group I Loans or Group II
Loans with respect to any Distribution Date equals the aggregate of the Stated
Principal Balances of the Loans outstanding in the relevant group, including
Loans in foreclosure and REO Properties, on their Due Dates in the month
preceding the month of that Distribution Date. The "Pool Principal Balance" with
respect to any Distribution Date equals the sum of the Group Principal Balances
for the Group I and Group II Loans.
Residual Certificates. The Class R Certificates will remain
outstanding for so long as the Trust Fund exists, 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 Spread Account Excess from
the Spread Account after payment of the other distributions described in
"--Distributions."
EXAMPLE OF DISTRIBUTIONS
The first collection period will begin on December 1, _____
and will continue through December 31, ______. The first Distribution Date will
occur on January 25, _____. 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:
January 1 - January 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.
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January 16 - February 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.
February 20......................... 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 February 25,
____.
Not later than 9:00 a.m. on
February 24......................... The Servicer transfers funds,
including any Advances, in the
Certificate Account to the
Distribution Account.
Not later than 12:00 p.m. on
February 24......................... The Trustee will notify the
Servicer and the Insurer of the
Insured Amounts, if any, required
to be distributed to the holders of
Class A certificates of record at
the close of business on February
24, ____.
February 24......................... Record Date. Distributions on
February 25, ____ will be made to
certificateholders of record at the
close of business on February 24,
________.
February 25......................... Distribution Date. The Trustee or
its designee will transfer funds
from the Distribution Account into
the Spread Account, as required,
will transfer to certificateholders
the amounts required to be
distributed pursuant to the
Agreement and will distribute the
Spread Account Excess to the
holders of Class R Certificates.
CROSS-COLLATERALIZATION PROVISIONS
The Agreement provides for cross-collateralization through the
application of excess amounts generated by one group of Loans to fund shortfalls
in Available Funds from the other group of Loans, subject to certain prior
requirements of such group of Loans. Therefore, as to any Distribution Date, the
amount, if any, of the Class A-1 Distributable Funds remaining after payment of
all then applicable prior requirements relating to the Class A-1 Certificates
will be used to fund any Class A-2 Available Funds Shortfall for that
Distribution Date. Likewise, as to any Distribution Date, the amount, if any, of
the Class A-2 Distributable Funds remaining after payment of all then applicable
prior requirements relating to the Class A-2 Certificates will be used to fund
any Class A-1 Available Funds Shortfall for that Distribution Date. The payment
of any amounts in respect of cross-collateralization will be applied in the
order specified above under "--Distributions."
CERTIFICATE GUARANTY INSURANCE POLICY
The following summary of the terms of the Certificate Guaranty
Insurance Policy to be issued by the Insurer (the "Policy") does not purport to
be complete and is qualified in its entirety by reference to the Policy. You may
obtain a form of the Policy, 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
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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.
The "Insured Amount" for any Distribution date shall equal the
sum of
o any shortfall in amounts available in the Distribution
Account to pay the Interest Distribution Amounts for the
related Interest Accrual Period, plus
o the Guaranteed Principal Distribution Amount, plus
o without duplication of the amount specified in the
immediately preceding bullet, 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 sum of
o the amount, if any, by which the Class Certificate Balance
of the Class A-1 Certificates exceeds the Group Principal
Balance of the Group I Loans as of that Distribution Date,
plus
o the amount, if any, by which the Class Certificate Balance
of the Class A-2 Certificates exceeds the Group Principal
Balance of the Group II Loans as of that 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.
The Insurer will pay claims under the Policy following Receipt
by the Insurer of the appropriate notice for payment on the later to occur of
(1) 12:00 noon, New York City time, on the Business Day following Receipt of
such notice for payment, and (2) 12:00 noon, New York City time, on the relevant
Distribution Date.
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 (1)
a Saturday or Sunday or (2) 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 will be deemed to 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 will 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 those Insured
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Amounts 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 are 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 of 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 those 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 those
certificateholders, and the holders of the Class A Certificates may exercise
those 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
will constitute an "Insurer Default." See "--Voting Rights."
The Agreement requires, on each Distribution Date, the
Trustee, on behalf of the Depositor, to pay to the Insurer a premium with
respect to the Policy (the "Insurer's Monthly Premium") out of Class A-1
Distributable Funds and Class A-2 Distributable Funds (collectively,
"Distributable Funds"). In addition, under the Insurance and Indemnity Agreement
to be executed by the Depositor, Equity One (as both a Seller and Servicer), the
Insurer and the Trustee, the Insurer is entitled to receive payments out of
Distributable Funds pursuant to the priority of payments set forth under
"--Priority of Distributions Among Certificates" (or, in certain instances,
directly from the Depositor or Equity One) in reimbursement for any Insured
Amounts, together with interest thereon if not repaid immediately, paid by the
Insurer under the Policy as well as certain of the expenses of the Insurer and
its counsel, and in satisfaction of any indemnification obligations owed to the
Insurer (collectively, any "I&I Payments").
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 aggregate amount equal to the sum of the Class A-1 Spread Account Deposit
Amount and Class A-2 Spread Account Deposit Amount.
The "Class A- 1 Spread Account Deposit Amount" with respect to
any Distribution Date is an amount equal to any excess of (1) Available Funds
relating to the Class A-1 Certificates over (2) the sum of
o the Insurer's Monthly Premium relating to the Group I Loans,
o any fees due and owing to the Trustee relating to the Group
I Loans,
o any fees due and owing to or Advances or servicing costs or
expenses to be reimbursed to the Servicer with respect to
the Group I Loans,
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o the Interest Distribution Amount for the Class A-1
Certificates,
o the Class A-1 Certificate Formula Principal Amount,
o any amounts paid to the Class A-2 Certificates as part of a
cross-collateralization obligation, and
o any I&I Payments paid to the Insurer on that Distribution
Date.
The "Class A-2 Spread Account Deposit Amount" is an amount equal to any
excess of (1) Available Funds relating to the Class A-2 Certificates over (2)
the sum of
o the Insurer's Monthly Premium relating to the Group II
Loans,
o any fees due and owing to the Trustee relating to the Group
II Loans,
o any fees due and owing to or Advances or servicing costs or
expenses to be reimbursed to the Servicer with respect to
the Group II Loans,
o the Interest Distribution Amount for the Class A-2
Certificates,
o the Class A-2 Certificate Formula Principal Amount,
o any amounts paid to the Class A-1 Certificates as part of a
cross-collateralization obligation, and
o any I&I Payments paid to the Insurer on that Distribution
Date.
On each Distribution Date, amounts, if any, on deposit in the
Spread Account will be available to fund any shortfall between Available Funds
with respect to the Class A Certificates and the amount of principal and
interest due on those Certificates prior to any draws being made on the Policy.
On each Distribution Date, the Trustee will distribute to the holders of the
Class R Certificates any amounts in the Spread Account in excess of the maximum
amount required to be maintained in the Spread Account at any time (the
"Specified Spread Account Requirement") (any such amount, a "Spread Account
Excess"). The Insurer may, in its sole discretion, reduce or eliminate the
Specified Spread Account Requirement without the consent of any
certificateholder as specified in the Agreement, provided that such reduction or
elimination does not result in the reduction of the rating of the Class A
Certificates without taking into account the Policy. 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 holders of the
Class A Certificates.
The funding and maintenance of the Spread Account is intended
to enhance the likelihood of timely payment of principal and interest to the
holders of 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 necessary to fund the full amount of principal and interest
due on the Class A Certificates on any Distribution Date.
OPTIONAL PURCHASE OF DEFAULTED LOANS
The Servicer may, at its option, purchase from the Trust Fund
any Loan that is delinquent in payment by 91 days or more. Any purchase shall be
at a price equal to 100% of the Stated Principal Balance of the 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 that amount is to be distributed.
S-47
<PAGE>
OPTIONAL TERMINATION
On any Distribution Date on which the Pool Principal Balance
is less than ____% of the Cut-off Date Pool Principal Balance (each, 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 this 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
___________________ 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 ________________. Class A
Certificates may be surrendered at the corporate trust office of the Trustee
located at __________________________, Attention: _______________, or at any
other addresses that 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 the 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 those holders and the purchase price of those
Certificates because monthly distributions will not be payable to those holders
until the ____ day, or, if that 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 that delay.
Delinquencies on the Loans that are not advanced by or on
behalf of the Servicer, because those advances 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. In addition, Net
Interest Shortfalls are not covered by the Policy and, therefore, will adversely
affect the yields on the Class A Certificates.
S-48
<PAGE>
PREPAYMENT CONSIDERATIONS AND RISKS
The rate of principal payments and the aggregate amount of
distributions on, 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 in Group I
with respect to the Class A-1 Certificates and the Loans in Group II with
respect to the Class A-2 Certificates. 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 that 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 that 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, you
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 Loans in the Applicable Group could result in you receiving an
actual yield that is lower than your anticipated yield. In the case of a Class A
Certificate purchased at a premium, a faster than anticipated rate of principal
payments could result in you receiving an actual yield that is lower than your
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 Loans in
the Applicable Group may significantly affect your actual yield to maturity,
even if the average rate of principal payments is consistent with your
expectation. In general, the earlier a prepayment of principal on Loans in the
Applicable Group, the greater the effect on your yield to maturity. The effect
on your yield as a result of principal payments occurring at a rate higher or
lower than the rate that you anticipated 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 (1) multiplying the amount of the net reduction, if any, of the
Class Certificate Balance of that Certificate on each Distribution Date by the
number of years from the date of issuance to that Distribution Date, (2) summing
the results and (3) dividing the sum by the aggregate amount of the net
reductions in Class Certificate Balance of that Certificate referred to in
clause (1).
For a discussion of the factors that 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.
S-49
<PAGE>
In general, the weighted average lives of the Class A
Certificates will be shortened if the level of prepayments of principal of Loans
in the Applicable Group 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 that 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 those 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.
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"):
o the Group I Loans consist of six 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)
- --------------------- ----------------- ---------------------- ----------------------- --------------
<S> <C> <C> <C> <C>
o the Group II Loans consist of six loans with the
following characteristics:
<CAPTION>
REMAINING
AMORTIZED
ORIGINAL TERM TO REMAINING TERM TO TERM
PRINCIPAL BALANCE MORTGAGE RATE MATURITY (IN MONTHS) MATURITY (IN MONTHS) (IN MONTHS)
- --------------------- ----------------- ---------------------- ----------------------- --------------
<S> <C> <C> <C> <C>
</TABLE>
o the Loans prepay at the specified constant percentages
of SPA,
o no Loan is ever delinquent and no Loan ever defaults,
o there are no Net Interest Shortfalls and all
prepayments are prepays in full and include 30 days
interest thereon,
o the initial Class Certificate Balance of each class of
Class A Certificates is as set forth on the cover page
hereof,
S-50
<PAGE>
o interest accrues on the Class A Certificates at the
applicable Pass-Through Rate set forth on the cover
page hereof and as described under "Description of the
Certificates--Interest,"
o distributions in respect of the Class A Certificates
are received in cash on the _____ day of each month
commencing in the calendar month following the Closing
Date,
o the Closing Date of the sale of the Class A
Certificates is the date set forth under "Summary of
Terms--Closing Date," and
o the Servicer exercises the option to repurchase the
Loans described herein under "Description of the
Certificates--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.
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 _____% per annum of the then unpaid
principal balance of the pool of mortgage loans in the first month of the life
of the mortgage loans and an additional _____% (precisely ____%) per annum in
each month thereafter (for example, ____% 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
____% 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.
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 these classes. The tables have
been prepared on the basis of the Structuring Assumptions. It is not likely that
(1) the Loans will have the precise characteristics described herein or (2) all
of the Loans will prepay at a constant percentage of SPA. Moreover, the diverse
remaining terms to maturity of the Loans could produce slower or faster
principal distributions than indicated in the tables, which have been prepared
using the specified constant percentages of SPA, even if the remaining term to
maturity of the Loans is consistent with the remaining term to maturity of the
Loans specified in the Structuring Assumptions.
S-51
<PAGE>
CLASS A-1
PERCENT OF INITIAL CLASS CERTIFICATE
BALANCES OUTSTANDING*
Various Constant Percentages of SPA
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------
Closing Date 100% 100% 100% 100% 100% 100%
Weighted Average
Life to Maturity
(in years)**
Weighted Average
Life to Call
(in years)**
- ---------------
* Rounded to the nearest whole percentage.
** Determined as specified under "--Weighted Average Lives of the Class A
Certificates."
S-52
<PAGE>
CLASS A-2
PERCENT OF INITIAL CLASS CERTIFICATE
BALANCES OUTSTANDING*
Various Constant Percentages of SPA
Date 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------------------
Closing Date 100% 100% 100% 100% 100% 100%
Weighted Average
Life to Maturity
(in years)**
Weighted Average
Life to Call
(in years)**
- ---------------
* Rounded to the nearest whole percentage.
** Determined as specified under "--Weighted Average Lives of the Class A
Certificates."
S-53
<PAGE>
LAST SCHEDULED DISTRIBUTION DATE
The "Last Scheduled Distribution Date" for the Class A-1
Certificates is the Distribution Date in ___________________ of ___. The "Last
Scheduled Distribution Date" for the Class A-2 Certificates is the Distribution
Date in November of ______. Each such Last Scheduled Distribution Date is the
Distribution Date in the 12th month following the latest scheduled maturity date
for any of the Loans in each Group. 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 in the
Applicable Group, the Class Certificate Balance of any 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 _________________ (the "Insurer")
for inclusion in this Prospectus Supplement. Accordingly, none of the Depositor,
the Servicer, the Sellers, the Trustee or the Underwriter makes any
representation as to the accuracy or completeness of this information.
The Insurer is a _____________ regulated by the of the State
of ______________ 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 _______________, a ______________ company.
______________, ______________, and _________________ 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 ____________, _____________ and ________, ________, and for
the three years ended _____________, ____, prepared in accordance with generally
accepted accounting principles, included in the Annual Report on Form 10-K of
_____________ (which was filed with the Commission on ____________, ____;
Commission File Number _______) and the consolidated financial statements of the
Insurer and its subsidiaries as of ______________, ____ and for the periods
ending ________, ____ and __________,____ included in the Quarterly Report on
Form 10-Q of ________ for the period ended ____________, ____ (which was filed
with the Commission on ______________, ____), 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 that 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 ______________________ 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 to be a part hereof from the
respective dates of filing of those documents.
The following table sets forth the Insurer's capitalization as
of _______, ____, _______, ____, and _______, ____, and _______, ____,
respectively, in conformity with generally accepted accounting principles.
S-54
<PAGE>
[INSURER'S NAME]
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
___ ___ ___ ___
(UNAUDITED)
<S> <C> <C> <C> <C>
Unearned premiums...........................
Other liabilities...........................
Total liabilities...........................
Stockholder's equity(1).....................
Common stock...........................
Additional paid-in capital.............
Accumulated other comprehensive
income...............................
Retained earnings......................
Total stockholder's equity..................
Total liabilities and stockholder's equity..
</TABLE>
- ----------------------
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "Accumulated other comprehensive income" in accordance with
the Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" adopted by the Insurer effective January 1, 1998. As this new standard
only requires additional information in the financial statements, it does not
affect the Insurer's financial position or results of operations.
For additional financial information concerning the Insurer,
see the audited and unaudited 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 ___________, ____ 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
_________ ______________________ and _____________________.
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 and
for general corporate purposes.
S-55
<PAGE>
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 Class
A Certificates will constitute the "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" in the Prospectus.
The Class A Certificates generally will be treated as debt
instruments issued by the REMIC for federal income tax purposes. Income on the
Class A Certificates must be reported under an accrual method of accounting.
The classes of Class A 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 Class A 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)(4)(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 Class A Certificates will
represent qualifying assets under Section 86OG(a)(3) if acquired by a REMIC
within the prescribed time periods of the Code.
The holders of the Class R Certificates must include the
taxable income of the REMIC in their federal taxable income. The resulting tax
liability of these holders may exceed cash distributions to them during certain
periods. All or a portion of the taxable income from a Class R 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 Class R 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 Class R Certificates should
consult their tax advisors regarding whether, at the time of acquisition, a
Class R 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.
S-56
<PAGE>
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 Retirement
Income Security Act of 1974, as amended ("ERISA") and/or the Code, of the Plan's
acquisition and ownership of those 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 that 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 those 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 the Underwriter. [(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 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.
S-57
<PAGE>
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Enhancement Act of 1984
because certain of the Loans serving as collateral for the Class A Certificates
will be secured by second liens on the related mortgaged properties.
Accordingly, many institutions with legal authority to invest in "mortgage
related securities" may not be legally authorized to invest in the Class A
Certificates.
The appropriate characterization of the Class A Certificates
under various legal investment restrictions, and thus the ability of investors
subject to those restrictions to purchase Class A Certificates, may be subject
to significant interpretive uncertainties. Accordingly, 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.
UNDERWRITING
Subject to the terms and conditions set forth in the
Underwriting Agreement dated as of __________________, 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 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 those 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.
S-58
<PAGE>
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.
___________________, will pass upon certain legal matters on behalf of the
Underwriter.
EXPERTS
The consolidated financial statements of ________________ and
its subsidiaries as of _______________, ____ and __________ and for each of the
years in the three year period ended ____________, ____ are incorporated by
reference herein and in the Registration Statement in reliance upon the report
of __________________, 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 _____________________ ("________") and "Aaa" by
__________________ ("_____" and, together with ________________, the "Rating
Agencies").
The ratings of ____________ and ______________ assigned to
mortgage pass-through certificates address the likelihood of the receipt by
certificateholders of all distributions to which they 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 the 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 _________ or
____________ 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 that 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-59
<PAGE>
INDEX OF DEFINED TERMS
Adjusted Net Mortgage Rate ..................................................36
Advance .....................................................................36
Agreement ...................................................................16
Applicable Group ............................................................40
Available Funds .............................................................40
Balloon Loans ...............................................................17
Beneficial Owner ............................................................37
Business Day ................................................................45
Cede ........................................................................37
Certificate Account .........................................................38
Certificate Formula Principal Amount ........................................42
Certificates ............................................................16, 37
Class A Certificates ....................................................16, 37
Class A- I Spread Account Deposit Amount ....................................46
Class A-1 Available Funds Shortfall .........................................41
Class A-1 Certificate Formula Principal Amount ..............................42
Class A-1 Distributable Funds ...........................................38, 40
Class A-2 Available Funds Shortfall .........................................41
Class A-2 Certificate Formula Principal Amount ..............................42
Class A-2 Distributable Funds ...........................................38, 40
Class A-2 Spread Account Deposit Amount .....................................47
Class Certificate Balance ...................................................37
Class Unpaid Interest Amounts ...............................................41
Closing Date ................................................................17
Code ........................................................................29
Collateral Value ............................................................18
Cut-off Date ................................................................16
Cut-off Date Group I Principal Balance ......................................17
Cut-off Date Group II Principal Balance .....................................17
Cut-off Date Pool Principal Balance .........................................17
Definitive Certificate ......................................................37
Deleted Loan ................................................................29
Depositor ...................................................................16
Distributable Funds .........................................................46
Distribution Account ........................................................38
Distribution Date ...........................................................39
DTC .........................................................................37
Due Date ....................................................................17
Equity One ..................................................................31
Equity One Standards ........................................................30
ERISA .......................................................................57
FHLMC .......................................................................16
Group Principal Balance .....................................................43
Guaranteed Principal Distribution Amount ....................................45
I&I Payments ................................................................46
Insurance Proceeds ..........................................................40
Insured Amount ..............................................................45
Insurer .................................................................16, 54
Insurer Default .............................................................46
Insurer's Monthly Premium ...................................................46
Interest Accrual Period .....................................................41
<PAGE>
Interest Distribution Amount ................................................41
IT ..........................................................................35
Last Scheduled Distribution Date ............................................54
Liquidated Loan .............................................................43
Liquidation Proceeds ........................................................40
Loan Losses .................................................................43
Loans .......................................................................16
Loan-to-Value Ratio .........................................................18
Mixed Use Loan ..............................................................16
Mortgage ....................................................................29
Mortgage File ...............................................................29
Mortgage Note ...............................................................29
Net Interest Shortfalls .....................................................41
Net Prepayment Interest Shortfall ...........................................42
OID .........................................................................56
Optional Termination Date ...................................................48
Permitted Investments .......................................................38
Plan ........................................................................57
Policy ......................................................................44
Pool Principal Balance ......................................................43
Preference Amount ...........................................................45
Prepayment Assumption .......................................................56
Prepayment Interest Excess ..................................................36
Prepayment Interest Shortfall ...............................................42
Prepayment Period ...........................................................41
Rating Agencies .............................................................59
Receipt .....................................................................45
Received ....................................................................45
Record Date .................................................................40
Refinance Loan ..............................................................18
Relief Act Reduction ........................................................42
REO Property ................................................................36
Replacement Loan ............................................................29
Residential Loan ............................................................16
Scheduled Payments ..........................................................17
Securities Act ..............................................................58
Seller and Sellers ..........................................................16
Servicer ....................................................................16
Servicing Fee ...............................................................35
Servicing Fee Rate ..........................................................35
SPA .........................................................................51
Specified Spread Account Requirement ........................................47
Spread Account ..............................................................46
Spread Account Draw .........................................................40
Spread Account Excess .......................................................47
Stated Principal Balance ....................................................43
Structuring Assumptions .....................................................50
Substitution Adjustment Amount ..............................................29
Tax Counsel .................................................................56
S-60
<PAGE>
Trustee .....................................................................16
Underwriter .................................................................58
Underwriter Exemption .......................................................57
Voting Rights ...............................................................48
S-61
<PAGE>
$_______________________________
EQUITY ONE MORTGAGE PASS-THROUGH TRUST _________-_____
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES _________-_____
EQUITY ONE ABS, INC.
(Depositor)
-------------------------------------------------
PROSPECTUS SUPPLEMENT
____________, __________
-------------------------------------------------
[Underwriter's Logo]
S-62
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED JUNE 18, 1999
Prospectus Supplement dated _________, ____
To Prospectus dated __________, ____
$________________________
EQUITY ONE MORTGAGE LOAN TRUST -
$______________[] ASSET BACKED NOTES, SERIES _____-____
$________________[] ASSET BACKED CERTIFICATES, SERIES _____-____
<TABLE>
EQUITY ONE, INC. EQUITY ONE ABS, INC.
as Master Servicer as Depositor
<CAPTION>
[Certificates/Notes] Principal Balance [Certificate] [Note] Payment Dates
----------------- -------------------- ------------- Net Proceeds
Rate to Depositor(1)
---- ---------------
<S> <C> <C> <C>
$ % $
$ % $
- -----------------------------------------------------------------------------------------------------------------------
Total $ N/A $
- ------------
(1) Before deducting expenses, payable by the Depositor, estimated to be $______________.
</TABLE>
<TABLE>
<S> <C>
- ------------------------------
BEFORE BUYING
[CERTIFICATES][NOTES], THE [CERTIFICATES] [NOTES]--
CONSIDER CAREFULLY THE RISK
FACTORS BEGINNING PAGE o the certificates represent an interest in a trust fund consisting primarily of a pool of
S-9 IN THIS DOCUMENT AND [fixed and variable] rate mortgage loans.
ON PAGE __ IN THE
PROSPECTUS. o the notes are secured by assets of the trust fund.
The [certificates] will o currently have no trading market.
represent interests in, and the
[notes] will be secured by CREDIT ENHANCEMENT FOR THE [CERTIFICATES][NOTES] --
the assets of, the trust fund
only and the securities will o will include a [surety bond][letter of credit]. This [policy][letter of credit] will
not represent interests in, be guarantee current payments of interest and ultimate payment of principal to
secured by or be obligations holders of the [certificates][notes] on the terms described in this document.
of any other entity.
[CERTIFICATE INSURER'S LOGO]
This prospectus supplement
may be used to offer and sell
the [certificates][notes] only
if it is accompanied by the
prospectus.
- ------------------------------
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE SECURITIES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[UNDERWRITER'S LOGO]
__________________, as underwriter of the securities, has agreed to purchase the
[certificates][notes] and the [certificates][notes] will be offered by the
underwriter from time to time as provided herein in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. It is expected
that delivery of the [certificates][notes] will be made in book-entry form only
through the facilities of The Depository Trust Company on or about _________,
___________.
S-1
<PAGE>
Information about the [certificates][notes] is presented in
two separate documents that progressively provide more detail:
o the accompanying prospectus which provides general
information, some of which may not apply to your
[certificates][notes], and
o this prospectus supplement, which describes the specific
terms of your [certificates][notes].
We strongly encourage you to read both this prospectus
supplement and the prospectus in full. You should rely only on the information
contained or incorporated by reference in this prospectus supplement and the
accompanying prospectus. We have not authorized anyone to provide you with
different information.
If the description of the terms of your [certificates][notes]
varies between this prospectus supplement and the accompanying prospectus, you
should rely on the information in this prospectus supplement.
We have made cross-references to captions in this prospectus
supplement and the accompanying prospectus under which you can find further
related discussions. The table of contents that follows on the next page and the
table of contents in the accompanying prospectus indicate where these captions
are located.
We are not offering the [certificates][notes] in any state
where the offer is not permitted.
We do not claim that the information in this prospectus
supplement and the accompanying prospectus is accurate as of any date other than
the dates stated on the cover of each document.
Dealers will deliver a prospectus supplement and prospectus
when acting as underwriters of the [certificates][notes] and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
[certificates][notes] will be required to deliver a prospectus supplement and
prospectus for ninety days following the date of this prospectus supplement.
Subject to certain limitations, you can get a copy of any of
the documents referred to in the accompanying prospectus under the caption
"Incorporation of Certain Documents by Reference" free of charge from the
trustee. You should direct any requests for these documents to the Corporate
Trust Office of the Trustee at ________________, telephone: _________________,
facsimile number: __________________, Attention:
________________.
This prospectus supplement and the accompanying prospectus
contain forward-looking statements relating to future economic performance or
projections and other financial items. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the depositor notes that these
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause actual results or performance to differ
materially from these forward-looking statements. Those risks, uncertainties and
other factors include, among others, general economic and business conditions,
competition, changes in political and social conditions, regulatory initiatives
and compliance with government regulations, customer preference and various
other matters, many of which are beyond the depositor's control. These
forward-looking statements, together with related qualifying language and
assumptions, are found in the material, including each of the tables, set forth
under the captions "Risk Factors...... Yield, Prepayment and Maturity
Considerations," and "Yield and Prepayment Considerations." Forward-looking
statements are also found elsewhere in this prospectus supplement and the
accompanying prospectus, and may be identified by, among other things, the use
of forward-looking words such as "expects," "intends," "anticipates,"
"estimates", "believes", "may" or other comparable words. These forward-looking
statements speak only as of the date of this prospectus supplement. The
depositor expressly disclaims any obligation or undertaking to update or revise
forward-looking statements to reflect any change in the depositor's expectations
or any change in events, conditions or circumstances on which any
forward-looking statement is based.
S-2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF TERMS................................................................................................S- 4
RISK FACTORS....................................................................................................S- 9
THE TRUST FUND..................................................................................................S-12
THE [LETTER OF CREDIT] [SURETY BOND] ISSUER.....................................................................S-12
THE MASTER SERVICER.............................................................................................S-12
THE LOAN PROGRAM................................................................................................S-13
DESCRIPTION OF THE LOANS........................................................................................S-17
MATURITY AND PREPAYMENT CONSIDERATIONS..........................................................................S-26
DESCRIPTION OF THE MASTER SERVICING AGREEMENT...................................................................S-26
DESCRIPTION OF THE SECURITIES...................................................................................S-30
THE DEPOSITOR...................................................................................................S-31
THE INDENTURE...................................................................................................S-32
THE TRUST AGREEMENT.............................................................................................S-35
ADMINISTRATION AGREEMENT........................................................................................S-37
THE INDENTURE TRUSTEE...........................................................................................S-37
THE OWNER TRUSTEE...............................................................................................S-37
USE OF PROCEEDS.................................................................................................S-37
FEDERAL INCOME TAX CONSEQUENCES.................................................................................S-37
STATE TAX CONSEQUENCES..........................................................................................S-39
ERISA CONSIDERATIONS............................................................................................S-39
LEGAL INVESTMEENT CONSIDERATIONS................................................................................S-41
UNDERWRITING....................................................................................................S-41
LEGAL MATTERS...................................................................................................S-42
RATINGS.........................................................................................................S-42
INDEX OF DEFINED TERMS..........................................................................................S-43
PROSPECTUS
Risk Factors......................................................................................................
The Trust Fund....................................................................................................
Use of Proceeds...................................................................................................
The Depositor.....................................................................................................
Loan Program......................................................................................................
Description of the Securities.....................................................................................
Credit Enhancement................................................................................................
Yield and Prepayment Considerations...............................................................................
The Agreements....................................................................................................
Legal Aspects of the Loans........................................................................................
Federal Income Tax Consequences...................................................................................
State Tax Considerations..........................................................................................
ERISA Considerations..............................................................................................
Legal Investment..................................................................................................
Method of Distribution............................................................................................
Legal Matters.....................................................................................................
Rating............................................................................................................
Available Information.............................................................................................
Incorporation of Certain Documents by Reference...................................................................
Index of Defined Terms............................................................................................
</TABLE>
S-3
<PAGE>
SUMMARY OF TERMS
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making your
investment decision. You should read this entire prospectus supplement and the
accompanying prospectus carefully before you decide whether to purchase
[certificates][notes].
This summary provides an overview of certain calculations, cash flows
and other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
THE TRUST FUND
Equity One Mortgage Loan Trust ________-____ , a Delaware business
trust, will be formed on ________, ____by Equity One ABS, Inc., as
depositor, [sellers], and ___________,as trustee. ___________,
____________, and __________, as sellers, will sell the mortgage loans
to Equity One ABS, Inc. Equity One ABS, Inc. will deposit the mortgage
loans with the trust fund.
[[Indenture Trustee] will act as trustee for the benefit of the
noteholders.] [[Owner Trustee] will act as trustee for the benefit of
the certificateholders.]
THE SECURITIES
On the closing date, _______________, _____, [the notes will be issued
pursuant to the indenture] [the trust fund will issue the securities].
Generally, we will offer the securities for purchase in denominations
of $25,000 and integral multiples of $1 in excess thereof.
REGISTRATION OF CERTIFICATES
We will issue the securities in book-entry form. You will hold your
interests through a depository. While the securities are book-entry
they will be registered in the name of the depository. The limited
circumstances under which definitive securities will replace the book
entry securities are described in this prospectus supplement.
TRUST PROPERTY
The [Indenture Trustee][Owner Trustee] will hold the trust property for
the benefit of the [noteholders][certificateholders]. The trust
property includes:
o a pool of fixed rate and variable rate mortgage loans
secured by first and/or subordinate liens on one-to
four-family residential properties and mixed
commercial/residential use properties
o payments on the mortgage loans received 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 mortgage loans due prior to the
[cut-off date])
o the deed of trust or mortgage related to each mortgage
loan
o property that once secured a mortgage loan that the
trust fund has acquired through foreclosure or deed in
lieu of foreclosure
o the benefits of the [letter of credit][surety bond]
o amounts on deposit in the various accounts maintained
by the servicer and the trustee for the benefit of the
certificateholders
S-4
<PAGE>
o rights of the depositor under the agreement pursuant to
which the depositor purchased the mortgage loans from
the sellers, including the right to require the sellers
to repurchase mortgage loans for breaches of
representations and warranties
o rights of the sellers under any hazard insurance
policies covering the mortgaged properties
We refer you to "The Trust Fund--General" in this prospectus
supplement.
THE MORTGAGE POOL
On [the closing date] the trust fund will acquire a pool of mortgage
loans. The information below is based on the pool as it existed on [the
cut-off date] of $_______. The mortgage loans have the following
characteristics as of [the cut-off date]:
o number of mortgage loans: ______
o aggregate principal balance: ________$
o mortgaged property location: __states; other than __%
of mortgaged properties located in [state], no state
represents more than ____% of the mortgage loans, by
loan balance
o maximum combined loan to value ratio at origination:
__% (based on credit limit)
o weighted average combined loan-to-value ratio: __%
(approximate)
o combined loan-to-value ratio range: __% to __%
(approximate)
o loan balance range: $___________ to $ ________
(approximate)
o credit limit range: $ __________ to __________
(approximate)
o mortgage loan origination range from __________ to
__________, ____
o weighted average loan utilization rate: __% (approximate)
o average loan balance: $____________
o interest rates range: __% to __%
o weighted average interest rate: __% (approximate)
o weighted average remaining term to stated maturity,
based on principal balance: ___ months (approximate)
o term to stated maturity range: __ months to __ months
o last maturity date: _________
o average credit limit: $____________
o use and type of each mortgaged property: __% owner
occupied; __% second vacation home;
o __% first priority and __% second priority lien
We refer you to "The Mortgage Pool" in this prospectus supplement.
S-5
<PAGE>
SERVICER AND SERVICING
Equity One, Inc. will service, manage and make collections on the
mortgage loans. In exchange for these services, Equity One, Inc. will
receive an annual servicing fee, payable monthly, of __% of the total
principal balance of the mortgage loans. The master servicer will also
be entitled to certain other amounts as servicing compensation from the
trust fund.
We refer you to "Description of the Master Servicing
Agreement--Servicing Compensation and Payment of Expenses" in this
prospectus supplement.
COLLECTIONS
The master servicer will allocate all collections on the loans between
amounts collected in respect of interest and amounts collected in
respect of principal. The master servicer will generally deposit
collections distributable to the securityholders in a collection
account.
We refer you to "Description of the Master Servicing
Agreement--Allocations and Collections" in this prospectus supplement
and "The Agreements--Payments on Loans; Deposits to Security Account"
and "--Collection Procedures" in the accompanying prospectus.
DISTRIBUTIONS TO SECURITYHOLDERS
On the distribution date the trustee will make a payment on each of the
securities. The distribution date will be the ____ day of each month
or, if the ___ day is not a business day, the next business day,
starting with __________, ____.
On each distribution date, collections on the mortgage loans will be
applied in the following order of priority:
o to the master servicer, the servicing fee;
o as payment for the accrued interest due and any overdue
accrued interest, with interest thereon;
o as principal on the securities, the excess of principal
collections over additional balances created during the
preceding collection period. This amount will be
allocated between the notes and certificates, pro rata,
based on their respective principal balances;
o as principal on the securities, payments for any
amounts unrecoverable as loses on the mortgage loans;
o the premium on the [surety bond];
o reimbursement of prior draws made on the [surety bond];
o any remaining amounts to the depositor.
We refer you to "Description of the Securities--Distributions" in this
prospectus supplement.
On the ___ day of that month or, if the ___ day is not a business day,
the prior business day, but no later than two business days prior to
that month's distribution date, the master servicer will calculate, and
instruct the trustee regarding, the amounts to be paid to you on that
month's distribution date.
INTEREST
Interest will accrue on the unpaid principal balance of the securities
at the applicable rate from the closing date to the first distribution
date. After the first distribution date, interest will accrue from and
including
S-6
<PAGE>
the preceding distribution date to but excluding the current
distribution date. [Interest will be calculated on the basis of the
actual number of days in each interest accrual period divided by 360.]
We refer you to "Description of the Securities--Distributions" and
"--Interest" in this prospectus supplement.
CREDIT ENHANCEMENT--GENERAL
Credit enhancements reduce the harm caused to securityholders by
shortfalls in payments received on the mortgage loans. They reduce the
effect of shortfalls on all classes of securities proportionately. The
credit enhancement provided for the benefit of securityholders consists
of the [letter of credit][surety bond], as described below and
elsewhere in this prospectus supplement.
[LETTER OF CREDIT][SURETY BOND]
______________, the __________, will issue the [letter of
credit][surety bond] to provide credit enhancement to the securities.
Generally, the terms of the [letter of credit][surety bond] will
guarantee payment on each distribution date to the trustee, for the
benefit of the securityholders, of an amount sufficient to cover any
shortfalls in funds available to pay amounts due to the securityholders
on that distribution date.
ALLOCATION OF LOSSES
Neither the securities nor the underlying mortgage loans are insured or
guaranteed by any governmental agency or instrumentality, or by any
other entity.
OPTIONAL TERMINATION
The master servicer has the option to purchase all the mortgage loans
and any properties that the trustee acquired in satisfaction of any of
the mortgage loans. The master servicer may exercise this option only
when the aggregate principal balance of all mortgage loans in the trust
fund, including the mortgage loans related to properties which the
trustee has acquired, is less than __% of the aggregate principal
balance of all mortgage loans in the trust fund as of _____________. If
the master servicer exercises this option, your security will be
retired early and you will be entitled to:
o the outstanding principal balance of your security; and
o any unpaid accrued interest on your security at the
applicable rate.
We refer you to "Description of the Securities--Optional Termination"
in this prospectus supplement.
FEDERAL INCOME TAX CONSEQUENCES
The trustee will elect to treat the trust fund as a "real estate
mortgage investment conduit," or REMIC, for federal income tax
purposes. The [certificates][notes] will constitute "regular interests"
in the REMIC.
We refer you to "Federal Income Tax Consequences" in this prospectus
supplement and in the accompanying prospectus.
ERISA CONSIDERATIONS
If you are a fiduciary of any pension or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as
amended, or Section 4975 of the Internal Revenue Code of 1986, as
amended, you should review carefully with your counsel whether you are
permitted to buy or hold any of the securities.
We refer you to "ERISA Considerations" in this prospectus supplement.
S-7
<PAGE>
LEGAL INVESTMENT
You should consult with your counsel to see if you are permitted to buy
any of the securities since the legal investment rules vary depending
on what kind of entity you are and which other entities regulate you.
We refer you to "Legal Investment Considerations" in this prospectus
supplement and "Legal Investment" in the accompanying prospectus.
RATINGS
The Trust Fund will not issue the securities unless they are rated:
o __________ by ____________; and
o __________ by ____________.
The ratings address credit risk. When evaluating credit risk, the
rating agencies look at the likelihood of whether or not you will
receive your interest and principal payments. Credit risk does not
relate to the likelihood of prepayments on the mortgage loans.
Prepayments affect the timing of your payments and, as a result, could
cause your actual return to differ substantially from your anticipated
return on your investment.
We refer you to "Ratings" and "Risk Factors-Certificate Rating Subject
to Change" in this prospectus supplement.
S-8
<PAGE>
RISK FACTORS
o The [notes][certificates] are not suitable investments for all investors.
o You should not purchase any class of [notes][certificates] unless you
understand and are able to bear the prepayment, credit, liquidity and
market risks associated with that class.
o The [notes][certificates] are complex securities and it is important that
you possess, either alone or together with an investment advisor, the
expertise necessary to evaluate the information contained in this
prospectus supplement and the accompanying prospectus in the context of
your financial situation.
o In addition to the matters described elsewhere in this prospectus
supplement and the accompanying prospectus, you should carefully consider
the following risk factors before deciding to purchase
[notes][certificates]. For a discussion of additional risks pertaining to
the [notes][certificates], we refer you to "Risk Factors" in the
accompanying prospectus.
BOOK-ENTRY CERTIFICATES MAY BE ILLIQUID.
Issuance of the Class A Certificates in book-entry form may adversely
affect your ability to sell your certificate in the secondary trading market
since investors may be unwilling to purchase certificates for which they cannot
obtain physical certificates.
We refer you to "Description of the Securities--Book-Entry
Certificates" in this prospectus supplement and "Risk Factors--Book-Entry
Registration" in the accompanying prospectus.
BOOK-ENTRY CERTIFICATES MAY NOT BE ABLE TO BE PLEDGED.
Since transactions in the Class A Certificates can be effected only
through DTC, participating organizations, indirect participants and certain
banks, your ability to pledge your certificate to persons or entities that do
not participate in the DTC system may be limited due to lack of a physical
certificate representing your certificate.
We refer you to "Description of the Securities--Book-Entry
Certificates" in this prospectus supplement and "Risk Factors--Book-Entry
Registration" in the accompanying prospectus.
BOOK-ENTRY CERTIFICATES MAY RESULT IN DELAYED RECEIPT OF DISTRIBUTIONS.
As a beneficial owner, you may experience some delay in receiving
distributions of interest and principal on your certificate since these
distributions will be:
o forwarded by the trustee to DTC;
o credited by DTC to the accounts of DTC participants; and
o ultimately credited to your account by a DTC participant.
We refer you to "Description of the Securities--Book-Entry
Certificates" in this prospectus supplement and "Risk Factors--Book-Entry
Registration" in the accompanying prospectus.
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<PAGE>
LIQUIDATIONS COULD RESULT IN DELAYS AND LOSSES.
Even if the mortgaged properties provide adequate security for the
mortgage loans, substantial delays could be encountered in connection with the
liquidation of mortgage loans that are delinquent and resulting shortfalls in
distributions on your security could occur. Corresponding delays in your receipt
of related proceeds could occur if the [letter of credit][surety bond] provider
fails to perform its obligations under the [letter of credit][surety bond].
Also, liquidation expenses (such as legal fees, real estate taxes, and
maintenance and preservation expenses) will be paid first, thereby reducing the
proceeds payable on your security and thereby reducing the security for the
mortgage loans. Mortgage loans secured by second liens on the related properties
will also generally be subject to the prior payment of loans secured by first
liens on those properties. If any of the mortgaged properties fail to provide
adequate security for the related mortgage loans, you could experience a loss if
the [letter of credit][surety bond] provider fails to perform its obligations
under the [letter of credit][surety bond].
We refer you to "Maturity and Prepayment Considerations" in this
prospectus supplement and "Prepayment and Yield Considerations" in the
accompanying prospectus.
WE HAVE LIMITED INFORMATION REGARDING PREPAYMENT HISTORY.
The yield to maturity and weighted average life of your security will
be affected primarily by the rate and timing of prepayments on the mortgage
loans. The mortgage loans may be prepaid in whole or in part at any time, most
without penalty. The trust's prepayment experience may be affected by a wide
variety of factors, including general economic conditions, interest rates, the
availability of alternative financing and homeowner mobility. In addition,
substantially all of the mortgage loans contain due-on-sale provisions, and the
master servicer intends to enforce these provisions unless (1) enforcement is
not permitted by applicable law or (2) the master servicer, in a manner
consistent with reasonable commercial practice, permits the purchaser of the
related mortgaged property to assume the mortgage loan. To the extent permitted
by applicable law, such assumption will not release the original borrower from
its obligation under the mortgage loan. Enforcement of a due-on-sale provision
would result in repayment in full of the mortgage loan, which would be treated
as a prepayment.
You will bear any reinvestment risks resulting from a faster or slower
incidence of prepayments of the mortgage loans.
Consider carefully the discussion under "Maturity and Prepayment
Considerations" in this prospectus supplement and under "Prepayment and Yield
Considerations" and "Certain Legal Aspects of the Loans--Due-on-Sale Clauses" in
the accompanying prospectus.
RATINGS OF THE SECURITIES RELATE TO CREDIT RISK ONLY.
The ratings of the securities would be based on, among other things,
the adequacy of the value of the mortgage loans, and the [letter of
credit][surety bond]. These ratings should not be deemed a recommendation to
purchase, hold or sell securities, since they do not address market price or
suitability for a particular investor. There is also no assurance that these
ratings will remain in effect for any given period of time or may not be lowered
or withdrawn entirely by the rating agency 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 mortgage loans, these ratings might
also be lowered or withdrawn, among other reasons, because of an adverse change
in the financial or other condition of the [letter of credit][surety bond]
provider or a change in the rating of the [letter of credit][surety bond]
provider's long term debt. Any reduction or withdrawal of a rating will have an
adverse effect on the value of the securities.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
MORTGAGE LOAN BALANCE.
The mortgage loans are secured by deeds of trust or mortgages (which
are first and/or subordinate liens). With respect to mortgage loans that are
secured by first mortgages, the master servicer has the power under certain
circumstances to consent to a new mortgage lien on the mortgaged property having
priority over the mortgage loan. Mortgage loans secured by second mortgages are
entitled to proceeds that remain from the sale of the related mortgaged property
after any related senior mortgage loan and prior statutory liens have been
satisfied. If proceeds from realization on the mortgaged properties are
insufficient to satisfy such loans and prior liens in the aggregate [and the
[letter of credit] [surety bond] provider is unable to perform its obligations
under the [letter of credit] [surety bond] or if the coverage under the [letter
of credit]
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[surety bond] is exhausted] the trust fund and, accordingly, the holders, bear
(1) the risk of delay in distributions while a deficiency judgment against the
borrower is obtained and (2) the risk of loss if the deficiency judgment cannot
be obtained or is not realized upon.
We refer you to "Certain Legal Aspects of the Loans" in the prospectus.
BANKRUPTCY OR INSOLVENCY OF SELLERS OR DEPOSITOR; RECLASSIFICATION OF SALE OF
MORTGAGE LOANS AS FINANCING.
The master servicer, the sellers and the depositor will treat each
conveyance of mortgage loans by the sellers to the depositor as a sale of those
mortgage loans. The depositor will treat each conveyance of mortgage loans from
the depositor to the trust fund as a sale of those mortgage loans. If the
conveyance of the mortgage loans by the sellers to the depositor is treated as a
sale, those mortgage loans would not be part of the related seller's bankruptcy
estate and would not be available to that seller's creditors. In the event of
the bankruptcy or insolvency of a seller, however, the bankruptcy trustee, a
conservator or a receiver of the seller or another person may attempt to
recharacterize the sale of the mortgage loans as a borrowing by the seller,
secured by a pledge of the mortgage loans. Similarly, if the conveyance of the
mortgage loans by the depositor to the trust fund is treated as a sale, those
mortgage loans would not be part of the depositor's bankruptcy estate and would
not be available to the depositor's creditors. In the event of the bankruptcy or
insolvency of the depositor, however, the bankruptcy trustee, a conservator or a
receiver of the depositor or another person may attempt to recharacterize the
sale of the mortgage loans as a borrowing by the depositor, secured by a pledge
of the mortgage loans. In either case, this position, if argued before or
accepted by a court, could prevent timely payments of amounts due on your
security and result in a reduction of payments due on your security.
MOST OF THE MORTGAGE LOANS ARE SECURED BY PROPERTIES LOCATED IN ONLY A FEW
STATES.
As of [the cut-off date]:
o approximately __%, __% and __% (by outstanding principal balance) of the
mortgage loans are secured by properties located in the State of
__________, the Commonwealth of __________ and the State of __________
respectively; and
o the aggregate outstanding principal balance of the mortgage loans secured
by properties in each other state represents not more than approximately
___% of the mortgage loans.
If the ____________, ____________, ____________, or ____________ residential
real estate markets should experience an overall decline in property values
after the dates of origination of the mortgage loans, the rates of losses on the
mortgage loans would be expected to increase, and could increase substantially.
[MASTER SERVICER'S ABILITY TO CHANGE THE TERMS OF THE LOANS.
The master servicer may agree to changes in the terms of a loan
agreement, provided that such changes (1) do not adversely affect the interest
of the holders or the [letter of credit] [surety bond] provider, and (2) are
consistent with prudent business practice. There can be no assurance that
changes in applicable law or the marketplace for mortgage loans or prudent
business practice will not result in changes in the terms of the mortgage
loans.]
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THE TRUST FUND
GENERAL
Equity One Mortgage Loan Trust ________-_____ (the "Issuer" or "Trust
Fund") , is a business trust formed under the laws of the State of Delaware
pursuant to a trust agreement (the "Trust Agreement") by and among Equity One
ABS, Inc., as depositor (the "Depositor") , [sellers] (the "Sellers") , and
___________,as owner trustee ("Owner Trustee") , for the transactions described
in this Prospectus Supplement. The Trust Agreement constitutes the "governing
instrument" under the laws of the State of Delaware relating to business trusts.
After its formation, the Issuer will not engage in any activity other than
o acquiring, holding and managing the Loans and the other assets of
the Trust Fund and proceeds therefrom,
o issuing the Notes and the Certificates,
o making payments on the Notes and the Certificates, and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto
or connected therewith.
The property of the Trust Fund will consist of the following:
o each of the Loans that are ___________;
o collections on the Loans received after ___________, ___ (the
"Cut-off Date") ;
o mortgaged properties pertaining to the related Loans that are
acquired by foreclosure or deed in lieu of foreclosure;
o the Collection Account and the [Distribution Account] (excluding
net earnings thereon);
o the [Letter of Credit] [Surety Bond]; and
o an assignment of the Depositor's rights under the Purchase
Agreement, including all rights of the Depositor to purchase
Additional Balances.
The Trust Fund's principal offices are in _____________, Delaware, in
care of ___________________, as Owner Trustee, at [ ].
THE [LETTER OF CREDIT] [SURETY BOND] ISSUER
The following information with respect to __________ ("__________") has
been furnished by __________. Accordingly, none of the Issuer, the Depositor or
Equity One, Inc., as master servicer (the "Master Servicer") makes any
representation as to the accuracy and completeness of such information.
[Description of Letter of Credit/Surety Issuer]
THE MASTER SERVICER
Equity One, Inc. ("Equity One"), a Delaware corporation and a
wholly-owned operating subsidiary of Popular North America, Inc., a Delaware
corporation, will act as Master Servicer for the Loans pursuant to a master
servicing agreement by and between the Depositor and the Master Servicer (the
"Master Servicing Agreement" . Equity One is engaged primarily in the mortgage
banking business, and as such, originates, purchases, sells and services
mortgage loans. Equity One originates mortgage loans through a retail branch
system and through mortgage loan brokers and correspondents nationwide. Equity
One's loans are principally
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o first- and second-lien, fixed or adjustable rate mortgage
loans secured by
o one- to four-family dwellings or
o multi-family properties and structures which include
both residential dwelling units and space used for
retail, professional or other commercial uses, and
o secured or unsecured consumer loans.
As of ______________, _____, Equity One and its subsidiaries provided
servicing for approximately mortgage loans (including mortgage loans serviced
for third parties) having an aggregate unpaid principal balance of approximately
$______________.
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.
THE LOAN PROGRAM
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").
[Through its bulk purchase program, each Seller also purchases mortgage
loans that have been originated and closed by other lenders. Sellers purchase
mortgage loans in blocks ranging from $1,000,000 to $20,000,000. Prior to
funding any bulk purchase, each loan package is underwritten in accordance with
the Equity One Standards. Bulk purchased loans represent approximately __% of
the Loans as of the Cut-off Date.]
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 generally allow for the origination and
purchase of mortgage loans under underwriting programs designated as Grade A
Credits, Grade B Credits or Grade C Credits. See "Specific Underwriting
Criteria; Underwriting Programs" and "Summary of Underwriting Requirements by
Program" in the Prospectus.
Grade A Credits Loans represent approximately __% of the Loans as of
the Cut-off Date.
Grade B Credits Loans represent approximately __% of the Loans as of
the Cut-off Date.
These underwriting programs and their underwriting criteria may change
from time to time. In addition, on a case-by-case basis, certain loans may be
made to borrowers not strictly qualifying under the specific criteria of an
underwriting program. Deviations from the specific criteria of an underwriting
program are permitted to reflect compensating factors such as local economic
trends, real estate valuations and other credit factors specific to each loan
application and/or each portfolio acquired, but the Equity One Standards do not
include any specific formula or assign any specific weight to compensating
factors for purposes of these determinations. We expect that some of the Loans
included in the mortgage pool will have been originated based on such
underwriting exceptions. Overall,
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the Sellers' goal is to maintain the integrity of these underwriting programs
while simultaneously providing lending officers and corresponding networks with
the flexibility to consider the specific circumstances of each loan.
Under the Equity One Standards, Sellers must use the Full Doc, the NIV
or the AIV loan documentation program to verify a borrower's income. See
"Specific Underwriting Criteria; Underwriting Programs" in the Prospectus.
o Approximately __% of the Loans will be underwritten pursuant to
the Full Doc program.
o Approximately __ % of the Loans will be underwritten pursuant to
the NIV program.
o Approximately __ % of the Loans will be underwritten pursuant to
the AIV 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 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 [, except appraisals
relating to mortgages acquired through bulk purchases.] 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 or AIV program generally do
not exceed $500,000.
Title insurance has been obtained on all Loans in the mortgage pool.
The improvements on each mortgaged property securing a Loan in the mortgage pool
are covered by hazard insurance with extended coverage in an amount at least
equal to the lesser of (1) the principal balance of the Loan or, if the loan is
secured by a second lien, the aggregate principal balance of such Loan and the
prior loan, and (2) the maximum insurable value of the improvements on the
mortgaged property.
LOAN SERVICING
Equity One services substantially all of the mortgage loans
originated or acquired by the Sellers, and also services mortgage loans for
third parties such as the Trust Fund to which the Sellers transfer mortgage
loans originated or acquired by them from time to time. 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 Master Servicer contacts the mortgagor in an attempt to get the mortgagor to
cure the deficiency. Pursuant to its servicing procedures, the Master 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).
Within 45 days thereafter, if the mortgage loan remains delinquent, the Master
Servicer will institute appropriate legal action to foreclose on the mortgaged
property. The Master Servicer may terminate these foreclosure proceedings if the
mortgagor cures the delinquency. Mortgage loans to borrowers in bankruptcy
proceedings may be restructured in accordance with law and with a view to
maximizing recovery on these mortgage loans, including any deficiencies.
Once foreclosure is initiated, the Master Servicer uses a
foreclosure tracking system to monitor the progress of the proceedings. The
system includes state specific parameters to monitor whether proceedings are
progressing within the time frame typical for the state in which the mortgaged
property is located. During the foreclosure proceeding, the Master Servicer
determines the amount of the foreclosure bid and whether to liquidate the
mortgage loan.
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After foreclosure, the Master Servicer may liquidate the
mortgaged property and charge-off the portion of the mortgage loan balance that
was not recovered as part of Liquidation Proceeds. If foreclosed, the mortgaged
property is sold at a public or private sale and may be purchased by the Master
Servicer.
Servicing and charge-off policies and collection practices may
change over time in accordance with, among other things, the business judgment
of the Master 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. You should
not consider this information 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 the actual foreclosure experience on the Loans.
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<PAGE>
LOSS AND DELINQUENCY TABLE(1)
(Dollars in Thousands)
<TABLE>
<CAPTION>
At or for the Year Ended At or for the At or for the
November 30, Eleven Months Eleven Months
Ended October 31, Ended October 31, ____
____ ____
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Portfolio Unpaid
Principal Balance(2)
Average Portfolio
Unpaid Principal
Balance(3)
60+ Days Delinquent(4)
Real Estate Owned(5)
Total Credit Losses(6) (7) (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 percentage 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.
The ____, _____ balance also includes properties securing mortgage
loans which had been in substance, but not legally, foreclosed by such
date.
(6) Total Credit Losses includes charge-offs of principal, net of
subsequent recoveries, relating to mortgage loans written off as
uncollectible. It does not include (a) losses incurred upon transfer of
mortgage loans to real estate owned and subsequent write downs of real
estate owned balances, (b) expenses associated with maintaining,
repairing, and selling foreclosed properties and real estate owned and
(c) losses (gains) on the disposition of real estate owned.
(7) Annualized.
- ------------------------------
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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 Master
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.
IMPACT OF THE YEAR 2000
The Year 2000 issue is the result of many computer programs
that were written using two digits rather than four to define the applicable
year. Any information technology ("IT") systems or non-IT systems (primarily
embedded systems and components) used by the Master Servicer, its affiliates or
any of their suppliers or outside service providers may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations, causing disruption of operations including, among
other things, a temporary inability to process transactions or engage in normal
business activities.
The Master Servicer and its affiliates have assigned certain
individuals to identify and correct Year 2000 compliance issues. IT systems with
non-compliant code are expected to be modified or replaced with systems that are
Year 2000 compliant. Similar actions are being taken with respect to non-IT
systems. These individuals are also responsible for investigating the readiness
of suppliers, service providers and other third parties along with the
development of contingency plans where necessary.
All IT systems have been inventoried and assessed for
compliance, and detailed plans are in place for required system modifications or
replacements. Remediation and testing activities are underway with approximately
___% of the systems already compliant. These systems are expected to be fully
compliant by __________________. Progress of the Year 2000 compliance program is
continuously being monitored by senior management.
The Master Servicer has identified critical suppliers, service
providers and other third parties and has surveyed their Year 2000 compliance
programs. Risk assessments and contingency plans, where necessary, will be
finalized in _________________.
Incremental costs of the Master Servicer directly related to
Year 2000 issues are estimated to be insignificant to the overall operating
expenses of the company between 1998 and 2000. Approximately ___% of the total
estimated spending for the Year 2000 represents costs to modify existing
systems. This estimate assumes that the Master Servicer will not incur
significant Year 2000 related costs on behalf of suppliers, service providers or
other third parties.
The Master Servicer's Year 2000 efforts are ongoing and its
overall plan, as well as the consideration of contingency plans, will continue
to evolve as new information becomes available. While the Master Servicer
anticipates no major interruption of its business activities, that will be
dependent in part on the ability of third parties to properly remediate their IT
and non-IT systems in a timely manner. Although the Master Servicer has
implemented the actions described above to address third party issues, it has no
ability to influence the compliance actions of those parties. Accordingly, while
the Master Servicer believes its actions in this regard should have the effect
of reducing Year 2000 risks, it is unable to eliminate them or estimate the
ultimate effect Year 2000 risks will have on its operating results.
DESCRIPTION OF THE LOANS
GENERAL
The property of the Trust Fund will consist of a pool of the following
types of loans (collectively, the "Loans"): mortgage loans mortgage loans
secured by first and/or subordinate liens on one- to four-family dwellings
(each, a "Residential Loan") and first liens on multi-family properties and
structures which include both residential dwelling units and space used for
retail, professional or other commercial uses (each, a "Mixed Use Loan"). We
expect that Residential Loans secured by one-family detached dwellings will
represent approximately ___% of the Loans. We expect that Mixed Use Loans will
represent less than ___% of the Loans. The Loans were originated pursuant to
loan agreements and disclosure statements (the "Loan Agreements"). The mortgaged
properties securing the Loans consist of [ ]. See "--Loan Terms" below.
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On ____________, ___ (the "Closing Date") , the Depositor will purchase
the Loans from the Sellers pursuant to a purchase agreement (the "Purchase
Agreement").
The Cut-off Date Pool Principal Balance is $_____________ , which is
equal to the aggregate principal balance of the Loans as of the Cut-off Date. As
of the Cut-off Date, the Loans were not more than [ ] days delinquent. The
average Cut-off Date Principal Balance was approximately $____________, the
minimum Cut-off Date Principal Balance was zero, the maximum Cut-off Date
Principal Balance was $_________, the minimum loan rate and the maximum loan
rate as of the Cut-off Date were _______% and ________% per annum, respectively,
and the weighted average loan rate as of the Cut-off Date was approximately
______% per annum. The remaining term to scheduled maturity for the Loans as of
the Cut-off Date ranged from ___ months to ___ months and the weighted average
remaining term to scheduled maturity was approximately ___ months. As of the
Cut-off Date, the Loan-to-Value Ratio of the Loans ranged from __________ % to
_______ % and the weighted average Loan-to-Value Ratio was ___%.
The "Loan-to-Value Ratio" of a Loan is the fraction, expressed as a
percentage, the numerator of which is the principal balance of the Loan at the
date of origination plus, in the case of a Loan secured by a second lien, the
outstanding principal balance of the related first lien mortgage loan on the
date of origination of the second lien loan, and the denominator of which is 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
o the appraised value based on an appraisal obtained by the
originator from an independent fee appraiser at the time of the
origination of the related Loan, and
o if the Loan was originated either in connection with the
acquisition of the mortgaged property by the borrower or within
one year after acquisition of the mortgaged property by the
borrower, the purchase price paid by the borrower for the
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.
As of the Cut-off Date, approximately ________ % of the Loans are
secured by mortgaged properties which are single-family residences and ____ %
were owner-occupied. As of the Cut-off Date, approximately %, %, %, %, % and %
by Cut-off Date Principal Balance are located in [________, _________,
_________, ________, ________, and _____________], respectively.
LOAN TERMS
As of the Cut-off Date, the aggregate of the principal balances of the
Loans is expected to be approximately $__________ (the "Cut-off Date Pool
Principal Balance"). [The Loans provide for payment based on the amortization of
the amount financed over a series of substantially equal monthly payments, with
balloon payments due at the stated maturities of (1) _______ years, in the case
of Residential Loans and (2) ______ to _____ years, in the case of Mixed Use
Loans. Loans with balloon payments may involve a greater degree of risk than
loans which are fully amortizing because the ability of a borrower to make a
balloon payment typically will depend upon the ability of the borrower to either
timely refinance the Loan or sell the related mortgaged property.] All the Loans
provide for payments due on a set day, but not necessarily the first day, of
each month (the "Due Date"). The Loans to be included in the pool were
originated or purchased by the Sellers and were originated substantially in
accordance with the Sellers' underwriting criteria for mortgage loans, described
under "The Loan Program--Underwriting Standards."
Scheduled monthly payments made by the mortgagors on the Loans either
earlier or later than the scheduled Due Dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest. Any Loan may be prepaid in full or in part at any time, most
without penalty.
Each Loan was originated after __________________________.
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The latest stated maturity date of any Loan is _______________________.
The earliest stated maturity date of ___________________________.
As of the Cut-off Date, no Loan was delinquent more than ___ days.
No Loan had a Loan-to-Value Ratio at origination of more than ___%.
Approximately ___ % of the Residential Loans had a Loan-to-Value Ratio at
origination of ___%. In general, the Mixed Use Loans had a Loan to-Value Ratio
at origination of not more than ___%.
No assurance can be given that the values of the mortgaged properties
have remained or will remain at their levels as of the dates of origination of
the related Loans. If the residential real estate market should experience an
overall decline in property values such that the outstanding balances of the
Loans become equal to or greater than the value of the mortgaged properties,
actual losses on the Loans could be higher than losses now generally experienced
in the mortgage lending industry.
The following information sets forth in tabular format certain
information, as of the Cut-off Date, as to the Loans that will be property of
the Trust Fund. Other than with respect to rates of interest, percentages
(approximate) are stated by principal balance of the Loans as of the Cut-off
Date and have been rounded in order to total 100%.
S-19
<PAGE>
LOAN TABLES
<TABLE>
<CAPTION>
LOAN RATE(1)
------------
LOANS RATES (%) NUMBER OF LOANS AGGREGATE PRINCIPAL PERCENT OF POOL
BALANCE OUTSTANDING
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6.250............................. $ %
6.750............................
6.875............................
7.000............................
7.125............................
7.250............................
7.500............................
7.625............................
7.750............................
7.875............................
8.000............................
8.125............................
8.250............................
8.375............................
8.500............................
8.625............................
8.750............................
8.875............................
9.000............................
9.125............................
9.250............................
9.375............................
9.500............................
9.875............................
10.000...........................
-- --------- ------
Totals.......................... -- $ 100.00%
========= ======
</TABLE>
(1) As of the Cut-off Date, the weighted average loan rate of the Loans (as
so adjusted) is expected to be approximately __________%. Without such
adjustment, the weighted average loan rate of the Loans is expected to
be approximately ______% per annum.
S-20
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS (1)
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE AGGREGATE PRINCIPAL
RATIOS (%) NUMBER OF LOANS BALANCE
OUTSTANDING PERCENT OF POOL
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
50.00 and below..........
50.01 to55.00............
55.00 to 60.00...........
60.01 to 65.00...........
65.01 to 70.00...........
70.01 to 75.00...........
75.01 to 80.00...........
80.01 to 85.00...........
85.01 to 90.00...........
90.01 to 95.00...........
-- ---------- ------
Totals $ 100.00%
========== ======
</TABLE>
- ----------
(1) The weighted average original Loan-to-Value Ratio of the Loans is expected
to be approximately ____%.
CURRENT LOAN PRINCIPAL BALANCES(1)
----------------------------------
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF POOL
CURRENT LOAN AMOUNTS LOANS BALANCE OUTSTANDING
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 0 - $ 50,000....
$ 50,001 - $ 100,000....
$100,001 - $ 150,000....
$150,001 - $ 200,000....
$200,001 - $ 250,000....
$250,001 - $ 300,000....
$300,001 - $ 350,000....
$350,001 - $ 400,000....
$400,001 - $ 450,000....
$450,001 - $ 500,000....
$500,001 - $ 550,000....
$550,001 - $ 600,000....
$600,001 - $ 650,000....
$650,001 - $ 750,000....
$750,001 - $1,000,000....
-- ----------- ------
Totals................... $ 100.00%
=========== ======
</TABLE>
- ----------
(1) As of the Cut-off Date, the average current Loan principal balance is
expected to be approximately $_____________.
S-21
<PAGE>
DOCUMENTATION PROGRAM FOR LOANS
-------------------------------
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF POOL
TYPE OF PROGRAM (1) LOANS BALANCE OUTSTANDING
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Full Doc........................ $ %
NIV.............................
AIV.............................
-- ----------- ------
Totals $ 100.00%
=========== ======
</TABLE>
- ----------
(1) See "The Loan Program--Underwriting Standards" herein and "Loan
Program-Specific Underwriting Criteria; Underwriting Programs" in the
Prospectus.
TYPE OF MORTGAGE PROPERTIES
---------------------------
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL
PROPERTY TYPE LOANS BALANCE OUTSTANDING PERCENT OF POOL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Single........................ $ %
Family........................
Condominium...................
Mixed
Use...........................
Two-to four-Family............
Planned Unit Development......
-- -------------- ------
Totals $ 100.00%
============== ======
</TABLE>
OCCUPANCY TYPES (1)
-------------------
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL
OCCUPANCY TYPE LOANS BALANCE OUTSTANDING PERCENT OF POOL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Primary................... $ %
Residence.................
Investor Property.........
Second Residence..........
-- -------------- ------
Totals $ 100.00%
============== ======
</TABLE>
(1) Based upon representation of the related mortgagors at the time of
origination.
S-22
<PAGE>
STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1)
---------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL
STATE LOANS BALANCE OUTSTANDING PERCENT OF CLASS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ %
Other (less than [2]%)............ -- ____________ ______
Totals............................ $ 100.00%
============ ======
</TABLE>
- ----------------
(1) Other includes other states with under [2]% concentrations individually. No
more than approximately ___% of the Loans will be secured by mortgaged
properties located in any one postal zip code area.
OCCUPANCY TYPES(1)
------------------
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PRINCIPAL PERCENT OF POOL
OCCUPANCY TYPE LOANS BALANCE OUTSTANDING (BY PRINCIPAL BALANCE)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-Owner Occupied......
Owner Occupied..........
Totals 100.00%
======
</TABLE>
S-23
<PAGE>
REMAINING TERMS TO MATURITY(1)
------------------------------
<TABLE>
<CAPTION>
REMAINING TERMS TO NUMBER OF AGGREGATE PRINCIPAL
MATURITY (MONTHS) LOANS BALANCE OUTSTANDING PERCENT OF CLASS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
180............................
179............................
178............................
177............................
176............................
175............................
174............................
173............................
172............................
171............................
170............................
169............................
168............................
167............................
166............................
165............................
164............................
163............................
162............................
161............................
160............................
159............................
158............................
157............................
156............................
155............................
154............................
153............................
152............................
151............................
150............................
149............................
158............................
147............................
146............................
145............................
144............................
-- ------------
Totals......................... $ 100.00%
============ ======
</TABLE>
(1) As of the Cut-off Date, the weighted remaining term to maturity of the
Loans is expected to be approximately _____ months.
S-24
<PAGE>
SALE OF LOANS
At the time of issuance of the Securities, the Depositor will sell,
assign and transfer to the Trust Fund all of its right, title and interest in
and to each Loan (including its right to purchase any Additional Balances
arising in the future), related Loan Agreements, mortgages [, security,
agreements] and other related documents (collectively, the "Related Documents"),
without recourse, including all collections received on or with respect to
each such Loan after the Cut-off Date (exclusive of payments in respect of
accrued interest due on or prior to the Cut-off Date or due in the month
of________). The Owner Trustee, concurrently with this transfer, will deliver
the Securities. Each Loan sold, transferred and assigned to the Trust Fund will
be identified on a schedule delivered to the Owner Trustee pursuant to the
Purchase Agreement. This schedule will include information as to the Cut-off
Date Principal Balance of each Loan, as well as information with respect to the
Loan's loan rate.
The Purchase Agreement will permit each Seller to maintain possession
of the Related Documents and certain other documents relating to the Loans (the
"Mortgage Files") and the sale, transfer and assignment of the Loans to the
Owner Trustee will be filed of public record.
Within 90 days of on Assignment Event the Owner Trustee will review the
Loans and the Related Documents and if any Loan or Related Document is found to
be defective in any material respect and such defect is not cured within 90 days
following notification thereof to the Seller and the Depositor by the Owner
Trustee, the Seller will be obligated to repurchase the Loan and to deposit the
Repurchase Price into the Collection Account. Upon such retransfer, the
principal balance of such Loan will be deducted from the Pool Balance. In lieu
of any such repurchase, the Seller may substitute an Eligible Substitute Loan.
Any such repurchase or substitution will be considered a payment in full of such
Loan. The obligation of the Seller to accept a transfer of a Defective Loan is
the sole remedy regarding any defects in the Loans and Related Documents
available to the Owner Trustee or the holders.
With respect to any Loan, the "Repurchase Price" is equal to the
principal balance of such Loan at the time of any transfer described above plus
accrued and unpaid interest thereon to the date of repurchase.
An "Eligible Substitute Loan" is a Loan substituted by the Depositor
for a Defective Loan which must, on the date of such substitution,
o have an outstanding principal balance (or in the case of a
substitution of more than one Loan for a Defective Loan, an
aggregate outstanding principal balance) of not _% more or less
than the principal balance of the Defective Loan;
o have a loan rate not less than the loan rate of the Defective
Loan and not more than 1 % in excess of the loan rate of the
Defective Loan;
o have a loan rate based on the same Index Rate with adjustments to
such loan rate made on the same Interest Rate Adjustment Date as
that of the Defective Loan;
o have a mortgage or security interest of the same or higher level
of priority as the mortgage or security interest relating to the
Defective Loan;
o have a remaining term to maturity not more than ___ months
earlier and not more than ___ months later than the remaining
term to maturity of the Defective Loan;
o comply with each representation and warranty as to the Loans set
forth in the Purchase Agreement (deemed to be made as of the date
of substitution);
o in general, have an original Combined Loan-to-Value Ratio not
greater than that of the Defective Loans; and
o satisfy certain other conditions specified in the Purchase
Agreement.
S-25
<PAGE>
To the extent the principal balance of an Eligible Substitute Loan is less than
the principal balance of the related Defective Loan, the Seller will be required
to make a deposit to the Collection Account equal to such difference.
Each Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the Owner
Trustee with respect to each Loan (e.g., Cut-off Date Principal Balance and the
loan rate). In addition, each Seller will represent and warrant on the Closing
Date that at the time of transfer to the Depositor, that Seller has sold,
transferred and assigned all of its right, title and interest in each Loan and
the Related Documents, free of any lien, subject to certain exceptions. Upon
discovery of a breach of any of these representations and warranties that
materially and adversely affects the interests of the holders or the [Letter of
Credit] [Surety Bond] provider in the related Loan and Related Documents, the
Seller of the Loan will have a period of 90 days after discovery or notice of
the breach to effect a cure. If the breach cannot be cured within the 90-day
period, the Seller will be obligated to repurchase or substitute the Defective
Loan from the Trust Fund. The same procedure and limitations that are set forth
above for the repurchase or substitution of Defective Loans will apply to the
transfer of a Loan that is required to be repurchased or substituted because of
a breach of a representation or warranty in the Purchase Agreement that
materially and adversely affects the interests of the holders.
Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Loans."
MATURITY AND PREPAYMENT CONSIDERATIONS
All of the Loans may be prepaid in full or in part at any time. The
prepayment experience with respect to the Loans will affect the weighted average
life of the Securities.
The rate of prepayment on the Loans cannot be predicted. The prepayment
experience of the Trust Fund with respect to the Loans may be affected by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the loan rates on the Loans, the
Loans could be subject to higher prepayment rates than if prevailing interest
rates were to remain at or above the loan rates on the Loans. Conversely, if
prevailing interest rates were to rise significantly, the rate of prepayments on
the Loans would generally be expected to decrease. No assurances can be given as
to the rate of prepayments on the Loans in stable or changing interest rate
environments. Substantially all of the Loans contain due-on-sale provisions and
the Master Servicer intends to enforce these provisions, unless enforcement is
not permitted by applicable law. The enforcement of a due-on-sale provision will
have the same effect as a prepayment of the related Loan. See "Certain Legal
Aspects of the Loans--Due-on-Sale Clauses" in the Prospectus.
The yield to an investor who purchases the Securities in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Loans is actually different than the rate anticipated
by such investor at the time the Securities were purchased.
Collections on the Loans may vary due to, among other things, the
seasonal purchasing and payment habits of borrowers. In addition, it is possible
that borrowers may fail to make scheduled payments.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust Fund and it can be expected that some borrowers will
not prepay their Loans to any significant degree. See "Yield and Prepayment
Considerations" in the Prospectus.
DESCRIPTION OF THE MASTER SERVICING AGREEMENT
The Master Servicer shall establish and maintain on behalf of the Owner
Trustee an account (the "Collection Account") for the benefit of the holders.
The Collection Account will be an Eligible Account. Subject to the investment
provision described in the following paragraphs, upon receipt by the Master
Servicer of amounts in respect of the Loans (excluding amounts representing
administrative charges, annual fees, taxes, assessments, credit insurance
charges, insurance proceeds to be applied to the restoration or repair of a
mortgaged property or similar items), the Master Servicer will deposit these
amounts in the Collection Account. Amounts so deposited may be invested in
Eligible Investments, as described in the Master Servicing Agreement, maturing
no later than
S-26
<PAGE>
one business day prior to the date on which the amount on deposit therein is
required to be deposited in the [Distribution Account] or on such Distribution
Date if approved by the Rating Agencies. Not later than the ______ business day
prior to each Distribution Date (the "Determination Date"), the Master Servicer
will notify the Owner Trustee and the Indenture Trustee of the amount of the
deposit to be included in funds available for the related Distribution Date.
The Owner Trustee and the Indenture Trustee will establish one or more
accounts (each, a "Security Account") into which will be deposited amounts
withdrawn from the Collection Account for distribution to holders on a
Distribution Date. The Security Account will be an Eligible Account. Amounts on
deposit therein will be invested in Eligible Investments maturing on or before
the business day prior to the related Distribution Date.
An "Eligible Account" is
o an account that is maintained with a depository institution whose
debt obligations at the time of any deposit therein have the
highest short-term debt rating by the Rating Agencies,
o one or more accounts with a depository institution having a
minimum long-term unsecured debt rating of "___" by and "___" by
_, which accounts are fully insured by either the Savings
Association Insurance Fund ("SAIF") or the Bank Insurance Fund
("BIF") of the Federal Deposit Insurance Corporation ("FDIC")
established by such fund,
o a segregated trust account maintained with the Owner Trustee or
an affiliate of the Owner Trustee in its fiduciary capacity, or
o an account that is otherwise acceptable to each Rating Agency as
evidenced by a letter from each Rating Agency to the Owner
Trustee, without reduction or withdrawal of their then current
ratings of the Securities.
"Eligible Investments" are specified in the Master Servicing Agreement
and are limited to
o obligations of the United States or any agency thereof, provided
such obligations are backed by the full faith and credit of the
United States;
o general obligations of or obligations guaranteed by any state of
the United States or the District of Columbia receiving the
highest long-term debt rating of each Rating Agency rating the
Securities, or such lower rating as will not result in the
downgrading or withdrawal of the ratings then assigned to the
Securities by each such Rating Agency;
o commercial or finance company paper which is then receiving the
highest commercial or finance company paper rating of each such
Rating Agency, or such lower rating as will not result in the
downgrading or withdrawal of the ratings then assigned to the
Securities by each such Rating Agency;
o certificates of deposit, demand or time deposits, or bankers'
acceptances issued by any depository institution or trust company
incorporated under the laws of the United States or of any state
thereof and subject to supervision and examination by federal
and/or state banking authorities, provided that the commercial
paper and/or long term unsecured debt obligations of such
depository institution or trust company (or in the case of the
principal depository institution in a holding company system, the
commercial paper or long-term unsecured debt obligations of such
holding company, but only if Moody's is not a Rating Agency) are
then rated one of the two highest long-term and the highest
short-term ratings of each such Rating Agency for such
securities, or such lower ratings as will not result in the
downgrading or withdrawal of the rating then assigned to the
Securities by any such Rating Agency;
o 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;
S-27
<PAGE>
o guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation containing, at the time of the
issuance of such agreements, such terms and conditions as will
not result in the downgrading or withdrawal of the rating then
assigned to the Securities by any such Rating Agency;
o repurchase obligations with respect to any security described in
the first two bullets above, in either case entered into with a
depository institution or trust company (acting as principal)
described in the fourth bullet above;
o securities (other than stripped bonds, stripped coupons or
instruments sold at a purchase price in excess of 115% of the
face amount thereof) bearing interest or sold at a discount
issued by any corporation incorporated under the laws of the
United States or any state thereof which, at the time of such
investment, have one of the two highest ratings of each Rating
Agency (except if the Rating Agency is Moody's, such rating shall
be the highest commercial paper rating of Moody's for any such
securities), or such lower rating as will not result in the
downgrading or withdrawal of the rating then assigned to the
Securities by any such Rating Agency, as evidenced by a signed
writing delivered by each such Rating Agency; and
o other investments having a specified stated maturity and bearing
interest or sold at a discount acceptable to each Rating Agency
as will not result in the downgrading or withdrawal of the rating
then assigned to the Securities by any such Rating Agency, as
evidenced by a signed writing delivered by each such Rating
Agency; provided that no such instrument shall be an Eligible
Investment if such instrument evidences the right to receive
interest only payments with respect to the obligations underlying
such instrument.
ALLOCATIONS AND COLLECTIONS
All collections on the Loans will generally be allocated in accordance
with the Loan Agreements between amounts collected in respect of interest and
amounts collected in respect of principal. As to any Distribution Date,
"Interest Collections" will be equal to the aggregate of the amounts collected
during the related Collection Period, including Net Liquidation Proceeds,
allocated to interest pursuant to the terms of the Loan Agreements.
As to any Distribution Date, "Principal Collections" will be equal to
the sum of
o the amounts collected during the related Collection Period,
including Net Liquidation Proceeds, and allocated to principal
pursuant to the terms of the Loan Agreements and
o any [Substitution Adjustment Amounts].
"Net Liquidation Proceeds" with respect to a Loan are equal to the
aggregate of all amounts received upon liquidation of such Loan, including,
without limitation, insurance proceeds, reduced by related expenses, but not
including the portion, if any, of such amount that exceeds the principal balance
of the Loan at the end of the Collection Period immediately preceding the
Collection Period in which such Loan became a Liquidated Loan plus accrued and
unpaid interest thereon through the date of liquidation.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the principal balances of all Loans as of such date. The principal
balance of a Loan (other than a Liquidated Loan) on any day is equal to
o the Cut-off Date Principal Balance thereof, plus
o any Additional Balances in respect of that Loan, minus
o all collections credited against the principal balance of that
Loan in accordance with the related Loan Agreement prior to that
day. The principal balance of a Liquidated Loan after final
recovery of related Liquidation Proceeds will be zero.
S-28
<PAGE>
HAZARD INSURANCE
The Master Servicing Agreement provides that the Master Servicer
maintain hazard insurance on the mortgaged properties relating to the Loans.
While the terms of the related Loan Agreements generally require borrowers to
maintain hazard insurance, the Master Servicer will not monitor the maintenance
of such insurance.
The Master Servicing Agreement requires the Master Servicer to maintain
for any mortgaged property acquired upon foreclosure of a Loan, by deed in lieu
of foreclosure [or upon realization of a security interest], hazard insurance
with extended coverage in an amount equal to the lesser of
o the maximum insurable value of the mortgaged property or
o the outstanding balance of the Loan plus the outstanding balance
on any mortgage loan senior to the Loan at the time of
foreclosure, deed in lieu of foreclosure [or realization upon the
security interest], plus accrued interest and the Master
Servicer's good faith estimate of the related liquidation
expenses to be incurred in connection therewith.
The Master Servicing Agreement provides that the Master Servicer may satisfy its
hazard insurance obligation by maintaining a blanket policy insuring against
losses on the mortgaged properties underlying the Loans. If this blanket policy
contains a deductible clause, the Master Servicer will be obligated to deposit
in the Collection Account the sums which would have been deposited therein but
for that clause. As set forth above, all amounts collected by the Master
Servicer, net of any reimbursements to the Master Servicer, under any hazard
policy, except for amounts to be applied to the restoration or repair of the
mortgaged property, will ultimately be deposited in the Collection Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and the like, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Loans will be underwritten by
different insurers and, therefore, will not contain identical terms and
conditions, the basic terms thereof are dictated by state laws. Most of these
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive or an
exact description of the insurance policies relating to the mortgaged
properties.
REALIZATION UPON DEFAULTED LOANS
The Master Servicer will foreclose upon or otherwise comparably convert
to ownership mortgaged properties securing defaulted Loans when, in accordance
with applicable servicing procedures under the Master Servicing Agreement, no
satisfactory arrangements can be made for the collection of delinquent payments.
In connection with this foreclosure or other conversion, the Master Servicer
will follow the practices that it deems necessary or advisable and that are in
keeping with its general mortgage servicing activities. The Master Servicer will
not be required to expend its own funds in connection with foreclosure or other
conversion, correction of default on a related senior mortgage loan or
restoration of any property unless, in its sole judgment, the foreclosure,
correction or restoration will increase Net Liquidation Proceeds. The Master
Servicer will be reimbursed out of Liquidation Proceeds for advances of its own
funds as liquidation expenses before any Net Liquidation Proceeds are
distributed to securityholders or the [related Seller].
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, other than the first Collection
Period, the Master Servicer will retain from interest collections in respect of
the Loan a portion of such interest collections as a monthly Servicing Fee in
the amount equal to _% per annum ("Servicing Fee Rate") on the aggregate
principal balances of the Loans as of the first day of each Collection Period.
The Master Servicer will retain all assumption fees, late payment charges and
other fees and charges, to the extent collected from borrowers, as additional
servicing compensation.
S-29
<PAGE>
The Master Servicer will pay certain ongoing expenses associated with
the Trust Fund and incurred by it in connection with its responsibilities under
the Master Servicing Agreement, including, without limitation, payment of the
fees and disbursements of the Trustee, any custodian appointed by the Trustee,
the entity maintaining the Security Register relating to the Securities and any
paying agent. In addition, the Master Servicer will be entitled to reimbursement
for certain expenses incurred by it in connection with defaulted Loans and in
connection with the restoration of mortgaged properties, these right of
reimbursement being prior to the rights of holders to receive any related Net
Liquidation Proceeds.
DESCRIPTION OF THE SECURITIES
GENERAL
The Asset-Backed Notes, Series _______-_____ (the "Notes") will be
issued pursuant to the Indenture (the "Indenture") dated as of _______________,
199_, between the Trust Fund and ___________ as Indenture Trustee (the
"Indenture Trustee") . The Asset-Backed Certificates, Series _______-_____ (the
"Certificates") will be issued pursuant to the Trust Agreement dated as of
_________, 199_, among the Depositor, ____________, and ___________ as Owner
Trustee. The following is a description of the material provisions of the Notes
and Certificates (collectively, the "Securities") , and the Indenture and Trust
Agreement. As used herein, "Agreement" shall mean either the Trust Agreement or
the Indenture, as the context requires.
The Certificates will be freely transferable and exchangeable at the
corporate trust office of the Owner Trustee. The Notes will be freely
transferable and exchangeable at the corporate trust office of the Indenture
Trustee.
BOOK-ENTRY SECURITIES
The Securities will be initially issued in book-entry form (the
"Book-Entry Securities"). Persons acquiring beneficial ownership interests in
the Book-Entry Securities will hold their Securities through the Depository
Trust Company ("DTC") in the United States [, or CEDEL or Euroclear (in Europe)]
if they are participants of these systems, or indirectly through organizations
that are participants in these systems. The Book-Entry Securities will be issued
in one or more certificates which equal the aggregate principal balance of the
Securities and will initially be registered in the name of Cede & Co., the
nominee of DTC. [CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositories which in turn
will hold such positions in customers' securities accounts in the depositories'
names on the books of DTC.] [Citibank will act as depository for CEDEL and Chase
will act as depository for Euroclear (in such capacities, individually the
"Relevant Depository" and collectively the "European Depositories").] Investors
may hold beneficial interests in the Book-Entry Securities in minimum
denominations of $1,000 and in integral multiples of $1.00 in excess thereof.
Except as described below, no person acquiring a Book-Entry Security will be
entitled to receive a physical certificate representing that Security (a
"Definitive Security"). Unless and until Definitive Securities are issued, it is
anticipated that the only "Securityholder" of the Book-Entry Securities will be
Cede & Co., as nominee of DTC. Beneficial owners will not be "Securityholders"
as that term is used in the Agreements. Beneficial owners can only exercise
their rights indirectly through DTC participants and DTC.
DISTRIBUTIONS
On each Distribution Date, collections on the Loans will be applied in
the following order of priority:
o to the Master Servicer, the Servicing Fee;
o as payment for the accrued interest due and any overdue accrued
interest on the respective principal balance of the Notes and the
Certificates;
S-30
<PAGE>
o as principal on the Securities, the excess of Principal
Collections over Additional Balances created during the preceding
Collection Period, such amount to be allocated between the Notes
and Certificates pro rata, based on their respective principal
balances;
o as principal on the Securities, as payment for any Liquidation
Loss Amounts on the Loans;
o as payment for the premium for the [Letter of Credit] [Surety
Bond];
o to reimburse prior draws made on the [Letter of Credit] [Surety
Bond]; and
o any remaining amounts to the Seller.
As to any Distribution Date, the "Collection Period" is the calendar
month preceding the month of that Distribution Date.
"Liquidation Loss Amount" means with respect to any Liquidated Loan,
the unrecovered principal balance thereof at the end of the Collection Period in
which that Loan became a Liquidated Loan after giving effect to the Net
Liquidation Proceeds in connection therewith.
INTEREST
Note Rate. Interest will accrue on the unpaid principal balance of the
Notes at the per annum rate (the "Note Rate") equal to __% per annum from the
Closing Date to the first Distribution Date and thereafter interest will accrue
on the Notes from and including the preceding Distribution Date to but excluding
the current Distribution Date (each, an "Interest Accrual Period") [at a
floating rate equal to LIBOR (as defined herein) plus __%] [__%]. [Interest will
be calculated on the basis of the actual number of days in each Interest Accrual
Period by 360.] A failure to pay interest on any Notes on any Distribution Date
that continues for five days constitutes an event of default under the
Indenture.
Pass-Through Rate. Interest will accrue on the unpaid principal balance
of the Certificates at the per annum rate (the "Pass-Through Rate") equal to __
% per annum from the Closing Date to the first Distribution Date and thereafter
interest will accrue on the Certificates for each Interest Accrual Period at [a
floating rate equal to LIBOR (as defined herein) plus ___%] [__%]. [Interest
will be calculated on the basis of the actual number of days in each Interest
Accrual Period divided by 360.] A failure to pay interest on any Certificates on
any Distribution Date that continues for five days constitutes an event of
default under the Trust Agreement.
OPTIONAL TERMINATION
The Trust Fund will terminate on the Distribution Date following the
earlier of
o ___________________ and
o the final payment or other liquidation of the last Loan in the
Trust Fund.
The Loans will be subject to optional repurchase by the Master Servicer
on any Distribution Date after the principal balance is reduced to an amount
less than or equal to $____ (5% of the initial principal balance). The
repurchase price will be equal to the sum of the outstanding principal balance
and accrued and unpaid interest thereon at the weighted average of the loan
rates through the day preceding the final Distribution Date.
THE DEPOSITOR
Equity One ABS, Inc., the Depositor, is a Delaware corporation
organized in March of 1997 for the limited purpose of acquiring, owning and
transferring Trust Assets and selling interests therein or bonds secured
thereby. The Depositor is a limited purpose wholly owned finance subsidiary of
Equity One. The Depositor maintains its
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principal office at 103 Springer Building, 3411 Silverside Road, Wilmington,
Delaware 19810. Its telephone number is (302) 478-6160.
THE INDENTURE
The following is a description of the material terms of the Indenture.
Whenever particular sections or defined terms of the Indenture are referred to,
those sections or defined terms are thereby incorporated herein by reference.
See "Description of the Securities" herein for a description of certain
additional terms of the Indenture.
REPORTS TO NOTEHOLDERS
The Indenture Trustee will mail to each noteholder, at the noteholder's
request, at its address listed on the note register maintained with the
Indenture Trustee a report setting forth certain amounts relating to the Notes.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
With respect to the Notes, events of default under the Indenture will
consist of the following:
o a default for five days or more in the payment of any interest on
any Note;
o a default in the payment of the principal of or any installment
of the principal of any Note when the same becomes due and
payable;
o a default in the observance or performance of any covenant or
agreement of the Trust Fund made in the Indenture and the
continuation of any such default for a period of 30 days after
notice thereof is given to the Trust Fund by the Indenture
Trustee or to the Trust Fund and the Indenture Trustee by the
holders of at least 25% in principal amount of the Notes then
outstanding;
o any representation or warranty made by the Trust Fund in the
Indenture or in any certificate delivered pursuant thereto or in
connection therewith having been incorrect in a material respect
as of the time made, and such breach not having been cured within
30 days after notice thereof is given to the Trust Fund by the
Indenture Trustee or to the Trust Fund and the Indenture Trustee
by the holders of at least 25% in principal amount of Notes then
outstanding; or
o certain events of bankruptcy, insolvency, receivership or
liquidation of the Trust Fund.
[The amount of principal required to be paid to noteholders under the
Indenture will generally be limited to amounts available to be deposited in the
Collection Account. Therefore, the failure to pay principal on the Notes
generally will not result in the occurrence of an event of default until the
final scheduled Distribution Date for the Notes.] If there is an event of
default with respect to a Note due to late payment or nonpayment of interest due
on a Note, additional interest will accrue on the unpaid interest at the
interest rate on the Note (to the extent lawful) until the interest is paid. The
additional interest on unpaid interest shall be due at the time that interest is
paid.
If there is an event of default due to late payment or nonpayment of
principal on a Note, interest will continue to accrue on that principal at the
interest rate on the Note until that principal is paid. If an event of default
should occur and be continuing with respect to the Notes, the Indenture Trustee
or holders of a majority in principal amount of Notes then outstanding may
declare the principal of the Notes to be immediately due and payable. This
declaration may, under certain circumstances, be rescinded by the holders of a
majority in principal amount of the Notes then outstanding.
If the Notes are due and payable following an event of default with
respect thereto, the Indenture Trustee may institute proceedings to collect
amounts due or foreclose on Trust Fund property or exercise remedies as a
secured party. If an event of default occurs and is continuing with respect to
the Notes, the Indenture Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the holders of the Notes, if the Indenture Trustee reasonably believes it will
not be adequately indemnified against the costs, expenses and liabilities which
might be incurred by it in complying with such request. Subject to the
provisions for indemnification and certain limitations contained in the
Indenture, the holders of a majority in principal amount of the outstanding
Notes will have the right to direct the time, method and place of conducting any
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proceeding or any remedy available to the Indenture Trustee, and the holders of
a majority in principal amount of the Notes then outstanding may, in certain
cases, waive any default with respect thereto, except a default in the payment
of principal or interest or a default in respect of a covenant or provision of
the Indenture that cannot be modified without the waiver or consent of all the
holders of the outstanding Notes.
No holder of a Note will have the right to institute any proceeding
with respect to the Indenture, unless
o such holder previously has given the Indenture Trustee
written notice of a continuing event of default,
o the holders of not less than 25% in principal amount of the
outstanding Notes have made written request to the Indenture
Trustee to institute such proceeding in its own name as
Indenture Trustee,
o such holder or holders have offered the Indenture Trustee
reasonable indemnity,
o the Indenture Trustee has for 60 days failed to institute
such proceeding and
o no direction inconsistent with such written request has been
given to the Indenture Trustee during the 60-day period by
the holders of a majority in principal amount of the Notes.
In addition, the Indenture Trustee and the noteholders, by accepting the Notes,
will covenant that they will not at any time institute against the Trust Fund
any bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law. With respect to the Trust Fund, neither the Indenture
Trustee nor the Owner Trustee in its individual capacity, nor any holder of a
Certificate representing an ownership interest in the Trust Fund nor any of
their respective owners, beneficiaries, agents, officers, directors, employees,
affiliates, successors or assigns will, in the absence of an express agreement
to the contrary, be personally liable for the payment of the principal of or
interest on the Notes or for the agreements of the Trust Fund contained in the
Indenture.
CERTAIN COVENANTS
The Indenture will provide that the Trust Fund may not consolidate with
or merge into any other entity, unless
o the entity formed by or surviving such consolidation or merger is
organized under the laws of the United States, any state or the
District of Columbia,
o such entity expressly assumes the Trust Fund's obligation to make
due and punctual payments upon the Notes and the performance or
observance of any agreement and covenant of the Trust Fund under
the Indenture,
o no event of default shall have occurred and be continuing
immediately after such merger or consolidation,
o the Trust Fund has been advised that the ratings of the
Securities then in effect would not be reduced or withdrawn by
any Rating Agency as a result of such merger or consolidation,
and
o the Trust Fund has received an opinion of counsel to the effect
that such consolidation or merger would have no material adverse
tax consequence to the Trust Fund or to any noteholder or
certificateholder.
The Trust Fund will not, among other things,
o except as expressly permitted by the Indenture, sell, transfer,
exchange or otherwise dispose of any of the assets of the Trust
Fund,
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o claim any credit on or make any deduction from the principal and
interest payable in respect of the Notes (other than amounts
withheld under the Code or applicable state law) or assert any
claim against any present or former noteholder because of the
payment of taxes levied or assessed upon the Trust Fund,
o dissolve or liquidate in whole or in part,
o permit the validity or effectiveness of the Indenture to be
impaired or permit any person to be released from any covenants
or obligations with respect to the Notes under the Indenture
except as may be expressly permitted thereby, or
o permit any lien, charge excise, claim, security interest,
mortgage or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the Trust Fund or
any part thereof, or any interest therein or the proceeds
thereof.
The Trust Fund may not engage in any activity other than as specified under "The
Trust Fund" herein. The Trust Fund will not incur, assume or guarantee any
indebtedness other than indebtedness incurred pursuant to the Notes and the
Indenture.
ANNUAL COMPLIANCE STATEMENT
The Trust Fund will be required to file annually with the Indenture
Trustee a written statement as to the fulfillment of its obligations under the
Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
The Indenture Trustee will be required to mail each year to all
noteholders a report relating to any change in its eligibility and qualification
to continue as Indenture Trustee under the Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of any
indebtedness owing by the Trust Fund to the Indenture Trustee in its individual
capacity, any change in the property and funds physically held by the Indenture
Trustee as such and any action taken by it that materially affects the Notes and
that has not been previously reported, but if no changes of this nature have
occurred, then no report will be required.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral
securing the Notes upon the delivery to the Indenture Trustee for cancellation
of all the Notes or, with certain limitations, upon deposit with the Indenture
Trustee of funds sufficient for the payment in full of all the Notes.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority in principal amount of
the Notes then outstanding, the Trust Fund and the Indenture Trustee may execute
a supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the Indenture, or modify, except as provided below, in any
manner the rights of the noteholders. Without the consent of the holder of each
outstanding Note affected thereby, however, no supplemental indenture will
o change the due date of any installment of principal of or
interest on any Note or reduce the principal amount thereof, the
interest rate specified thereon or the redemption price with
respect thereto or change any place of payment where or the coin
or currency in which any Note or any interest thereon is payable;
o impair the right to institute suit for the enforcement of certain
provisions of the Indenture regarding payment;
o reduce the percentage of the aggregate amount of the outstanding
Notes, the consent of the holders of which is required for any
supplemental indenture or the consent of the holders of which is
required for any waiver of compliance with certain provisions of
the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture;
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o modify or alter the provisions of the Indenture regarding the
voting of Notes held by the Trust Fund, the Depositor or an
affiliate of any of them;
o decrease the percentage of the aggregate principal amount of
Notes required to amend the sections of the Indenture which
specify the applicable percentage of aggregate principal amount
of the Notes necessary to amend the Indenture or certain other
related agreements; or
o permit the creation of any lien ranking prior to or on a parity
with the lien of the Indenture with respect to any of the
collateral for the Notes or, except as otherwise permitted or
contemplated in the Indenture, terminate the lien of the
Indenture on any such collateral or deprive the holder of any
Note of the security afforded by the lien of the Indenture.
The Trust Fund and the Indenture Trustee may also enter into supplemental
indentures, without obtaining the consent of the noteholders, for the purpose
of, among other things, adding any provisions to or changing in any manner or
eliminating any of the provisions of the Indenture or of modifying in any manner
the rights of the noteholders; provided that such action will not materially and
adversely affect the interest of any noteholder.
VOTING RIGHTS
At all times, the voting rights of noteholders under the Indenture will
be allocated among the Notes pro rata in accordance with their outstanding
principal balances.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Indenture Trustee nor any director, officer
or employee of the Depositor or the Indenture Trustee will be under any
liability to the Trust Fund or the related noteholders for any action taken or
for refraining from the taking of any action in good faith pursuant to the
Indenture or for errors in judgment. However, none of the Indenture Trustee, the
Depositor and any director, officer or employee thereof will be protected
against any liability which would otherwise be imposed by reason of willful
malfeasance, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties under the Indenture.
Subject to certain limitations set forth in the Indenture, the Indenture Trustee
and any director, officer, employee or agent of the Indenture Trustee shall be
indemnified by the Trust Fund and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the Indenture
other than any loss, liability or expense incurred by reason of willful
malfeasance, bad faith or gross negligence in the performance of its duties
under such Indenture or by reason of reckless disregard of its obligations and
duties under the Indenture. Any indemnification of this nature by the Trust Fund
will reduce the amount distributable to the noteholders. All persons into which
the Indenture Trustee may be merged or with which it may be consolidated or any
person resulting from that merger or consolidation shall be the successor of the
Indenture Trustee under each Indenture.
THE TRUST AGREEMENT
The following is a description of the material terms of the Trust
Agreement. Whenever particular sections or defined terms of the Trust Agreement
are referred to, those sections or defined terms are thereby incorporated herein
by reference. See "Description of the Securities" herein for a description of
certain additional terms of the Trust Agreement.
AMENDMENT
The Depositor and the Owner Trustee may amend the Trust Agreement,
without consent of the holders, to cure any ambiguity, to correct or supplement
any provision or for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions thereof or of modifying in any
manner the rights of the holders. However, this action cannot, as evidenced by
an opinion of counsel satisfactory to the Owner Trustee, adversely affect in any
material respect the interests of any holders. The Depositor and the Owner
Trustee also may amend the Trust Agreement with the consent of the holders of
Certificates evidencing at least a majority in principal amount of then
outstanding Certificates and holders owning Voting Interests aggregating not
less than a majority of
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the aggregate Voting Interests for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Trust
Agreement or modifying in any manner the rights of the holders.
INSOLVENCY EVENT
"Insolvency Event" means, with respect to any person, any of the
following events or actions; certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings with respect to
that person and certain actions by that person indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations. Upon termination of the Trust Fund, the Owner Trustee shall direct
the Indenture Trustee promptly to sell the assets of the Trust Fund, other than
the Collection Account, in a commercially reasonable manner and on commercially
reasonable terms. The proceeds from any this sale, disposition or liquidation of
the Loans will be treated as collections on the Loans and deposited in the
Collection Account. The Trust Agreement will provide that the Owner Trustee does
not have the power to commence a voluntary proceeding in bankruptcy with respect
to the Trust Fund without the unanimous prior approval of all holders, including
the Depositor, of the Trust Fund and the delivery to the Owner Trustee by each
holder, including the Depositor, of a certificate certifying that the holder
reasonably believes that the Trust Fund is insolvent.
LIABILITY OF THE DEPOSITOR
Under the Trust Agreement, the Depositor will agree to be liable
directly to an injured party for the entire amount of any losses, claims,
damages or liabilities, other than those incurred by a noteholder or a holder in
the capacity of an investor with respect to the Trust Fund, arising out of or
based on the arrangement created by the Trust Agreement.
VOTING INTERESTS
As of any date, the aggregate principal balance of all Certificates
outstanding will constitute the
voting interest of the Issuer (the "Voting Interests"). However,
o for purposes of determining Voting Interests, Certificates owned
by the Issuer or its affiliates, other than the Depositor, will
be disregarded and deemed not to be outstanding, and
o in determining whether the Owner Trustee is protected in relying
upon any request, demand, authorization, direction, notice,
consent or waiver, only Certificates that the Owner Trustee knows
to be so owned will be so disregarded.
Certificates so owned that have been pledged in good faith may be regarded as
outstanding if the pledgee establishes to the satisfaction of the Owner Trustee
the Pledgor's right so to act with respect to those Certificates and that the
pledgee is not the Issuer or its affiliates.
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CERTAIN MATTERS REGARDING THE OWNER TRUSTEE AND THE DEPOSITOR
Neither the Depositor, the Owner Trustee nor any director, officer or
employee of the Depositor or the Owner Trustee will be under any liability to
the Trust Fund or the related holders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Trust Agreement or
for errors in judgment. However, none of the Owner Trustee, the Depositor and
any director, officer or employee thereof will be protected against any
liability which would otherwise be imposed by reason of willful malfeasance, bad
faith or gross negligence in the performance of duties or by reason of reckless
disregard of obligations and duties under the Trust Agreement. Subject to
certain limitations set forth in the Trust Agreement, the Owner Trustee and any
director, officer, employee or agent of the Owner Trustee shall be indemnified
by the Trust Fund and held harmless against any loss, liability or expense
incurred in connection with investigating, preparing to defend or defending any
legal action, commenced or threatened, relating to the Trust Agreement other
than any loss, liability or expense incurred by reason of willful malfeasance,
bad faith or gross negligence in the performance of its duties under the Trust
Agreement or by reason of reckless disregard of its obligations and duties under
the Trust Agreement. Any indemnification of this nature by the Trust Fund will
reduce the amount distributable to the holders. All persons into which the Owner
Trustee may be merged or with which it may be consolidated or any person
resulting from that merger or consolidation will be the successor of the Owner
Trustee under each Trust Agreement.
ADMINISTRATION AGREEMENT
______________ in its capacity as "Administrator," will enter into the
"Administration Agreement" with the Trust Fund and the Owner Trustee pursuant to
which the Administrator will agree, to the extent provided in the Administration
Agreement, to provide notices and perform other administrative obligations
required by the Indenture and the Trust Agreement.
THE INDENTURE TRUSTEE
[____________________] is the Indenture Trustee under the Indenture.
The mailing address of the Indenture Trustee is ________________________
Attention: Corporate Trust Department.
THE OWNER TRUSTEE
[_____________________] is the Owner Trustee under the Trust Agreement.
The mailing address of the Owner Trustee is ____________________ Attention:
Corporate Trust Administration.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be applied by the
Depositor towards the purchase price of the Loans.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes the material United States
federal income tax aspects of the purchase, ownership and disposition of the
Notes and Certificates, is based on the provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), the Treasury regulations promulgated
thereunder, and published rulings and court decisions in effect as of the date
hereof, all of which are subject to change, possibly retroactively. This
discussion does not address every aspect of the United States federal income tax
laws which may be relevant to noteholders and certificateholders in light of
their personal investment circumstances or to certain types of
certificateholders subject to special treatment under the United States federal
income tax laws (for example, tax exempt investors, banks and life insurance
companies). Accordingly, investors should consult their tax advisors regarding
United States federal, state, local, foreign and any other tax consequences to
them of investing in the Notes and Certificates.
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TAX CHARACTERIZATION OF THE TRUST FUND AS A PARTNERSHIP
Stradley, Ronon, Stevens & Young, LLP, special counsel to the Depositor
("Tax Counsel"), is of the opinion that the Trust Fund will not be an
association (or a publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion is based on the assumption that the
terms of the Trust Agreement and related documents will be complied with, and on
Tax Counsel's conclusions that
o the Trust Fund will not have certain characteristics necessary
for a business trust to be classified as an association taxable
as a corporation and
o the nature of the income of the Trust Fund exempts it from the
rule that certain publicly traded partnerships are taxable as
corporations, so that the Trust Fund will not be characterized as
a publicly traded partnership taxable as a corporation.
If the Trust Fund was taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
The Trust Fund will agree, and the noteholders will agree by their
purchase of the Notes, to treat the Notes as debt for federal income tax
purposes. Based on the application of existing law to the facts as set forth in
the Agreement and other relevant documents and assuming compliance with the
terms of the Agreement as in effect on the date of issuance of the Notes and
Certificates, Tax Counsel is of the opinion that the Notes will be treated as
debt instruments for federal income tax purposes as of such date. See "Federal
Income Tax Consequences--Tax Consequences to Holders of the Notes" in the
Prospectus.
It is not anticipated that the Notes will be issued with original issue
discount ("OID"). The stated interest thereon will be taxable to a noteholder as
ordinary interest income when received or accrued in accordance with such
noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
The Trust Fund and the Master Servicer will agree, and the
certificateholders will agree by their purchase of Certificates, to treat the
Trust Fund as a partnership for purposes of federal and state income tax,
franchise tax and any other tax measured in whole or in part by income, with the
assets of the partnership being the assets held by the Trust Fund, the partners
of the partnership being the certificateholders, and the Notes being debt of the
partnership. However, the proper characterization of the arrangement involving
the Trust Fund, the Certificates, the Notes, and the Master Servicer is not
clear because there is no authority on transactions closely comparable to that
contemplated herein. For example, because the Certificates have certain features
characteristic of debt, the Certificates might be considered debt of the Trust
Fund. Any such characterization would not result in materially adverse tax
consequences to certificateholders as compared to the consequences from
treatment of the Certificates as equity in a partnership.
As a partnership, the Trust Fund will not be subject to federal income
tax. Rather, each certificateholder will be required to separately take into
account such holder's allocated share of income, gains, losses, deductions and
credits of the Trust Fund. The Trust Fund's income will consist primarily of
interest and finance charges earned on the Loans (including appropriate
adjustments for market discount, OID and bond premium) and any gain upon
collection or disposition of Loans. The Trust Fund's deductions will consist
primarily of interest accruing with
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respect to the Notes, servicing and other fees, and losses or deductions upon
collection or disposition of Loans. See "Federal Income Tax Consequences--Tax
Consequences to Holders of the Certificates" in the Prospectus.
The Trust Fund expects to withhold on the portion of its taxable income
that is allocable to foreign certificateholders pursuant to Section 1446 of the
Code, as if such income were effectively connected to a United States trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures. See "Federal Income Tax
Consequences--Tax Consequences to Holders of the Certificates--Tax Consequences
to Foreign Certificateholders" in the Prospectus.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences" herein, potential investors should consider
the state income tax consequences of the acquisition, ownership, and disposition
of the Securities offered hereunder. State income tax law may differ
substantially from the corresponding federal tax law, and this discussion does
not purport to describe any aspect of the income tax laws of any state.
Therefore, potential investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Securities offered
hereunder.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") and Section 4975 of the Code impose certain restrictions on employee
benefit plans subject to ERISA or plans or arrangements subject to Section 4975
of the Code ("Plans") and on persons who are parties in interest or disqualified
persons ("Parties in Interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Securities without
regard to the ERISA considerations described below, subject to other applicable
federal and state law. However, any such governmental or church plan which is
qualified under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules set
forth in section 503 of the Code. Any Plan fiduciary which proposes to cause a
Plan to acquire any of the Securities should consult with its counsel with
respect to the potential consequences under ERISA, and the Code, of the Plan's
acquisition and ownership of the Securities. See "ERISA Considerations" in the
Prospectus. Investments by Plans are also subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits Parties in Interest with respect to a
Plan from engaging in certain transactions (including loans) involving a Plan
and its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in some
cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA) on
Parties in Interest which engage in non-exempt prohibited transactions.
PLAN ASSET REGULATION
The United States Department of Labor ("DOL") has issued final
regulations concerning the definition of what constitutes the assets of a Plan
for purposes of ERISA and the prohibited transaction provisions of the Code (the
"Plan Asset Regulation"). The Plan Asset Regulation describes the circumstances
under which the assets of an entity in which a Plan invests will be considered
to be "plan assets" such that any person who exercises control over such assets
would be subject to ERISA's fiduciary standards. Under the Plan Asset
Regulation, generally when a Plan invests in another entity, the Plan's assets
do not include, solely by reason of such investment, any of the underlying
assets of the entity. However, the Plan Asset Regulation provides that, if a
Plan acquires an "equity
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interest" in an entity that is neither a "publicly-offered security" (as defined
therein) nor a security issued by an investment company registered under the
Investment Company Act of 1940, the assets of the entity will be treated as
assets of the Plan investor unless certain exceptions apply. If the
[Notes/Certificates] were deemed to be equity interests and no statutory,
regulatory or administrative exemption applies, the Trust Fund could be
considered to hold plan assets by reason of a Plan's investment in the Notes.
Such plan assets would include an undivided interest in any assets held by the
Trust Fund. In such an event, the Trustee and other persons, in providing
services with respect to the Trust Fund's assets, may be parties in interest
with respect to such Plans, subject to the fiduciary responsibility provisions
of Title I of ERISA, including the prohibited transaction provisions of Section
406 of ERISA, and Section 4975 of the Code with respect to transactions
involving the Trust Fund's assets. Under the Plan Asset Regulation, the term
"equity interest" is defined as any interest in an entity other than an
instrument that is treated as indebtedness under "applicable local law" and
which has no "substantial equity features." Although the Plan Assets Regulation
is silent with respect to the question of which law constitutes "applicable
local law" for this purpose, DOL has stated that these determinations should be
made under the state law governing interpretation of the instrument in question.
In the preamble to the Plan Assets Regulation, DOL declined to provide a precise
definition of what features are equity features or the circumstances under which
such features would be considered "substantial," noting that the question of
whether a plan's interest has substantial equity features is an inherently
factual one, but that in making a determination it would be appropriate to take
into account whether the equity features are such that a Plan's investment would
be a practical vehicle for the indirect provision of investment management
services. Stradley, Ronon, Stevens & Young, LLP ("ERISA Counsel") has rendered
its opinion that the Notes will be classified as indebtedness without
substantial equity features for ERISA purposes. ERISA Counsel's opinion is based
upon the terms of the Notes, the opinion of Tax Counsel that the Notes will be
classified as debt instruments for federal income tax purposes and the ratings
which have been assigned to the Notes. However, if contrary to ERISA Counsel's
opinion the Notes are deemed to be equity interests in the Trust Fund and no
statutory, regulatory or administrative exemption applies, the Trust Fund could
be considered to hold plan assets by reason of a Plan's investment in the Notes.
THE UNDERWRITER'S EXEMPTION
DOL has granted to [ ] (the "Underwriter") an administrative exemption
(Prohibited Transaction Exemption ______ (the "Exemption")) which exempts from
the application of the prohibited transaction rules of ERISA and the related
excise tax provisions of Section 4975 of the Code transactions relating to
o the acquisition, sale and holding by Plans of certificates
representing an undivided interest in certain asset backed
pass-through trusts with respect to which the Underwriter or any
of its affiliates is the sole underwriter or the manager or
co-manager of the underwriting syndicate, and
o the servicing, operation and management of such asset backed
passthrough trusts, provided that the general conditions and
certain other conditions set forth in the Exemption are
satisfied.
The Exemption will apply to the acquisition, holding and resale of the
Certificates by a Plan provided that certain conditions (some of which are
described below) are met.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
o 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;
o 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;
o the Certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest
generic rating categories from either Standard & Poor's Ratings
Group, a division of The McGraw-Hill Companies, Moody's Investors
Service, Inc, Duff & Phelps Credit Rating Co. or Fitch Investors
Service, Inc.;
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o the trustee must not be an affiliate of the Underwriter, the
Trustee, any Master Servicer, any obligor with respect to assets
held in the Trust Fund constituting more than five percent of the
aggregate unamortized principal balance of the assets in the
Trust Fund;
o the sum of all payments made to and retained by the Underwriter
in connection with the distribution of the Certificates
represents not more than reasonable compensation for underwriting
the Certificates; the sum of all payments made to and retain by
the Issuer pursuant to the assignment of the Loans to the Trust
Fund represents not more than the fair market value of such
Loans; the sum of all payments made to and retained by the
servicer represents not more than reasonable compensation for
such person's services under a master agreement and
reimbursements of such person's reasonable expenses in connection
therewith; and
o the Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of
1933, as amended.
The Underwriter believes that the Exemption will apply to the
acquisition and holding of the Certificates by Plans and that all conditions of
the Exemption other than those within the control of the investors will be met.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Securities on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any
Securities, a fiduciary of a Plan should make its own determination as to
whether the Trust Fund, as obligor on the Securities, is a party in interest
with respect to the Plan, the availability of the exemptive relief provided in
the Plan Asset Regulations and the availability of any other prohibited
transaction exemptions. Purchasers should analyze whether the decision may have
an impact with respect to purchases of the Securities.
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the Securities under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Securities, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether, and
to what extent, the Securities will constitute legal investments for them. The
Depositor makes no representation as to the proper characterization of the
Securities for legal investment or financial institution regulatory purposes, or
as to the ability of particular investors to purchase Securities under
applicable legal investment restrictions. The uncertainties described above, and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Securities, may adversely affect
the liquidity of the Securities.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and _____________ (the "Underwriting
Agreement"), the Depositor has agreed to sell to [ ] (the "Underwriter"), and
the Underwriter has agreed to purchase from the Depositor, the Securities. The
Underwriter is obligated to purchase all the Securities offered hereby if any
are purchased. Distribution of the Securities will be made by the Underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Proceeds to the Depositor are expected to be
$______________ from the sale of the Notes and $______________ from the sale of
the Certificates, before deducting expenses payable by the Depositor of
$____________. In connection with the purchase and sale of the Securities, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts, concessions or commissions.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute payments the Underwriter may be required
to make in respect thereof The Depositor is an affiliate of the Underwriter. The
Underwriter is an affiliate of the Depositor.
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LEGAL MATTERS
Certain legal matters with respect to the Securities will be passed
upon for the Depositor by Stradley, Ronon, Stevens & Young, LLP, Philadelphia,
Pennsylvania and for the Underwriter by ________________.
RATINGS
It is a condition to the issuance of the [certificates/notes]
that they be rated "AAA" by _____________________ ("________") and "Aaa" by
__________________ ("_____" and, together with ________________, the "Rating
Agencies").
The ratings of ____________ and ______________ assigned to
[certificates/notes] address the likelihood of the receipt by the holders of all
distributions to which they are entitled. The rating process addresses
structural and legal aspects associated with the [certificates/notes], including
the nature of the underlying mortgage loans. The ratings assigned to
[certificates/notes] do not represent any assessment of the likelihood that
principal prepayments will be made by the mortgagors or the degree to which the
prepayments will differ from that originally anticipated. The rating of the
[certificates/notes] will depend primarily on an assessment by the Rating
Agencies of the Loans and upon the claims-paying ability of the [letter of
credit/surety bond] provider. Any change in the ratings of the [letter of
credit/surety bond] provider by _________ or ____________ may result in a change
in the ratings on the [certificates/notes]. The ratings do not address the
possibility that holders 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 [certificates/notes] 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 [certificates/notes].
The Depositor has not requested that any rating agency rate
the [certificates/notes] other than as stated above. However, there can be no
assurance as to whether any other rating agency will rate the
[certificates/notes], or, if it does, what rating would be assigned by that
rating agency. A rating on the [certificates/notes] by another rating agency, if
assigned at all, may be lower than the ratings assigned to the
[certificates/notes] as stated above.
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<PAGE>
INDEX OF DEFINED TERMS
Administration Agreement......................................................37
Administrator.................................................................37
Agreement.....................................................................30
BIF...........................................................................27
Book-Entry Securities.........................................................30
Certificates..................................................................30
Closing Date..................................................................18
Code..........................................................................37
Collateral Value..............................................................18
Collection Account............................................................26
Collection Period.............................................................31
Cut-off Date..................................................................12
Cut-off Date Pool Principal Balance...........................................18
Defective Loans...............................................................26
Definitive Security...........................................................30
Depositor.....................................................................12
Determination Date............................................................27
DOL...........................................................................39
DTC...........................................................................30
Due Date......................................................................18
Eligible Account..............................................................27
Eligible Investments..........................................................27
Eligible Substitute Loan......................................................25
Equity One....................................................................12
Equity One Standards..........................................................13
ERISA.........................................................................39
ERISA Counsel.................................................................40
European Depositories.........................................................30
Exemption.....................................................................40
FDIC..........................................................................27
Indenture.....................................................................30
Indenture Trustee.............................................................30
Insolvency Event..............................................................36
Interest Accrual Period.......................................................31
Interest Collections..........................................................28
Issuer........................................................................12
IT 17
<PAGE>
Liquidation Loss Amount.......................................................31
Loan Agreements...............................................................17
Loans.........................................................................17
Loan-to-Value Ratio...........................................................18
Master Servicer...............................................................12
Master Servicing Agreement....................................................12
Mixed Use Loan................................................................17
Mortgage Files................................................................25
Net Liquidation Proceeds......................................................28
Note Rate.....................................................................31
Notes.........................................................................30
OID...........................................................................38
Owner Trustee.................................................................12
Parties in Interest...........................................................39
Pass-Through Rate.............................................................31
Plan Asset Regulation.........................................................39
Plans.........................................................................39
Pool Balance..................................................................28
Principal Collections.........................................................28
Purchase Agreement............................................................18
Rating Agencies...............................................................42
Refinance Loan................................................................18
Related Documents.............................................................25
Relevant Depository...........................................................30
Repurchase Price..............................................................25
Residential Loan..............................................................17
SAIF..........................................................................27
Securities....................................................................30
Security Account..............................................................27
Sellers.......................................................................12
Servicing Fee Rate............................................................29
Tax Counsel...................................................................38
Trust Agreement...............................................................12
Trust Fund....................................................................12
Underwriter...............................................................40, 41
Underwriting Agreement........................................................41
Voting Interests..............................................................36
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$-------------------------------
Equity One Mortgage Loan Trust _________-_____
$_________ [] Asset-Backed Certificates, Series _________-_____
$_________ [] Asset-Backed Notes, Series _________-_____
Equity One ABS, Inc.
(Depositor)
-------------------------------------------------
PROSPECTUS SUPPLEMENT
------------, ----------
-------------------------------------------------
[Underwriter's Logo]
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<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 18, 1999
Prospectus dated _______, _____
EQUITY ONE ABS, INC.
Depositor
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(Issuable in Series)
-------------------------------
Equity One ABS, Inc., as depositor, may offer from time to time under this
prospectus and related prospectus supplements securities that are asset-backed
certificates or asset-backed notes. The depositor will sell these securities
from time to time in one or more series, each of which series will be issued in
one or more classes.
<TABLE>
<S> <C>
- ------------------------------------
BEFORE BUYING SECURITIES, CONSIDER The related prospectus supplement will set forth the specific assets of the
CAREFULLY THE RISK FACTORS trust fund and the seller or sellers from whom the assets are acquired.
BEGINNING ON PAGE 5 OF THIS
PROSPECTUS. EACH TRUST FUND'S ASSETS MAY INCLUDE--
Neither the securities of o one or more pools of
any series nor the underlying
loans will be insured or o mortgage loans secured by first and/or subordinate mortgages on
guaranteed by any governmental
agency or instrumentality, or by o one- to four-family residential properties and
any other entity.
o mixed commercial/residential use properties and other
The securities of each series will multi-family residential properties,
represent interests in the related
trust fund only and will not o revolving home equity loans or balances thereof secured by first
represent interests in or be and/or subordinate mortgages on one- to four-family residential
obligations of any other entity. properties,
This prospectus may be used to o all monies due under the above assets, which may be net of some of the
offer and sell any series of amounts payable to the servicer, and
securities only if it is
accompanied by the o other funds, credit enhancement and other assets.
prospectus supplement
for that series. The assets comprising the trust fund may be divided into
one or more asset groups and each class of the related series will
evidence beneficial ownership of the corresponding asset group, as
applicable.
The prospectus supplement will state if the trust fund will make a REMIC
election for federal income tax purposes.
- ------------------------------------
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Information about the securities is presented in two separate documents
that progressively provide more detail: (1) this prospectus, which provides
general information, some of which may not apply to your series of securities,
and (2) the accompanying prospectus supplement, which will describe the specific
terms of your series of securities, including:
o the principal balances and/or interest rates of each class;
o the timing and priority of interest and principal payments;
o statistical and other information about the loans;
o information about credit enhancement, if any, for each class;
o the ratings for each class; and
o the method for selling the securities.
We strongly encourage you to read both this prospectus and the
accompanying prospectus supplement in full. You should rely only on the
information contained or incorporated by reference in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with different information.
If the description of the terms of your securities varies between this
prospectus and the accompanying prospectus supplement, you should rely on the
information in the prospectus supplement.
We are not offering securities in any state where the offer is not
permitted.
We do not claim that the information in this prospectus and the
accompanying prospectus supplement is accurate as of any date other than the
dates stated on the cover of each document.
We have made cross-references to captions in this prospectus and the
accompanying prospectus supplement under which you can find further related
discussions. The following table of contents and the table of contents in the
related prospectus supplement indicate where these captions are located.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
RISK FACTORS......................................................................................................5
LIQUIDATION VALUE OF TRUST FUND ASSETS MAY BE INSUFFICIENT TO SATISFY ALL CLAIMS AGAINST TRUST FUND............5
DECREASE IN VALUE OF MORTGAGED PROPERTY WOULD DISPROPORTIONATELY AFFECT JUNIOR LIENHOLDERS.....................5
LIQUIDATIONS COULD RESULT IN DELAYS AND LOSSES.................................................................5
JUNIOR LIENS MAY RESULT IN LOSSES IN FORECLOSURE PROCEEDINGS...................................................6
PROCEEDS OF LIQUIDATION OF MIXED USE LOANS MAY TAKE LONGER TO RECOVER..........................................6
BALLOON LOANS ARE LIKELY TO BE PREPAID.........................................................................6
PRE-FUNDING ACCOUNTS AND POSSIBILITY OF PREPAYMENT.............................................................6
LIMITS ON CREDIT ENHANCEMENT...................................................................................7
THE DEPOSITOR HAS LIMITED ASSETS...............................................................................7
LIMITED RECOURSE TO SELLERS, DEPOSITOR OR SERVICER.............................................................8
BANKRUPTCY AND INSOLVENCY RISKS; RECLASSIFICATION OF SALE OF LOANS AS FINANCING................................8
TIMING AND RATE OF PREPAYMENTS MAY RESULT IN LOWER YIELD.......................................................9
SOME SECURITIES MAY BE ISSUED WITH ORIGINAL ISSUE DISCOUNT....................................................10
LIMITED LIQUIDITY MAY RESULT IN DELAYS IN LIQUIDATIONS OR LOWER RETURNS.......................................10
VIOLATIONS OF LENDING LAWS COULD CAUSE LOSSES.................................................................10
MORTGAGED PROPERTIES MAY BE SUBJECT TO ENVIRONMENTAL RISKS....................................................10
RATINGS OF THE SECURITIES RELATE TO CREDIT RISK ONLY..........................................................11
THE TRUST FUND...................................................................................................11
GENERAL.......................................................................................................11
THE LOANS.....................................................................................................12
SUBSTITUTION OF TRUST FUND ASSETS.............................................................................14
USE OF PROCEEDS..................................................................................................15
THE DEPOSITOR....................................................................................................15
LOAN PROGRAM.....................................................................................................15
UNDERWRITING STANDARDS........................................................................................15
SPECIFIC UNDERWRITING CRITERIA; UNDERWRITING PROGRAMS.........................................................16
SUMMARY OF UNDERWRITING REQUIREMENTS BY PROGRAM...............................................................17
QUALIFICATIONS OF SELLERS.....................................................................................20
REPRESENTATIONS BY SELLERS; REPURCHASES.......................................................................20
DESCRIPTION OF THE SECURITIES....................................................................................21
GENERAL.......................................................................................................21
DISTRIBUTIONS ON SECURITIES...................................................................................23
ADVANCES......................................................................................................25
REPORTS TO SECURITYHOLDERS....................................................................................25
CATEGORIES OF CLASSES OF SECURITIES...........................................................................26
INDICES APPLICABLE TO FLOATING RATE AND INVERSE FLOATING RATE CLASSES.........................................29
BOOK-ENTRY REGISTRATION OF SECURITIES.........................................................................31
CREDIT ENHANCEMENT...............................................................................................34
GENERAL.......................................................................................................34
SUBORDINATION.................................................................................................34
LETTER OF CREDIT..............................................................................................35
INSURANCE POLICIES, SURETY BONDS AND GUARANTIES...............................................................35
OVER-COLLATERALIZATION........................................................................................35
RESERVE ACCOUNTS..............................................................................................36
POOL INSURANCE POLICIES.......................................................................................37
CROSS-COLLATERALIZATION.......................................................................................38
YIELD AND PREPAYMENT CONSIDERATIONS..............................................................................38
THE AGREEMENTS...................................................................................................40
ASSIGNMENT OF THE TRUST FUND ASSETS...........................................................................40
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT...............................................................41
PRE-FUNDING ACCOUNT...........................................................................................43
</TABLE>
3
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<TABLE>
<S> <C>
SUB-SERVICING BY SELLERS......................................................................................44
COLLECTION PROCEDURES.........................................................................................44
HAZARD INSURANCE..............................................................................................45
REALIZATION UPON DEFAULTED LOANS..............................................................................46
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES......................................................47
EVIDENCE AS TO COMPLIANCE.....................................................................................47
SERVICER AND DEPOSITOR ISSUES.................................................................................48
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT...............................................................48
AMENDMENT.....................................................................................................50
TERMINATION; OPTIONAL TERMINATION.............................................................................51
THE TRUSTEE...................................................................................................52
LEGAL ASPECTS OF THE LOANS.......................................................................................52
GENERAL.......................................................................................................52
FORECLOSURE/REPOSSESSION......................................................................................52
ENVIRONMENTAL RISKS...........................................................................................54
RIGHTS OF REDEMPTION..........................................................................................55
ANTI-DEFICIENCY LEGISLATION; BANKRUPTCY LAWS; TAX LIENS.......................................................55
DUE-ON-SALE CLAUSES...........................................................................................55
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES............................................................56
EQUITABLE LIMITATIONS ON REMEDIES.............................................................................56
APPLICABILITY OF USURY LAWS...................................................................................57
SOLDIERS'AND SAILORS'CIVIL RELIEF ACT.........................................................................57
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES.................................................................57
THE TITLE I PROGRAM...........................................................................................58
CONSUMER PROTECTION LAWS......................................................................................61
FEDERAL INCOME TAX CONSEQUENCES..................................................................................61
GENERAL.......................................................................................................61
TAXATION OF DEBT SECURITIES...................................................................................61
TAXATION OF THE REMIC AND ITS HOLDERS.........................................................................65
REMIC EXPENSES; SINGLE CLASS REMICS...........................................................................66
TAXATION OF THE REMIC.........................................................................................66
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES...........................................................67
ADMINISTRATIVE MATTERS........................................................................................69
TAX STATUS AS A GRANTOR TRUST.................................................................................70
SALE OR EXCHANGE..............................................................................................72
MISCELLANEOUS TAX ASPECTS.....................................................................................72
TAX TREATMENT OF FOREIGN INVESTORS............................................................................73
TAX CHARACTERIZATION OF THE TRUST FUND AS A PARTNERSHIP.......................................................73
TAX CONSEQUENCES TO HOLDERS OF THE NOTES......................................................................74
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES...............................................................75
STATE TAX CONSIDERATIONS.........................................................................................79
ERISA CONSIDERATIONS.............................................................................................79
LEGAL INVESTMENT.................................................................................................83
METHOD OF DISTRIBUTION...........................................................................................84
LEGAL MATTERS....................................................................................................84
RATING...........................................................................................................84
AVAILABLE INFORMATION............................................................................................85
INCORPORATION OF DOCUMENTS BY REFERENCE..........................................................................85
INDEX OF DEFINED TERMS...........................................................................................87
</TABLE>
4
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RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of securities.
LIQUIDATION VALUE OF TRUST FUND ASSETS MAY BE INSUFFICIENT TO SATISFY ALL CLAIMS
AGAINST TRUST FUND.
There is no assurance that the market value of the primary assets or
any other assets for a series of securities will at any time be equal to or
greater than the aggregate principal amount of the securities of that series
then outstanding, plus accrued interest thereon. In addition, upon an event of
default under the indenture for a series of notes and a sale of the assets in
the trust fund or upon a sale of the assets of a trust fund for a series of
certificates, the trustee, the servicer, if any, the credit enhancer and any
other service provider specified in the related prospectus supplement generally
will be entitled to receive the proceeds of the sale to the extent of unpaid
fees and other amounts owing to those persons under the related agreement prior
to distributions to holders of securities. Upon any sale of trust fund assets,
the proceeds from the sale may be insufficient to pay in full the principal of
and interest on the securities of the related series.
Liquidation expenses for 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 larger principal balance, the amount realized after
expenses of liquidation would be smaller as a percentage of the outstanding
principal balance of the smaller loan than would be the case with a larger loan.
Because the average outstanding principal balances of the loans are small
relative to the size of the loans in a typical pool of first mortgages,
realizations net of liquidation expenses on defaulted loans may also be smaller
as a percentage of the principal amount of the loans than in the case of a
typical pool of first mortgage loans. The payment of these expenses will reduce
the portion of the amount realized that will be available to make payments on
the securities and may result in the related securityholders suffering a loss.
We refer you to "Yield and Prepayment Considerations."
DECREASES IN THE VALUE OF MORTGAGED PROPERTY WILL DISPROPORTIONATELY AFFECT
JUNIOR LIENHOLDERS.
There are several factors that could adversely affect the value of a
mortgaged property by causing the outstanding balance of the related loan,
together with any senior financing on the mortgaged property, to equal or exceed
the value of the mortgaged property. Among the factors that could adversely
affect the value of mortgaged properties are an overall decline in the
residential 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 the failure of borrowers to maintain them adequately or natural
disasters that are not covered by insurance, including earthquakes and floods.
Any decline of this type could extinguish the value of a junior interest in a
mortgaged property before having any effect on the related senior interest
therein. If a decline of this type occurs, the actual rates of delinquencies,
foreclosure and losses on the junior loans could be higher than those currently
experienced in the mortgage lending industry in general.
We refer you to "The Trust Fund--The Loans--Additional Information."
LIQUIDATIONS COULD RESULT IN PAYMENT DELAYS AND LOSSES.
Even if 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 on your securities could occur. Corresponding delays in your
receipt of related proceeds could occur if the credit enhancement for your
series, as described in the accompanying prospectus supplement, does not cover
these shortfalls. Also, liquidation expenses (such as legal fees, real estate
taxes, and maintenance and preservation expenses) will be paid first, thereby
reducing the proceeds payable on your securities and the security for the loans.
5
<PAGE>
Loans secured by junior liens on the related properties will also generally be
subject to the prior payment of loans secured by senior liens on those
properties. If any of the mortgaged properties fail to provide adequate security
for the related loans, you could experience a loss if the credit enhancement for
your series does not cover these shortfalls.
We refer you to "Yield and Prepayment Considerations."
JUNIOR LIENS MAY RESULT IN LOSSES IN FORECLOSURE PROCEEDINGS.
Some of the mortgages serving as collateral for your series may be
junior liens subordinate to the rights of the mortgagee under the related senior
mortgage or mortgages. The proceeds from any liquidation, insurance or
condemnation proceedings in connection with a mortgage will be available to
satisfy the outstanding balance of the junior mortgage only after the claims of
all 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 the senior
mortgages, in which case it must either pay the entire amount due on the senior
mortgages to the senior mortgagees at or prior to the foreclosure sale or
undertake the obligation to make payments on the senior mortgages 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.
We refer you to "Legal Aspects of the Loans--Junior Mortgages; Rights
of Senior Mortgagees."
PROCEEDS OF LIQUIDATION OF MIXED USE LOANS MAY TAKE LONGER TO RECOVER.
Mixed use loans are mortgage loans secured by multi-family properties
and structures that include both residential dwelling units and/or space used
for retail, professional or other commercial uses. Due to the limited market for
the type of properties securing mixed use loans, in the event of a foreclosure
we expect that it will take longer to recover proceeds from the liquidation of a
mixed use loan than it would for a mortgage loan secured by a one- to
four-family dwelling.
We refer you to "The Trust Fund--The Loans--General."
BALLOON LOANS MAY BEAR HIGHER RISK OF LOSS.
Some of the loans underlying the securities may be balloon loans, which
generally provide for equal monthly payments and a final monthly payment
substantially greater than the preceding monthly payments. Balloon loans may
have a greater risk of loss at their final maturity date because of the
substantially greater monthly payment to be made by the mortgagor on that date.
The mortgagor on a balloon loan will generally attempt to refinance a balloon
loan or sell the underlying mortgaged property on or prior to the stated
maturity date in order to avoid payment of the final balloon payment. A
mortgagor's ability to accomplish either of these goals may be adversely
affected by a number of factors, however, 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. You may bear a portion of losses on
balloon loans that are not otherwise covered by the credit enhancement for your
series of securities.
PRE-FUNDING ACCOUNTS AND POSSIBILITY OF PREPAYMENT.
If the prospectus supplement relating to your series of securities
provides for pre-funding, on the closing date the depositor will deposit a
specified amount of cash into a pre-funding account. The amount of cash
deposited will not exceed 25% of the initial aggregate principal amount of the
related series of securities. The deposited cash will be used to purchase loans
from the depositor (which, in turn, will acquire these loans from the seller or
sellers
6
<PAGE>
specified in the related prospectus supplement), during the funding period,
which is a period from the earliest to occur of:
o the date the amount on deposit in the pre-funding account is less
than the amount specified in the agreement(s) relating to that
series;
o the date an event of default occurs under the related
agreement(s); or
o the date which is the later of three months or 90 days after the
related closing date.
These subsequently purchased loans will be required to conform to the
requirements set forth in the related agreement(s) and described in the related
prospectus supplement. The Trustee will maintain the pre-funding account for the
related series of securities for the sole purpose of holding funds to be paid by
the trustee during the above-described funding period to the depositor the
purchase price of these 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 amount of cash in the pre-funding account has not been
used to purchase 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 securities 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. The holders of the
related class of securities will bear any reinvestment risk resulting from this
prepayment.
LIMITS ON CREDIT ENHANCEMENT.
Although credit enhancement for the securities is intended to reduce
the risk of delinquent payments or losses to holders of securities entitled to
the benefit thereof, the amount of the enhancement will be limited as set forth
in the related prospectus supplement. The amount of credit enhancement available
will decline and could be depleted under certain circumstances prior to the
payment in full of the related series of securities, and as a result you may
suffer losses. In addition, credit enhancement for your series of securities
will not cover all potential losses or risks.
We refer you to "Credit Enhancement."
THE DEPOSITOR HAS LIMITED ASSETS.
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
assets of the trust fund for those securities. There will be no recourse to the
depositor or any other person for any default on the notes or any failure to
receive distributions on the certificates.
Further, unless otherwise stated in the related prospectus supplement,
at the times set forth in the related prospectus supplement, some of the primary
assets and/or any balance remaining in the security account or distribution
account immediately after making all payments due on the securities of the
related series and other payments specified in the related prospectus
supplement, may be promptly released or remitted to the depositor, the servicer,
the provider of any credit enhancement or any other person entitled thereto and
will no longer be available for making payments to holders of securities.
Consequently, holders of securities of each series must rely solely upon
payments from the primary 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 that series, for the payment of principal
of and interest on the securities of that series.
Holders of notes will be required under the indenture for their series
to proceed only against the primary assets and other assets constituting the
related trust fund in the case of a default on the notes and may not proceed
against any assets of the depositor. If payments from the assets securing a
series of notes, including any credit enhancement, were to become insufficient
to make payments on those notes, no other assets would be available for payment
of the deficiency and you may experience a loss.
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LIMITED RECOURSE TO SELLERS, DEPOSITOR OR SERVICER.
The only obligations, if any, of the depositor to the securities of any
series will be pursuant to representations and warranties made by the depositor.
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 primary
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 primary
asset, its only sources of funds to make the repurchase would be from funds
obtained from the enforcement of a corresponding obligation, if any, on the part
of the originator of the primary assets, the servicer or a seller, as the case
may be, or from a reserve fund established to provide funds for these
repurchases.
The only obligations of the servicer, other than its servicing
obligations, to the assets of the trust fund or the securities of any series
will be pursuant to representations and warranties made by the servicer. The
servicer may be required to repurchase or substitute for any loan with respect
to which its representations and warranties are breached. There is no assurance,
however, that the servicer will have the financial ability to effect any
repurchase or substitution of loans.
The only obligations of any seller of loans (and Equity One, Inc.,
where the seller is a subsidiary of Equity One, Inc.) to assets of the trust
fund or the securities of any series will be pursuant to representations and
warranties made by the relevant entity and document delivery requirements. A
seller (and Equity One, Inc., where the seller is a subsidiary of Equity One,
Inc.) may be required to repurchase or substitute for any loan with respect to
which its representations and warranties or document delivery requirements are
breached. There is no assurance, however, that a seller (and Equity One, Inc.,
where the seller is a subsidiary of Equity One, Inc.) will have the financial
ability to effect a repurchase or substitution.
We refer you to "Loan Program--Representations by Sellers;
Repurchases."
BANKRUPTCY AND INSOLVENCY RISKS; RECLASSIFICATION OF SALE OF LOANS AS FINANCING.
The servicer, the sellers and the depositor will treat each conveyance
of loans by the sellers to the depositor as a sale of those loans. The depositor
will treat each conveyance of loans from the depositor to the trust fund as a
sale of those loans. If the conveyance of the loans by the sellers to the
depositor is treated as a sale, those loans would not be part of the related
seller's bankruptcy estate and would not be available to that seller's
creditors. If a seller becomes bankrupt or insolvent, however, the bankruptcy
trustee, a conservator or a 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, if the conveyance of the loans by the
depositor to the trust fund is treated as a sale, those loans would not be part
of the depositor's bankruptcy estate and would not be available to the
depositor's creditors. In the event of the bankruptcy or insolvency of the
depositor, however, the bankruptcy trustee, a conservator or a 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 your securities and result in a reduction of
payments due on your securities.
In addition, we anticipate 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.
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.
In addition, federal and state statutory provisions, including the
Bankruptcy Reform Act of 1978 and state laws affording relief to debtors, may
interfere with or affect the ability of a secured mortgage lender to realize
upon its security. For example, in a proceeding under the Bankruptcy Reform Act
of 1978, a lender may not foreclose on a mortgaged property without the
permission of the bankruptcy court. 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, the
debtor's proposed rehabilitation plan may provide for the reduction of the
secured indebtedness to the value of the mortgaged property as of the date of
the commencement of the bankruptcy,
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rendering the lender a general unsecured creditor for the difference. The
debtor's proposed plan may also reduce the monthly payments due under the
mortgage loan, change the rate of interest and/or alter the mortgage loan
repayment schedule. These proceedings under the Bankruptcy Reform Act of 1978,
including but not limited to any automatic stay, could cause delays in receiving
payments on the loans underlying a series of securities and possible reductions
in, or eliminations of, the aggregate amount of these payments.
PREPAYMENTS OF LOANS AND OTHER FACTORS MAY RESULT IN LOWER YIELD.
The timing of principal payments of the securities of a series will be
affected by a number of factors, including: (1) the extent of prepayments of the
loans underlying that series of securities, which may be influenced by a variety
of factors (including prepayments resulting from refinancing or liquidations of
loans due to defaults, casualties, condemnations and repurchases by the
depositor, the servicer or a seller due to material breaches of their
representations and warranties regarding the loans), (2) the manner of
allocating principal payments among the classes of securities of a series as
specified in the related prospectus supplement, (3) the exercise by the party
entitled thereto of any right of optional termination of a series of securities
and (4) the rate and timing of payment defaults and losses incurred on the
assets underlying the series. The yields to maturity and weighted average lives
of a series of securities will be affected primarily by the rate and timing of
prepayment of the loans representing assets underlying a series. The yields to
maturity and weighted average lives of securities will also 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 prepayments of loans held by a trust fund will be borne
entirely by the holders of one or more classes of a related series of
securities.
We refer you to "Loan Program--Representations by Sellers;
Repurchases," "Yield and Prepayment Considerations" and "The
Agreements--Pre-Funding Account."
Interest payable on the securities of a series on each distribution
date will include all interest accrued during the period specified in the
related prospectus supplement. If interest accrues during the calendar month
prior to a distribution date, the effective yield to holders 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 each distribution
date, and the effective yield (at par) to holders will be less than the
indicated coupon rate.
We refer you to "Description of the Securities--Distributions on
Securities--Distributions of Interest."
BOOK-ENTRY SECURITIES MAY POSE LIMITATIONS.
If the securities are issued in book-entry form, you may have
difficulty selling your securities in the secondary trading market since
investors may be unwilling to purchase securities for which they cannot obtain
physical certificates. In addition, since transactions in book-entry securities
can be effected only through the Depository Trust Company (which is referred to
hereafter as DTC) participating organizations, indirect participants and some
banks, your ability to pledge your securities to persons or entities that do not
participate in the DTC system may be limited due to lack of a physical
certificate representing your securities.
We refer you to "Description of the Securities--Book-Entry Registration
of Securities."
BOOK-ENTRY SECURITIES MAY RESULT IN DELAYED RECEIPT OF DISTRIBUTIONS.
As a beneficial owner of book-entry securities, you may experience some
delay in receiving payments on your securities since these payments will be:
o forwarded by the trustee to DTC;
o credited by DTC to the accounts of DTC participants; and
o ultimately credited to your account by a DTC participant.
We refer you to "Description of the Securities--Book-Entry Registration
of Securities."
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SOME SECURITIES MAY BE ISSUED WITH ORIGINAL ISSUE DISCOUNT.
Some classes of securities will be issued with original issue discount
for federal income tax purposes. If you hold securities issued with original
issue discount, you will be required to include original issue discount in
ordinary gross income for federal income tax purposes as it accrues, in advance
of receipt of the cash attributable to that income. Accrued but unpaid interest
on securities that are accrual securities generally will be treated as original
issue discount for this purpose.
We refer you to "Federal Income Tax Consequences--Taxation of Debt
Securities--Interest and Acquisition Discount" and "--Market Discount."
LIMITED LIQUIDITY MAY RESULT IN DELAYS IN LIQUIDATION OR LOWER RETURNS.
There will be no market for the securities of any series prior to its
issuance, and there can be no assurance that a secondary market will develop or,
if it does develop, that it will provide holders with liquidity of investment or
that any market will continue for the life of the securities of any series. Any
underwriter(s) specified in the related prospectus supplement may make a
secondary market in the securities, but have no obligation to do so. Absent a
secondary market for the securities you may experience a delay if you choose to
sell your securities or the price you receive may be less than that which is
offered for a comparable liquid security.
VIOLATIONS OF LENDING LAWS COULD CAUSE LOSSES.
Applicable state laws generally regulate interest rates and other
charges and require specific types of disclosures. In addition, other state
laws, public policy and general principles of equity relating to the protection
of consumers, unfair and deceptive practices and debt collection practices may
apply to the origination, servicing and collection of the 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 related trust fund as the owner of the loan,
to damages and administrative enforcement.
The loans are also subject to federal laws, including laws that require
specific types of disclosures to borrowers, that prohibit discrimination and
that regulate the use and reporting of information relating to the borrower's
credit experience. Violations of some of the 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 related trust fund to
damages and administrative enforcement. You may experience a loss if the credit
enhancement for your series of securities, as described in the accompanying
prospectus supplement, does not cover these types of losses on the loans.
We refer you to "Legal Aspects of the Loans."
MORTGAGED PROPERTIES MAY BE SUBJECT TO ENVIRONMENTAL RISKS.
Real property pledged as security to a lender may be subject to
environmental risks. Under the laws of some states, contamination of a property
may give rise to a lien on the property to assure the costs of clean-up. In
several states, this type of lien has priority over the lien of an existing
mortgage or owner interest against the property. In addition, under the laws of
some states and under the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, 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 or not the environmental damage or threat was
caused by a prior owner. A lender also risks this liability on foreclosure of
the mortgaged property securing a mortgage.
We refer you to "Legal Aspects of the Loans--Environmental Risks."
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RATINGS OF THE SECURITIES RELATE TO CREDIT RISK ONLY; REDUCTION OF WITHDRAWAL OF
RATINGS WILL ADVERSELY EFFECT SECURITIES.
The issuance of a series of securities offered hereby may be
conditioned on their being rated in specific rating categories of the rating
agency specified in the related prospectus supplement. The rating of a series of
securities will be based on, among other things, the adequacy of the value of
the primary assets and any credit enhancement relating to the series. A
securities rating should not be deemed a recommendation to purchase, hold or
sell securities, since it does not address market price or suitability for a
particular investor. There is also no assurance that any rating will remain in
effect for any given period of time or that it may not be lowered or withdrawn
entirely by a rating agency based on its subjective assessment of the
circumstances. A securities rating may be lowered or withdrawn, among other
reasons, due to a decrease in the value of assets underlying the securities,
because of an adverse change in the financial or other condition of the credit
enhancement for the securities or a change in the rating of an enhancer's long
term debt. Any reduction or withdrawal of a rating will have an adverse effect
on the value of the related securities.
We refer you to "Rating."
THE TRUST FUND
GENERAL
The securities of each series will represent interests in the assets of
a related trust fund, and the notes of each series will be secured by the pledge
of the assets of a related trust fund. The entity named in the related
prospectus supplement as trustee (the "Trustee") will hold the trust fund for a
series of securities for the benefit of the related securityholders. Each trust
fund will consist of a group of assets (the "Trust Fund Assets"), including a
pool of loans (the "Loans") and payments in respect of these Loans, as specified
in the related prospectus supplement.* The pool of Loans will be created on the
first day of the month of the issuance of the related series of securities or
another 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 Equity One ABS, Inc., as depositor (the "Depositor").
The Depositor will acquire the Trust Fund Assets, either directly or
through affiliates, from originators or sellers that may be affiliates of the
Depositor (collectively, the "Sellers") pursuant to a pooling and servicing
agreement (each, a "Pooling and Servicing Agreement") for a series consisting
solely of certificates, or a purchase agreement (each, a "Purchase Agreement")
for a series consisting of certificates and notes. The Depositor will then
convey the Trust Fund Assets without recourse to the related trust fund. The
Depositor will acquire loans that were either originated or acquired by
affiliates of the Depositor 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." We refer you to "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 for the benefit of the holders of the securities of the related series.
The entity named as servicer in the related prospectus supplement, which may be
an affiliate of the Depositor (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 for a series
consisting solely of certificates, or a master servicing agreement (each, a
"Master Servicing Agreement") between
- --------------------------
* Whenever the terms "pool," "certificates," "notes" and
"securities" are used in this prospectus, they will be deemed to apply, unless
the context indicates otherwise, to one specific pool and the securities of one
series including the certificates representing certain undivided interests in,
and/or notes secured by the assets of, a single trust fund consisting primarily
of the loans in such pool. Similarly, the term "Pass-Through Rate" will refer to
the Pass-Through Rate borne by the certificates and the term "interest rate"
will refer to the interest rate borne by the notes of one specific series, as
applicable, and the term "trust fund" will refer to one specific trust fund.
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the Trustee and the Servicer for a series consisting of certificates and notes.
The Servicer will receive a fee for these services. We refer you to "Loan
Program" and "The Agreements." If the Servicer services Trust Fund Assets
through a Sub-Servicer, the Servicer will remain liable for its servicing
obligations under the related Agreement as if the Servicer alone were servicing
the Trust Fund Assets.
As used herein, "Agreement" means, for a series consisting solely of
certificates, the Pooling and Servicing Agreement, and for 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
the trust fund.
No trust fund will have any assets or liabilities prior to the initial
offering of the related series of securities. No trust fund is expected to
engage in any activities other than purchasing, managing and holding the related
Trust Fund Assets and other assets contemplated herein or specified in the
related prospectus supplement and the proceeds thereof, issuing securities,
making payments and distributions on securities and related activities. No trust
fund is expected to have any source of capital other than its assets and any
related credit enhancement.
The Depositor's only obligations to a series of securities will be to
obtain specific representations and warranties from Equity One, Inc. ("Equity
One") and the Sellers and to assign to the Trustee for that series of securities
the Depositor's rights attaching to those representations and warranties. We
refer you to "Loan Program--Representations by Sellers; Repurchases" and "The
Agreements--Assignment of the Trust Fund Assets." The Servicer's obligations to
the Trust Fund Assets 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 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 Servicer's
obligation to make advances may be subject to limitations, to the extent
provided herein and in the related prospectus supplement.
The following is a brief description of the assets expected to be
included in the trust funds. If specific information respecting the Trust Fund
Assets is not known at the time the related series of securities initially is
offered, more general information of the nature described below will be provided
in the related prospectus supplement, and specific information will be set forth
in a report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of the securities. A copy of the
Agreement for 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 that series will be attached to the Agreement delivered to the Trustee upon
delivery of the securities.
THE LOANS
General. The Loans will consist of (1) 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 (2) revolving home equity loans or balances thereof
(the "Revolving Credit Line Loans") secured by first and/or subordinate liens on
one- to four-family residential properties. All Loans will be 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 like the Federal Housing Administration ("FHA") or
Department of Veterans Affairs ("VA").
All of the Loans 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 a combination thereof), all as
described below or in the related prospectus supplement:
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(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 specific 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 these limitations.
Accrued interest may be deferred and added to the principal of a Loan
for the periods and under the 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 of the Loan
for a period of time or for the life of the Loan, and the amount of any
difference may be contributed from funds supplied by the seller of the
mortgaged property or another source.
(b) Principal may be payable in equal installments over the
term of the Loan, may be calculated on the basis of an assumed term to
maturity that is significantly longer than the actual term to maturity
(resulting in the need to make a larger "balloon" payment upon final
maturity) or on an interest rate that is different from the Loan's
specified interest rate, or may not be payable during all or a portion
of the original term. Payment of all or a substantial portion of the
principal may be due on maturity (a "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 specific
periods ("Lockout Periods"). Some Loans may permit prepayments after
expiration of the applicable Lockout Period and may require the payment
of a prepayment fee in connection with any 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 Loans will be secured by mortgages or deeds of trust or other
similar security instruments creating a lien on the related mortgaged property.
In the case of Revolving Credit Line Loans, these 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 some other dwelling units ("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 ("Mixed Use Properties"). 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 specified Loan-to-Value Ratios and/or principal balances may
be covered wholly or partially by primary mortgage guaranty insurance policies.
The existence, extent and duration of any 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.
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Home Equity Loans. Some 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 the
Loan by 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 some circumstances, a borrower under one of these
Loans may choose an interest-only payment option and is obligated to pay only
the amount of interest which accrues on the Loan during the billing cycle. An
interest-only payment option may be available for a specified period before the
borrower must begin paying at least the minimum monthly payment of a specified
percentage of the average outstanding balance of the Loan.
Additional Information. Each prospectus supplement will contain
information, as of the date of that prospectus supplement and to the extent then
specifically known to the Depositor, regarding the Loans constituting Trust Fund
Assets of the related trust fund, including (1) the aggregate outstanding
principal balance and the average outstanding principal balance of the Loans as
of the applicable Cut-off Date, (2) the type of property securing the Loan
(e.g., Single Family Properties, Mixed Use Properties, or other real property),
(3) the original terms to maturity of the Loans, (4) the largest principal
balance and the smallest principal balance of any of the Loans, (5) the earliest
origination date and latest maturity date of any of the Loans, (6) the
Loan-to-Value Ratios of the Loans, (7) the stated interest rates or annual
percentage rates ("APR") or range of stated interest rates or APRs the Loans,
(8) the maximum and minimum per annum interest rates, and (9) the geographic
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 a report on Form 8-K to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of the
securities.
The "Loan-to-Value Ratio" of a Loan at any given time is the fraction,
expressed as a percentage, the numerator of which is the sum of (1) the
principal balance of that Loan at the date of origination (or, in the case of a
Revolving Credit Line Loan, the maximum amount thereof available) plus (2) 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 for that mortgage loan, regardless of any
lesser amount actually outstanding at the date of origination of the Loan, and
the denominator of which is the Collateral Value of the related mortgaged
property. The "Collateral Value" of the mortgaged property, other than for some
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 of that
mortgaged property based on an appraisal obtained by the originator at
origination of that Loan and (b) if the Loan was originated either in connection
with the acquisition of the mortgaged property by the borrower or within one
year after acquisition of the mortgaged property by the borrower, the purchase
price paid by the borrower for the 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 experiences an overall
decline in property values causing 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 trust fund to 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 on any group of Loans. To
the extent that these losses are not covered by subordination provisions or
alternative arrangements, the 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 if the
representations and warranties regarding any original Trust Fund Asset are
breached or if the documentation regarding any Trust Fund Asset is determined by
the Trustee to be incomplete. The related prospectus supplement will generally
set forth the period during which substitution will be permitted. Substituted
Trust Fund Assets generally will comply with all of the representations
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<PAGE>
and warranties and satisfy he criteria set forth in the related Agreement and
described in the related prospectus supplement as of the date of substitution.
We refer you to "Loan Program-Representations by Sellers; Repurchases" and" The
Agreements--Assignment of the Trust Fund Assets."
USE OF PROCEEDS
The Depositor will use all or substantially all of the net proceeds
from the sale of each series of securities for one or more of the following
purposes:
o to purchase the related Trust Fund Assets,
o to establish any Reserve Accounts described in the related
prospectus supplement,
o to pay costs of structuring and issuing the securities, including
the costs of obtaining credit enhancement, if any, and
o 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 Popular North America, Inc., a Delaware
corporation ("PNA"). PNA 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"). The Depositor and Equity One
are subject to comprehensive regulation by the Board of Governors of the Federal
Reserve System ("Federal Reserve"). 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 be purchased by the Depositor, either directly or
through affiliates, from the Sellers. The Loans so purchased by the Depositor
will have been either originated or acquired by the Sellers 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 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
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.
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<PAGE>
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 regarding the applicant's liabilities, income, credit history,
including the principal balance and payment history regarding any senior
mortgage, and employment history, as well as other personal information which,
to the extent specified in the related prospectus supplement, has 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 regarding the foregoing matters that has been
provided by a mortgage brokerage company prior to funding a loan and
periodically audit files based on a random sample of closed loans. Each borrower
is generally required to provide an authorization to apply for a credit report
which summarizes the borrower's credit history with local and national merchants
and lenders, installment debt payments and any record of defaults, bankruptcies,
repossessions, suits or judgments. In most cases, an employment verification is
obtained either in writing or verbally from the borrower's employer, which
verification reports, among other things, the length of employment with that
organization and the borrower's current salary. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns.
In determining the adequacy of the property to be used as collateral,
an appraisal will generally be made of each property considered for financing in
an amount in excess of $15,000. The appraiser is generally required to inspect
the property, issue a report on its condition and, if applicable, verify
construction, if new, has been completed. The appraisal is based on the market
value of comparable homes, the estimated rental income (if considered applicable
by the appraiser) and the cost of replacing the home. The value of the property
being financed, as indicated by the appraisal, must be high enough to currently
support, and be 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 (1) 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 (2) 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 Ratio
limit are permitted based on compensating factors. The underwriting standards
applied by Sellers, particularly regarding the level of loan documentation and
the borrower's income and credit history, may be varied in appropriate cases
where factors such as a low Loan-to-Value Ratio or other favorable credit
factors exist.
Some 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, some 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 payment amounts 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 all
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 three types of income
documentation programs are used
o full income documentation ("Full Doc"),
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<PAGE>
o no income verification ("NIV"), and
o alternative income verification ("AIV").
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. Under the AIV program, the
borrower must submit bank statements for the past twenty-four months to verify
the average monthly income used to qualify the borrower. Tax returns are
generally not required under any income documentation program, however, each
lender always has the right to require tax returns if that is the only means of
verifying income or cash flow.
Underwriting with the NIV or AIV 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 50% of stated income as disclosed on the loan application.
For loans underwritten pursuant to the AIV program, the Debt-to-Income Ratio is
based on a maximum of 50% of average monthly income over the past twenty-four
months, as verified through monthly bank statements.
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 that has been discharged for a minimum of five
years is acceptable if the borrower has since established a payment history,
notwithstanding the bankruptcy, consistent with this underwriting program. 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 the bankruptcy, consistent with this underwriting program.
Unpaid charge-offs, collections, liens or judgments may not exceed $500 in the
aggregate. During the most recent 12 month period, the borrower may not have
more than (1) one 30 day delinquency in his or her mortgage payment history
(consecutive 30 day delinquencies are treated as one 30 day account), (2) three
major credit cards with a maximum of one 30 day delinquency and (3) three retail
credit cards with a maximum of two 30 day delinquencies.
2. Generally, the borrower must have (1) been employed for not less
than three years with the same employer or (2) established comparable stability
in a particular field of work.
3. Loan-to-Value Ratios and Debt-to-Income Ratios must conform to the
following criteria: (exception: credit insurance premiums and discount points
financed may increase the Loan-to-Value Ratio to a maximum of 100%):
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<PAGE>
<TABLE>
<CAPTION>
Maximum Maximum Debt-
Property Type Loan-to-Value-Ratio to-Income Ratio
- ------------- ------------------- ---------------
<S> <C> <C>
Owner occupied one- to four-family
dwellings, townhouses, condominiums,
true second homes 95% 50%
Non-owner occupied single family
dwellings, townhouses, condominiums 80% 50%
Non-owner occupied two- to
four-family dwellings 75% 50%
Mixed use: Purchase 75% Minimum Debt
Refinance 70% Service Coverage 1.15
</TABLE>
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
two year satisfactory payment plan and one year of reestablished 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 (1) more than two 30 day delinquencies in his or her mortgage
payment history (consecutive 30 day delinquencies are treated as one 30 day
account), (2) more than four major credit cards or installment debts with a
maximum of two 30 day delinquencies, (3) any retail credit cards with more than
three 30 day delinquencies and (4) more than two retail credit cards with a
maximum of one 60 day delinquency.
2. Generally, the borrower must have (1) been employed for not less
than three years with the same employer or (2) established comparable stability
in a particular field of work.
3. Loan-to-Value Ratios and Debt-to-Income Ratios must conform to the
following criteria (exception: credit insurance premiums and discount points
financed may increase the Loan-to-Value Ratio to a maximum of 100%):
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<PAGE>
<TABLE>
<CAPTION>
Maximum Maximum Debt-
Property Type Loan-to-Value-Ratio to-Income Ratio
- ------------- ------------------- ---------------
<S> <C> <C>
Owner occupied one- to four-family
dwellings, townhouses, condominiums 95% 50%
True Second Homes, condominiums 90% 50%
Non-owner occupied single family
dwellings, townhouses, condominiums 80% 50%
Non-owner occupied two- to
four-family dwellings 75% 50%
Mixed use: Purchase 70% Minimum Debt
Refinance 65% Service Coverage 1.15
</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.
2. Generally, the borrower must have (1) been employed for not less
than one year with the same employer or (2) established comparable stability in
a particular field of work.
3. Loan-to-Value Ratios and Debt-to-Income Ratios must conform to the
following criteria (exception: credit insurance premiums and discount points
financed may increase the Loan-to-Value Ratio to a maximum of 90%):
19
<PAGE>
<TABLE>
<CAPTION>
Maximum Maximum Debt-
Property Type Loan-to-Value-Ratio to-Income Ratio
- ------------- ------------------- ---------------
<S> <C> <C>
Owner occupied single family
dwellings, townhouses 80% 50%
Owner occupied two- to four-family
dwellings 75% 50%
Owner occupied condominiums 70% 50%
True Second Homes 75% 50%
Non-owner occupied one- to
four-family dwellings 70% 50%
</TABLE>
If the Loan-to-Value Ratio of a particular borrower's loan exceeds 85%, in
determining the credit grade of the borrower's loan each Seller will also
analyze standardized credit history data available from credit bureaus in the
form of a credit "score" of the borrower based on the borrower's past credit
history. Generally, a higher credit score signifies that a borrower has a better
credit history. Currently, the Sellers employ the credit scoring system of the
Fair Isaac Credit Bureau in assessing borrowers under these circumstances. If a
borrower's credit score becomes relevant because the borrower's loan has a high
Loan-to-Value ratio, the borrower's loan may receive a lower credit grade from a
Seller if his or her credit score does not meet a minimum threshold.
QUALIFICATIONS OF SELLERS AND SERVICER
Each Seller is required to be an institution experienced in originating
loans of the type contained in the related trust fund in accordance with
accepted practices and prudent guidelines and must maintain satisfactory
facilities to originate those loans. The Servicer is required to be an
institution experienced in originating and servicing loans of the type contained
in the related trust fund in accordance with accepted practices and prudent
guidelines and must maintain satisfactory facilities to originate and service
those loans. Each Seller must maintain 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 make representations and warranties in respect of the Loans sold by
the Seller to a trust fund. These representations and warranties may include,
among other things: (1) that (except for Loans in amounts less than $15,000)
title insurance (or in the case of mortgaged properties located in areas where
these 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; (2) that Seller had good title to each Loan and that
each Loan was subject to no offsets, defenses, counterclaims or rights of
rescission except to the extent that any buydown agreement may forgive some
indebtedness of a borrower; (3) that each Loan constituted a valid lien on, or a
perfected security interest attaching to the mortgaged property (subject only to
permissible liens disclosed, if applicable, title insurance exceptions, if
applicable, and other exceptions described in the Agreement) and that the
mortgaged property was free from damage and was in acceptable condition; (4)
that there were no delinquent tax or assessment liens against the mortgaged
property; (5) that no required payment on a Loan was delinquent more than the
number of days specified in the related prospectus supplement; and (6) 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
holders of the securities secured by the Loan. If the Seller cannot cure a
breach within 90 days following notice from the Servicer or the Trustee, as the
case may be, then the Seller will be obligated either to (1) repurchase the 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's stated interest rate (less any Advances or amount payable as
related servicing compensation if the Seller is the Servicer) or (2) substitute
for the 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 for 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 repurchase or
substitution and the Trustee must have received a satisfactory opinion of
counsel that the 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 payment
from the assets of the related trust fund or from any holder of the related
residual certificate. We refer you to "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 the 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 for 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 for 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 will be issued pursuant to
either (1) a Pooling and Servicing Agreement among the Depositor, the Servicer,
the Trustee and the Sellers or (2) 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 will be issued pursuant to an
Indenture between the related trust fund established by the Depositor 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 that 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 asset-backed certificates, evidence specified beneficial
ownership interests in, and in the case of asset-backed 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. Some of the Loans may be
21
<PAGE>
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:
o 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 (each, a "Retained Interest")),
including all payments of interest and principal received on
the Loans after the Cut-off Date (to the extent not applied in
computing the principal balance of the Loans as of the Cut-off
Date (the "Cut-off Date Principal Balance")),
o assets that 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,"
o property which secured a Loan and which is acquired on behalf
of the holders of securities of the related series by
foreclosure or deed in lieu of foreclosure, and
o 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 asset-backed 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 asset-backed 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 that series. Some 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 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
other intervals and on other dates as 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; 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 the 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 specified events by or on behalf of any employee benefit plan or
other retirement
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<PAGE>
arrangement (including individual retirement accounts and annuities, Keogh plans
and collective investment funds in which 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. We refer you to "ERISA
Considerations." The transfer of securities of this type of class will not be
registered unless the transferee (1) represents that it is not, and is not
purchasing on behalf of, any plan, account or arrangement or (2) provides an
opinion of counsel satisfactory to the Trustee and the Depositor that the
purchase of securities of that class by or on behalf of the 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.
An election may be made to treat the trust fund related to each series
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 specific conditions are
satisfied. The terms and provisions applicable to the making of a REMIC election
for a particular series will be set forth in the related prospectus supplement.
If a REMIC election is made for 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 that series will
constitute "regular interests" in the related REMIC, as defined in the Code. If
a REMIC election is made for a particular series, 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
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 enhancement, if any, that is used for that series. We refer you to
"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 that 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 therefor (a "Reserve
Account"). The related prospectus supplement will describe the method for
allocating distributions made on any Distribution Date among securities of
different classes and between distributions of principal (and, if applicable,
between distributions of Principal Prepayments, as defined below., and scheduled
payments of principal) and interest. 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 that
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 (or, in the case of securities entitled only to distributions
allocable to interest, the aggregate notional amount) of each class of
securities 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 the related prospectus supplement), and for the
periods specified in the related prospectus supplement. "Pass-Through Rate"
means a rate equal to the interest rate borne by the underlying Loans 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 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 principal balance of that
class of securities has been distributed in full or, in the case of securities
entitled only to distributions allocable to interest, until the aggregate
notional amount of those securities is reduced to zero or for the period of time
designated in the related
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prospectus supplement. The original aggregate principal balance of each class of
securities will equal the aggregate distributions allocable to principal to
which that 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 that security. The notional amount of
a security will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing the
calculation of interest and for other specified 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
that Distribution Date, and the effective yield (at par) to securityholders will
be less than the indicated coupon rate.
If specified in the related prospectus supplement, any interest that
has accrued on a class of Accrual Securities but is not paid on a given
Distribution Date will be added to the aggregate principal balance of that class
of Accrual 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 the related prospectus supplement. Until distribution of
interest commences, the beneficial ownership interest in the trust fund or the
principal balance, as applicable, of that class of Accrual Securities, will
increase on each Distribution Date by the amount of interest that accrued on
that class of securities during the preceding interest accrual period but was
not distributed to that class on that Distribution Date. Each class of Accrual
Securities will thereafter accrue interest on its outstanding aggregate
principal 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
principal will be allocated among the classes of securities entitled to
distributions of principal. The aggregate principal balance of any class of
securities entitled to distributions of principal generally will be the initial
aggregate principal balance of that class of securities specified in the related
prospectus supplement, reduced by all distributions reported to the holders of
those securities as allocable to principal and, (1) in the case of Accrual
Securities, increased by all interest accrued but not then distributable on the
Accrual Securities and (2) 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 these payments
("Principal Prepayments") in the percentages and under the circumstances or for
the periods specified in the related prospectus supplement. Any allocation of
Principal Prepayments to a class or classes of securities will have the effect
of accelerating the amortization of those 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 specific securities is intended to preserve the availability of the
subordination provided by the 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 the prospectus supplement. If applicable, the Trustee
will be required to make 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 that
Distribution Date. The amount of any unscheduled distribution that is allocable
to principal will not exceed the amount that would otherwise have been required
to be distributed as principal on the securities on the next Distribution Date.
The unscheduled distributions will include interest at the applicable
Pass-Through Rate (if any) or interest rate (if any) on the amount of the
unscheduled distribution allocable to principal for the period and to the date
specified in the related prospectus supplement.
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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 that term
is defined in the related prospectus supplement), subject to the Servicer's
determination that the 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 these funds on or before any future Distribution Date to
the extent that funds in the applicable Security Account on that Distribution
Date would be less than the amount required to be available for distributions to
securityholders on that date. Each Advance will be reimbursable to the Servicer
out of recoveries on the specific Loans with respect to which the 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 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, for some taxes and insurance premiums not paid by
borrowers on a timely basis. These 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 the Advance in its capacity as successor servicer. If
the Trustee makes an Advance, it will be entitled to be reimbursed for the
Advance to the same extent and degree as the Servicer is entitled to be
reimbursed for Advances. We refer you to "Description of the
Securities--Distributions on Securities."
REPORTS TO SECURITYHOLDERS
Before distributing funds on a Distribution Date, the Servicer or the
Trustee will furnish to each securityholder of record of the related series (if
applicable to that series of securities) a statement setting forth the following
information as well as other specified information:
o the amount of the 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,
o the amount of the distribution allocable to interest,
o the amount of any Advance,
o the aggregate amount (1) otherwise allocable to Subordinated
Securities on that Distribution Date, and (2) withdrawn from the
Reserve Account, if any, that is included in the amounts
distributed to the Senior Securities,
o the outstanding principal balance or notional amount of each class
of the related series after giving effect to the distribution of
principal on that Distribution Date,
o the percentage of principal payments on the Loans (excluding
Principal Prepayments), if any, which each class will be entitled
to receive on the following Distribution Date,
o the percentage of Principal Prepayments on the Loans, if any, which
each class will be entitled to receive on the following
Distribution Date,
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o 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,
o the number and aggregate principal balances of Loans (1) delinquent
(exclusive of Loans in foreclosure) (a) 1 to 30 days, (b) 31 to 60
days, (c) 61 to 90 days and (d) 91 or more days and (2) in
foreclosure and delinquent (a) 1 to 30 days, (b) 31 to 60 days, (c)
61 to 90 days and (d) 91 or more days, as of the close of business
on the last day of the calendar month preceding that Distribution
Date,
o the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure,
o the Pass-Through Rate or interest rate, as applicable, if adjusted
from the date of the last statement, of any class expected to be
applicable to the next distribution to that class,
o if applicable, the amount remaining in any Reserve Account at the
close of business on the Distribution Date,
o the Pass-Through Rate or interest rate, as applicable, as of the
day prior to the immediately preceding Distribution Date, and
o 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 that calendar year a report (a) as to the aggregate of
amounts reported pursuant to the first two items above for that calendar year
or, in the event that person was a securityholder of record during a portion of
that calendar year, for the applicable portion of that year and (b) other
customary information 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.
The different classes of securities in a series, in general, will fall into
different categories. The following chart identifies and generally defines some
of the more typical categories. The prospectus supplement for a series of
securities may identify the classes which comprise that 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
</TABLE>
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<TABLE>
<S> <C>
characteristics but together constitute a single class.
component of a Component Class may be identified
Each 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 that series. The prospectus
supplement relating to each Planned Principal
Class will disclose the principal balance schedule
pertaining to that 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 regarding original terms to
maturity, the remaining terms to maturity, and
interest rates of the underlying Loans, and the
assumptions some the rate of prepayment on the
underlying Loans.
Scheduled
Principal Class...................................... A class that is designed to receive principal
payments using a predetermined principal balance
schedule but is not designated as a Planned
Principal Class or Targeted Principal Class. In
many cases, the schedule is derived by assuming
two constant prepayment rates for the underlying
Trust Fund Assets. These two rates are the
endpoints for the "structuring range" for the
Scheduled Principal Class.
Sequential Pay Class................................. Classes that receive principal payments in a
prescribed sequence, that do not have
predetermined principal balance schedules and that
under all circumstances receive payments of
principal continuously from the first Distribution
Date on which they receive principal until they
are retired. A single class that receives
principal payments before or after all other
classes in the same series of
</TABLE>
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<TABLE>
<S> <C>
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 that
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 regarding
original terms to maturity, the remaining terms to
maturity, and interest rates of the underlying
Loans, and the assumptions regarding 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 that 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 that index.
Variable Rate Class.................................. A class with an interest rate that resets
periodically and is calculated by reference to the
rate or rates of interest applicable to specified
assets or instruments (e.g., the interest 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
</TABLE>
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<TABLE>
<S> <C>
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 that class on
each applicable Distribution Date, with the
remainder of accrued interest to be distributed
currently as interest to that class. This
accretion may continue until a specified event has
occurred or until the Partial Accrual Class is
retired.
Accrual Class........................................ A class that accretes the amount of accrued
interest otherwise distributable on the class,
which amount will be added as principal to the
principal balance of the class on each applicable
Distribution Date. This accretion may continue
until some specified event has occurred or until
the 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 this 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 that LIBOR Determination Date. In lieu of relying on
the quotations for those Reference Banks that appear at that time on the
Telerate Screen Page 3750, the Calculation Agent will request each of the
Reference Banks to provide offered quotations at that time. "Telerate Screen
Page 3750" means the display page currently so designated on the Dow Jones
Telerate Service (or any page that replaces 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 offered quotations, LIBOR for the next Interest Accrual
Period shall be the arithmetic mean of the 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 offered quotations, LIBOR for the next
Interest Accrual Period (as this term is defined in the related
prospectus supplement) shall be whichever is the higher of (1) LIBOR as
determined on the previous LIBOR Determination Date or (2) the Reserve
Interest Rate. The "Reserve Interest Rate" shall be the rate per annum
which the Calculation Agent determines to be either (1) 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
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Determination Date, to the principal London offices of at least two of
the Reference Banks to which these quotations are, in the opinion of
the Calculation Agent, being so made, or (2) in the event that the
Calculation Agent can not determine the arithmetic mean, the lowest
one-month United States dollar lending rate which New York City banks
selected by the Calculation Agent are quoting on that 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 in the
related prospectus supplement.
Each Reference Bank (1) must be a leading bank engaged in transactions
in Eurodollar deposits in the international Eurocurrency market; (2) may not
control, be controlled by, or be under common control with the Calculation
Agent, and (3) must have an established place of business in London. If any
Reference Bank is unwilling or unable to act in that capacity or if appointment
of any 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 this 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
that date), expressed as a per annum percentage rate, on (1) U.S. Treasury
securities adjusted to the "constant maturity" (as further described below)
specified in the related prospectus supplement or (2) if no "constant maturity"
is so specified, United States Treasury securities trading on the secondary
market having the maturity specified in the related 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 that week, then it will use
the Statistical Release from the immediately preceding week.
Yields on United States Treasury securities at "constant maturity" are
derived from the United States Treasury's daily yield curve. This curve, which
relates the yield on a security to its time to maturity, is based on the closing
market bid yields on actively traded Treasury securities in the over-the-counter
market. These market yields are calculated from composites of quotations
reported by five leading United States government securities dealers to the
Federal Reserve Bank of New York. This method provides a yield for a given
maturity even if no security with that exact maturity is outstanding. If 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 this 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 the
range will be used. If 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
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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 be
equal to the actual index or indices employed under applicable Loan documents in
calculating the interest rates on Loans in the relevant class or classes of
securities (the "Loan Indices"). If this type of interest rate mismatch occurs,
the amounts available for payment of interest on the relevant class or classes
of securities may increase or decrease depending upon the divergence 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 the relevant class or classes of securities to pay
the interest accruing on those class or classes of securities, the availability
of interest rate hedging protection, if any, will 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 Book-Entry Securities ("Beneficial Owners") will hold their
Book-Entry Securities through DTC in the United States, or Cedel Bank, Societe
Anonyme ("CEDEL") or Euroclear System ("Euroclear") in Europe, if they are
participants of those systems, or indirectly through organizations which are
participants in those systems. The Book-Entry Securities will be issued in one
or more certificates which equal the aggregate principal balance of the relevant
class of 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 omnibus 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
these 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 his or her security (a
"Definitive Security"). Unless and until Definitive Securities are issued, it is
anticipated that the only record holder of Book-Entry Securities will be Cede &
Co., as nominee of DTC. Beneficial Owners are only permitted to exercise their
rights in Book-Entry Securities indirectly through DTC Participants and DTC.
Each 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 that purpose. In turn, the Financial
Intermediary's ownership of a 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, Book-Entry 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 for the
Book-Entry Securities and is required to receive and transmit distributions of
principal of, and interest on, Book-Entry Securities. DTC Participants and
indirect participants with whom Beneficial Owners have accounts for their
Book-Entry Securities are similarly required to make book-entry transfers and
receive and transmit 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
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participants by instructing DTC Participants and indirect participants to
transfer securities, by book-entry transfer, through DTC for the account of the
purchasers of the 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. These credits or any transactions in the
securities settled during processing will be reported to the relevant Euroclear
Participants or CEDEL Participants on that 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 by DTC in
accordance with the Rules on behalf of CEDEL or Euroclear, as the case may be,
by the Relevant Depository. However, these cross-market transactions will
require delivery of instructions to CEDEL or Euroclear, as the case may be, by
the counterparty in that system in accordance with its rules and procedures and
within its established deadlines (European time). If the transaction meets its
settlement requirements, CEDEL or Euroclear, as the case may be, will 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 laws of the
State of New York, 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 was created to hold securities for its participating
organizations and facilitate the clearance and the settlement of securities
transactions between DTC Participants through electronic book-entry changes in
DTC Participants' accounts, thereby eliminating the need for physical movement
of certificates. DTC Participants include securities brokers and dealers (who
may include the underwriters of any series), banks, trust companies and clearing
corporations and may in the future include some other organizations. Indirect
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 some other
organizations and may include the underwriters of any series. 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 27 currencies, including United
States dollars.
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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 this 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. It is regulated and examined by the
Board of Governors of 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 on 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 these
payments will be forwarded by the Trustee to Cede & Co., as nominee of DTC.
Distributions on 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. These distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Consequences--Tax Treatment of Foreign Investors" and "--Tax
Consequences to holders of the Notes--Backup Withholding." Because DTC can only
act on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Securities to persons or entities that do not participate in
the Depository system may be limited due to the lack of physical certificates
for Book-Entry Securities. In addition, issuance of the Book-Entry Securities in
book-entry form may reduce the liquidity of these securities in the secondary
market since some 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 the 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 these actions are taken
on behalf of Financial Intermediaries whose holdings include 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 these actions on its behalf through DTC. DTC may take
actions, at the direction of the related DTC Participants, for some securities
which conflict with actions taken for other securities.
Definitive Securities will be issued to securityholders only if (1) the
Servicer advises the applicable Trustee in writing that DTC is no longer willing
or able to discharge properly its responsibilities as depository for the
securities and the Trustee is unable to locate a qualified successor, (2) the
Servicer at its option, elects to terminate the book-entry system through DTC or
(3) after the occurrence of an Event of Default or the resignation or removal of
the Servicer for these securities, holders representing at least a majority of
the outstanding principal amount of the related securities of that 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) for those securities is
no longer in the best interest of the holders of the securities.
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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 the 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 the 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 these procedures and they 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 beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided for one or more classes of a series
of securities or for 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 that 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,
over-collateralization, 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, one or more
classes of a series of securities (the "Senior Securities") may be credit
enhanced by granting Senior Securities the preferential right to receive
distributions of scheduled principal, Principal Prepayments, interest or any
combination thereof prior to holders of one or more other classes of that series
("Subordinated Securities") as specified in the related prospectus supplement.
Protection may also be afforded to the holders of Senior Securities of a series
by: (1) reducing the ownership interest (if applicable) of the related
Subordinated Securities; (2) a combination of the immediately preceding sentence
and clause (1) above; or (3) 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 the related 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 home 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 the 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. These 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
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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 some classes of securities at
the times and under the circumstances specified in the related 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 some distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-collateralization
mechanism or otherwise.
Distributions may be allocated among classes of Senior Securities and
among classes of Subordinated Securities (1) in the order of their scheduled
final distribution dates, (2) in accordance with a schedule or formula, (3) in
relation to the occurrence of events, or (4) otherwise, in each case as
specified in the related prospectus supplement.
LETTER OF CREDIT
The letter of credit, if any, for 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 some 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 related trust
fund. We refer you to "The Agreements--Termination; Optional Termination." A
copy of the letter of credit for a series, if any, will be filed with the
Securities and Exchange Commission (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 those securities or some classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. These instruments may cover timely
distributions of interest and/or full distributions of principal for one or more
classes of securities of the related series 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 (1)
maintaining timely payments or providing additional protection against losses on
the assets included in the trust fund, (2) paying administrative expenses or (3)
establishing a minimum reinvestment rate on the payments made in respect of
those assets or principal payment rate on those assets. These 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
the related prospectus supplement. A copy of any 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
specific class or classes of securities and, thus, accelerate the rate of
payment of principal on those securities.
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RESERVE ACCOUNTS
If specified in the related prospectus supplement, credit enhancement
for a series of securities will be provided by the establishment and maintenance
with the Trustee for that series of securities, in trust, of one or more Reserve
Accounts for that series. The related prospectus supplement will specify whether
or not any Reserve Accounts will be included in the trust fund for that series.
The Reserve Account for a series will be funded (1) 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, (2) by the deposit therein from
time to time of amounts, as specified in the related prospectus supplement to
which the holders of Subordinated Securities, if any, would otherwise be
entitled or (3) in another manner 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 (1) obligations of the United States
or any agency thereof, provided these obligations are backed by the full faith
and credit of the United States; (2) 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 (each, a "Rating Agency"), or a lower rating that
will not result in the downgrading or withdrawal of the ratings then assigned to
that securities by each Rating Agency; (3) commercial or finance company paper
which is then receiving the highest commercial or finance company paper rating
of each Rating Agency, or a lower rating that will not result in the downgrading
or withdrawal of the ratings then assigned to that securities by each Rating
Agency; (4) 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 that 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 that holding company, but only if
Moody's Investors Service, Inc. ("Moody's") is not a Rating Agency for that
series of securities) are then rated one of the two highest long-term and the
highest short-term ratings of each Rating Agency for those securities, or any
lower ratings that will not result in the downgrading or withdrawal of the
rating then assigned to those securities by any Rating Agency, (5) demand or
time deposits or certificates of deposit issued by any bank or trust company or
savings institution to the extent that the deposits are fully insured by the
FDIC; (6) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation containing, at the time of the issuance of the
agreements, terms and conditions that will not result in the downgrading or
withdrawal of the rating then assigned to those securities by any Rating Agency;
(7) repurchase obligations for any security described in clauses (1) and (2)
above, in either case entered into with a depository institution or trust
company (acting as principal) described in clause (4) above; (8) 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 that investment, have one of
the two highest ratings of each Rating Agency (except if the Rating Agency is
Moody's, the rating shall be the highest commercial paper rating of Moody's for
those securities), or a lower rating that will not result in the downgrading or
withdrawal of the rating then assigned to those securities by any Rating Agency,
as evidenced by a signed writing delivered by each Rating Agency; (9) interests
in any money market fund which at the date of acquisition of the interests in
the fund and throughout the time those interests are held in the fund has the
highest applicable rating by each Rating Agency or a lower rating that will not
result in the downgrading or withdrawal of the ratings then assigned to those
securities by each Rating Agency; (10) 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 Rating Agency in their respective highest applicable rating
category or a lower rating that will not result in the downgrading or withdrawal
of the ratings then assigned to those securities by each Rating Agency; and (11)
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 those securities by any
Rating Agency, as evidenced by a signed writing delivered by each Rating Agency;
provided that no instrument shall be a Permitted Investment if the instrument
evidences the right to receive interest-only payments on the obligations
underlying that instrument; and provided further, that no investment specified
in clause (9) or clause (10) above will 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, the letter of credit will be irrevocable.
Any instrument deposited therein will name the Trustee, in its
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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 regarding instruments
deposited in the Reserve Accounts will be set forth in the related prospectus
supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of securities of the related series for the purposes, in the manner and
at the times specified in the related prospectus supplement.
POOL INSURANCE POLICIES
If specified in the related prospectus supplement, a separate pool
insurance policy will be obtained for the Loans in a particular trust fund and
issued by the insurer (the "Pool Insurer") named in the related 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
trust fund in an amount equal to a percentage specified in the related
prospectus supplement of the aggregate principal balance of the Loans on the
Cut-off Date which are not covered as to the 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 the 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 (1) any required primary mortgage insurance policy is in effect
for the defaulted Loan and a claim thereunder has been submitted and settled;
(2) 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; (3) 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 (4) the insured has
acquired good and merchantable title to the mortgaged property free and clear of
liens except specific 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's interest rate to the date
of the purchase and specified 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's interest 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 specified 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 (1) restoration will increase the proceeds to
securityholders on liquidation of the Loan after reimbursement of the Servicer
for its expenses and (2) these 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 losses sustained by reason of a
default arising from, among other things, (1) 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 (2) 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 might give rise to an obligation on the part
of the Seller to repurchase the defaulted Loan if the breach cannot be cured by
the 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 that Loan, at the time of default or thereafter,
was not approved by the applicable insurer.
The original amount of coverage under each pool insurance policy will
be reduced over the life of the related securities by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the
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Pool Insurer upon disposition of all foreclosed properties. The amount of claims
paid will include some 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 home by the related securityholders.
CROSS-COLLATERALIZATION
If specified in the related prospectus supplement, different classes of
the related series of securities may hold the sole beneficial ownership interest
in separate groups of Trust Fund Assets. In this case, credit enhancement may be
provided by a cross-collateralization feature requiring that distributions be
made on 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 that trust fund.
Cross-collateralization may be provided by (1) the allocation of some excess
amounts generated by one or more asset groups to one or more other asset groups
within the same trust fund or (2) the allocation of losses on one or more asset
groups to one or more other asset groups within the same trust fund. These
excess amounts will be applied and/or these 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 this 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 the credit enhancement relates and the manner of determining the amount of
coverage provided to those trust funds thereby and of the application of that
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 trust fund will
vary depending upon the type of Loans included therein. Each prospectus
supplement will contain information regarding the type and maturities of the
Loans in the related trust fund. 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 trust fund
will affect the weighted average life of the related series of securities.
The rate of prepayment on the Loans cannot be predicted. 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,
these Loans may experience a higher rate of prepayment than traditional
fixed-rate mortgage loans. In addition, any future limitations on the right of
borrowers to deduct interest payments on home equity loans for federal income
tax purposes may further increase the rate of prepayments of the Loans. The
enforcement of a "due-on-sale" provision (as described below) will have the same
effect as a prepayment of the related Loan. We refer you to "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 the investor at the time the securities were
purchased.
Collections on Revolving Credit Line Loans may vary because, among
other things, borrowers may (1) make payments during any month as low as the
minimum monthly payment for that month or, during the interest-only period for
some Revolving Credit Line Loans with respect to which an interest-only payment
option has been
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selected, the interest and the fees and charges for that month or (2) 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 some 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 these 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. We refer you to "The Agreements--Collection
Procedures" and "Legal Aspects of the Loans" for a description of some
provisions of each Agreement and some legal developments that may affect the
prepayment experience on the Loans.
The rate of prepayments on conventional mortgage loans has fluctuated
significantly in recent years. In general, if prevailing rates fall
significantly below the interest rates borne by the Loans, the Loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above those interest rates. Conversely, if prevailing
interest rates rise appreciably above the interest rates borne by the Loans, the
Loans are more likely to experience a lower prepayment rate than if prevailing
rates remain at or below those Loan interest rates. However, there can be no
assurance that this 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 that month. Prepayments will be passed through or paid
as described in the related prospectus supplement.
Even assuming that the mortgaged properties provide adequate security
for the Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by securityholders could occur. An action to foreclose on a
mortgaged property securing a Loan is regulated by state statutes and rules and
is subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore. in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a default
by a borrower, these restrictions among other things, may impede the ability of
the Servicer to foreclose on or sell the mortgaged property or to obtain
Liquidation Proceeds sufficient to repay all amounts due on the related Loan. In
addition, the Servicer will be entitled to deduct from related Liquidation
Proceeds all expenses reasonably incurred in attempting to recover amounts due
on defaulted Loans and not yet repaid, including payments to senior lienholders,
legal fees and costs of legal action, real estate taxes and maintenance and
preservation expenses.
Liquidation expenses for 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 specified disclosures, and require licensing of some
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
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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 interest rates
will affect the yield on those 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 interest
will not be made earlier than the month following the month of accrual.
Under some 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
causing earlier retirement of the related series of securities. We refer you to
"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 those securities.
THE AGREEMENTS
Set forth below is a description of the material provisions of each
Agreement which is 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, the 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 those
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 the conveyance,
deliver the securities to the Depositor in exchange for the Loans. Each Loan
will be identified in a schedule appearing as an exhibit to the related
Agreement. This 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 interest rate or Annual
Percentage Rate ("APR"), the maturity of the Loan, the Loan-to-Value Ratio at
origination and other specified 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:
o the mortgage note or contract endorsed without recourse in
blank or to the order of the Trustee,
o 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 the Mortgage together with a
certificate that the original of the Mortgage was delivered to
that recording office),
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o an assignment of the Mortgage to the Trustee, which assignment
will be in recordable form in the case of a Mortgage
assignment,
o other assignments deemed necessary by the Trustee, including
assignments of title insurance policies covering the mortgaged
properties, and
o 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
these Loan documents within the time period specified in the related prospectus
supplement after receipt thereof, and the Trustee will hold those documents in
trust for the benefit of the related securityholders. If any Loan document is
found to be missing or defective in any material respect, the Trustee (or the
custodian) will notify the Servicer and the Depositor, and the Servicer will
notify the related Seller. If the Seller cannot cure the omission or defect
within the time period specified in the related prospectus supplement after
receipt of the notice, the Seller will be obligated to either (1) purchase the
related Loan from the trust fund at the Purchase Price or (2) if so specified in
the related prospectus supplement, remove the Loan from the trust fund and
substitute in its place one or more other Loans that meets the 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
this 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 the Loan if the Seller
defaults on its obligation, unless the 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 representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
Agreement. Upon a breach of any 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
a breach of a representation by the Servicer.
Notwithstanding the foregoing provisions, no purchase or substitution
of a Loan will be made for a trust fund which has made a REMIC election if the
purchase or substitution would result in a prohibited transaction tax under the
Code.
No Recourse to Sellers; Depositor or Servicer. As described above under
"--Conveyance of the Loans," the Depositor will cause the Loans comprising the
related trust fund to be conveyed to the Trustee, without recourse. However,
each Seller (and Equity One, where the Seller is a subsidiary of Equity One)
will be obligated to repurchase or substitute for any Loan as to which certain
representations and warranties are breached or for failure to deliver certain
documents relating to the Loans as described herein under "--Conveyance of the
Loans" and "Loan Program--Representations by Sellers; Repurchases." In addition,
the Servicer and the Depositor will be obligated to purchase or substitute for
any Loan as to which certain representations and warranties are breached as
described herein under "--Conveyance of the Loans." These obligations to
purchase or substitute constitute the sole remedy available to the
securityholders of the related series or the Trustee for a breach of any
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 for 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 one of the following:
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o 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,
o 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"),
o 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 so
that, as evidenced by an opinion of counsel, the
securityholders have a claim on the funds in the Security
Account or a perfected first priority security interest
against any collateral securing these 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
o 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 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):
o all payments on account of principal, including Principal
Prepayments and, if specified in the related prospectus
supplement, any applicable prepayment penalties, on the Loans,
o all payments on account of interest on the Loans, net of
applicable servicing compensation,
o 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 these 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 on any properties acquired on behalf of the
securityholders by foreclosure or deed in lieu of foreclosure,
o all proceeds of any Loan or property in respect thereof
purchased by the Servicer, the Depositor or any Seller as
described under "Loan Program--Representations by Sellers,
Repurchases" or "--Assignment of the Trust Fund Assets" and
all proceeds of any Loan repurchased as described under
"--Termination; Optional Termination,"
o all payments required to be deposited in the Security Account
in order to satisfy any deductible clause in any blanket
insurance policy described under "--Hazard Insurance,"
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o 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
o 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:
o 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 on funds in the amounts in the
Security Account credited thereto,
o to reimburse the Servicer for Advances, this right of
reimbursement for any Loan being limited to amounts received
that represent late recoveries of payments of principal and/or
interest on the Loan (or Insurance Proceeds or Liquidation
Proceeds with respect thereto) with respect to which that
Advance was made,
o to reimburse the Servicer for any Advances previously made
which the Servicer has determined to be nonrecoverable,
o to reimburse the Servicer from Insurance Proceeds for expenses
incurred by the Servicer and covered by the related insurance
policies,
o 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, the
right of reimbursement being limited to amounts received
representing late recoveries of the payments for which the
advances were made,
o to pay to the Servicer, for 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
the repurchased Loan,
o to reimburse the Servicer or the Depositor for expenses
incurred and reimbursable pursuant to the Agreement,
o to withdraw any amount deposited in the Security Account and
not required to be deposited therein, and
o to clear and terminate the Security Account upon termination
of the Agreement.
In addition, on or prior to the business day immediately preceding each
Distribution Date, the Servicer shall withdraw from the Security Account the
amount of Available Funds, to the extent on deposit, for deposit in an account
maintained by the Trustee for the related series of securities.
PRE-FUNDING ACCOUNT
If so provided in the related prospectus supplement, the Servicer will
establish and maintain a Pre-Funding Account, in the name of the related Trustee
on behalf of the related securityholders, into which the Depositor will deposit
cash in an amount (the "Pre-Funded Amount") specified in the related prospectus
supplement 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 the Trustee during the period from the
related Closing Date to a date specified in the related prospectus supplement
(the "Funding Period") to pay to the Depositor the purchase price for subsequent
Loans ("Subsequent Loans") acquired as Trust Fund Assets. 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
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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. (1)
the date the amount on deposit in the Pre-Funding Account is less than the
minimum dollar amount specified in the related Agreement; (2) the date on which
an event of default occurs under the related Agreement, or (3) 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 another trust account 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 the amount 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 the 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 the
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 the Sub-Servicing Agreement. Notwithstanding any 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 collection procedures that are customary for loans
comparable to the Loans. Consistent with the above, the Servicer may, in its
discretion, (1) waive any assumption fee. late payment or other charge in
connection with a Loan and (2) to the extent not inconsistent with the coverage
of the Loan by a pool insurance policy, primary mortgage insurance policy, FHA
insurance, V A 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, the obligation will
remain during any period of this 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 the conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the Loan under any
due-on-sale clause applicable thereto, but only if the exercise of these 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 the due-on-sale clause or if the 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
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assumption and modification agreement with the person to whom the property has
been or is about to be conveyed, pursuant to which that 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. We refer you to
"Certain Legal Aspects of the Loans--Due-on-Sale Clauses." In connection with
any of this type, 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 that mortgaged property is located. Except as
otherwise specified in the related prospectus supplement, this coverage will be
in an amount equal to at least the lesser of
o the sum of the original principal balance of the Loan and the
original principal balance of any other loan on the mortgaged
property having lien priority over the Loan, if any, and
o the greater of
o the maximum insurable value of the improvements on the
mortgaged property and
o an amount sufficient to ensure that the proceeds of the
policy will 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. This 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
this 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 halt, 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 of these
policies do not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mud flows), nuclear reactions,
wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not intended to be all inclusive. If the
mortgaged property securing a Loan is located in a federally designated special
flood area at the time of origination, the Servicer will require the mortgagor
or obligor to obtain and maintain flood insurance.
The hazard insurance policy covering each mortgaged property securing
each Loan typically contains a clause which in effect requires the insured at
all times to carry insurance in an amount which is the lesser of (1) the
replacement value of the mortgaged property or (2) 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 (1) 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 (2) the same
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of these 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
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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. We refer you to "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 (1)
that the restoration will increase the proceeds to securityholders on
liquidation of the Loan after reimbursement of the Servicer for its expenses and
(2) that these 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 normal practices and procedures that
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 the Loan plus interest accrued
thereon that is payable to securityholders, the trust fund will realize a loss
in the amount of the difference plus the aggregate of expenses incurred by the
Servicer in connection with these proceedings and which are reimbursable under
the Agreement. In the unlikely event that any proceedings result in a total
recovery which is, after reimbursement to the Servicer of its expenses, in
excess of the principal balance of the 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 for the Loan and amounts representing the balance of the 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 a 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 resulting from that Loan. In the
event that the Servicer has expended its own funds to restore the damaged
mortgaged property and these 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 the 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 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. We refer
you to "Credit Enhancement."
The proceeds from any liquidation of a Loan will be applied in the
following order of priority:
o 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 relating to the Loan,
o second, to reimburse the Servicer for any unreimbursed
Advances relating to the Loan,
o third, to accrued and unpaid interest (to the extent no
Advance has been made for this amount) on the Loan; and
fourth, as a recovery of principal of the Loan.
REALIZATION UPON DEFAULTED LOANS
FHA Insurance, VA Guaranties. Loans designated in the related
prospectus supplement as insured by the FHA will be insured by the FHA as
authorized under the United States Housing Act of 1937, as amended. In addition
to the Title I Program of the FHA (see "Certain Legal Aspects of the
Loans--Title I Program") certain Loans will be insured under various FHA
programs including the standard FHA 203(b) program to finance the acquisition of
one- to four-family housing units and the FHA 245 graduated payment mortgage
program. These programs generally limit the principal amount and interest rates
of the mortgage loans insured. Loans insured by FHA generally require a minimum
down payment of approximately 5% of the original principal amount of the loan.
No FHA-insured Loans relating to a series may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time of origination
of the Loan.
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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. 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 a portion of the mortgage
financing for the purchase or refinancing of a dwelling to be used as the
veteran's home at interest rates permitted by the VA. Loans made under the
program cannot exceed the reasonable value of the property or certain lower
limits in the case of refinancing loans. The program requires no down payment
from the purchaser and permits the guaranty of mortgage loans of up to 30 years'
duration. No Loan guaranteed by the VA will have an original principal amount
greater than five times the partial VA guaranty for the 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 3703, 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 the 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
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 a 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 that 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 this compensation will be retained by it from
collections of interest on the Loan in the related trust fund (the "Servicing
Fee"). As compensation for its servicing duties, a Sub-Servicer or, if there is
no Sub-Servicer, the Servicer will be entitled to a monthly servicing fee as
described in the related prospectus supplement. In addition, the Servicer or
Sub-Servicer will retain all prepayment charges, assumption fees and late
payment charges, to the extent collected from borrowers, and any benefit that
may accrue as a result of the investment of funds in the applicable Security
Account.
The Servicer will pay or cause to be paid certain ongoing expenses
associated with each trust fund and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit enhancement
arrangements, payment of the fees and disbursements of the Trustee, any
custodian appointed by the Trustee, the certificate registrar and any paying
agent, and payment of expenses incurred in enforcing the obligations of
Sub-Servicers and Sellers. The Servicer will be entitled to reimbursement of
expenses incurred in enforcing the obligations of Sub-Servicers and Sellers
under certain limited circumstances.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by that firm
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for the
Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac"), 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
these agreements except for any significant exceptions or errors in records
that, in the opinion of the firm, the Audit Program for Mortgages serviced for
FHLMC, or the Uniform Single Attestation Program for Mortgage Bankers, it is
required to report. In rendering its statement the 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 the statement) of
firms of independent public accountants with respect to the related
Sub-Servicer.
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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 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 director,
officer, employee, or agent of the Servicer or the Depositor 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 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 action which it may deem
necessary or desirable under the Agreement and the rights and duties of the
parties thereto and the interests of the securityholders thereunder. If this
occurs, the legal expenses and costs of the 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 the 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
the merger, consolidation or succession does not adversely affect the then
current rating or ratings of the class or classes of securities of that 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
o 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
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giving of written notice of 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 that class
evidencing not less than 25% of the total distributions
allocated to that class ("Percentage Interests"),
o any failure by the Servicer to make an Advance as required
under the Agreement, unless cured as specified therein,
o 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 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 that class, and
o certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings
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 a trust
fund described under "Credit Enhancement" herein if payments from these sources
are insufficient to make all payments required in the Agreement. The assets of a
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 under any
other circumstances specified in the Agreement, the Trustee will terminate all
of the rights and obligations of the Servicer under the Agreement relating to
that trust fund and in and to the related Trust Fund Assets, The Trustee will
then 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. If 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 at least
$10,000,000 to act as successor to the Servicer under the Agreement. Pending
this appointment, the Trustee is obligated to act as a successor to the
Servicer. The Trustee and any successor to the Servicer 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 the holder's status as a securityholder,
will have any right under any Agreement to institute any proceeding relating to
the Agreement, unless the holder previously has given to the Trustee written
notice of default and unless the holders of securities of any class of that
series evidencing not less than 25% of the aggregate Percentage Interests
constituting the class have made a written request of the Trustee to institute
the proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity, and the Trustee for 60 days has neglected or
refused to institute any proceeding.
Indenture. Except as otherwise specified in the related prospectus
supplement, events of default under the Indenture for each series of
asset-backed notes shall include:
o a default in the payment of any principal of or interest on
any note of that series which continues unremedied for five
days after written notice of default is given as specified in
the related prospectus supplement,
o 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,
o certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the trust fund, or
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o any other event of default provided for 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 the notes.
If an event of default on 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 that series
may declare the principal amount (or, if the notes of that series have an
interest rate of 0%, the 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 that series to be due and payable immediately. The declaration
may, under certain circumstances, be rescinded and annulled by the holders of
more than 50% of the Percentage Interests of the notes of that series.
If, following an event of default on any series of notes, the notes of
that series have been declared to be due and payable, the Trustee may, in its
discretion, notwithstanding acceleration, elect to maintain possession of the
collateral securing the notes of that series and to continue to apply
distributions on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of that series as they would
have become due if there had not been 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 that series for five days or more, unless
(1) the holders of 100% of the Percentage Interests of the notes of that series
consent to the sale, (2) the proceeds of the sale or liquidation are sufficient
to pay in full the principal of and accrued interest, due and unpaid, on the
outstanding notes of that series at the date of the sale or (c) the Trustee
determines that the collateral would not be sufficient on an ongoing basis to
make all payments on the notes as these payments would have become due if the
notes had not been declared due and payable, and the Trustee obtains the consent
of the holders of 66% of the Percentage Interests of the notes of that series.
If 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 liquidation for unpaid fees and
expenses. As a result, upon the occurrence of a payment-related 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 this type of 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 notes issued at a discount from par may be
entitled to receive no more than the unpaid principal amount thereof less the
amount of the discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an event of default relating to a series of notes occurs
and is continuing, the Trustee will have 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 that series, unless the holders offer to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with the request or
direction. Subject to these provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the notes of that 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 relating to the notes of that series, and the holders of a majority of
the then aggregate outstanding amount of the notes of that 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 that 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, (1) to cure any ambiguity;
(2) to correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein; or (3) to make any other
revisions relating to matters or questions arising under the
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Agreement which are not inconsistent with the provisions thereof, provided that
the amendment 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
the amendment obtains a letter from each Rating Agency requested to rate the
class or classes of securities of that series stating that the amendment will
not result in the downgrading or withdrawal of the respective ratings then
assigned to those 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 the change does not adversely affect the then current
rating on the class or classes of securities of that series that have been
rated. In addition, if a REMIC election is made for a trust fund, the related
Agreement may be amended to modify, eliminate or add to any of its provisions to
the extent 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 the action is necessary or helpful to maintain qualification as a
REMIC. 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 that 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 amendment may
(1) 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 the security, or (2) reduce the aforesaid percentage of
securities of any class the holders of which are required to consent to the
amendment without the consent of the holders of all securities of that class
covered by the Agreement then outstanding. If a REMIC election is made for 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 the amendment will not cause the 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 that Agreement following the later of (1) 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 Trust Fund Assets
remaining in the trust fund or (2) 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 from the related
trust fund of all of the remaining Trust Fund Assets and all property acquired
in respect of those Trust Fund Assets.
Unless otherwise specified by the related prospectus supplement, any
purchase of Trust Fund Assets and property acquired in respect of Trust Fund
Assets evidenced by a series of asset-backed certificates will be made at the
option of the Servicer, the holders of certificates or, if applicable, a holder
of the REMIC residual interest, at a price specified in the related prospectus
supplement. The exercise of this right will effect early retirement of the
asset-backed certificates of that series, but the right of the Servicer, the
holders of certificates or, if applicable, a 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 for a trust fund, any purchase
pursuant to clause (2) 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 for a series of notes
(except for certain continuing rights specified in the Indenture) upon the
delivery to the Trustee for cancellation of all the notes of that series or,
with certain limitations, upon deposit with the Trustee of funds sufficient for
the payment in full of all of the notes of that series.
The Indenture will also provide that, if so specified for the notes of
any series, the related trust fund will be discharged from any and all
obligations to the notes of that series (except for certain obligations relating
to temporary notes and exchanges of notes, to register the transfer of or
exchange notes of that series, to replace stolen,
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lost or mutilated notes of that 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 that series on
the last scheduled Distribution Date for those notes and any installment of
interest on those notes in accordance with the terms of the Indenture and the
notes of that series. In the event of any defeasance and discharge of notes of
that series, holders of notes of that series would be able to look only to that
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.
LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Loans. Because these 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 that is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of recording
with a state or county office. There are two parties to a mortgage, the
mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until 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, for 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,
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.
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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 a deficiency
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 repairs
necessary to render the property suitable for sale at its own expense. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
Courts have imposed equitable principles upon foreclosure, which are
generally designed to mitigate the legal consequences to the borrower of the
borrower's default under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
Right of Redemption. In many states, the borrower, or any other person
having a junior encumbrance on the real estate, may, during a statutorily
prescribed reinstatement period, cure a monetary default by paying the entire
amount in arrears plus other designated costs and expenses incurred in enforcing
the obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or deed
of trust. We refer you to "--Junior Mortgages; Rights of Senior Mortgagees."
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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 this lien has priority over the lien of
an existing mortgage against the 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 preexisting, 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 these costs
on any and all "responsible parties," including an owner or operator as that
term is therein defined. In 1996, however, Congress passed the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which substantially modified the definition of "owner or operator" to make
several important exclusions relating to persons who hold indicia of facility
ownership primarily as a means to protect that person's security interest in the
facility (the "Secured Creditor Exclusion"). This exclusion contains several
restrictions, however, under which the lender holding the security interest must
operate to insure that it is not "participating in management" of the facility.
Thus, if a lender's activities begin to encroach on the actual management of a
contaminated facility or property while the borrower is still in possession of
the 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, or fails to market or lease the property at the
earlier practicable, commercially reasonable time, on commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements.
This new legislation also 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 provides that participation in the management of the property does
not include "merely having the capacity to influence, or unexercised right to
control" operations, which had been one of the major concerns arising from the
Eleventh Circuit's decision in U.S. v. Fleet Factors Corp., 901 F. 2d 1550 (11th
Cir. 1990). A lender does not "participate in the management", the standard for
incurring owner and operator liability under CERCLA, unless it: (1) exercises
decision-making control over environmental compliance related to the property
while the borrower is still in possession of the property or facility; (2)
actually participates in the management or operational affairs of the facility;
or (3) exercises control over substantially all of the non-environmental
compliance operational functions of the property (as opposed to financial or
administrative functions). These amendments do not, however, 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 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 which also contains a
liability exclusion analogous to the Secured Creditor Exclusion. 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 of the mortgaged properties 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.
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RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In certain
other states, this right of redemption applies only to sales following judicial
foreclosure, and not to sales pursuant to a non-judicial power of sale. In most
states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In other states, redemption may be authorized if the former borrower pays
only a portion of the sums due. The effect of a statutory right of redemption is
to diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser from
the lender subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run. In some states, there is no right to redeem property.
ANTI-DEFICIENCY LEGISLATION; BANKRUPTCY LAWS; TAX LIENS
Certain states have imposed statutory restrictions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against borrowers financing the purchase of their
residence or following sale under a deed of trust or certain other foreclosure
proceedings. A deficiency judgment is a personal judgment against the borrower
equal in most cases to the difference between the amount due to the lender and
the fair market value of the real property at the time of the foreclosure sale.
As a result of these prohibitions, it is anticipated that in most instances the
Servicer will utilize the non-judicial foreclosure remedy and will not seek
deficiency judgments against defaulting borrowers.
Some state statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting the security however,
in some of these states, the lender, following judgment on the personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies relating 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 the mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any
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 these 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
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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 these 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 these clauses over mortgage loans that were (1) 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 (2) originated by lenders other
than national banks, federal savings institutions and federal credit unions.
Freddie Mac 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 for certain categories of window period loans. Also, the
Garn-St Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain
Act sets forth nine specific instances in which a mortgagee covered thereunder
may not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related mortgaged property to
an uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
Loans and the number of Loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from the 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 when
the prepayments are made 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 on
many of the Loans. The absence of a restraint on prepayment, particularly on
fixed rate Loans having higher interest rates, may increase the likelihood of
refinancing or other early retirement of these 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
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under a deed of trust or by a mortgagee under a mortgage having a power of sale,
there is insufficient state action to afford constitutional protection to the
borrower.
APPLICABILITY OF USURY LAWS
Each Mortgage Loan jurisdiction has usury laws which limit the interest
and other amounts that may be charged under certain loans. Title V of the
Depository Institutions Deregulation and Monetary Control Act of 1980, enacted
in March 1980, as amended ("Title V") provides that state usury limitations
shall not apply to certain types of residential first mortgage loans originated
by certain lenders after March 31, 1980. The OTS, as successor to the Federal
Home Loan Bank Board, is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. The statute
authorized the states to reimpose interest rate limits by adopting, before April
1, 1983, a law or constitutional provision which expressly rejects an
application of the federal law. Fifteen states adopted this type of 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 the 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 the borrower's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that the 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 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 a 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 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 these proceeds and awards to any indebtedness secured
by the mortgage, in the order determined by the mortgagee. 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.
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Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
THE TITLE I PROGRAM
General. Certain of the Loans contained in a trust fund may be loans
insured under the Title I Credit Insurance program created pursuant to Sections
I and 2(a) of the National Housing Act of 1934, as amended (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 these loans which
include a "direct loan" or a "dealer loan." For 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. For 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. For 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 tender 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 typical) the case with
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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 this 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 the material misstatement of fact or misuse
of loan proceeds was caused by (or was knowingly sanctioned by) the lender or
its employees.
Requirements for Title I Loans. The maximum principal amount for Title
I Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that the 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 on multiple properties, and a borrower may obtain more
than one Title I Loan on 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 the list of items and activities. Before the lender may disburse funds on
any dealer Title I Loan, the lender must have in its possession a completion
certificate on a HUD approved form, signed by the borrower and the dealer. For a
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 these 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
for loans insured under the lender's contract of insurance by (1) the amount of
insurance claims approved for payment relating to insured loans and (2) 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 eligible loans registered with
the Secretary of HUD for insurance under the Title I Program. The Secretary of
HUD may transfer insurance coverage between
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insurance coverage reserve accounts with earmarking relating to a particular
insured loan or group of insured loans when a determination is made that it is
in the Secretary of HUD's interest to do so.
The lender may transfer insured loans and loans reported for insurance
only to another qualified lender under a valid Title I contract of insurance
(except as collateral in a bona fide transaction). Unless an insured loan is
transferred with recourse or with a guaranty or repurchase agreement, the
Secretary of HUD, upon receipt of the loan report required upon transfer in
accordance with the Title I regulations, will transfer from the transferor's
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 the 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 the 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 the 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 of these defects 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 the 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, the Homeowners Protection 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; the Fair Credit Reporting Act regulates the use
and reporting of information related to the borrower's credit experience; and
the Homeowners Protection Act requires the cancellation of private mortgage
insurance once certain equity levels are reached. Certain provisions of these
laws impose specific statutory liabilities upon lenders who fail to comply
therewith. In addition, violations of these 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
offered hereby and represents the opinion of Stradley, Ronon, Stevens & Young,
LLP, special counsel to the Depositor. The summary is based upon the provisions
of the Internal Revenue Code of 1986, as amended (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. This
interpretation is based on statutory provisions, regulations, and
interpretations that are subject to change, including change that 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 on 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 (1) the securities of a series are classified as indebtedness; (2) 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
Code; (3) the securities represent an ownership interest in some or all of the
assets included in the trust fund for a series; or (4) 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 for that 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 regarding
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 (1) securities held by a domestic building and loan
association will or, in the case of asset-backed 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
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section 7701(a)(19)(C); and (2) securities held by a real estate investment
trust will constitute "real estate assets" within the meaning of Code section
856(c)(4)(A) and interest on securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code section 856(c)(3)(B).
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 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 that class will be
treated as the fair market value of that class on the 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 these 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 these 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
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 the Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the de minimis rule described below. In the case of a Debt Security with a
long first period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Debt Security.
Under the de minimis rule, OID on a Debt Security generally will be
considered to be zero if OID is less than 0.25% of the stated redemption price
at maturity of the Debt Security multiplied by the weighted average
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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 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 this 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, (1) the interest is
unconditionally payable at least annually, (2) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (3)
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 the 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") has 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 this 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 the Debt
Security, the sum of the "daily portions" of the 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 to the 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 these
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, 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: (1) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and property adjusted for the length of the
accrual period), (2) events which have occurred before the end of the accrual
period and (3) 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 on 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 on 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.
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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 these 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 a subsequent holder who purchases the 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 the
OID by comparable economic accruals of portions of the excess.
Effects of Defaults and Delinquencies. Holders will be required to
report income from 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 1995 Technical Advice Memorandum, ruled that holders of a debt
instrument having OID must continue to accrue OID, as distinguished from the
accrual of interest, even when the there is no reasonable expectation that the
instrument will be redeemed according to its terms due to the issuer's financial
condition. As a result, the amount of income (including OID) reported by a
holder of this type of security in any period could significantly exceed the
amount of cash distributed to the 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 these 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 for 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 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 the holder for the security over its stated
principal amount, if any. Under this approach, a holder would be entitled to
amortize the premium only if it has in effect an election under Section 171 of
the Code for all taxable debt instruments held by the 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. This treatment may be more likely in the case of Interest Weighted
Securities that are Stripped Securities as described below. We refer you to
"--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 (1) the yield to maturity of the Debt
Securities and (2) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on the Debt Securities, should be calculated
as if the interest index remained at its value as of the issue date of these
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 the
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. This market discount would
accrue in a manner to be provided in Treasury regulations but, until these
regulations are issued, market discount would in general accrue either (1) on
the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (2) 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 the 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
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Pass-Through Certificate, as described below, the Loans underlying the 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 the security is
allowed as a current deduction only to the extent this excess is greater than
the market discount that accrued during the taxable year in which the interest
expense was incurred. In general, the deferred portion of any interest expense
will be deductible when the 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 the holder during the taxable year the 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 the 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 that 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, the 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 the holder, and will be irrevocable without the consent
of the IRS. Purchasers who pay a premium for the securities should consult their
tax advisers regarding the election to amortize premium and the method to be
employed.
The IRS has issued final regulations (the "Amortizable Bond Premium
Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code Section
1272(a)(6) such as the securities. Absent further guidance from the IRS, the
Trustee intends to account for amortizable bond premium in the manner described
above. Prospective purchasers of the securities should consult their tax
advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If this type of election were to be made for
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
relating to all other debt instruments having market discount that the 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 on all debt instruments having amortizable bond premium
that the holder owns or acquires. The election to accrue interest, discount and
premium on a constant yield method for 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 for 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.
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Except to the extent specified otherwise in a prospectus supplement, if
a REMIC election is made for a series of securities, (1) 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)(11)
(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 (2) securities held by a
real estate investment trust will constitute "real estate assets" within the
meaning of Code Section 856(c)(5)(B), and income from 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 (1) or (2) above, then a security will qualify for the tax
treatment described in (1) and (2) in the proportion that the 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), the expenses will be deductible
only to the extent that the expenses, plus other "miscellaneous itemized
deductions" of the holder, exceed 2% of the 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 (1) 3% of the excess of adjusted gross income over the
applicable amount, or (2) 80% of the amount of itemized deductions otherwise
allowable for that taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular Interest Security to a
holder with that level of income. In general terms, a single class REMIC is one
that either (1) 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 (2)
is similar to a grantor trust and is structured 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 (1) the gross income produced
by the REMIC's assets, including stated interest and any OID or market discount
on loans and other assets, and (2) deductions, including stated interest and OID
accrued on Regular Interest Securities, amortization of any premium relating 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 these expenses, when aggregated with the holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
the 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
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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 made by 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 the 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 the 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 the 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 that date, it is possible that the
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 (1) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (2) subject to a
limited exception, the sale or other disposition of a cash flow investment; (3)
the receipt of any income from assets not permitted to be held by the REMIC
pursuant to the Code; or (4) 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 taxes
imposed on the REMIC. To the extent not paid by the holders or otherwise,
however, taxes will be paid out of the trust fund and will be allocated pro rata
to all outstanding classes of securities of the 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
the 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 that quarter. and by allocating that
amount among the holders (on that day) of the Residual Interest Securities in
proportion to their respective holdings on that 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 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 from 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
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characteristics and pretax yield. Therefore, the after-tax yield on the Residual
Interest Security may be less than that of that type of 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 the loss arises. A holder's basis in a
Residual Interest Security will initially equal the 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 those 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 the 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 the 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 the holder's
adjusted basis in the Residual Interest Security at the time of the 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 the disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder
of a Residual Interest Security consisting of "excess inclusion" income may not
be offset by other deductions or losses, including net operating losses, on the
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), the holder's excess
inclusion income will be treated as unrelated business taxable income of the
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. We refer you to "--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 the 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 these 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 that quarterly
period of (1) 120% of the long term applicable federal rate on the startup day
multiplied by (2) the adjusted issue price of the Residual Interest Security at
the beginning of that 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
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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. We refer you to "--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 the
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 the Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a passthrough 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 (1) 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 (2) 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 for certain transfers of residual
interests by Foreign Persons to United States Persons. We refer you to "--Tax
Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the Treasury has 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.
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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 that series, the
"Pass-Through Certificates"). In some series there will be no separation of the
principal and interest payments on the Loans. In these 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 these 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 on the Loans, and paid directly its share of the Servicing Fees. In the
case of Pass-Through Certificates other than Stripped Securities, this 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, this income will consist of a pro
rata share of the income derived from each stripped bond or stripped coupon in
which the holder owns an interest. The holder of a security will generally be
entitled to deduct these Servicing Fees under Section 162 or Section 212 of the
Code to the extent that these 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 the
holder's regular tax liability only to the extent that these fees, when added to
other miscellaneous itemized deductions, exceed 2% of adjusted gross Income and
may not be deductible to any extent in computing the 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 (1) 3% of
the excess of adjusted gross income over the applicable amount or (2) 80% of the
amount of itemized deductions otherwise allowable for that 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
on 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 based upon
the Loans underlying the Certificate, rather than the Certificate itself. 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. We refer you to "--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
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the 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 the principal payment is made. This 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" when
referring to principal payments and "stripped coupons" when referring 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 the
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 the stripped interest.
Servicing fees in excess of reasonable servicing fees ("Excess
Servicing") will be treated under the stripped bond rules. If the Excess
Servicing fee is less than 100 basis points (1%) (i.e., 1% interest on the Loan
principal balance) or the securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the securities should be treated
as market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Loan by Loan basis, which could result in some Loans being
treated as having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to apply
to Stripped Securities and other Pass-Through Certificates. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made which take
into account for each accrual period the effect of prepayments during this
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
these 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 from 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 (1) 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; (2) the non-Interest
Weighted Securities are subject to the contingent payment provisions of the
Contingent Regulations; or (3) 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.
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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 these 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)(5) 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.
SALE OR EXCHANGE
Subject to the discussion below regarding trust funds as to which a
partnership election is made, a holder's tax basis in its security is the price
the 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 (1) the amount that
would have been includible in the holder's income if the yield on the Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of the holder's holding period, over (2) the amount of ordinary income
actually recognized by the holder from the Regular Interest Security. For
taxable years beginning after December 31, 1992, the maximum tax rate on
ordinary income for individual taxpayers is 39.6%. For taxable years beginning
after December 31, 1997, the maximum tax rate on long-term capital gains for
these taxpayers is generally 20%. 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 regarding 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% for 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
(1) fails to furnish the Trustee with its taxpayer identification
number ("TIN"),
(2) furnishes the Trustee an incorrect TIN,
(3) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
(4) under certain circumstances, fails to provide the Trustee or the
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, 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 that year and the
amount of tax withheld, if any, from payments on the securities.
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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 regarding 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, the interest will normally qualify as portfolio interest
(except where (1) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (2) the recipient
is a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. Upon receipt of appropriate ownership
statements as to status as a Foreign Person, the issuer normally will be
relieved of obligations to withhold tax from these 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 the
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 this
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
these amounts to be taken into account at an earlier time in order to prevent
the avoidance of tax. These 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 these 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. We refer you to "--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 (1) the trust fund will be eligible to be classified
as a partnership and (2) the nature of the income of the trust fund will exempt
it from
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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 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 tax of this
type that is unpaid by the trust fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The trust fund will agree, and
the holders of asset-backed notes will agree by their purchase of notes, to
treat the notes as debt for federal income tax purposes. Special counsel to the
Depositor will, except as otherwise provided in the related prospectus
supplement, advise the Depositor that the notes will be classified as debt for
federal income tax purposes. The discussion below assumes this characterization
of the notes is correct.
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., generally 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 for any
given series of notes, additional tax considerations relating to the 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 the
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 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 the 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 the noteholder in income resulting from the note
and decreased by the amount of bond premium (if any) previously amortized and by
the amount of principal payments previously received by the noteholder on the
note. Any gain or loss of this type will be capital gain or loss
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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 (1) is not actually or constructively a "10 percent shareholder"
of the trust fund or the Seller (including a holder of 10% of the outstanding
asset-backed 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 (2) provides the Owner Trustee or other person who is otherwise
required to withhold United States tax from payments on 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 this 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.
The Treasury has issued final regulations that modify the information
and forms (i.e., Form W-8) that must be provided to certify that a Beneficial
Owner of a note is a Foreign Person. Generally, the regulations apply to
payments made to Foreign Persons after December 31, 2000. Foreign Persons should
consult their own tax advisers concerning use of the appropriate form(s) to
certify that they are a Foreign Person.
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 (1) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the Foreign Person and (2) 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 or 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 Depositor, the IRS successfully asserted that
one or more of the notes did not represent debt for federal income tax purposes,
the notes might be treated as equity interests in the trust fund. If so treated,
the trust fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on Notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
Depositor, the trust fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the notes as equity interests in 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 holders of asset-backed certificates will agree by
their purchase of the 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
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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 characterization of
this type 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.
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 for any given series of certificates, additional tax considerations
relating to those 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 the 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 on 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 (1) the interest
that accrues on the certificates in accordance with their terms for that month,
including interest accruing at the Pass-Through Rate for that month and interest
on amounts previously due on the certificates but not yet distributed; (2) 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; (3) prepayment premium payable to the certificateholders for that month;
and (4) any other amounts of income payable to the certificateholders for that
month. This 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 certificateholders. 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 this
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 these 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 this type of holder under the Code to the extent
that the 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. These deductions might be disallowed to the individual in whole or
in part and might result in the holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the holder over the life of
the trust fund.
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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 these calculations be made separately for each Loan, the trust fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on certificateholders.
Discount and Premium. It is believed that the Loans were not issued
with OID, and, therefore, the trust fund should not have OID income. However,
the purchase price paid by the trust fund for the Loans may be 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 discount in income currently as it
accrues over the life of the Loans or to offset any premium against interest
income on the Loans. As indicated above, a portion of 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 on the 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
those certificates, and, upon sale or other disposition of some of the
certificates, allocate a portion of that 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 these 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, this 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 that 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 this type of 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 that
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. These 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-1 information to nominees that fail to provide
the trust fund with the information statement described below and these nominees
will be required to forward this information to the Beneficial Owners of the
certificates. Generally, holders must file tax returns that are consistent with
the information return filed the trust fund or be subject to penalties unless
the holder notifies the IRS of all 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. This information includes
(1) the name, address and taxpayer identification number of the
nominee, and
(2) as to each Beneficial Owner
(a) the name, address and identification number of the person,
(b) whether the 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 the 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
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 3 1. 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, in that capacity, 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 from the perspective of
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 these 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 this income were effectively
connected to a United States trade or business, at a rate of 35% for holders
that are Foreign Persons taxable as corporations and 39.6% for all other holders
who are Foreign Persons. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the trust fund to
change its withholding procedures. In determining a holder's withholding status,
the trust fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of foreign status signed under penalties of perjury.
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Each holder who is a Foreign Person might be required to file a United
States individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the trust fund's income.
Each holder who is a Foreign Person must obtain a taxpayer identification number
from the IRS and submit that number to the trust fund on Form W-8 in order to
assure appropriate crediting of the taxes withheld. A holder who is a Foreign
Person generally would be entitled to file with the IRS a claim for refund on
taxes withheld by the trust fund taking the position that no taxes were due
because the trust fund was not engaged in a United States trade or business.
However, interest payments made (or accrued) to a certificateholder who is a
Foreign Person generally will be considered guaranteed payments to the extent
the 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 this 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 from the guaranteed payments.
The Treasury has issued final regulations that modify the information
and forms (i.e., Form W-8) that must be provided to certify that a holder is a
Foreign Person. Generally, the regulations apply to payments made to Foreign
Persons after December 31, 2000. Foreign Persons should consult their own tax
advisers concerning use of the appropriate form(s) to certify that they are a
Foreign Person.
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 regarding the various state and
local tax consequences of an investment in the securities.
ERISA CONSIDERATIONS
The following describes certain considerations under the Employee
Retirement Income Security Act of 1974, as amended ("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 those 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 these plans, accounts or arrangements are invested)
(collectively, "Plans") subject to ERISA and on persons who are fiduciaries of
those 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 those 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 the 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
these 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 plan which is qualified and exempt from taxation under
Code Sections 401 (a) and 5 01 (a), however, is subject to the prohibited
transaction rules set forth in Code Section 503.
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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 the Plan if the equity interest acquired by the investing Plan is a
publicly-offered security. A publicly-offered security, as defined in the Labor
Reg. Section 2510.3-101, is a security that is widely held, freely transferable
and registered under the Exchange Act.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries of the 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 those certificates.
PTE 83-1 permits, subject to certain conditions, transactions which might
otherwise be prohibited between Plans and Parties in Interest of 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
those 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 (1) securities
issued in a series consisting of only a single class of securities; and (2)
securities issued in a series in which there is only one class of those
securities; provided that the securities in the case of clause (1), or the
securities in the case of clause (2), 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: (1) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing those 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; (2) the existence of a pool trustee
who is not an affiliate of the pool sponsor; and (3) 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 for the securities in a
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series issued without a subordination feature and for the securities 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 (this
subordination, pool insurance or other form of credit enhancement being the
system of insurance or other protection referred to above) relating to a series
of securities is maintained in an amount not less than the greater of one
percent of the aggregate principal balance of the Loans or the principal balance
of the largest Loan. See "Description of the Securities." In the absence of a
ruling that the system of insurance or other protection for 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 83-1. The
Underwriter Exemptions contain an expanded definition of "certificate" which
includes an interest which entities 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 the 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 Services, L.P. ("Fitch");
(4) the trustee must not be an affiliate of any other member
of the Restricted Group as defined below,
(5) the sum of all payments made to and retained by the
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 pool
sponsor pursuant to the assignment of the loans to the trust fund
represents not more than the fair market value of the loans; the sum of
all payments made to and retained by the servicer and any other
servicer represents not more than reasonable compensation for that
person's services under the agreement pursuant to which the loans are
pooled and reimbursements of that person's reasonable expenses in
connection therewith;
(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; and
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(7) in the event that the obligations used to fund the trust
have not been transferred to the trust on the Closing Date, additional
obligations (as specified in the Underwriter Exemptions) may be
transferred to the trust during the Funding Period in exchange for
amounts credited to the Pre-Funding Account, provided that the
Pre-Funded Amount does not exceed 25% of the initial aggregate
principal amount of the Certificates and/or Notes of the related series
of securities and provided that certain other conditions set forth in
the Underwriter Exemptions are satisfied.
The Underwriter Exemptions provide that the term "trust" does not
include any investment pool unless, among other things, it meets the following
requirements:
(1) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
(2) certificates in these 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
(3) certificates evidencing interests in these 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:
o 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 and at least 50 percent of the
aggregate interest in the trust is acquired by persons independent of
the Restricted Group,
o the 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,
o 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
o immediately after the acquisition, no more than twenty-five percent
(25%) of the assets of the Plan with respect to which the 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 Depositor, the
related Underwriter, the Trustee, the Servicer, any insurer for the Loans, any
obligor for 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 these 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 who proposes to cause a Plan to purchase securities
should consult with its 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 this 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.
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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 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 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 of those entities. Under SMMEA, if a
state enacts legislation prior to October 4, 1991 specifically limiting the
legal investment authority of any of those entities relating to "mortgage
related securities," securities will constitute legal investments for entities
subject to the legislation only to the extent provided therein. Approximately
twenty-one states adopted this legislation prior to the October 4, 1991
deadline. SMMEA provides, however, that in no event will the enactment of any
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 the contractual commitment was made or the securities were acquired
prior to the enactment of the legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
securities without limitations as to the percentage of their assets represented
thereby, federal credit unions may invest in mortgage related securities, and
national banks may purchase securities for their own account without regard to
the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to any regulations prescribed by the
applicable federal authority. 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, these "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 this type of 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 those
investors.
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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 the
series is being offered, the nature and amount of any underwriting discounts or
additional compensation to the underwriters and the proceeds of the offering to
the Depositor, or the method by which the price at which the underwriters will
sell the securities will be determined. Each prospectus supplement for an
underwritten offering will also contain information regarding the nature of the
underwriters' obligations, any material relationship between the Depositor and
any underwriter and, where appropriate, information regarding any discounts or
concessions to be allowed or reallowed to dealers or others and any arrangements
to stabilize the market for the securities so offered. In firm commitment
underwritten offerings, the underwriters will be obligated to purchase all of
the securities of that series if any securities of that type 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 the 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 the
offering and any agreements to be entered into between the Depositor and
purchasers of securities of that 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 rating of the securities offered hereby would be based on, among
other things, the adequacy of the value of the Trust Fund Assets and any credit
enhancement of that class and will reflect that Rating Agency's assessment
solely of the likelihood that holders of a class of securities of that class
will receive payments to which those securityholders are entitled under the
related Agreement. The 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 prepayments might differ from that originally
anticipated or the likelihood of early optional termination of the series of
securities. The 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. The rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause the investor to experience a lower than anticipated yield or
that an investor
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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 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 of a
series, the 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 that credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
for a series of securities will be determined on the basis of criteria
established by each Rating Agency rating classes of that series. These criteria
are sometimes based upon an actuarial analysis of the behavior of mortgage loans
in a larger group. This analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required for each class.
There can be no assurance that the historical data supporting any 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 resulting in the outstanding principal
balances of the Loans in a particular trust fund and any secondary financing on
the related mortgaged properties becoming 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 of any trust fund. To the extent that
these losses are not covered by credit enhancement, the losses will be borne, at
least in part, by the holders of one or more classes of the securities of the
related series.
AVAILABLE INFORMATION
Copies of the registration statement of which this prospectus forms a
part and the exhibits to the registration statement are on file at the offices
of the Securities and Exchange Commission in Washington, D.C. The Depositor is
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and files reports and other information with the Commission.
Reports and information on file with the Commission, including the registration
statement and filings made by the Depositor can be inspected without charge at
the public reference facilities maintained by the Commission or may be copied at
rates prescribed by the Commission. The public reference facilities are at:
o 450 Fifth Street, N.W., Washington, D.C. 20549
o Midwest Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661
o Northeast Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048.
In addition, the Commission maintains a web site at http://www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants, including the Depositor, that file electronically with
the Commission.
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, after the date of this prospectus and prior to the termination
of any offering of
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the securities issued by the 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 these 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 that statement. Any 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 for 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 any 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
that 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 the
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 that series. These
requests should be directed to the corporate trust office of the Trustee or the
address of the 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 that other entity.
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INDEX OF DEFINED TERMS
Accrual Securities.........................................................23
Act.........................................................................2
Advances...................................................................25
Agreement..................................................................12
AIV........................................................................17
Amortizable Bond Premium Regulations.......................................65
APR....................................................................14, 40
Balloon Payment............................................................13
Belgian Cooperative........................................................33
Beneficial Owners..........................................................31
BIF........................................................................42
Book-Entry Securities......................................................31
Calculation Agent..........................................................29
Capitalized Interest Account...............................................44
Cash Flow Bond Method......................................................71
CEDEL......................................................................31
CEDEL Participants.........................................................32
CERCLA.....................................................................54
Claimable Amount...........................................................60
Code.......................................................................61
Collateral Value...........................................................14
Commission.................................................................35
Companion Class............................................................28
Contingent Regulations.....................................................63
Credit Enhancement.........................................................81
Cut-off Date...............................................................11
Cut-off Date Principal Balance.............................................22
DCR........................................................................81
Debt Securities............................................................62
Debt-to-Income Ratio.......................................................16
Definitive Security........................................................31
Depositor..............................................................11, 15
Disqualified Organization..................................................69
DOL........................................................................80
EPA........................................................................54
Equity One.............................................................12, 15
Equity One Standards.......................................................15
ERISA......................................................................79
Euroclear..................................................................31
Euroclear Operator.........................................................33
Euroclear Participants.....................................................32
European Depositories......................................................31
Excess Servicing...........................................................71
Fannie Mae.................................................................48
Federal Reserve............................................................15
FHA........................................................................12
FHLMC......................................................................47
Financial Intermediary.....................................................31
Fitch......................................................................81
FNMA.......................................................................48
Foreign Person.............................................................73
Freddie Mac................................................................47
Full Doc...................................................................16
Funding Period.............................................................43
Garn-St Germain Act........................................................56
Home Equity Loans..........................................................14
HUD........................................................................58
Insurance Proceeds.........................................................42
Insured Expenses...........................................................42
interest rate..............................................................11
IRS........................................................................63
L/C Bank...................................................................35
L/C Percentage.............................................................35
Liquidation Expenses.......................................................42
Liquidation Proceeds.......................................................42
Loan Indices...............................................................31
Loans......................................................................11
Loan-to-Value Ratio........................................................14
Lockout Periods............................................................13
Mark-to-Market Regulations.................................................69
Master Servicing Agreement.................................................11
Mixed Use Loan.............................................................12
Mixed Use Properties.......................................................13
Moody's................................................................36, 81
Morgan.....................................................................33
Mortgage...................................................................40
NCUA.......................................................................83
NIV........................................................................17
OID........................................................................62
OID Regulations............................................................62
PAC........................................................................27
Parties in Interest........................................................80
Pass-Through Certificates..................................................70
Pass-Through Rate......................................................11, 23
Pay-Through Security.......................................................63
Percentage Interests.......................................................49
Permitted Investments......................................................36
Plans......................................................................79
PNA........................................................................15
Pool Insurer...............................................................37
Pooling and Servicing Agreement............................................11
Popular....................................................................15
Pre-Funded Amount..........................................................43
Prepayment Assumption......................................................63
Prime Rate.................................................................30
Principal Prepayments......................................................24
Property Improvement Loans.................................................58
PTE 83-1...................................................................80
Purchase Agreement.........................................................11
Purchase Price.............................................................21
Rating Agency..........................................................36, 84
Ratio Strip Securities.....................................................71
RCRA.......................................................................54
Record Date................................................................22
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Reference Banks............................................................29
Refinance Loan.............................................................14
Regular Interest Securities................................................62
Relevant Depository........................................................31
Relief Act.................................................................57
REMIC..................................................................23, 61
Reserve Account............................................................23
Reserve Interest Rate......................................................29
Residential Loan...........................................................12
Residual Interest Security.................................................67
Restricted Group...........................................................82
Retained Interest..........................................................22
Revolving Credit Line Loans................................................12
Rules......................................................................31
S&P........................................................................81
SAIF.......................................................................42
Secured Creditor Exclusion.................................................54
Securities Index...........................................................31
Security Account...........................................................41
Sellers....................................................................11
Senior Securities..........................................................34
Servicer...................................................................11
Servicing Fee..........................................................47, 70
Short-Term Note............................................................74
Single Family Properties...................................................13
Single Family Securities...................................................80
SMMEA......................................................................83
Stripped Securities........................................................70
Subordinated Securities....................................................34
Subsequent Loans...........................................................43
Sub-Servicer...............................................................11
Sub-Servicing Agreement....................................................44
TAC........................................................................28
Telerate Screen Page 3750..................................................29
Terms and Conditions.......................................................33
Thrift Institutions........................................................68
TIN........................................................................72
Title I Loans..............................................................58
Title I Program............................................................58
Title V....................................................................57
Treasury Index.............................................................30
Trust Agreement............................................................12
Trust Fund.................................................................11
Trust Fund Assets..........................................................11
Trustee....................................................................11
Underwriter Exemptions.....................................................81
United States Person.......................................................73
VA.........................................................................12
VA Guaranty................................................................47
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the securities being registered under this
Registration Statement, other than underwriting discounts and commissions
SEC Registration Fee................................................$270.00
Printing and Engraving Expenses..........................................**
Legal Fees and Expenses..................................................**
Trustee Fees and Expenses................................................**
Accounting Fees and Expenses.............................................**
Blue Sky Fees and Expenses...............................................**
Rating Agency Fees.......................................................**
Miscellaneous............................................................**
Total...................................................................$**
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* All amounts except the SEC Registration Fee are estimates of expenses
incurred in connection with the issuance and distribution of a series of
securities in an aggregate principal amount assumed for these purposes to
be equal to $____________ of securities registered hereby.
** To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of Delaware empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that he or she is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise. Depending on the character of the proceeding, a corporation may
indemnify against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
that action, suit or proceeding if the person indemnified acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation, and, for any criminal action or proceeding,
had no cause to believe his or her conduct was unlawful. In the case of an
action by or in the right of the corporation, no indemnification may be made in
respect to any claim, issue or matter as to which that person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which that action or suit was brought shall
determine that, despite the adjudication of liability but in view of all the
circumstances of the case, that person is fairly and reasonably entitled to
indemnity for those expenses which the court shall deem proper. Section 145
further provides that to the extent a director or officer of a corporation has
been successful in the defense of any action, suit or proceeding referred to
above or in the defense of any claim, issue or matter therein. He or she shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection therewith.
The Certificate of Incorporation of the Registrant provides, in effect,
that, to the extent and under the circumstances permitted by Section 145 of the
General Corporation Law of Delaware, the Registrant shall indemnify any person
who was or is a party or is threatened to be made a party to any action, suit or
proceeding of the type described above by reason of the fact that he or she (1)
is or was a director or officer of the Registrant or (2) is or was serving at
the request of the Registrant as a director or officer (or its equivalent) of
another enterprise, except as to any action, suit or proceeding brought by or on
behalf of a director or officer without prior approval of the Board of Directors
of the Registrant. The Registrant does not maintain liability insurance coverage
for its
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directors, officers or other persons; however, these persons are covered by a
liability insurance policy maintained by Popular, Inc. for itself and its
subsidiaries.
ITEM 16. EXHIBITS.
3.1 Restated Certificate of Incorporation of the Registrant *
3.2 Bylaws of the Registrant (1)
4.1 Form of Pooling and Servicing Agreement *
4.2 Form of Trust Agreement (2)
4.3 Form of Indenture (2)
5.1 Opinion of Stradley, Ronon, Stevens & Young, LLP as to legality of the
securities *
8.1 Opinion of Stradley, Ronon, Stevens & Young, LLP as to certain tax
matters (included in Exhibit 5.1)
23. Consent of Stradley, Ronon, Stevens & Young, LLP (included in Exhibits
5.1 and 8.1 hereof)
24.1 Power of Attorney (included on the signature page hereof)
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(1) Previously filed with Registration Statement on Form S-3 (File No.
333-24599) originally filed April 4, 1997 and incorporated herein by
reference.
(2) Previously filed with Amendment No. 1 to Registration Statement on Form S-3
(File No. 333-24599) originally filed May 28, 1997 and incorporated herein
by reference.
*To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this
Registration Statement;
(A) To include any prospectus required
by Section 10(a)(3) of the
Securities Act of 1933, as amended
(the "Act");
(B) To reflect in the prospectus any
facts or events arising after the
effective date of this Registration
Statement (or the most recent
post-effective amendment hereof)
which, individually or in the
aggregate, represent a fundamental
change in the information set forth
in this Registration Statement.
Notwithstanding the foregoing, any
increase or decrease in volume of
securities offered (if the total
dollar value of securities offered
would not exceed that which was
registered) and any deviation from
the low or high and of the estimated
maximum offering range may be
reflected in the fund of prospectus
filed with the Commission pursuant
to Rule 424(b) if, in the aggregate,
the changes in volume and price
represent no more than 20 percent
change in the maximum aggregate
offering price set forth in the
"Calculation of Registration Fee"
table in the effective Registration
Statement;
(C) To include any material information
regarding the plan of distribution
not previously disclosed in this
Registration Statement or any
material change to the information
in this Registration Statement;
provided, however, that paragraphs (a)(1)(A) and (a)(1)(B) do
not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by
the Registrant pursuant to Section 13 or
II-2
<PAGE>
15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any
liability under the Act, each post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of the securities
at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of the
offering.
(b) The undersigned Registrant hereby undertakes that, for
purposes of determining any liability under the Act, each filing of a trust
fund's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of the securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
that type of indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against those liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by that
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication of the
issue.
(d) The undersigned Registrant hereby undertakes to file an
application for the purpose of determining the eligibility of the trustee to act
under subsection (a) of Section 310 of the Trust Indenture Act of 1939 in
accordance with the rules and regulations prescribed by the Commission under
Section 305(b)(2) of the Indenture Act of 1939.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that (1) it reasonably believes that the security
rating requirement of Transaction Requirement B.5 of Form S-3 will be met by the
time of sale of each series of securities to which this Registration Statement
relates and (2) it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wilmington, Delaware on the 18th day of June, 1999.
Equity One ABS, Inc.
By /s/ Cameron E. Williams
--------------------------------
Cameron E. Williams
President
Each person whose signature appears below hereby constitutes and
appoints Cameron E. Williams and Dennis Kildea, and each of them, with full
power to act without the other, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for her or him and
in her or his name, place and stead in any and all capacities (until revoked in
writing to sign all amendments (including post-effective amendments) to this
Registration Statement on Form S-3 of Equity One ABS, Inc., and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary fully to all
intents and purposes as she or he might or could do in person thereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their or her or his substitute, may lawfully do or cause to be done, by virtue
hereof. Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/Cameron E. Williams Director and President (Chief Executive June 18, 1999
- ------------------------------------ Officer)
Cameron E. Williams
/s/Dennis Kildea Director, Vice President, Treasurer and June 18, 1999
- ------------------------------------ Assistant Secretary (Chief Financial/
Dennis Kildea Accounting Officer)
/s/John N. Martella Director, Vice President, Secretary and June 18, 1999
----------------------------------- Assistant Treasurer
John N. Martella
/s/George P. Warren, Jr. Director, Vice President and Assistant June 18, 1999
- ------------------------------------ Secretary
George P. Warren, Jr.
/s/Gilbert B. Warren Director June 18, 1999
- ------------------------------------
Gilbert B. Warren
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
- --- ----------------------
3.1 Restated Certificate of Incorporation of the Registrant **
3.2 Bylaws of the Registrant (1)
4.1 Form of Pooling and Servicing Agreement **
4.2 Form of Trust Agreement (2)
4.3 Form of Indenture (2)
5.1 Opinion of Stradley, Ronon, Stevens & Young, LLP as to
legality of the securities **
8.1 Opinion of Stradley, Ronon, Stevens &, Young, LLP as to
certain tax matters (included in Exhibit 5.1)
23.1 Consent of Stradley, Ronon, Stevens & Young, LLP (included in
Exhibits 5.1 and 8.1)
24.1 Power of Attorney (included on the signature page hereof)
- ---------------
(1) Previously filed with Registration Statement on Form S-3 (File No.
333-24599) originally filed April 4, 1997 and incorporated herein by
reference.
(2) Previously filed with Amendment No. 1 to Registration Statement on Form S-3
(File No. 333-24599) originally filed May 28, 1997 and incorporated herein
by reference.
** To be filed by amendment.
