<PAGE>
As Filed with the Securities and Exchange Commission on January 8, 2001
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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-2029487
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
(302) 478-6160
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(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
James H. Jenkins
Equity One ABS, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
(302) 478-6160
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With a copy to:
David H. Joseph, 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.|_|
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to Be Registered Registered Per Unit(1) Offering Price(1) Fee(2)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Notes and Asset Backed $15,984,094 100% $15,984,094 $4,219.80
Certificates.............................
====================================================================================================================
</TABLE>
(1) Estimated for the purpose of calculating the registration fee.
(2) $14,984,094 in securities are being carried forward and $3,955.80 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. 333-81237).
Pursuant to Rule 429 of the Securities and Exchange Commission's Rules and
Regulations under the Securities Act of 1933, as amended, the prospectus and
prospectus supplements contained in this Registration Statement also relate to
the Registrant's previous Registration Statement on Form S-3 (File No.
333-81237).
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)
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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 JANUARY 8, 2001
Prospectus Supplement to Prospectus dated ___________, ______
Equity One ABS, Inc.
as Depositor
Equity One, Inc.
as Servicer
Equity One Mortgage Pass-Through Trust _____-__
$ __________ Mortgage Pass-Through Certificates, Series _____-__
<TABLE>
<CAPTION>
Offered Price to Underwriting Net Proceeds
Certificates Principal Balance Pass-Through Rate Public(1) Discount to Depositor(1)
------------ ----------------- ----------------- ---------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Class A-_ $_________ ____% _______% ____% $ _________
Class A-_ $_________ ____% _______% ____% $ _________
Class A-_ $_________ ____% _______% ____% $ _________
Class A-_ $_________ ____% _______% ____% $ _________
Class A-_ $_________ ____%(2)(3) _______% ____% $ _________
Class A-_ $_________ ____% _______% ____% $ _________
</TABLE>
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(1) Before deducting expenses, payable by the depositor, estimated to be
approximately $_________. The price to the public will be the percentage
listed in the table above plus accrued interest.
(2) This rate may be limited by a maximum rate described under the caption
"Description of the Certificates--Interest."
(3) After the optional termination date, this rate will increase by ____% per
annum.
<TABLE>
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<S> <C>
Before buying certificates, The certificates--
consider carefully the risk o represent an interest in a trust fund consisting primarily of a pool of
factors beginning on page fixed rate mortgage loans.
S-11 in this document and on
page 5 in the prospectus. o currently have no trading market.
Credit enhancement for the certificates--
The certificates will o will include overcollateralization. A portion of excess interest received
represent interests in the from the mortgage loans will be applied as payments of principal on the
trust fund only and will not certificates to establish and maintain a required level of overcollateralization.
represent interests in or be Overcollateralization is the excess of the principal balance of the mortgage loans
obligations of any other over the principal balance of the certificates.
entity.
o will also include a certificate guaranty insurance policy from
This prospectus supplement ___________________________. This policy will guarantee current payments of
may be used to offer and interest and ultimate payment of principal to holders of the certificates on
sell the certificates only the terms described in this document.
if it is accompanied by the
prospectus. [Certificate Insurer's Logo]
------------------------------
</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.
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,
Clearstream Banking, societe anonyme, and the Euroclear System on or about
_________, _________.
[Underwriter's Logo]
---------, ---------
<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 until _________,
_________.
Subject to some 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, the rate and timing of prepayments on
mortgage loans, general economic and business conditions, competition, changes
in political and social conditions, regulatory initiatives and compliance with
government regulations, customer preferences 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 like
"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
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<S> <C>
Summary of Terms...............................................................................................S-4
Risk Factors..................................................................................................S-11
The Mortgage Pool.............................................................................................S-17
Servicing of Loans............................................................................................S-30
Description of the Certificates...............................................................................S-34
Yield, Prepayment and Maturity Considerations.................................................................S-45
The Insurer...................................................................................................S-55
Use of Proceeds...............................................................................................S-56
Federal Income Tax Consequences...............................................................................S-56
ERISA Considerations..........................................................................................S-58
Legal Investment..............................................................................................S-60
Underwriting..................................................................................................S-60
Legal Matters.................................................................................................S-61
Experts.......................................................................................................S-61
Ratings.......................................................................................................S-61
Index of Defined Terms........................................................................................S-63
Annex I - Global Clearance, Settlement and Tax Documentation Procedures........................................A-1
</TABLE>
Prospectus
<TABLE>
<S> <C>
Risk Factors.....................................................................................................5
The Trust Fund..................................................................................................13
Use of Proceeds.................................................................................................17
The Depositor...................................................................................................17
Loan Program....................................................................................................18
Description of the Securities...................................................................................24
Credit Enhancement..............................................................................................38
Yield and Prepayment Considerations.............................................................................44
The Agreements..................................................................................................46
Legal Aspects of the Loans......................................................................................58
Federal Income Tax Consequences.................................................................................67
State Tax Considerations........................................................................................91
ERISA Considerations............................................................................................91
Legal Investment................................................................................................95
Method of Distribution..........................................................................................96
Legal Matters...................................................................................................96
Rating..........................................................................................................97
Available Information...........................................................................................97
Incorporation of Certain Documents by Reference.................................................................98
Index of Defined Terms..........................................................................................99
</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.
This summary provides an overview of 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 and the Sellers
Equity One Mortgage Pass-Through Trust _______ will be formed pursuant
to a pooling and servicing agreement to be dated as of _________, _____
by and among Equity One ABS, Inc., as depositor, Equity One, Inc., as a
seller and as the servicer, __________________, as trustee, and the
other sellers listed in the next sentence. __________________,
________________, ________________, 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 or about _________, _______, the trust fund will issue the
certificates. This document discusses the following classes of
certificates: the Class A Certificates, the Class X Certificates and
the Class R Certificates, all of which will represent interests in the
trust fund. The Class A Certificates will consist of the Class A-__
Certificates, the Class A-__ Certificates, the Class A-__ Certificates,
the Class A-__ Certificates, the Class A-__ Certificates and the Class
A-__ Certificates. The Class A Certificates are being offered to you by
this prospectus supplement and the accompanying prospectus. We are not
offering the Class X Certificates or 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 either through a depository in the United States or
through one of two depositories in Europe. While the Class A
Certificates are book-entry they will be registered in the name of the
nominee of the depository in the United States.
Transfers within any depository system will be in accordance with the
usual rules and operating procedures of that system. Cross-market
transfers between two different depository systems may be effected
through a third-party bank and/or the related depositories. The limited
circumstances under which definitive certificates will replace the
book-entry certificates are described in the prospectus.
We refer you to "Description of the Certificates--Book-Entry
Certificates," and Annex I in this prospectus supplement and
"Description of the Securities--Book-Entry Registration of Securities"
in the prospectus for more detail.
Trust Property
The trustee will hold the trust property for the benefit of the
certificateholders. The trust property will include:
o a pool of first lien fixed rate mortgage loans;
S-4
<PAGE>
o payments on the mortgage loans received after _______, ____
or, in the case of subsequent mortgage loans originated after
_________, _____, payments received after their date of
origination, sometimes referred to in this prospectus
supplement as the cut-off date (other than amounts received
after the applicable cut-off date in respect of principal and
interest on the mortgage loans due on or prior to the
applicable 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;
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 and the trustee under the pooling and
servicing agreement and one or more subsequent transfer
agreements pursuant to which the depositor or the trust fund,
as applicable, purchased the mortgage loans from the sellers,
including the right to require the sellers or their
successors in interest to repurchase mortgage loans for
breaches of representations and warranties; and
o rights of the sellers or their successors in interest under
any hazard insurance policies covering the mortgaged
properties.
The Mortgage Pool
On the closing date, the trust fund will acquire a pool of fixed rate
mortgage loans secured by first liens on one- to four-family dwellings
and 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 initial mortgage loans had the following characteristics as of the
close of business on _______, ______:
o number of mortgage loans: _______
o aggregate principal balance: $_______________
o mortgaged property location: ___ states; other than
approximately ___%, ____% and ___% of the loans (by principal
balance) on mortgaged properties located in _______ ________
and _______, respectively, no state represented more than
____% of the mortgage loans, by principal balance
o maximum original loan-to-value ratio: _____%
o weighted average original loan-to-value ratio: _____%
(approximate)
o original loan-to-value ratio range: _____% to _____%
(approximate)
o principal balance range: $_______to $__________ (approximate)
o loan origination dates range from __________, _____ to
__________, _____
o average principal balance: $__________ (approximate)
o interest rate range: _____% to _____%
S-5
<PAGE>
o weighted average interest rate: _____% (approximate)
o weighted average remaining term to stated maturity, based on
principal balance: _____ months (approximate)
o remaining term to stated maturity range: _____ months to
_____ months
o last maturity date: __________, _____
o use of each mortgaged property: _____% owner occupied and
_____% non-owner occupied (by principal balance)
We refer you to "The Mortgage Pool" in this prospectus supplement.
Funding Period
On the closing date, the depositor will deposit an amount equal to not
more than approximately $__________in a pre-funding account and an
amount equal to not more than approximately $________in a capitalized
interest account. During the funding period, which will commence on the
closing date and end no later than ________, _____, the amounts on
deposit in the pre-funding account will be used to purchase subsequent
mortgage loans for inclusion in the trust fund and the amounts on
deposit in the capitalized interest account will be used to fund
shortfalls in interest collections attributable to the pre-funding
feature of the trust fund.
Any amounts in the pre-funding account not used during the funding
period to purchase subsequent mortgage loans will be paid to the
certificateholders as a prepayment of principal on the
______distribution date. Any unused amounts remaining in the
capitalized interest account at the end of the funding period will be
remitted to the depositor and will not thereafter be available for
distribution to the holders of the Class A Certificates.
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
principal balance of each mortgage loan. The servicer will also be
entitled to other specified 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 each distribution date, the trustee will make a payment on the Class
A Certificates. The distribution date will be the 25th day of each
month or, if the 25th day is not a business day, the next business day,
commencing on __________, _____. Distributions will be made to the
persons in whose names the certificates are registered at the close of
business on the last business day of the calendar month immediately
preceding that distribution date.
Payments on the Class A Certificates will be funded:
o from the payments received with respect to the mortgage
loans; and
o if the amount described in the above bullet is insufficient,
from excess interest; and
S-6
<PAGE>
o if the amount described in the two above bullets is
insufficient, from draws on the certificate guaranty
insurance policy; and
o if the pass-through rate for the Class A-__ Certificates is
determined by the maximum rate, supplemental interest
payments may be made from amounts released from an interest
reserve fund.
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 the
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, and other specified allocations, any remaining amounts
will be distributed on the Class X Certificates or the Class R
Certificates.
We refer you to "Description of the Certificates--Principal--Residual
Certificates" in this prospectus supplement.
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 fixed
rate per annum set forth on the cover page of this prospectus
supplement, subject to, with respect to the Class A-__ Certificates,
the maximum rate described under the caption "Description of the
Certificates--Interest," except that, if you hold Class A-__
Certificates, the rate at which you are paid interest will increase by
_____% per annum 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, as described under the caption
"Description of the Certificates--Optional Termination."
You will also be entitled to receive any interest that you earned
previously but did not receive plus interest thereon. There are some
circumstances which could reduce the amount of interest payable to you.
In addition, with respect to the Class A-__ Certificates, if the amount
of interest you are entitled to receive on any distribution date is
determined by the maximum rate, you may also be entitled to receive
supplemental interest payments on a subordinated basis from an interest
reserve fund referred to in this prospectus supplement as the Net WAC
Cap Account. The Net WAC Cap Account will be funded on the Closing Date
with a deposit of $_____. Subsequent deposits to the Net WAC Cap
Account will be made from distributions of excess distributable funds,
if any, so that the amount on deposit in the Net WAC Cap Account does
not exceed $_____.
We refer you to "Description of the Certificates--Distributions" and
"--Interest" 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 and the priorities of payment in the Pooling and Servicing
Agreement provide for a payment to your class of certificate. The
amount of principal distributable to the holders of the Class A
Certificates on any distribution date will generally equal:
o the amount of principal received on the mortgage loans during
the prior month; plus
o in some circumstances, losses on the mortgage loans incurred
during the prior month; plus
S-7
<PAGE>
o until the required overcollateralization level has been
reached, excess interest payments on the mortgage loans; plus
o on the distribution date for __________, any money remaining
in the pre-funding account.
Each of the Class A-__, Class A-__, Class A-__, Class A-__, Class A-__
and Class A-__ Certificates is a "sequential pay" class, in that each
class will not receive any payments of principal until the principal
balance of all classes of Class A Certificates having a lower numerical
class designation has been paid in full. Although the Class A-__
Certificates generally will be the last class of Class A Certificates
to be paid principal, after an initial "lockout period," the Class A-__
Certificates will be paid a specified percentage of available principal
on each distribution date before all other classes of certificates.
We refer you to "Description of the Certificates--Distributions" and
"--Principal" in this prospectus supplement for more details.
Credit Enhancement
General
Credit enhancement is intended to reduce the harm caused to holders of
certificates by shortfalls in payments received on the mortgage loans.
The credit enhancement provided for the benefit of certificateholders
consists of overcollateralization and the certificate guaranty
insurance policy, as described below and elsewhere in this prospectus
supplement.
Overcollateralization
On the date of issuance of the Class A Certificates, the unpaid
principal balance of the mortgage loans plus the amount on deposit in
the pre-funding account will equal the principal balance of the Class A
Certificates. Overcollateralization is the excess, if any, of the sum
of the principal balance of the mortgage loans and the amount on
deposit in the pre-funding account over the principal balance of the
Class A Certificates. Any excess interest not used to cover interest
shortfalls or current period losses will be paid as an accelerated
payment of principal on the Class A Certificates until the required
level of overcollateralization is reached. Any overcollateralization
will generally be available to absorb losses on the mortgage loans.
Excess interest collections not used to cover current losses will be
used to pay principal on the certificates to maintain the level of
overcollateralization at required levels. The required level of
overcollateralization may increase or decrease over time. We cannot
assure you that sufficient interest will be generated by the mortgage
loans to maintain the required level of overcollateralization. If the
required level of overcollateralization is permitted to decrease, the
Pooling and Servicing Agreement permits a portion of the principal
distribution amount available for distribution to not be distributed in
reduction of the principal balance of the Class A Certificates.
If on any distribution date overcollateralization is funded to the
required level, any additional excess cash flow will be available to
fund any supplemental interest payments to the Class A-__ Certificates
due as a result of the application of the maximum rate, to fund the Net
WAC Cap Account to its required level and to make distributions to the
Class X Certificates and the Class R Certificates.
We refer you to "Description of the
Certificates--Overcollateralization" 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 on the Class A Certificates at the lesser of
the fixed rate per annum appearing on the cover page or maximum rate,
as applicable, on that distribution date. The certificate guaranty
S-8
<PAGE>
insurance policy does not cover any specified rate of payment of
principal; provided, however, that it guarantees payment of (1) on each
distribution date, the amount, if any, by which the aggregate principal
balance of the Class A Certificates exceeds the sum of the aggregate
principal balance of the mortgage loans in the trust fund and the
amount on deposit in the pre-funding account and (2) the aggregate
outstanding principal balance of the Class A Certificates to the extent
they would otherwise remain unpaid on the last scheduled distribution
date or any earlier termination of the trust fund. The certificate
guaranty insurance policy does not guarantee the receipt of any
supplemental interest payments.
We refer you to "Description of the Certificates--Certificate Guaranty
Insurance Policy" in this prospectus supplement.
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 is required to make cash
advances to cover delinquent scheduled payments of principal of and
interest on any mortgage loan in the trust fund if it determines that
these advances will be recoverable from subsequent collections on that
mortgage loan. In some cases, the trustee will be required to make an
advance if the servicer fails to do so.
We refer you to "Servicing of Loans--Advances" in this prospectus
supplement.
Optional Termination
The servicer may exercise an option to purchase all the mortgage loans
and any properties that the trustee acquired in satisfaction of any of
the mortgage loans 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 sum
of the aggregate principal balance of all mortgage loans in the trust
fund as of __________, _____ plus the amount on deposit in the
pre-funding account on the closing date. 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;
o any unpaid accrued interest on your certificate at the fixed
rate per annum appearing on the cover page or, with respect
to the Class A-__ Certificates, the lesser of the fixed rate
per annum appearing on the cover page and the maximum rate;
and
o with respect to the Class A-__ Certificates, any unpaid
supplemental interest payments on your certificate to the
date of optional termination.
We refer you to "Description of the Certificates--Optional Termination"
in this prospectus supplement.
Federal Income Tax Consequences
The trust fund will make elections to treat some of its assets as
several "real estate mortgage investment conduits," or REMICs, for
federal income tax purposes. The Class A Certificates (excluding, with
respect to the Class A-__ Certificates, any rights to receive interest
above the maximum rate described herein) and the Class X Certificates
will constitute "regular interests" in a REMIC and the Class R
Certificates will constitute the sole class of "residual interest" in
each REMIC. Depending on their issue price, the Class A Certificates
may, and the Class X Certificates will, 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.
S-9
<PAGE>
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.
Subject to the considerations described under "ERISA Considerations" in
this prospectus supplement and in the accompanying prospectus, it is
expected that the Class A Certificates may be purchased by a pension or
other employee benefit plan.
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.
We refer you to "Legal Investment" in this prospectus supplement and in
the accompanying prospectus.
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.
The entitlement to any supplemental interest payments on the Class A-__
Certificates is not rated, and therefore the ratings of those
certificates do not address the likelihood of whether you will receive
any supplemental interest payments on your certificate.
We refer you to "Ratings" and "Risk Factors--Certificate Rating Subject
to Change" in this prospectus supplement.
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RISK FACTORS
o The certificates are not suitable investments for all investors.
o You should not purchase any of the certificates unless you understand and
are able to bear the prepayment, credit, liquidity and market risks
associated with these securities.
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.
You may have difficulty selling your certificates
The Class A Certificates will not be listed on any securities exchange.
As a result, if you wish to sell your certificates, you will have to find a
purchaser that is willing to purchase your certificates. The underwriter intends
to make a secondary market for the Class A Certificates. The underwriter may do
so by offering to buy the Class A Certificates from investors that wish to sell.
However, the underwriter will not be obligated to make offers to buy the Class A
Certificates and may stop making offers at any time. In addition, the prices
offered, if any, may not reflect prices that other potential purchasers, were
they to be given the opportunity, would be willing to pay. There have been times
in the past where there have been very few buyers of similar asset-backed
securities, and there may be similar times in the future. As a result, you may
not be able to sell your certificates when you wish to do so or you may not be
able to obtain the price you wish to receive.
The borrowers have less than perfect credit and may be more likely to default.
The underwriting standards of the sellers are less restrictive than
those of Fannie Mae or Freddie Mac with respect to a borrower's credit history
and other factors. A derogatory credit history or a lack of credit history will
not necessarily prevent the sellers from making a loan but may reduce the size
and the loan-to-value ratio of the loan the sellers will make. As a result of
these less restrictive standards, the trust fund may experience higher rates of
delinquencies, defaults and losses than if the mortgage loans were underwritten
in a more traditional manner.
Newly originated mortgage loans may be more likely to default which may cause
losses.
Defaults on mortgage loans tend to occur at higher rates during the
early years of the mortgage loans. Most of the mortgage loans will have been
originated within 12 months prior to the sale to the trust fund. As a result,
the trust may experience higher rates of default than if the mortgage loans had
been outstanding for a longer period of time.
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.
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Book-entry certificates may not be able to be pledged.
Since transactions in the Class A Certificates can be effected only
through The Depository Trust Company, Clearstream Banking, societe anonyme, or
the Euroclear System, their participating organizations, indirect participants
and certain banks, your ability to pledge your certificate to persons or
entities that do not participate in the Euroclear System, the Depository Trust
Company or Clearstream Banking, societe anonyme, systems 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 the depository;
o credited by the depository to the accounts of its participants;
and
o ultimately credited to your account by a depository
participant.
We refer you to "Description of the Certificates--Book-Entry
Certificates" and Annex I in this prospectus supplement and "Risk
Factors--Book-Entry Registration" in the accompanying prospectus.
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 insurer fails to perform its
obligations under the certificate guaranty insurance policy. Also, liquidation
expenses (including 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. If
any of the mortgaged properties fails to provide adequate security for the
related mortgage loan, you could experience a loss if 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.
Your yield to maturity may be reduced by prepayments.
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 the trust fund. The mortgage loans may be prepaid in whole or in part
at any time, many 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. The servicer and its affiliates periodically conduct mass mailings to
their existing customers with respect to the refinancing of existing mortgage
loans. Although these marketing efforts are not specifically directed to
customers who have mortgage loans included in a trust fund, these customers may
receive the marketing materials as part of a broader mailing, which may result
in an increase in the rate of prepayments of mortgage loans included in a trust
fund through refinancings. In addition, substantially all of the mortgage loans
contain due-on-sale provisions, and the servicer intends to enforce those
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, assumption of the mortgage loan 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. In addition, the weighted
average life of the certificates will be affected by any prepayment resulting
from the distribution of amounts (if any) on deposit in the pre-funding account
after the end of the funding period.
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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.
A substantial prepayment could occur if the trust fund has difficulty acquiring
subsequent mortgage loans.
The ability of the trust fund to acquire subsequent mortgage loans
depends on the ability of the sellers to originate or acquire mortgage loans
during the funding period that meet the eligibility criteria for subsequent
mortgage loans. The ability of the sellers to originate or acquire those loans
will be affected by a number of factors including prevailing interest rates,
employment levels, and economic conditions generally. If the full amount on
deposit in the pre-funding account allocated to purchase subsequent mortgage
loans cannot be used by the end of the funding period for that purpose, amounts
remaining on deposit in the pre-funding account will be distributed to the
certificateholders as a prepayment of principal on the __________ distribution
date. No assurance can be given as to the magnitude of any amount on deposit in
the pre-funding account at the end of the funding period.
Subsequent mortgage loans may have characteristics that differ from those of the
initial mortgage loans which may reduce your yield to maturity.
Although the pooling and servicing agreement will specify criteria for
the inclusion of subsequent mortgage loans in the trust fund, following the
transfer of the subsequent mortgage loans to the trust fund after the closing
date the characteristics of the mortgage loans may differ from the information
presented in this prospectus supplement. The characteristics that may differ
include, among others, the composition of the mortgage loans and of the
borrowers of the mortgage loans, the credit quality of the mortgage loans, the
distribution by interest rate, the distribution by principal balance, the
distribution by loan-to-value ratio and the distribution by remaining term to
stated maturity. We recommend that you consider potential variances when making
your investment decision concerning the Class A Certificates.
Defaults and delinquent payments on the mortgage loans could affect your yield.
If 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 trust
fund. If the actual rate of defaults on the mortgage loans in the trust fund 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 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 will affect the yield to maturity on your
certificate even if the rate of defaults and severity of those 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.
Limitations on interest rate of the certificates may affect your yield to
maturity.
The rate at which interest accrues on the Class A-__ Certificates is
subject to a maximum rate based on the weighted average of the interest rates on
the mortgage loans in the trust fund, net of fees and expenses aggregating
_____% per annum. If mortgage loans with relatively higher interest rates
prepay, the maximum rate on the Class A-__ Certificates will be lower than
otherwise would be the case. In this event, the value and marketability of the
Class A-__ Certificates may be temporarily or permanently reduced.
As of __________, _____, mortgage loans representing approximately
_____% of the aggregate outstanding principal balance of the mortgage loans in
the trust fund had net interest rates (net of certain fees and expenses of the
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trust fund) less than the fixed rate of interest for the Class A-__ Certificates
appearing on the cover page of this prospectus supplement.
If the pass-through rate for the Class A-__ Certificates is determined
by the maximum rate described in this prospectus supplement, holders of Class
A-__ Certificates will be entitled to receive supplemental interest payments
only to the extent of available funds in the Net WAC Cap Account. Supplemental
interest payments, however, are not rated, not covered under the certificate
guaranty insurance policy or otherwise guaranteed, are contingent on the
performance of the mortgage loans and may not ever be available.
The rate at which interest accrues on the Class A Certificates may also
be reduced if borrowers under the mortgage loans obtain relief from payment
obligations pursuant to statutory provisions or if interest shortfalls resulting
from borrower prepayments of mortgage loans are not covered by a reduction of
the servicer's fees for the following distribution date as provided in the
pooling and servicing agreement.
We refer you to "Servicing of Loans--Adjustment to Servicing Fee in
Connection with Certain Prepaid Loans" and "Description of the
Certificates--Interest."
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
borrower payments during the prior calendar month. The distribution date will be
the 25th 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 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 25th day of the following month.
Balloon loans may bear higher risk of loss.
Approximately _____% of the aggregate outstanding principal balance of
the mortgage loans in the trust fund as of __________, _____ were 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 36 to 180 months and provide for
monthly payments based on a 180 to 360 month amortization schedule. The borrower
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 borrower'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 borrower's equity in the related mortgaged property, the
financial condition of the borrower, tax laws and prevailing general economic
conditions. If a borrower is unable to refinance a balloon loan prior to its
stated maturity date, the borrower may be more likely to default on the loan.
None of the sellers, the servicer, the depositor or the trustee is obligated to
refinance any mortgage loan.
The liquidation proceeds 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. Mixed use loans represented
approximately _____% of the aggregate principal balance of the mortgage loans in
the trust fund as of __________, _____. 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.
Withdrawal or downgrading of initial ratings will reduce the value of the
certificates.
The ratings of the certificates will be based on, among other things,
the adequacy of the value of the mortgage loans 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
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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 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.
There could be delays in distributions on your certificate if the transfer of
the mortgage loans to the trust fund is not considered a sale in the event of
bankruptcy.
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 on your certificate.
Geographic concentration of mortgaged properties may affect payments on your
certificate.
As of __________, _____:
o approximately _____%, _____% and _____% (by outstanding
principal balance) of the mortgage loans are secured by
properties located in the ____________________,
_______________and __________ __________, respectively;
o approximately _____% (by outstanding principal balance) of the
Loans are secured by properties located in a single zip code in
____________________; 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 the
trust fund.
If the __________ or ___________residential real estate markets should
experience an overall decline in property values or a catastrophic event occurs
in these areas 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. Because of the concentration of mortgage loans in these
states, those types of problems may have a greater effect on your certificates
than if borrowers and mortgaged properties were more spread out in different
geographic areas.
Interest payments may be insufficient to create overcollateralization.
Because the weighted average of the interest rates on the mortgage
loans is expected to be higher than the weighted average of the interest rates
on the Class A Certificates, the mortgage loans are expected to generate more
interest than the amount necessary to pay interest owed on the Class A
Certificates as well as certain fees and expenses of the trust fund. Any
remaining interest will then be used to compensate for losses that occur on the
mortgage loans. After these financial obligations of the trust fund are covered,
the available excess interest will be used to create and maintain
overcollateralization. We cannot assure you, however, that enough excess
interest will be generated to attain or to maintain the overcollateralization
level required by the rating agencies and the insurer. The factors described
below will affect the amount of excess interest that the mortgage loans will
generate:
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o Every time a mortgage loan is prepaid in full, excess interest
may be reduced because the mortgage loan will no longer be
outstanding and generating interest or, in the case of a
partial prepayment, will be generating less interest.
o Every time a mortgage loan is liquidated or written off, excess
interest will be reduced because the mortgage loan will no
longer be outstanding and generating interest.
o If the rates of delinquencies, defaults or losses on the
mortgage loans turn out to be higher than expected, excess
interest will be reduced by the amount necessary to compensate
for any shortfalls in cash available on that date to pay
certificateholders.
Violations of consumer protection laws may result in losses.
Applicable state laws generally regulate interest rates and other
charges and require specific 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 mortgage loans.
The mortgage loans are also subject to federal laws including:
o the federal Truth in Lending Act and Regulation Z promulgated
under the Truth in Lending Act, which require particular
disclosures to the borrowers regarding the terms of the
mortgage loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
under the Equal Credit Opportunity Act, which prohibit
discrimination on the basis of age, race, color, sex religion,
martial status, national origin, receipt of public assistance
or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
o the Americans with Disabilities Act, which, among other things,
prohibits discrimination on the basis of disability in the full
and equal enjoyment of the goods, services, facilities,
privileges, advantages or accommodations of any place of public
accommodation; and
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience.
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 mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the trust
fund, as owner of the mortgage loans, to damages and administrative enforcement.
Incomplete loan files may result in prepayments.
Some of the loan files being transferred to the trustee are known to be
missing one or more of the items required to be contained therein.
Notwithstanding the foregoing, each seller will represent that each loan file
transferred by it is complete in all material respects and the related seller
will be obligated to cure any defect or repurchase or substitute for the related
mortgage loan if a defect in a loan file has a material adverse effect on the
value of the mortgage loan or on the certificateholders' or the insurers'
interest in that mortgage loan. If a seller does not cure or substitute for a
mortgage loan with a defective loan file, the certificateholders may receive a
prepayment of principal resulting from the repurchase of that mortgage loan.
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THE MORTGAGE POOL
General
Unless otherwise indicated, information presented herein under "The
Mortgage Pool" expressed as percentages (other than rates of interest) are
approximate percentages based on the Stated Principal Balances of the Initial
Loans (as defined below) as of the Initial Cut-off Date (as defined below).
The mortgage pool will consist of fixed rate mortgage loans
(collectively, the "Loans") secured by first liens on one- to four-family
dwellings (each, a "Residential Loan") and 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- to
four-family detached dwellings will represent approximately _____% of the
Initial Loans. Mixed Use Loans represented approximately _____% of the Initial
Loans as of the Initial Cut-off Date.
Equity One ABS, Inc. (the "Depositor") will purchase the initial Loans
(the "Initial Loans") from _______________, __________________,
____________________, and ____________________ (each a "Seller" and,
collectively, the "Sellers") pursuant to the Pooling and Servicing Agreement
(the "Pooling and Servicing Agreement") dated as of __________, _____ (the
"Initial Cut-off Date") among the Sellers, Equity One, Inc. (the "Servicer"),
the Depositor and _____ _____ _____ (the "Trustee"). The Depositor will then
convey the Initial Loans, without recourse, to the Trustee for the benefit of
the holders of the Mortgage Pass-Through Certificates, Series _____-__ (the
"Certificates"). In addition, the Pre-Funded Amount (as defined below) will be
deposited in the Pre-Funding Account (as defined below) and approximately $_____
will be deposited in the Capitalized Interest Account (as defined below) on the
Closing Date (as defined below).
The Certificates will consist of the Class A Certificates, the Class X
Certificates and the Class R Certificates. We are offering the Class A
Certificates pursuant to this prospectus supplement; we are not offering the
Class X Certificates or the Class R Certificates for sale to investors.
Under the Pooling and Servicing Agreement, the Sellers will make
representations, warranties and covenants to the Depositor relating to, among
other things, the due execution and enforceability of the Pooling and Servicing
Agreement and 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 representation,
warranty or covenant. The Sellers will represent and warrant to the Depositor in
the Pooling and Servicing 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 Pooling and Servicing 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 Pooling and Servicing 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 obligations of Equity One, Inc., as Servicer, with respect
to the Certificates are limited to the Servicer's contractual servicing
obligations under the Pooling and Servicing Agreement.
Information with respect to the Initial Loans expected to be included
in the mortgage pool is set forth below. Prior to __________, _____ (the
"Closing Date"), Initial Loans may be removed from the mortgage pool and other
Initial 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
some characteristics of the Initial Loans in the mortgage pool may vary.
Information regarding FICO scores is presented for informational purposes only.
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"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 that Due Date
and irrespective of any delinquency in payment by the related borrower. The
"Pool Principal Balance" with respect to any Distribution Date equals the
aggregate of the Stated Principal Balances of the Loans in the trust fund.
As of the close of business on the Initial Cut-off Date, the aggregate
of the Stated Principal Balances of the Initial Loans was $__________ (the
"Initial Cut-off Date Pool Principal Balance"),
Initial 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 over approximately 180 to 360 months, with
a significantly greater payment due at the stated maturity. As of the Initial
Cut-off Date, approximately _____% of the Initial 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 of the Initial Loans provide for payments due on a set day, but not
necessarily the first day, of each month (the "Due Date"). The Initial 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 borrowers on the Initial Loans
("Scheduled Payments") either earlier or later than the scheduled Due Dates
thereof will not affect the amortization schedule or the relative application of
those payments to principal and interest. All of the Initial Loans provide for
the actuarial accrual of interest. All of the Initial Loans provide for a grace
period of 15 days for monthly payments, as required by applicable law. All of
the Initial Loans may be prepaid in full or in part at any time, approximately
___% without penalty.
Each Initial Loan was originated on or after __________, _____.
The latest stated maturity date of any Initial Loan is __________,
_____. The earliest stated maturity date of any Initial Loan is __________,
______.
As of the Initial Cut-off Date, no Initial Loan was ___ or more days
delinquent.
No Initial Loan had a Loan-to-Value Ratio at origination of more than
_____%. The weighted average Loan-to-Value Ratio of the Initial Loans at
origination was approximately _____%.
The weighted average of the most recent FICO score (issued by the Fair
Isaac Credit Bureau with a higher score generally signifying a better credit
history) obtained by the Sellers for each borrower on the Initial Loans that
were scored was approximately _____.
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 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 Loans that 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
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<PAGE>
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.
None of the Initial Loans is subject to the Home Ownership and Equity
Protection Act.
The following section, "Mortgage Pool Tables," sets forth in tabular
format information, as of the Initial Cut-off Date, relating to the Initial
Loans. The sum of the columns in the tables below may not equal the total
indicated due to rounding.
Mortgage Pool Tables
Mortgage Rates(1)
-----------------
<TABLE>
<CAPTION>
Number of Aggregate Principal Percent of Pool
Mortgage Rate (%) Initial Loans Balance Outstanding (by principal balance)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
8.500
8.500+ to 9.000
9.000+ to 9.500
9.500+ to 10.000
10.000+ to 10.500
10.500+ to 11.000
11.000+ to 11.500
11.500+ to 12.000
12.000+ to 12.500
12.500+ to 13.000
13.000+ to 13.500
13.500+ to 14.000
Total 100.00%
=======
</TABLE>
-------------------
(1) As of the Initial Cut-off Date, the weighted average mortgage rate of the
Initial Loans was approximately _____%.
S-19
<PAGE>
Initial Cut-Off Date Loan Principal Balances(1)
-----------------------------------------------
<TABLE>
<CAPTION>
Initial Cut-Off Date Loan Number of Aggregate Principal Percent of Pool
Principal Balance Initial Loans Balance Outstanding (by principal balance)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
0.00+ to 25,000.00
25,000.00+ to 50,000.00
50,000.00+ to 75,000.00
75,000.00+ to 100,000.00
100,000.00+ to 125,000.00
125,000.00+ to 150,000.00
150,000.00+ to 175,000.00
175,000.00+ to 200,000.00
200,000.00+ to 225,000.00
225,000.00+ to 250,000.00
250,000.00+ to 275,000.00
275,000.00+ to 300,000.00
300,000.00+ to 325,000.00
325,000.00+ to 350,000.00
350,000.00+ to 375,000.00
375,000.00+ to 400,000.00
400,000.00+ to 425,000.00
450,000.00+ to 475,000.00
475,000.00+ to 500,000.00
Total 100.00%
=======
</TABLE>
------------------
(1) As of the Initial Cut-off Date, the average Initial Loan principal balance
was $__________.
S-20
<PAGE>
FICO Scores(1)
--------------
<TABLE>
<CAPTION>
Number of Aggregate Principal Percent of Pool
FICO Score (1) Initial Loans Balance Outstanding (by principal balance)
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total 100.00%
=======
</TABLE>
----------------
(1) FICO scores listed represent the most recent FICO score obtained by the
Sellers for each borrower on the Initial Loans that were scored.
S-21
<PAGE>
State Distribution of Mortgaged Properties(1)
---------------------------------------------
<TABLE>
<CAPTION>
Number of Aggregate Principal Percent of Pool
State Initial Loans Balance Outstanding (by principal balance)
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total 100.00%
=======
</TABLE>
----------------
(1) No more than approximately _____% of the Initial Loans will be secured by
mortgaged properties located in any one postal zip code area.
S-22
<PAGE>
Occupancy Types(1)
------------------
<TABLE>
<CAPTION>
Number of Aggregate Principal Percent of Pool
Occupancy Type Initial Loans Balance Outstanding (by principal balance)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Owner Occupied
Non-Owner Occupied
Total 100.00%
=======
</TABLE>
---------------
(1) Based upon representations of the related borrowers at the time of
origination.
Remaining Terms to Maturity (1)
-------------------------------
<TABLE>
<CAPTION>
Remaining Term to
Maturity Number of Aggregate Principal Percent of Pool
(Months) Initial Loans Balance Outstanding (by principal balance)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
0+ to 60
60+ to 120
120+ to 180
180+ to 240
240+ to 300
300+ to 360
Total 100.00%
=======
</TABLE>
----------------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Initial Loans was approximately _____ months.
Documentation Type (1)
----------------------
<TABLE>
<CAPTION>
Number of Aggregate Unpaid Percent of Pool
Documentation Initial Loans Principal Balance (by principal balance)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Verifiable
Non-Income Verifiable
Total 100.00%
=======
</TABLE>
----------------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
Prospectus for a description of the Sellers' documentation programs.
S-23
<PAGE>
Loan-to-Value Ratio(1)
----------------------
<TABLE>
<CAPTION>
Number of Aggregate Unpaid Percent of Pool
Loan-to-Value Ratio Initial Loans Principal Balance (by principal balance)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10.0+ to 15.0
15.0+ to 20.0
20.0+ to 25.0
25.0+ to 30.0
30.0+ to 35.0
35.0+ to 40.0
40.0+ to 45.0
45.0+ to 50.0
50.0+ to 55.0
55.0+ to 60.0
60.0+ to 65.0
65.0+ to 70.0
70.0+ to 75.0
75.0+ to 80.0
80.0+ to 85.0
85.0+ to 90.0
90.0+ to 95.0
95.0+ to 100.0
Total 100.00%
=======
</TABLE>
----------------
(1) At time of origination.
Credit Grades (1)
-----------------
<TABLE>
<CAPTION>
Number of Aggregate Unpaid Percent of Pool
Credit Grade Initial Loans Principal Balance (by principal balance)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
A
B
C
Total 100.00%
=======
</TABLE>
---------------
(1) See "Specific Underwriting Criteria; Underwriting Programs" in the
Prospectus for a description of the Sellers' underwriting programs.
S-24
<PAGE>
Sale of the Loans
Pursuant to the Pooling and Servicing 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 Initial Loan and all right, title and interest in and to all
other assets included in the trust fund as of the Closing Date, including all
principal and interest received on or with respect to the Initial Loans after
the Initial Cut-off Date, exclusive of principal and interest due on or prior to
the Initial Cut-off Date.
In connection with the conveyance of each of the Initial Loans and the
Subsequent Loans (as defined below) and pursuant to the requirements of the
Pooling and Servicing Agreement and any Subsequent Transfer Agreement (as
defined below), the Depositor or the Seller(s), as the case may be, 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 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 the Mortgage Note
and Mortgage (except for any 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 within 45 days of the Subsequent Transfer Date (as defined
below), as applicable, or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date or Subsequent Transfer Date, as
applicable. 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 a longer period not
to exceed 2 years after the Closing Date or Subsequent Transfer Date, as
applicable, as provided in the Pooling and Servicing Agreement or Subsequent
Transfer Agreement, as applicable, 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 Pooling and Servicing 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,
S-25
<PAGE>
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,
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 Pooling and Servicing Agreement or Subsequent Transfer
Agreement, as applicable, 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.
Pre-Funding
On the Closing Date the excess of the aggregate Class Certificate
Balance of the Certificates over the Initial Cut-off Date Pool Principal Balance
(the "Pre-Funded Amount") (which Pre-Funded Amount is not expected to exceed
$__________) will be deposited in a pre-funding account (the "Pre-Funding
Account") established and maintained by the Trustee on behalf of the holders of
the Class A Certificates. Any investment income earned from amounts in the
Pre-Funding Account shall be paid to the Depositor, and will not be available
for payments on the Certificates. The Pre-Funded Amount will be used to purchase
Subsequent Loans. During the period from the Closing Date to __________, _____
(the "Funding Period"), the Trust Fund is expected to purchase Residential Loans
originated or purchased by the Sellers or their successors in interest after
__________, _____ ("Subsequent Loans") from the Sellers or their successors in
interest. The purchase price for each Subsequent Loan will equal the principal
balance of the Subsequent Loan as of the cut-off date specified in the
Subsequent Transfer Agreement (the related "Subsequent Cut-off Date") and will
be paid from the Pre-Funding Account. Accordingly, the purchase of Subsequent
Loans will decrease the amount on deposit in the Pre-Funding Account and
increase the Pool Principal Balance.
In addition, on the Closing Date, cash in the approximate amount of
$________ will be deposited by the Depositor in a capitalized interest account
(the "Capitalized Interest Account"), which Capitalized Interest Account will be
in the name of and maintained by the Trustee and will be part of the Trust Fund.
The amount on deposit in the Capitalized Interest Account, including
reinvestment income on that amount, will be used by the Trustee, on the
Distribution Dates during and immediately following the Funding Period, to fund
shortfalls in the interest collections attributable to the pre-funding feature
of the Trust Fund. Any amounts remaining in the Capitalized Interest Account and
not needed for this purpose will be remitted to the Depositor and will not
thereafter be available for distribution to the holders of the Class A
Certificates.
Amounts on deposit in the Pre-Funding Account and the Capitalized
Interest Account will be invested in Permitted Investments. The Pre-Funding
Account and the Capitalized Interest Account will not be assets of any REMIC.
Pursuant to the Pooling and Servicing Agreement and a Subsequent
Transfer Agreement (a "Subsequent Transfer Agreement") to be executed by the
applicable Seller(s) and the Trustee, the conveyance of Subsequent Loans may be
made on any Business Day during the Funding Period (a "Subsequent Transfer
Date"), subject to the fulfillment of conditions in the Pooling and Servicing
Agreement, including that:
o none of the Subsequent Loans may:
o be more than __ days delinquent as of the related
Subsequent Cut-off Date;
o have an original term to maturity in excess of ___ months;
S-26
<PAGE>
o have a mortgage rate less than ____%;
o have a principal balance as of the related Subsequent
Cut-off Date in excess of $_____;
o have a Loan-to-Value Ratio in excess of _____%;
o be a Mixed-Use Loan;
o the Subsequent Loans conveyed on the Subsequent Transfer Date
satisfy the same representations and warranties in the Pooling
and Servicing Agreement applicable to the Initial Loans (except
representations and warranties pertaining to specific
characteristics of the Initial Loans);
o the Subsequent Loans conveyed on the Subsequent Transfer Date
were selected in a manner reasonably believed not to be adverse
to the interests of the certificateholders or the Insurer;
o the Trustee and the Insurer receive an opinion of counsel to
the effect that the conveyance of the Subsequent Loans conveyed
on the Subsequent Transfer Date will not (1) result in the
imposition of the tax on "prohibited transactions" on the Trust
Fund or contributions after the Startup Date, as defined in
Sections 860F(a)(2) and 860G(d) of the Code, respectively, or
(2) cause the Trust Fund to fail to qualify as a REMIC at any
time that any Certificates are outstanding;
o the Trustee and the Insurer receive opinions of counsel to the
effect that the conveyance of the Subsequent Loans conveyed on
the Subsequent Transfer Date from the Seller(s) to the Trust
Fund will be characterized as true sales and not loans secured
by the Subsequent Loans;
o the conveyance of the Subsequent Loans on the Subsequent
Transfer Date will not result in a reduction or withdrawal of
any ratings assigned to the Class A Certificates without giving
effect to the Policy; and
o the Insurer and the Rating Agencies have consented to the
conveyance of the Subsequent Loans to the Trust Fund.
Pursuant to the Subsequent Transfer Agreement, on the Subsequent Transfer Date
each of the applicable Seller(s) will provide the Trustee with an officer's
certificate stating that all conditions precedent to the transfer of the
Subsequent Loans have been satisfied.
Following the addition of the Subsequent Loans, the Loans (including
the applicable Subsequent Loans, if any) will have the following
characteristics:
<TABLE>
<S> <C>
First liens: _____%
Balloon Loans: Not more than _____%
Lite Doc, SI and AIV: Collectively, not more than ____%
Grade B Credits: Not more than _____%
Grade C Credits: Not more than _____%
Single zip code concentration: Not more than _____%
_________ concentration: Not more than _____%
__________ concentration: Not more than _____%
Weighted average mortgage rate: At least _____%
Weighted average Loan-to-Value Ratio: Not more than _____%
</TABLE>
S-27
<PAGE>
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 the Servicer and are consistent with
those utilized by mortgage lenders generally during the period of origination
for similar types of loans (the "Equity One Standards"). All Loans to be
included in the mortgage pool have been or will be underwritten by Equity One's
Central Credit office in accordance with the Equity One Standards.
Through its bulk purchase program, each Seller also purchases mortgage
loans that have been originated and closed by other lenders. The Sellers
purchase these 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 Initial Loans as of the Initial 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.
The mortgage pool consists of approximately _____% Grade A Credits
Loans, approximately _____% Grade B Credits Loans and approximately _____% Grade
C Credits Loans as of the Initial Cut-off Date.
These underwriting programs and their underwriting criteria may change
from time to time. In addition, on a case-by-case basis, 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 like 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 those types of 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 Lite
Doc, the SI or the AIV loan documentation program to verify a borrower's income.
The Lite Doc, SI and AIV loan documentation programs are all forms of
"non-income verifiable" or "NIV" programs. See "Specific Underwriting Criteria;
Underwriting Programs" in the Prospectus.
As of the Initial Cut-off Date, approximately _____% of the Initial
Loans in the mortgage pool have been underwritten pursuant to the Full Doc
program and approximately _____% of the Initial Loans in the mortgage pool have
been underwritten pursuant to either the Lite Doc, SI or AIV programs.
The Equity One Standards require an independent appraisal that conforms
to Fannie Mae standards of each mortgaged property securing each mortgage loan
in excess of $15,000. All Initial Loans in the mortgage pool have independent
appraisals on the related mortgaged properties. 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
S-28
<PAGE>
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 SI or AIV program
generally do not exceed $500,000.
Title insurance has been obtained on all Initial Loans in the mortgage
pool. To the best of the Servicer's knowledge, the improvements on each
mortgaged property securing an Initial 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, 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 Pooling and Servicing Agreement. The Servicer may perform any of
its obligations under the Pooling and Servicing Agreement through one or more
sub-servicers. Notwithstanding any sub-servicing arrangement, the Servicer will
remain liable for its servicing duties and obligations under the Pooling and
Servicing Agreement as if the Servicer alone were servicing the Loans. As of the
Closing Date, the Servicer 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 Pooling and
Servicing Agreement. Equity One is engaged primarily in the mortgage banking and
consumer lending business, and in that capacity, originates, purchases, sells
and services mortgage and consumer loans. Equity One is a Fannie Mae approved
lender. It originates loans through a retail branch system and through loan
brokers and correspondents nationwide. Equity One's loans are principally
o first-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 400
Lippincott Drive, Marlton, NJ 08053. Its telephone number is (800) 461-8643.
Equity One conducts operations from its headquarters in Marlton 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
like the trust fund to which the Sellers transfer mortgage loans originated or
S-29
<PAGE>
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 borrower fails to make a payment on a mortgage loan, the
Servicer contacts the borrower in an attempt to get the borrower to cure the
deficiency. Pursuant to its servicing procedures, the Servicer generally mails
to the borrower a notice of intent to foreclose after the mortgage loan becomes
90 days past due (three 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 borrower 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.
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 scheduled 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-30
<PAGE>
Loss and Delinquency Table(1)
(Dollars in Thousands)
<TABLE>
<CAPTION>
At or for the At or for the At or for the At or for the
Year Ended Year Ended _____ Months _____ Months
November 30, November 30, Ended Sept. 30, Ended Sept. 30,
---------------- ---------------- ------------------- -------------------
<S> <C> <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)
</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 (a) principal to be
paid on each mortgage loan, (b) loan origination fees, net of costs, (c)
unearned interest and (d) other miscellaneous deferred charges and fees;
and excludes the principal balance of each mortgage loan for which the
related mortgaged property had been acquired through foreclosure or deed in
lieu of foreclosure by that 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 ten
(10) in the case of the ten month figures).
(4) Delinquency percentages are calculated as the dollar amount of the unpaid
principal balance of the mortgage loans that are delinquent divided by 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 that date.
(5) Real estate owned represents the aggregate estimated fair value of the
properties acquired through foreclosure or deed in lieu of foreclosure.
(6) Total Credit Losses includes charge-offs of principal, net of subsequent
recoveries, relating to mortgage loans written off as uncollectible and,
beginning in 1999, initial write-downs of loans upon transfer to real
estate owned. It does not include (a) 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.
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,
like national or local economic conditions or downturn in the real estate
markets of its lending areas, will not result in increased rates of
delinquencies and foreclosure losses in the future.
S-31
<PAGE>
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 of the Loan multiplied by the Servicing Fee Rate
(the "Servicing Fee"). The "Servicing Fee Rate" for each Loan will equal _____%
per annum.
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
(aggregating _____% per annum). 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 in connection with any
principal prepayment of a Loan subsequent to its Due Date in any Prepayment
Period, which payment of interest is intended to cover the period on and after
the Due Date ("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. The Servicer is
obligated to pay certain ongoing expenses associated with the Loans and incurred
by the Trustee in connection with its responsibilities under the Pooling and
Servicing Agreement.
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. If a Borrower prepays a Loan in whole or in part during any
Prepayment Period on a date that is prior to the Loan's Due Date, the amount of
interest that accrues on the amount of the prepayment will be less than the
corresponding amount of interest accruing on the Class A Certificates.
Accordingly, there will be a shortfall in the amount of interest to be
distributed to certificateholders with respect to those prepaid Loans.
Pursuant to the Pooling and Servicing 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 that excess. See "Description of the
Certificates--Interest."
Advances
Subject to the following limitations, the Servicer will be required to
advance (each, 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 that
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 with respect to
delinquent payments of principal of or interest on each Loan to the extent that
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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 the Class A Certificates. Failure by the
Servicer to make an Advance required under the Pooling and Servicing Agreement
with respect to the Class A Certificates will be an Event of Default thereunder,
in which case the Trustee, acting in the capacity of servicer, or the successor
servicer will be obligated to make that Advance, in accordance with the terms of
the Pooling and Servicing Agreement.
DESCRIPTION OF THE CERTIFICATES
General
The trust fund will issue the Certificates pursuant to the Pooling and
Servicing 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 Pooling and Servicing
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-__, Class A-__, Class A-__, Class A-__, Class A-__ and Class A-__
Certificates (collectively, the "Class A Certificates"), the Class X
Certificates and the Class R Certificates (collectively, the "Certificates").
This document only offers the Class A Certificates. The Class A Certificates
will have the initial Class Certificate Balance and will bear interest at the
fixed rate per annum set forth or described on the cover page hereof, subject,
in the case of the Class A-__ Certificates, to the Net WAC Cap, except that the
interest rate on the Class A-__ Certificates will be subject to an increase of
____ as described under "--Interest." Interest on the Class A Certificates will
be subject to adjustment as described under "--Interest." The Class X
Certificates and 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
Pooling and Servicing 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 trust fund will initially issue the Class A Certificates
in book-entry form.
Separate REMIC Structure
For federal income tax purposes, the trust fund, other than the
Pre-Funding Account, the Capitalized Interest Account and the Net WAC Cap
Account, created by the Pooling and Servicing Agreement will include multiple
segregated asset pools, each of which will be treated as a separate REMIC,
creating a tiered REMIC structure. The Class A Certificates, excluding, in the
case of the Class A-__ Certificates, any right to receive Net WAC Cap Carryover,
will be designated as regular interests in a REMIC.
Book-Entry Certificates
The trust fund will issue the 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"). Persons acquiring beneficial ownership interests in the
Class A Certificates ("Beneficial Owners") will hold their Certificates
indirectly through the book-entry facilities of DTC in the United States or
Clearstream Banking, societe anonyme, or the Euroclear System in Europe, if they
are participants of those systems, or indirectly through participants of those
systems. 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
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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 Beneficial Owner
of a Class A Certificate will be entitled to receive a physical certificate
representing that Certificate (a "Definitive Certificate").
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. For information with respect to
tax documentation procedures relating to the Certificates, see "Federal Income
Tax Consequences" herein and "Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" in Annex
I hereto.
Payments on Loans; Certificate and Distribution 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 Pooling and Servicing 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
applicable Cut-off Date, other than principal and interest due on the Loans on
or before the applicable Cut-off 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 the Class A Certificates, and will deposit
this amount 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 Distributable Funds (provided that the Trustee may only use any
Insured Amounts for the items listed in clauses (4) and (5) below), to the
extent available, to the parties and in the priorities indicated:
(1) first, to the Insurer, the Insurer's Monthly Premium;
(2) second, to the Trustee, any amounts then due and owing
representing fees of the Trustee;
(3) third, to the Servicer, an amount equal to the sum of (a) the
Servicing Fee, 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 the Loans and reimbursable thereto under the Pooling and
Servicing Agreement but not previously reimbursed;
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(4) fourth, to the Class A Certificates, the related Interest
Distribution Amount, pro rata, based on the amount of interest which each class
of Class A Certificates is entitled to receive on that Distribution Date;
(5) fifth, to the Class A Certificates, the Certificate Formula
Principal Amount in the following order of priority:
(a) to the Class A-__ Certificates, the Class A-__ Lockout
Distribution Amount, until the Class Certificate Balance
thereof has been reduced to zero; and
(b) sequentially, to the Class A-__, Class A-__, Class A-__,
Class A-__, Class A-__ and Class A-__ Certificates, in that
order, until the respective Class Certificate Balances
thereof have been reduced to zero;
(6) sixth, to the Insurer, any I&I Payments then due and owing; and
(7) seventh, an amount equal to the lesser of (a) the Distributable
Excess Spread, or (b) the amount necessary to reduce the related Class
Certificate Balance to zero, in the same order of priority described in clause
(5) above;
B. On each Distribution Date, following all distributions made pursuant
to clause (A) above, the Trustee will distribute any remaining Distributable
Funds in the following order of priority:
(1) first, for deposit into the Net WAC Cap Account, the amount
equal to (a) the Net WAC Cap Carryover for that Distribution Date plus (b) the
amount, if any, sufficient to increase the aggregate amount on deposit in the
Net WAC Cap Account to $ ______ after giving effect to any payments pursuant to
clause (C) below;
(2) second, to the holders of the Class X Certificates, the amount
required under the Pooling and Servicing Agreement; and
(3) third, to the holders of the Class R Certificates, the
remaining amount.
C. On each Distribution Date, following all distributions and deposits
made pursuant to clauses (A) and (B) above, the Trustee will distribute the Net
WAC Cap Carryover for that Distribution Date, if any, from the Net WAC Cap
Account to the holders of the Class A-__ Certificates.
The Trustee will make distributions on the Certificates on the 25th day
of each month, or if that 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
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 Pooling and Servicing 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 Certificates generally will equal the sum of
o Available Funds,
o any Insured Amounts, and
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o the amount, if any, remaining in the Pre-Funding Account at the
end of the Funding Period (collectively, "Distributable
Funds").
"Available Funds" with respect to any Distribution Date will be equal
to the sum of
o all scheduled installments of interest and principal on the
Loans 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
Loans, to the extent those proceeds are not applied to the
restoration of the related mortgaged property or released to
the borrower in accordance with the Servicer's normal servicing
procedures (collectively, "Insurance Proceeds") and all other
cash amounts received and retained in connection with the
liquidation of defaulted Loans, by foreclosure or otherwise
(together with Insurance Proceeds, "Liquidation Proceeds")
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 during the
calendar month preceding 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 or a Loan 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 Pooling and Servicing
Agreement.
Interest
The "Pass-Through Rate" for each class of the Class A Certificates,
other than the Class A-__ Certificates, is the fixed rate per annum for that
class set forth on the cover page hereof. The "Pass-Through Rate" for the Class
A-__ Certificates is the lesser of the fixed rate per annum 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 the
caption "--Optional Termination," the fixed rate per annum for the Class A-__
Certificates shall increase to ____% per annum (the "Formula Rate") and (2) the
Net WAC Cap. The "Net WAC Cap" with respect to each Distribution Date is the
weighted average Adjusted Net Mortgage Rate of the Loans as of the first day of
the Interest Accrual Period relating to that Distribution Date.
On each Distribution Date, to the extent of funds available therefor,
the Class A Certificates will be entitled to receive interest in an amount equal
to the Interest Distribution Amount with respect to the related Interest Accrual
Period. The "Interest Distribution Amount" for the Class A Certificates will be
equal to the sum of:
(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, together with
interest accrued thereon at the Pass-Through Rate ("Class Unpaid
Interest Amounts").
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The Class A-__ Certificates will also be entitled to receive any Net
WAC Cap Carryover for each Distribution Date from the Net WAC Cap Account to the
extent of the available funds therein. The "Net WAC Cap Carryover" with respect
to each Distribution Date is the sum of:
(1) the excess, if any, of the Interest Distribution Amount for the
Class A-__ Certificates for that Distribution Date, calculated at
the Formula Rate, over the actual Interest Distribution Amount for
the Class A-__ Certificates for that Distribution Date, and
(2) any Net WAC Cap Carryover remaining unpaid from prior Distribution
Dates, together with interest accrued thereon at the Formula Rate.
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 the Class A Certificates
for any Distribution Date will be reduced by the amount of Net Interest
Shortfalls. With respect to any Distribution Date, "Net Interest Shortfalls" is
an amount equal to the sum of (1) the aggregate amount of interest that would
otherwise have been received with respect to each Loan 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
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, a
"Net Prepayment Interest Shortfall" is the amount by which the aggregate of
Prepayment Interest Shortfalls 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 the 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 unpaid Interest Distribution
Amount 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 interest losses may be allocated to the Class A Certificates. The
Policy does not cover interest losses due to Net Interest Shortfalls or
non-payment of the Net WAC Cap Carryover.
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 Class Unpaid Interest Amount will be carried forward and added to
the amount holders of the Class A Certificates will be entitled to receive on
the next Distribution Date. Such a shortfall could occur, for example, if losses
realized on the Loans were exceptionally high or were concentrated in a
particular month and the Insurer defaulted on its obligations under the Policy.
Principal
Class A Certificates. On each Distribution Date, the Trustee will distribute the
Certificate Formula Principal Amount as a payment of principal on the Class A
Certificates to the extent of the amount of funds available for the distribution
of principal on that class. The Class A-__, Class A-__, Class A-__, Class A-__,
Class A-__ and Class A-__ Certificates are "sequential pay" classes, which means
that none of those classes having a higher numerical class designation will be
entitled to distributions of principal until the Class Certificate Balance of
each class of Class A Certificates having a lower numerical class designation
has been reduced to zero, except as described below with respect to the Class
A-__ Certificates; provided, however, that if on any Distribution Date the
Insurer fails to pay an Insured Amount when due, the Certificate Formula
Principal Amount for the Class A Certificates will be distributed pro rata to
each class of Class A Certificates, based on its current Class Certificate
Balance.
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The holders of the Class A-__ Certificates are entitled to receive
payments of the Class A-__ Lockout Distribution Amount specified herein;
provided, however, that if on any Distribution Date the Class Certificate
Balance of the Class A-__ Certificates has been reduced to zero, the holders of
the Class A-__ Certificates will be entitled to receive any remaining amount of
the Certificate Formula Principal Amount on that date and all of the Certificate
Formula Principal Amount on any future Distribution Date until the Class
Certificate Balance of the Class A-__ Certificates has been reduced to zero.
The "Class A-__ Lockout Distribution Amount" for any Distribution Date
will be the lesser of (a) the product of (i) the applicable Class A-__ Lockout
Percentage for that Distribution Date and (ii) the Class A-__ Pro Rata
Distribution Amount for that Distribution Date and (b) the Class Certificate
Balance of the Class A-__ Certificates.
The "Class A-__ Lockout Percentage" for each Distribution Date shall be
as follows:
Distribution Date Class A-__ Lockout Percentage
----------------- -----------------------------
--------------------------------------------------------------------------------
___-___ _____%
--------------------------------------------------------------------------------
___-___ _____%
--------------------------------------------------------------------------------
___-___ _____%
--------------------------------------------------------------------------------
___-___ _____%
--------------------------------------------------------------------------------
___ and thereafter _____%
--------------------------------------------------------------------------------
The "Class A-__ Pro Rata Distribution Amount" for any Distribution Date
will be an amount equal to the product of (x) a fraction, the numerator of which
is the Class Certificate Balance of the Class A-__ Certificates immediately
prior to that Distribution Date and the denominator of which is the aggregate
Class Certificate Balance of all classes of the Class A Certificates immediately
prior to that Distribution Date and (y) the Certificate Formula Principal Amount
for that Distribution Date.
The "Certificate Formula Principal Amount" for any Distribution Date
and with respect to the Class A Certificates will equal the excess of (a) the
sum of
o the principal portion of each Scheduled Payment due on each
Loan on that Loan's Due Date in the Due Period related to that
Distribution Date,
o the Stated Principal Balance of each Loan that was repurchased
by a Seller or another person pursuant to the Pooling and
Servicing Agreement as of that Distribution Date,
o the Substitution Adjustment Amount in connection with any
Deleted Loan received with respect to that Distribution Date,
o any Insurance Proceeds or Liquidation Proceeds allocable to
recoveries of principal of Loans that are not yet Liquidated
Loans received during the Due Period relating to that
Distribution Date,
o with respect to each Loan 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,
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o all partial and full principal prepayments by borrowers on
Loans received during the related Prepayment Period,
o the principal portion of any Loan Losses on Loans incurred
during the calendar month preceding the month of that
Distribution Date, and
o for the ________ Distribution Date, any amounts remaining in
the Pre-Funding Account after the end of the Funding Period
(net of any investment income therefrom),
over (b) the excess, if any, of the Overcollateralized Amount (assuming all
related principal distributions have been made to the Class A Certificates) over
the Overcollateralization Target Amount for that Distribution Date.
With respect to each Distribution Date, the "Due Period" will be 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 Pooling and Servicing 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 Balances of that Loan.
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 remaining Distributable Funds after
payment of the other distributions described in "--Distributions," including the
deposit into the Net WAC Cap Account of any Net WAC Cap Carryover and the
payment, if any, required to be made to the holders of the Class X Certificates
for that Distribution Date.
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Example of Distributions
The first Distribution Date will occur on __________, ____. The first
Due Period and Interest Accrual Period will begin on _________, ____ and will
continue through ____________, ____. Thereafter, each Due Period and Interest
Accrual Period will consist of the calendar month immediately preceding the
month of the related Distribution Date. The following sets forth an example of a
hypothetical monthly distribution in January ____:
<TABLE>
<S> <C>
December 1-December 31.............. Due Period/Interest Accrual Period. The Servicer and any
sub-servicers remit for deposit into the Certificate Account
all amounts received on account of the Loans, including
principal prepayments, other than amounts of interest and
principal due prior to the applicable Cut-off Date but received
on or after the applicable Cut-off Date.
December 31........................ Record Date. Distributions on January 25, ____ will be made to
certificateholders of record at the close of business on
December 31, ____.
January 22.......................... 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
January 25, ____.
Not later than 9:00 a.m. on The Servicer transfers funds, including any Advances, in the
January 24.......................... Certificate Account to the Distribution Account.
Not later than 12:00 p.m. on The Trustee will notify the Servicer and the Insurer of the
January 24.......................... Insured Amounts, if any, required to be distributed to the
holders of Class A certificates of record at the close of
business on December 31, ____.
January 25.......................... Distribution Date. The Trustee or its designee will transfer
funds from the Distribution Account to the Trustee, Servicer,
Insurer and the holders of Class A Certificates in the amounts
required to be distributed pursuant to the Pooling and
Servicing Agreement and will distribute any remaining
Distributable Funds, first, as a deposit to the Net WAC Cap
Account of any Net WAC Cap Carryover and second, to the holders
of Class R Certificates.
</TABLE>
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 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 Pooling and Servicing Agreement except amendments or modifications to
which the Insurer has given its prior written consent.
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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 the 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 Pooling and
Servicing Agreement.
The "Guaranteed Principal Distribution Amount" for any Distribution
Date shall equal the amount, if any, by which the Class Certificate Balance of
the Class A Certificates exceeds the sum of the Pool Principal Balance of the
Loans and the amount, if any, on deposit in the Pre-Funding Account 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 Policy does not cover any Net Interest Shortfalls or any Net
WAC Cap Carryover.
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 the 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 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 or corrected 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 those 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 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. 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.
S-41
<PAGE>
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.
Rights and Obligations of the Insurer under the Pooling and Servicing Agreement
Pursuant to the terms of the Pooling and Servicing 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 Pooling and Servicing 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
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 some 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 some 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").
Overcollateralization
The weighted average Adjusted Net Mortgage Rate of the Loans is
generally expected to be higher than the Pass-Through Rates on the Class A
Certificates. As a result, excess interest collections will be generated and
will be applied, to the extent not used to cover current period losses, in an
amount equal to Distributable Excess Spread initially to principal distributions
on the Class A Certificates. This acceleration feature creates
overcollateralization (i.e., the excess of the sum of the Pool Principal Balance
and amounts, if any, then on deposit in the Pre-Funding Account over the Class
Certificate Balance of the Class A Certificates). Once the Overcollateralization
Target Amount is reached, and subject to the provisions described in the next
paragraph, the acceleration feature will cease, until necessary to maintain the
Overcollateralization Target Amount.
The Pooling and Servicing Agreement provides that, subject to specified
floors, caps and triggers, the required level of overcollateralization may
increase or decrease over time. Any decrease in the required level of
overcollateralization will occur only at the sole discretion of the Insurer and
will have the effect of reducing the amortization of the Class A Certificates
below what it otherwise would have been.
The "Distributable Excess Spread" with respect to the Class A
Certificates and any Distribution Date is the amount, if any, required to be
distributed on that Distribution Date to satisfy the Overcollateralization
Target Amount on that Distribution Date.
The "Overcollateralization Step-up Trigger Event" shall mean, for any
Distribution Date, with respect to the Class A Certificates, the occurrence
during the related Due Period of an instance when the aggregate amount of
cumulative losses on the Loans exceeds the product of (a) the sum of the Initial
Cut-off Date Pool Principal Balance and the amount on deposit in the Pre-Funding
Account as of the Closing Date and (b) the cumulative loss percentage in effect
during that Due Period, as set forth in the following table:
S-42
<PAGE>
Due Periods Cumulative Loss Percentage
----------- --------------------------
November ____-October ____ ____%
November ____-October ____ ____%
November ____-October ____ ____%
November ____-October ____ ____%
November ____ and thereafter ____%
The "Overcollateralization Target Amount" means,
(a) on any Distribution Date occurring prior to the Stepdown Date and
as long as no Overcollateralization Step-Up Trigger Event is in effect, an
amount equal to the greatest of (i) ____% (provided, however, that if an
Overcollateralization Step-Up Trigger Event is in effect, the applicable
percentage shall be ____%) of the Initial Cut-off Date Pool Principal Balance
plus the amount on deposit in the Pre-Funding Account on the Closing Date, (ii)
____% of the aggregate principal balance of Balloon Loans with original terms
less than or equal to ____ months which are ____ or more days delinquent
(including Loans in foreclosure and REO Properties), and (iii) the aggregate
principal balance of the Loans which are ____ or more days delinquent (including
Loans in foreclosure and REO Properties); and
(b) on any Distribution Date occurring on or after the Stepdown Date
and as long as no Overcollateralization Step-Up Trigger Event is in effect, an
amount equal to the greatest of (i) ____% (provided, however, that if an
Overcollateralization Step-Up Trigger Event is in effect, the applicable
percentage shall be ____%) of the Pool Principal Balance as of that Distribution
Date, (ii) the sum of the outstanding principal balances of the three largest
Loans as of that date, (iii) ____ of the Initial Cut-off Date Pool Principal
Balance plus the amount on deposit in the Pre-Funding Account on the Closing
Date, (iv) ____% of the aggregate principal balance of Balloon Loans with
original terms less than or equal to ____ months which are ____ or more days
delinquent (including Loans in foreclosure and REO Properties) and (v) the
aggregate principal balance of the Loans which are ____ or more days delinquent
(including Loans in foreclosure and REO Properties).
The "Overcollateralized Amount" for any Distribution Date is the
amount, if any, by which (a) the sum of the Pool Principal Balance on the last
day of the immediately preceding Due Period plus the amount, if any, then on
deposit in the Pre-Funding Account exceeds (b) the Class Certificate Balance of
the Class A Certificates as of that Distribution Date after giving effect to
distributions to be made on the Class A Certificates on that Distribution Date.
The "Stepdown Date" means the later to occur of (a) the ____
Distribution Date and (b) the date upon which the Pool Principal Balance of the
Loans has been reduced to ____% of the sum of the Initial Cut-off Date Pool
Principal Balance and the amount on deposit in the Pre-Funding Account on the
Closing Date.
Net WAC Cap Account
The Pooling and Servicing Agreement provides for a reserve fund (the
"Net WAC Cap Account") which will be established with an initial deposit of
$ ______ on the Closing Date and held by the Trustee for the benefit of the
holders of the Class A-__ Certificates. To the extent of amounts on deposit
therein, on each Distribution Date holders of the Class A-__ Certificates will
be entitled to receive payments from the Net WAC Cap Account equal to any Net
WAC Cap Carryover. The amount required to be deposited in the Net WAC Cap
Account on each Distribution Date will equal any Net WAC Cap Carryover for that
Distribution Date plus the amount, if any, sufficient to increase the amount on
deposit in the Net WAC Cap Account (after giving effect to any payments to be
made to the holders of the Class A-__ Certificates from that account on that
date) to $ ______, to the extent of funds available after giving effect to any
required payments of Distributable Excess Spread. Any investment earnings on
amounts on deposit in the Net WAC Cap Account will be paid to (and for the
benefit of) the holders of the Class X Certificates and will not be available to
pay any Net WAC Cap Carryover. The Net WAC Cap Account will not be included as
an asset of the REMIC.
S-43
<PAGE>
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 borrower or
advanced, and not reimbursed, to the first day of the month in which that amount
is to be distributed.
Optional Termination
On any Distribution Date on which the Pool Principal Balance is less
than __% of the sum of (1) the Initial Cut-off Date Pool Principal Balance and
(2) the amount on deposit in the Pre-Funding Account on the Closing Date (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 (1)
any accrued and unpaid interest thereon at the Pass-Through Rate (including any
Class Unpaid Interest Amounts) and (2) any accrued and unpaid Net WAC Cap
Carryover as of that Distribution Date. Distributions on the Certificates in
respect of any optional termination will be paid to the Certificates as
described in "--Principal" and "--Interest."
The Trustee
_______________________ will be the Trustee under the Pooling and
Servicing 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 that 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 those
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
25th 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-44
<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. 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 borrowers at any time, many without a
prepayment penalty. The Loans are subject to the due-on-sale provisions included
therein. In addition, the Servicer and its affiliates periodically conduct
telemarketing and mass mailings to their existing customers with respect to the
refinancing of existing mortgage loans. Although these marketing efforts are not
specifically directed to customers who have mortgage loans included in a trust
fund, these customers may receive the marketing materials as part of a broader
mailing, which may result in an increase in the rate of prepayments of mortgage
loans included in a trust fund through refinancings. 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 that
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 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
borrowers' housing needs, job transfers, unemployment, borrowers' 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 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 the Loans occurs, 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.
Mandatory Prepayment
In the event that at the end of the Funding Period there is an amount
on deposit in the Pre-Funding Account that has not been used to acquire
Subsequent Loans, the holders of the Class A Certificates will receive an
additional distribution allocable to principal in an amount equal to that unused
amount. Although there can be no assurance, the Depositor anticipates that there
should be no material principal prepayment to the holders of the Class A
Certificates due to a lack of Subsequent Loans.
S-45
<PAGE>
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.
In general, the weighted average lives of the Class A Certificates will
be shortened if the level of prepayments of principal of the Loans increases.
However, the weighted average lives of the Class A Certificates will depend upon
a variety of other factors, including, without limitation, the timing of changes
in the rate of principal payments, changes in the interest rate environment and
delays in realizing on REO Properties.
The interaction of the foregoing factors may have different effects on
the Class A Certificates at different times during the life of that class.
Accordingly, no assurance can be given as to the weighted average life of the
Class A Certificates. Further, to the extent the price of the Class A
Certificates represents a discount or premium to its original Class Certificate
Balance, variability in the weighted average life of the Class A Certificates
will result in variability in its yield to maturity. For an example of how the
weighted average life of the 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 Initial Loans consist of 9 loans with initial payments
commencing during the first Interest Accrual Period with the
following characteristics:
<TABLE>
<CAPTION>
Initial Loans
Original
Original Term Amortized Term Remaining Term
Principal Balance Mortgage Rate to Maturity (in months) (in months) to Maturity (in months)
--------------------------------------------------------------------------------------------------------------------
<S> <C>
</TABLE>
o the Subsequent Loans consist of an additional __ loans with
initial payments commencing during the third Interest Accrual
Period with the following characteristics:
S-46
<PAGE>
<TABLE>
<CAPTION>
Subsequent Loans
Original
Original Term Amortized Term Remaining Term
Principal Balance Mortgage Rate to Maturity (in months) (in months) to Maturity (in months)
--------------------------------------------------------------------------------------------------------------------
<S> <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,
o interest accrues on each class of Class A Certificates at the
related Pass-Through Rate set forth on the cover page hereof
and as described under "Description of the
Certificates--Interest,"
o distributions in respect of each class of Class A
Certificates are received in cash on the 25th 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,"
o all of the Pre-Funded Amount is used to purchase Subsequent
Loans during the Funding Period, and
o where indicated, 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 the mortgage loans, 100% SPA assumes a constant prepayment rate of
__% per annum. 0% SPA assumes no prepayments. There is no assurance that
prepayments will occur at any SPA rate or at any other constant rate.
S-47
<PAGE>
Decrement Tables
The following tables indicate the percentages of the initial Class
Certificate Balance of each class 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 each class of Class A
Certificates. 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-48
<PAGE>
<TABLE>
<CAPTION>
CLASS A-__ CERTIFICATES
Percent of Initial Class Certificate
Balance Outstanding
Various Constant Percentages of SPA
Date 0% 50% 75% 100% 125% 150%
---------------------------------------------------------------------------------------------------
<S> <C>
Weighted Average
Life to Maturity
(in years)*
Weighted Average Life
to Call
(in years)*
---------------
</TABLE>
* Determined as specified under "--Weighted Average Lives of the Class A
Certificates."
S-49
<PAGE>
<TABLE>
<CAPTION>
CLASS A-__ CERTIFICATES
Percent of Initial Class Certificate
Balance Outstanding
Various Constant Percentages of SPA
Date 0% 50% 75% 100% 125% 150%
---------------------------------------------------------------------------------------------------
<S> <C>
Weighted Average
Life to Maturity
(in years)*
Weighted Average Life
to Call
(in years)*
---------------
</TABLE>
* Determined as specified under "--Weighted Average Lives of the Class A
Certificates."
S-50
<PAGE>
<TABLE>
<CAPTION>
CLASS A-__ CERTIFICATES
Percent of Initial Class Certificate
Balance Outstanding
Various Constant Percentages of SPA
Date 0% 50% 75% 100% 125% 150%
---------------------------------------------------------------------------------------------------
<S> <C>
Weighted Average
Life to Maturity
(in years)**
Weighted Average Life
to Call
(in years)**
---------------
</TABLE>
* Less than __% but greater than zero.
** Determined as specified under "--Weighted Average Lives of the Class A
Certificates."
S-51
<PAGE>
<TABLE>
<CAPTION>
CLASS A-__ CERTIFICATES
Percent of Initial Class Certificate
Balance Outstanding
Various Constant Percentages of SPA
Date 0% 50% 75% 100% 125% 150%
---------------------------------------------------------------------------------------------------
<S> <C>
Weighted Average
Life to Maturity
(in years)*
Weighted Average Life
to Call
(in years)*
---------------
</TABLE>
* Determined as specified under "--Weighted Average Lives of the Class A
Certificates."
S-52
<PAGE>
<TABLE>
<CAPTION>
CLASS A-__ CERTIFICATES
Percent of Initial Class Certificate
Balance Outstanding
Various Constant Percentages of SPA
Date 0% 50% 75% 100% 125% 150%
---------------------------------------------------------------------------------------------------
<S> <C>
Weighted Average
Life to Maturity
(in years)**
Weighted Average Life
to Call
(in years)**
---------------
</TABLE>
* Less than ___%, but greater than zero.
** Determined as specified under "--Weighted Average Lives of the Class A
Certificates."
S-53
<PAGE>
<TABLE>
<CAPTION>
CLASS A-__ CERTIFICATES
Percent of Initial Class Certificate
Balance Outstanding
Various Constant Percentages of SPA
Date 0% 50% 75% 100% 125% 150%
---------------------------------------------------------------------------------------------------
<S> <C>
Weighted Average
Life to Maturity
(in years)**
Weighted Average Life
to Call
(in years)**
---------------
</TABLE>
* Less than ___%, but greater than zero.
** Determined as specified under "--Weighted Average Lives of the Class A
Certificates."
S-54
<PAGE>
Last Scheduled Distribution Date
The "Last Scheduled Distribution Date" for the Class A Certificates is
the Distribution Date in ________ of ____. The Last Scheduled Distribution Date
is the Distribution Date in the 12th month following the expected latest
scheduled maturity date for any of the Loans. Since the rate of distributions in
reduction of the Class Certificate Balance of the Class A Certificates will
depend on the rate of payment, including prepayments, of the Loans, the Class
Certificate Balance of any class of Class A Certificates 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
____________________________________ ________________and licensed to do business
in 50 states, the District of Columbia, the Commonwealth of Puerto Rico, and the
Territory of Guam. The Insurer primarily insures newly issued municipal and
structured finance obligations. The Insurer is a wholly-owned subsidiary of
________________________ a ________company. ________________,
________________________________ and ________, Inc. have each assigned a
triple-A claims paying ability rating to the Insurer.
The consolidated financial statements of the Insurer and subsidiaries
as of ____________ ____ and ____________ ____, and for each of the years in the
three-year period 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 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 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-55
<PAGE>
---------------------------------
Consolidated Capitalization Table
(Dollars in Millions)
<TABLE>
<CAPTION>
December 31, December 31, _____ 30
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Unearned premiums...........................
Other liabilities...........................
Total liabilities...........................
Stockholder's equity:
Common stock...........................
Additional paid-in capital.............
Accumulated other comprehensive income..
Retained earnings......................
Total stockholder's equity..................
Total liabilities and stockholder's equity..
</TABLE>
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 ___________________________
_________________________________________.
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 Initial Loans, to fund
the Pre-Funding Account and for general corporate purposes.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, multiple elections will be made to
treat some of the assets of the trust fund (exclusive of the Net WAC Cap
Account, the Capitalized Interest Account and the Pre-Funding Account) as
several REMICs. Assuming those elections are timely made and the terms of the
Pooling and Servicing Agreement are complied with, Stradley, Ronon, Stevens &
Young, LLP, special tax counsel to the Depositor ("Tax Counsel") is of the
opinion that the trust fund (exclusive of the Net WAC Cap Account, the
Capitalized Interest Account and the Pre-Funding Account) will qualify as
several REMICs within the meaning of the Code. The Class A Certificates
(excluding, with respect to the Class A-__ Certificates, any associated rights
to receive any Net WAC Cap Carryover) and the Class X Certificates will
constitute the "regular interests" in the REMIC. The Class R Certificates will
constitute the sole class of "residual interest" in each REMIC. See "Federal
Income Tax Consequences" in the Prospectus.
The Class A Certificates (exclusive, with respect to the Class A-__
Certificates, of any right to receive Net WAC Cap Carryover) will be treated as
debt instruments for federal income tax purposes. Income on the Class A
Certificates must be reported under an accrual method of accounting.
S-56
<PAGE>
The following discussion assumes that the rights of a holder of a Class
A-__ Certificate in respect of Net WAC Cap Carryover will be treated for federal
income tax purposes as the beneficial ownership of an interest in a limited
recourse interest rate cap contract (the "Cap Contract") rather than as an
interest in a partnership with the holders of Class X Certificates in respect of
the Class X Certificates' entitlement to interest. In the event that the rights
of the Class A-__ Certificates to Net WAC Cap Carryover are treated as
representing beneficial interests in an entity taxable as a partnership for
federal income tax purposes, such Certificateholders may be subject to different
tax timing consequences and withholding on those amounts with respect to holders
of the Class A-__ Certificates who are Non-U.S. Persons. A holder of a Class
A-__ Certificate must allocate its purchase price for that Certificate between
its two components - the REMIC regular interest component and the Cap Contract
component. For information reporting purposes, it will be assumed that, with
respect to any Class A-__ Certificate, the Cap Contract component will have only
nominal value relative to the value of the regular interest component. The IRS
could, however, argue that the Cap Contract component has a greater than de
minimis value, and if that argument were sustained, the regular interest
component could be viewed as having been issued with original issue discount
("OID") (which could cause the total amount of discount to exceed a statutorily
defined de minimis amount).
Upon the sale, exchange, or other disposition of a Class A-__
Certificate, the holder thereof must allocate the amount realized between the
two components of a Class A-__ Certificate based on the relative fair market
values of those components at the time of sale. Assuming that a Class A-__
Certificate is held as a "capital asset" within the meaning of section 1221 of
the Code, gain or loss on the disposition of an interest in the Cap Contract
component should be capital gain or loss, and gain or loss on the disposition of
the regular interest component should, subject to the limitation described
below, be capital gain or loss. Gain attributable to the regular interest
component of a Class A-__ Certificate will be treated as ordinary income,
however, to the extent the gain does not exceed the excess, if any, of (i) the
amount that would have been includible in the holder's gross income with respect
to the regular interest component had income thereon accrued at a rate equal to
110% of the applicable federal rate as defined in section 1274(d) of the Code
determined as of the date of purchase of that Certificate over (ii) the amount
actually included in the holder's income.
As indicated above, a portion of the purchase price paid by a
certificateholder to acquire a Class A-__ Certificate will be attributable to
the Cap Contract component of that Certificate. The portion of the overall
purchase price attributable to the Cap Contract component must be amortized over
the life of the Certificate taking into account the declining balance of the
related regular interest component. Treasury regulations concerning notional
principal contracts provide alternative methods for amortizing the purchase
price of an interest rate cap contract. Under one method--the level yield
constant interest method--the price paid for an interest rate cap agreement is
amortized over the life of the cap as though it were the principal amount of a
loan bearing interest at a reasonable rate. Certificateholders are urged to
consult their tax advisors concerning the methods that can be employed to
amortize the portion of the purchase price paid for the Cap Contract component
of a Class A-__ Certificate.
Any payments made to a certificateholder from the Net WAC Cap Account
will be treated as periodic payments on an interest rate cap contract. To the
extent the sum of the periodic payments for any year exceed that year's
amortized cost of the Cap Contract component, that excess is ordinary income. If
for any year the amount of that year's amortized cost exceeds the sum of the
periodic payments, that excess is allowable as an ordinary deduction, subject,
in the case of individuals to the potential application of certain limitations
with regard to miscellaneous itemized deductions.
The Class A Certificates, depending on their issue prices, as described
in the Prospectus under "Federal Income Tax Consequences," may be treated as
having been issued with OID for federal income tax purposes. For purposes of
determining the amount and rate of accrual of OID and market discount, the trust
fund intends to assume that there will be prepayments on the 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.
If the holders of the Class A Certificates are treated as holding the
Certificates at a premium, those 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 (exclusive, with respect to the Class
A-__ Certificates, of any right to receive Net WAC Cap Carryover) will represent
qualifying assets to a Real Estate Investment Trust ("REIT") under Section
856(c)(4)(A) and to a domestic building and loan association under Section
S-57
<PAGE>
7701(a)(19)(C) of the Code. Net interest income attributable to the Class A
Certificates (exclusive, with respect to the Class A-__ Certificates, of any
right to receive Net WAC Cap Carryover) will be "interest on obligations secured
by mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code for REIT qualification purposes, to the extent the assets of the trust fund
are assets described in those sections. Mixed Use Loans may not qualify under
Section 7701(a)(19) of the Code as loans secured by an interest in residential
real property for purposes of the asset test applicable to domestic building and
loan associations. The Class A Certificates (exclusive, with respect to the
Class A-__ Certificates, of any right to receive Net WAC Cap Carryover) will
represent qualifying assets under Section 860G(a)(3) if acquired by a REMIC
within the prescribed time periods of the Code.
The owners of the Net WAC Cap Account are the holders of the Class X
Certificates. The Net WAC Cap Account is an outside reserve fund and is not an
asset of any REMIC. Amounts transferred by the REMIC to the Net WAC Cap Account
are treated as amounts distributed by the applicable REMIC to the holders of the
Class X Certificates or transferees of the holders of the Class X Certificates
for all federal tax purposes.
ERISA CONSIDERATIONS
Any Plan fiduciary who proposes to cause a Plan (as defined below) to
acquire 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 and Section 4975 of the Code prohibit "parties in interest"
with respect to an employee benefit or other plan or arrangement, including, but
not limited to, individual retirement accounts, that is 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, regulatory or administrative exemption applies to the transaction.
Section 4975 of the Code imposes certain excise taxes on prohibited transactions
involving Plans 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.
Some 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 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
___, Exemption Application No. _______, __ Fed. Reg. _____ (_______, ____) (the
"Underwriter Exemption") from some 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 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.
On July 21, 1997, the Department of Labor published in the Federal
Register an amendment to the Underwriter Exemption, which extends exemptive
relief to certain mortgage-backed and asset-backed securities transactions using
pre-funding accounts for trusts issuing pass-through certificates. The amendment
generally allows mortgage loans or other secured receivables supporting payments
to certificateholders, and having a value equal to no more than twenty-five
percent (25%) of the total principal amount of the certificates being offered by
the trust, to be transferred to the trust within a 90-day or three-month period
following the closing date, instead of requiring that all of those obligations
be either identified or transferred on or before the closing date. The relief is
available when the following conditions are met:
S-58
<PAGE>
o The ratio of the amount allocated to the pre-funding account
to the total principal amount of the certificates being
offered (the "pre-funding limit") must not exceed twenty-five
percent (25%).
o All receivables transferred after the closing date
("additional receivables") must meet the same terms and
conditions for eligibility as the original receivables used
to create the trust, which terms and conditions have been
approved by a rating agency described in the Underwriter
Exemption (an "exemption rating agency").
o The transfer of the additional receivables to the trust
during the pre-funding period must not result in the
certificates to be covered by the Exemption receiving a lower
credit rating from an exemption rating agency upon
termination of the pre-funding period than the rating that
was obtained at the time of the initial issuance of the
certificates by the trust.
o Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the
receivables in the trust at the end of the pre-funding period
must not be more than 100 basis points lower than the average
interest rate for the receivables transferred to the trust on
the closing date.
o In order to insure that the characteristics of the additional
receivables are substantially similar to the original
receivables which were transferred to the trust fund:
o the characteristics of the additional receivables must
be monitored by an insurer or other credit support
provider that is independent of the depositor; or
o an independent accountant retained by the depositor must
provide the depositor with a letter (with copies
provided to each exemption rating agency rating the
certificates, the related underwriter and the related
trustee) stating whether or not the characteristics of
the additional obligations conform to the
characteristics described in the related prospectus or
prospectus supplement and/or pooling and servicing
agreement. In preparing the letter, the independent
accountant must use the same type of procedures as were
applicable to the receivables transferred to the trust
as of the closing date.
o The pre-funding period must end no later than three months or
90 days after the closing date or earlier in some cases if
the pre-funding account falls below the minimum level
specified in the pooling and servicing agreement or an event
of default occurs.
o Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the
pre-funding may be invested only in specified permitted
investments.
o The related prospectus or prospectus supplement must describe
the pre-funding period.
o The trustee of the trust (or any agent with whom the trustee
contracts) must be a substantial financial institution or
trust company experienced in trust activities and familiar
with its duties, responsibilities and liabilities as a
fiduciary under ERISA.
o The related pooling and servicing agreement must describe the
permitted investments for the pre-funding account and/or
capitalized interest account and, if not disclosed in the
related prospectus or prospectus supplement, the terms and
conditions for eligibility of additional receivables.
S-59
<PAGE>
On November 13, 2000, the Department of Labor published in the Federal
Register an additional amendment to the Underwriter Exemption. The amendment,
would permit Plans to invest in certain investment grade (i.e., securities which
are rated at the time of issuance in one of the four highest generic rating
categories by at least one rating agency) mortgage backed-securities and
asset-backed securities which are either senior or subordinated. The amendment
would also permit the use of eligible interest rate swaps (both ratings
dependent and non-rating dependent) under certain circumstances; permit the use
of yield supplements, which involve notional principal amounts; and make other
changes to the Underwriter Exemption that reflect the Department's current
interpretation of the Underwriter Exemption.
For a general description of the Underwriter Exemption, as amended on
July 21, 1997 and on November 13, 2000, 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
borrower 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.
LEGAL INVESTMENT
The Class A Certificates will [not] constitute "mortgage related
securities" for purposes of the Secondary Mortgage Enhancement Act of 1984.
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 ____ ____ (the "Underwriting Agreement") among the Depositor,
Equity One 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. The Class A Certificates
will be offered by the Underwriter when, as and if issued and sold by the
Depositor to the Underwriter, subject to the Underwriter's right to reject any
subscription in whole or in part.
The Underwriter has informed the Depositor that it proposes to offer
the Class A Certificates for sale from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of the related sale. The Underwriter may effect those 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
S-60
<PAGE>
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "Securities Act").
No Class A Certificate will have an established trading market when
issued. The Underwriter may, from time to time, act as a broker or purchase and
sell Class A Certificates in the secondary market, but the Underwriter is under
no obligation to do so and there can be no assurance that there will be a
secondary market for the Class A Certificates or liquidity in the secondary
market if one does develop.
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 those transactions or that
those transactions, once commenced, will not be discontinued without notice.
Equity One and the Depositor have agreed to indemnify the Underwriter
against, or make contributions to the Underwriter with respect to specific
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Certificates, including specific 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
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 "____" by ___________________________________________________and "___"
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 borrowers 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 certificate
holders might suffer a lower than anticipated yield due to non-credit events,
and do not address the likelihood that holders of the Class A-__ Certificates
will receive the Net WAC Cap Carryover.
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.
S-61
<PAGE>
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-62
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Adjusted Net Mortgage Rate......................S-32 Mortgage File...................................S-25
Advance.........................................S-32 Mortgage Note...................................S-25
Available Funds.................................S-36 Net Interest Shortfalls.........................S-37
Balloon Loans...................................S-18 Net Prepayment Interest Shortfall...............S-37
Beneficial Owners...............................S-33 Net WAC Cap.....................................S-36
Business Day....................................S-41 Net WAC Cap Account.............................S-43
Cap Contract....................................S-57 Net WAC Cap Carryover...........................S-37
Capitalized Interest Account....................S-26 OID.............................................S-57
Cede............................................S-34 Optional Termination Date.......................S-44
Certificate Account.............................S-34 Overcollateralization Step-up Trigger Event.....S-42
Certificate Formula Principal Amount............S-38 Overcollateralization Target Amount.............S-43
Certificates..............................S-17, S-33 Overcollateralized Amount.......................S-43
Class A Certificates............................S-33 Pass-Through Rate...............................S-36
Class A-__ Lockout Distribution Amount..........S-38 Permitted Investments...........................S-34
Class A-__ Lockout Percentage...................S-38 Plan............................................S-58
Class A-__ Pro Rata Distribution Amount.........S-38 Policy..........................................S-40
Class Certificate Balance.......................S-33 Pool Principal Balance..........................S-18
Class Unpaid Interest Amounts...................S-36 Pooling and Servicing Agreement.................S-17
Closing Date....................................S-17 Preference Amount...............................S-41
Code............................................S-25 Pre-Funded Amount...............................S-26
Collateral Value................................S-18 Pre-Funding Account.............................S-26
Definitive Certificate..........................S-34 Prepayment Assumption...........................S-57
Deleted Loan....................................S-25 Prepayment Interest Excess......................S-32
Depositor.......................................S-17 Prepayment Interest Shortfall...................S-37
Distributable Excess Spread.....................S-42 Prepayment Period...............................S-36
Distributable Funds.............................S-36 Rating Agencies.................................S-61
Distribution Account............................S-34 Receipt.........................................S-41
Distribution Date...............................S-35 Received........................................S-41
DTC.............................................S-33 Record Date.....................................S-35
Due Date........................................S-18 Refinance Loan..................................S-18
Due Period......................................S-39 REIT............................................S-57
Equity One......................................S-29 Relief Act Reduction............................S-37
Equity One Standards............................S-28 REO Property....................................S-32
ERISA...........................................S-58 Replacement Loan................................S-25
Formula Rate....................................S-36 Residential Loan................................S-17
Funding Period..................................S-26 Scheduled Payments..............................S-18
Guaranteed Principal Distribution Amount........S-41 Securities Act..................................S-61
I&I Payments....................................S-42 Seller and Sellers..............................S-17
Initial Cut-off Date............................S-17 Servicer........................................S-17
Initial Cut-off Date Pool Principal Balance.....S-18 Servicing Fee...................................S-32
Initial Loans...................................S-17 Servicing Fee Rate..............................S-32
Insurance Proceeds..............................S-36 SPA.............................................S-47
Insured Amount..................................S-41 Stated Principal Balance........................S-18
Insurer...................................S-17, S-55 Stepdown Date...................................S-43
Insurer Default.................................S-42 Structuring Assumptions.........................S-46
Insurer's Monthly Premium.......................S-42 Subsequent Cut-off Date.........................S-26
Interest Accrual Period.........................S-37 Subsequent Loans................................S-26
Interest Distribution Amount....................S-36 Subsequent Transfer Agreement...................S-26
Last Scheduled Distribution Date................S-55 Subsequent Transfer Date........................S-26
Liquidated Loan.................................S-39 Substitution Adjustment Amount..................S-25
Liquidation Proceeds............................S-36 Tax Counsel.....................................S-56
Loan Losses.....................................S-39 Trustee.........................................S-17
Loans...........................................S-17 Underwriter.....................................S-60
Loan-to-Value Ratio.............................S-18 Underwriter Exemption...........................S-58
Mixed Use Loan..................................S-17 Underwriting Agreement..........................S-60
Mortgage........................................S-25 Voting Rights...................................S-44
</TABLE>
S-63
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in specific limited circumstances, the globally offered Mortgage
Pass-Through Certificates, Series _____-___ (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
the Global Securities through any of The Depository Trust Company ("DTC"),
Clearstream Banking, societe anonyme ("Clearstream, Luxembourg") or the
Euroclear System ("Euroclear"). The Global Securities will be tradable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and similar issues of mortgage pass-through
certificates.
Secondary cross-market trading between Clearstream, Luxembourg or
Euroclear and DTC participants holding Certificates will be effected on a
delivery-against-payment basis through the respective depositaries of
Clearstream, Luxembourg and Euroclear (in that capacity) and as DTC
participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless the holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect participants in DTC. As a result, Clearstream,
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective depositaries, which in turn will hold positions in
accounts as DTC participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to similar issues of mortgage
pass-through certificates. Investor's securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to similar issues
of mortgage pass-through certificates in same-day funds.
A-1
<PAGE>
Trading between Clearstream, Luxembourg and/or Euroclear participants.
Secondary market trading between Clearstream, Luxembourg participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC seller and Clearstream, Luxembourg or Euroclear
purchaser. When Global Securities are to be transferred from the account of a
DTC participant to the account of a Clearstream, Luxembourg participant or a
Euroclear participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg participant or
Euroclear participant at least one business day before settlement. Clearstream,
Luxembourg or Euroclear will instruct its respective depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last
distribution date to but excluding the settlement date, on the basis of either
the actual number of days in that accrual period and a year assumed to consist
of 360 days or a 360-day year of twelve 30-day months as applicable to the
related class of Global Securities. For transactions settling on the 31st of the
month, payment will include interest accrued to but excluding the first day of
the following month. Payment will then be made by the respective depositary of
the DTC participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream, Luxembourg participant's or Euroclear
participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream, Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream, Luxembourg participants and Euroclear participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global Securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended
a line of credit to them, Clearstream, Luxembourg participants or Euroclear
participants can elect not to pre-position funds and allow that credit line to
be drawn upon to finance settlement. Under this procedure, Clearstream,
Luxembourg participants or Euroclear participants purchasing Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Global Securities were credited to their accounts. However, interest on
the Global Securities would accrue from the value date. Therefore, in many cases
the investment income on the Global Securities earned during that one-day period
may substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Clearstream, Luxembourg participant's or
Euroclear participant's particular cost of funds.
Since the settlement will take place during New York business hours,
DTC participants can employ their usual procedures for sending Global Securities
to the respective European depositary for the benefit of Clearstream, Luxembourg
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to DTC participants a cross-market
transaction will settle no differently than a trade between two DTC
participants.
Trading between Clearstream, Luxembourg or Euroclear seller and DTC
purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
participants and Euroclear participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective depositary, to a DTC
participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg participant or Euroclear participant
at least one business day prior to settlement. In these cases Clearstream,
Luxembourg or Euroclear will instruct the respective depositary, as appropriate,
to deliver the Global Securities to the DTC participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last distribution date to but excluding the settlement date, on
the basis of either the actual number of days in that accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 30-day months as
A-2
<PAGE>
applicable to the related class of Global Securities. For transactions settling
on the 31st of the month, payment will include interest accrued to but excluding
the first day of the following month. The payment will then be reflected in the
account of the Clearstream, Luxembourg participant or Euroclear participant the
following day, and receipt of the cash proceeds in the Clearstream, Luxembourg
participant's or Euroclear participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Clearstream, Luxembourg participant or Euroclear participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day period.
If settlement is not completed on the intended value date (i.e., the trade
fails), receipt of the cash proceeds in the Clearstream, Luxembourg
participant's or Euroclear participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream, Luxembourg or Euroclear and
that purchase Global Securities from DTC participants for delivery to
Clearstream, Luxembourg participants or Euroclear participants should note that
these trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
(a) borrowing through Clearstream, Luxembourg or Euroclear for
one day (until the purchase side of the day trade is reflected in their
Clearstream, Luxembourg or Euroclear accounts) in accordance with the
clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their
Clearstream, Luxembourg or Euroclear account in order to settle the
sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
participant is at least one day prior to the value date for the sale to
the Clearstream, Luxembourg participant or Euroclear participant.
Certain U.S. Federal Income Tax Documentation Requirements
A Beneficial Owner of Global Securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons (as defined below) (or the 31% U.S.
backup withholding tax), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between the Beneficial
Owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) the Beneficial Owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (as defined below) (Form W-8BEN).
Beneficial owners of Global Securities that are non-U.S. Persons may be able to
obtain a complete exemption from the withholding tax by filing a signed Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). If the information shown on Form W-8BEN changes, a new Form W-8BEN
must be filed within 30 days of the change.
Exemption for non-U.S. Persons with effectively connected income (Form
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, may be able to obtain an exemption
from the withholding tax by filing Form W-8ECI (Certificate of Foreign Person's
Claim for Exemption From Withholding on Income Effectively Connected With the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form W-8BEN). Non-U.S. Persons that are Beneficial Owners residing in
a country that has a tax treaty with the United States may be able to obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
W-8BEN.
A-3
<PAGE>
Exemption for U.S. Persons (Form W-9). U.S. Persons may be able to
obtain a complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Beneficial Owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8BEN and Form W-8ECI are generally
effective for three calendar years.
The term "U.S. Person" means:
(a) a citizen or resident of the United States;
(b) a corporation or partnership organized in or under the
laws of the United States, any state thereof or the District of Columbia (other
than a partnership that is not treated as a United States person under any
applicable Treasury regulations);
(c) an estate the income of which is includible in gross
income for United States tax purposes, regardless of its source; or
(d) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more United States persons have authority to control all substantial decisions
of the trust.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities or
with all aspects of Treasury regulations relating to tax documentation
requirements that are generally effective with respect to payments made after
________________. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities, the right to receive any Net WAC Cap Carryover and the U.S. federal
income tax documentation requirements (described above) related to the same.
A-4
<PAGE>
Equity One Mortgage Pass-Through Trust ____-__
$ __________ Mortgage Pass-Through Certificates, Series ____-__
Equity One ABS, Inc.
(Depositor)
-------------------------------------------------
PROSPECTUS SUPPLEMENT
Dated ____________, ____
-------------------------------------------------
[Underwriter's Logo]
<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 JANUARY 8, 2001
Prospectus Supplement to Prospectus dated ___________, ______
$__________
Equity One Mortgage Loan Trust _____________ - ________
$__________ [ ] ASSET BACKED NOTES, SERIES _____-____
$__________ [ ] ASSET BACKED CERTIFICATES, SERIES _____-____
<TABLE>
<CAPTION>
Equity One, Inc. Equity One ABS, Inc.
as Master Servicer as Depositor
<S> <C> <C> <C> <C>
[Certificates/Notes] Principal Balance [Certificate] [Note] Payment Dates Net Proceeds
----------------- --------------------- ------------- to Depositor(1)
Rate ---------------
----
$ % $
$ % $
--------------------------------------------------------------------------------------------------------------------
Total $ N/A $
</TABLE>
------------
(1) Before deducting expenses, payable by the Depositor, estimated to be
$_______________.
<TABLE>
<CAPTION>
<S> <C>
------------------------------
Before buying
[certificates][notes], The [certificates] [notes]--
consider carefully the risk
factors beginning on page o the certificates represent an interest in a trust fund consisting
S-9 in this document and on primarily of a pool of [fixed and variable] rate mortgage loans.
page 5 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 Credit enhancement for the [certificates][notes] --
by the assets of, the trust
fund only and the securities o will include a [surety bond][letter of credit]. This [surety
will not represent interests bond][letter of credit] will guarantee current payments of interest and
in, be secured by or be ultimate payment of principal to holders of the [certificates][notes]
obligations of any other on the terms described in this document.
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.
It is expected that delivery of securities will be made in book-entry form only
through the facilities of The Depository Trust Company, Clearstream Banking,
societe anonyme, and the Euroclear System on or about _________,
_________.
[Underwriter's Logo]
_________,__________
<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 some 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 like "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-9
The Trust Fund..............................................................S-15
The [Letter of Credit] [Surety Bond] Issuer.................................S-15
The Master Servicer.........................................................S-16
The Loan Program............................................................S-16
Description of the Loans....................................................S-20
Maturity and Prepayment Considerations......................................S-28
Description of the Master Servicing Agreement...............................S-29
Description of the Securities...............................................S-32
The Depositor...............................................................S-34
The Indenture...............................................................S-34
The Trust Agreement.........................................................S-39
The Administration Agreement................................................S-40
The Indenture Trustee.......................................................S-40
The Owner Trustee...........................................................S-40
Use of Proceeds.............................................................S-40
Federal Income Tax Consequences.............................................S-41
State Tax Consequences......................................................S-42
ERISA Considerations........................................................S-42
Legal Investment Considerations.............................................S-45
Underwriting................................................................S-46
Legal Matters...............................................................S-46
Ratings.....................................................................S-46
Index of Defined Terms......................................................S-48
Annex I - Global Clearance, Settlement and Tax Documentation Procedures......A-1
Prospectus
Risk Factors...................................................................5
The Trust Fund................................................................13
Use of Proceeds...............................................................17
The Depositor.................................................................17
Loan Program..................................................................18
Description of the Securities.................................................24
Credit Enhancement............................................................38
Yield and Prepayment Considerations...........................................44
The Agreements................................................................46
Legal Aspects of the Loans....................................................58
Federal Income Tax Consequences...............................................67
State Tax Considerations......................................................91
ERISA Considerations..........................................................91
Legal Investment..............................................................95
Method of Distribution........................................................96
Legal Matters.................................................................96
Rating........................................................................97
Available Information.........................................................97
Incorporation of Certain Documents by Reference...............................98
Index of Defined Terms........................................................99
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 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 [spread account][letter of credit]
[surety bond]
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
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: $____________
S-5
<PAGE>
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 master servicer will also
be entitled to 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 mortgage 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.
S-6
<PAGE>
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 and be payable on each distribution date with
respect to the calendar month preceding that distribution date.
Interest will be calculated on the basis of a 360-day year made up of
twelve 30-day months.
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 [spread account][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.
S-7
<PAGE>
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.
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.
You may have difficulty selling your securities.
The securities will not be listed on any securities exchange. As a
result, if you wish to sell your securities, you will have to find a purchaser
that is willing to purchase your securities. The underwriter intends to make a
secondary market for the [securities]. The underwriter may do so by offering to
buy the [securities] from investors that wish to sell. However, the underwriter
will not be obligated to make offers to buy the [securities] and may stop making
offers at any time. In addition, the prices offered, if any, may not reflect
prices that other potential purchasers, were they to be given the opportunity,
would be willing to pay. There have been times in the past where there have been
very few buyers of similar asset-backed securities, and there may be similar
times in the future. As a result, you may not be able to sell your securities
when you wish to do so or you may not be able to obtain the price you wish to
receive.
The borrowers have less than perfect credit and may be more likely to default.
The underwriting standards of the sellers are less restrictive than
those of Fannie Mae or Freddie Mac with respect to a borrower's credit history
and other factors. A derogatory credit history or a lack of credit history will
not necessarily prevent the sellers from making a loan but may reduce the size
and the loan-to-value ratio of the loan the sellers will make. As a result of
these less restrictive standards, the trust fund may experience higher rates of
delinquencies, defaults and losses than if the mortgage loans were underwritten
in a more traditional manner.
Newly originated mortgage loans may be more likely to default which may cause
losses.
Defaults on mortgage loans tend to occur at higher rates during the
early years of the mortgage loans. Most of the mortgage loans will have been
originated within 12 months prior to the sale to the trust fund. As a result,
the trust fund may experience higher rates of default than if the mortgage loans
had been outstanding for a longer period of time.
Book-entry securities may be illiquid.
Issuance of the [notes] [certificates] in book-entry form may adversely
affect your ability to sell your [note] [certificate] in the secondary trading
market since investors may be unwilling to purchase [notes] [certificates] for
which they cannot obtain physical certificates.
We refer you to "Description of the Securities--Book-Entry Securities"
in this prospectus supplement and "Risk Factors--Book-Entry Registration" in the
accompanying prospectus.
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<PAGE>
Book-entry securities may not be able to be pledged.
Since transactions in the [notes] [certificates] can be effected only
through The Depository Trust Company, Clearstream Banking, societe anonyme, or
the Euroclear System, their participating organizations, indirect participants
and certain banks, your ability to pledge your [note] [certificate] to persons
or entities that do not participate in the Euroclear System, the Depository
Trust Company or Clearstream Banking, societe anonyme, systems may be limited
due to lack of a physical certificate representing your [note] [certificate].
We refer you to "Description of the Securities--Book-Entry Securities"
in this prospectus supplement and "Risk Factors--Book-Entry Registration" in the
accompanying prospectus.
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 Securities"
in this prospectus supplement and "Description of the Securities--Book-Entry
Registration of Securities" in the accompanying prospectus.
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 [note] [certificate] could occur. [Corresponding delays in
your receipt of related proceeds could occur if the [surety bond provider] fails
to perform its obligations under the [surety bond].] Also, liquidation expenses
(including legal fees, real estate taxes, and maintenance and preservation
expenses) will be paid first, thereby reducing the proceeds payable on your
[note] [certificate] and thereby reducing the security for the mortgage loans.
If any of the mortgaged properties fails to provide adequate security for the
related mortgage loan, you could experience a loss [if the [surety bond
provider] fails to perform its obligations under the [surety bond]].
We refer you to "Maturity and Prepayment Considerations" in this
prospectus supplement and "Prepayment and Yield Considerations" in the
accompanying prospectus.
Your yield to maturity may be reduced by prepayments.
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 in the trust fund. 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. The servicer and its affiliates periodically conduct mass mailings to
their existing customers with respect to the refinancing of existing mortgage
loans. Although these marketing efforts are not specifically directed to
customers who have mortgage loans included in a trust fund, these customers may
receive the marketing materials as part of a broader mailing, which may result
in an increase in the rate of prepayments of mortgage loans included in a trust
fund through refinancings. In addition, substantially all of the mortgage loans
contain due-on-sale provisions, and the servicer intends to enforce those
provisions unless (1) enforcement is not permitted by
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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, assumption
of the mortgage loan 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.
In addition, the weighted average life of the certificates will be affected by
any prepayment resulting from the distribution of amounts (if any) on deposit in
the pre-funding account after the end of the funding period.
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 any other provider of credit
enhancement defaults on its payment obligations, the yield to maturity on your
security will be sensitive to defaults and delinquent payments on the mortgage
loans. If the actual rate of defaults on the mortgage loans 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 security, 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 any other provider of credit enhancement defaults on its
payment obligations, the timing of losses to the trust fund in connection with
liquidations of mortgage loans will affect the yield to maturity on your
security even if the rate of defaults and severity of the 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.
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
security until the distribution date in the following calendar month. As a
result, the monthly distributions on your security 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 security because distributions on your security in respect of any given
month will not be made until on or about the _____ day of the following month.
Balloon loans may bear higher risk of loss.
Approximately ____% of the mortgage loans 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.
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<PAGE>
The liquidation proceeds 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. 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 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 to a great enough extent to cause the outstanding balance of the
related mortgage loan, together with any senior financing on the properties, to
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 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, like earthquakes and floods. Any
decline of this nature 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 mortgage loans secured by second liens could be higher than those currently
experienced in the mortgage lending industry in general.
Withdrawal or downgrading of initial ratings will reduce the value of the
certificates.
The ratings of the securities will be based on, among other things, the
adequacy of the value of the mortgage loans, the spread account 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 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 [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.
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There could be delays in distributions on your certificate if the transfer of
the mortgage loans to the trust fund is not considered a sale in the event of
bankruptcy.
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
security and result in a reduction of payments due on your security.
Geographic concentration of mortgaged properties may affect payments on your
certificate.
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.
Because of the concentration of mortgage loans in these states, those types of
problems may have a greater effect on your securities than if borrowers and
mortgaged properties were more spread out in different geographic areas.
Violations of consumer protection laws may result in losses.
Applicable state laws generally regulate interest rates and other
charges and require specific 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 mortgage loans.
The mortgage loans are also subject to federal laws including:
o the federal Truth in Lending Act and Regulation Z
promulgated under the Truth in Lending Act, which require
particular disclosures to the borrowers regarding the
terms of the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B
promulgated under the Equal Credit Opportunity Act, which
prohibit discrimination on the basis of age, race, color,
sex religion, martial status, national origin, receipt of
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public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of
credit;
o the Americans with Disabilities Act, which, among other
things, prohibits discrimination on the basis of
disability in the full and equal enjoyment of the goods,
services, facilities, privileges, advantages or
accommodations of any place of public accommodation; and
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience.
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 mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the trust
fund, as owner of the mortgage loans, to damages and administrative enforcement.
Incomplete loan files may result in prepayments.
Some of the loan files being transferred to the trustee are known to be
missing one or more of the items required to be contained therein.
Notwithstanding the foregoing, each seller will represent that each loan file
transferred by it is complete in all material respects and the related seller
will be obligated to cure any defect or repurchase or substitute for the related
mortgage loan if a defect in a loan file has a material adverse effect on the
value of the mortgage loan or on the securityholders' or the [letter of
credit][surety bond] provider's interest in that mortgage loan. If a seller does
not cure or substitute for a mortgage loan with a defective loan file, the
securityholders may receive a prepayment of principal resulting from the
repurchase of that mortgage loan.
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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.
o 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 this information.
[Description of Letter of Credit/Surety Issuer]
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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 in that capacity, 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
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 400
Lippincott Drive, Marlton, NJ 08053. Its telephone number is (800) 461-8643.
Equity One conducts operations from its headquarters in Marlton 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"). All Loans to be included in
the mortgage pool have been or will be underwritten by Equity One's Central
Credit office in accordance with 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.
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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, 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 like 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 those types of 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 Lite
Doc, the SI or the AIV loan documentation program to verify a borrower's income.
The Lite Doc, SI and AIV loan documentation programs are all forms of
"non-income verifiable" or "NIV" programs. 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.
As of the Cut-off Date, approximately ____% of the Loans in the
mortgage pool have been underwritten pursuant to the Full Doc program and
approximately ____% of the Loans in the mortgage pool have been underwritten
pursuant to either the Lite Doc, SI or AIV programs.
The Equity One Standards require an independent appraisal that conforms
to Fannie Mae standards of each mortgaged property securing each mortgage loan
in excess of $15,000. All Initial Loans in the mortgage pool have independent
appraisals on the related mortgaged properties. 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 SI 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 the Loan and the
prior loan, and (2) the maximum insurable value of the improvements on the
mortgaged property.
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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
like 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.
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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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, ______ Months ______ Months
Ended _________, ____ Ended _________, ____
--------------------------------- -------------------------- -------------------------
<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 that 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
that 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 that
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, like 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.
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.
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 Combined Loan-to-Value Ratio of the Loans ranged from
__________ % to _______ % and the weighted average Combined Loan-to-Value Ratio
was ___%.
The "Combined Loan-to-Value Ratio" 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 Loans that 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.
S-20
<PAGE>
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 those 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 __________________________.
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 Combined Loan-to-Value Ratio at origination of more than
___%. Approximately ___ % of the Residential Loans had a Combined Loan-to-Value
Ratio at origination of ___%. In general, the Mixed Use Loans had a Combined
Loan to-Value Ratio at origination of not more than ___%.
No borrower of a Loan had a FICO score (issued by the Fair Isaac Credit
Bureau with a higher score generally signifying a better credit history) of less
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 information, as
of the Cut-off Date, relating to the Loans that will be property of the Trust
Fund. Other than with respect to rates of interest, percentages (approximate)
are stated by principal balance of the Loans as of the Cut-off Date and have
been rounded in order to total 100%.
S-21
<PAGE>
Loan Tables
<TABLE>
<CAPTION>
Loan Rate(1)
------------------
Aggregate Principal Percent of Pool
Loans Rates (%) Number of Loans Balance Outstanding (by principal balance)
-------------------------------- ----------------------------- -------------------- -----------------------
<S> <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 the
adjustment, the weighted average loan rate of the Loans is expected to
be approximately ______% per annum.
S-22
<PAGE>
Original Combined Loan-to-Value Ratios (1)
------------------------------------------
<TABLE>
<CAPTION>
Aggregate Principal
Original Combined Loan- Number of Balance Percent of Pool
to-Value Ratios (%) Loans Outstanding (by principal balance)
-------------------------------- ------------------- ------------------------ ---------------------------
<S> <C> <C> <C>
50.00 and below........
50.01 to 55.00...........
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 Combined Loan-to-Value Ratio of the Loans
is expected to be approximately ____%.
Current Loan Principal Balances(l)
----------------------------------
<TABLE>
<CAPTION>
Number of Aggregate Principal Percent of Pool
Current Loan Amounts Loans Balance Outstanding (by principal balance)
---------------------------------- ---------------- ------------------------- ---------------------------
<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-23
<PAGE>
Documentation Program for Loans
-------------------------------
<TABLE>
<CAPTION>
Number of Aggregate Principal Percent of Pool
Type of Program (1) Loans Balance Outstanding (by principal balance)
---------------------------------- ---------------- ------------------------- ---------------------------
<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 Percent of Pool
Property Type Loans Balance Outstanding (by principal balance)
---------------------------------- ---------------- ------------------------- ---------------------------
<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 Percent of Pool
Occupancy Type Loans Balance Outstanding (by principal balance)
---------------------------------- ---------------- ------------------------- ---------------------------
<S> <C> <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-24
<PAGE>
State Distribution of Mortgaged Properties(1)
---------------------------------------------
<TABLE>
<CAPTION>
Number of Aggregate Principal Percent of Pool
State Loans Balance Outstanding (by principal balance)
---------------------------------- ---------------- ------------------------- ---------------------------
<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(l)
------------------
<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>
FICO Scores
<TABLE>
<CAPTION>
Number of Aggregate Principal Percent of Pool
FICO Score Loans Balance Outstanding (by principal balance)
---------------------------------- -------------- ----------------------------- -------------------------
<S> <C> <C> <C>
Totals 100%
====
</TABLE>
S-25
<PAGE>
Remaining Terms to Maturity(1)
------------------------------
<TABLE>
<CAPTION>
Remaining Terms to Number of Aggregate Principal Percent of Pool
Maturity (Months) Loans Balance Outstanding (by principal balance)
-------------------------------- ------------------ ------------------------- ---------------------------
<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-26
<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 of those Loans 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 the 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 the retransfer, the principal
balance of the Loan will be deducted from the Pool Balance. In lieu of a
repurchase, the Seller may substitute an Eligible Substitute Loan. Any
repurchase or substitution will be considered a payment in full of that 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 that 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 the 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 the 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);
S-27
<PAGE>
o in general, have an original Combined Loan-to-Value Ratio
not greater than that of the Defective Loans; and
o satisfy other conditions specified in the Purchase
Agreement.
To the extent the principal balance of an Eligible Substitute Loan is less than
the principal balance of the related Defective Loan, the Seller will be required
to make a deposit to the Collection Account equal to the difference.
Each Seller will make representations and warranties as to the accuracy
in all material respects of 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 specified 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 that 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.
S-28
<PAGE>
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 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 that
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 the 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.
o "Eligible Investments" are specified in the Master
Servicing Agreement and are limited to
o obligations of the United States or any agency thereof,
provided the 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 any lower rating that
will not result in the downgrading or withdrawal of the
ratings then assigned to the Securities by each Rating
Agency;
o commercial or finance company paper which is then
receiving the highest commercial or finance company paper
rating of each Rating Agency, or any lower rating that
will not result in the downgrading or withdrawal of the
ratings then assigned to the Securities by each Rating
Agency;
S-29
<PAGE>
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 the 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 the 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
Rating Agency for such securities, or any lower ratings
that will not result in the downgrading or withdrawal of
the rating then assigned to the Securities by any 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 the deposits are fully insured by the FDIC;
o 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 the Securities
by any 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 the 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 any such securities), or any
lower rating that will not result in the downgrading or
withdrawal of the rating then assigned to the Securities
by any Rating Agency, as evidenced by a signed writing
delivered by each 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 Rating Agency, as evidenced by a signed writing
delivered by each Rating Agency; provided that no
instrument of this type shall be an Eligible Investment if
it evidences the right to receive interest only payments
with respect to the obligations underlying the 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
S-30
<PAGE>
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 the Loan, including,
without limitation, insurance proceeds, reduced by related expenses, but not
including the portion, if any, of the amount that exceeds the principal balance
of the Loan at the end of the Collection Period immediately preceding the
Collection Period in which the 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 that 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.
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 that 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
S-31
<PAGE>
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in some cases vandalism. The foregoing list is merely indicative of
different 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 the 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.
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 some of the 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.
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Book-Entry Securities
The Securities will be initially issued in book-entry form and will be
issued in one or more certificates that equal the aggregate principal balance of
the Securities, which will be held by a nominee of DTC. Persons acquiring
beneficial ownership interests in the Securities ("Beneficial Owners") will hold
their Securities indirectly through the book-entry facilities of DTC in the
United States or Clearstream Banking, societe anonyme, or the Euroclear System
in Europe, if they are participants of those systems, or indirectly through
participants of those systems. Investors may hold their beneficial interests in
the Securities in minimum denominations representing an original principal
amount of $25,000 and integral multiples of $1 in excess thereof. One investor
in the Securities 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
Securities. Except as described in the Prospectus under "Description of the
Certificates--Book-Entry Certificates," no Beneficial Owner of a Security will
be entitled to receive a physical certificate representing that Security (a
"Definitive Certificate").
Unless and until Definitive Certificates are issued, it is anticipated
that the only securityholder of the Securities will be Cede, as nominee of DTC.
Beneficial Owners of the Securities will not be "Securityholders," as that term
is used in the Agreements. Beneficial Owners are only permitted to exercise the
rights of securityholders 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 Securities of those Beneficial Owners are
credited.
For a description of the book-entry procedures generally applicable to
the Securities, see "Description of the Securities--Book-Entry Registration of
Securities" in the Prospectus. For information with respect to tax documentation
procedures relating to the Securities, see "Federal Income Tax Consequences"
herein and "Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" in Annex
I hereto.
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;
o as principal on the Securities, the excess of Principal
Collections over Additional Balances created during the
preceding Collection Period, this 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.
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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 and be
payable on each Distribution Date with respect to the calendar month preceding
that 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 a 360-day year made up of twelve 30-day months. 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 and be payable on each Distribution Date with respect to the calendar
month preceding that Distribution Date at [a floating rate equal to LIBOR (as
defined herein) plus ___%] [__%]. Interest will be calculated on the basis of a
360-day year made up of twelve 30-day months. 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 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 additional terms
of the Indenture.
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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 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 that 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 that 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 specified 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 that request. Subject to the
provisions for indemnification and limitations contained in the Indenture, the
holders of a majority in principal amount of the outstanding Notes will have the
right to direct the time, method and place of conducting any proceeding or any
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remedy available to the Indenture Trustee, and the holders of a majority in
principal amount of the Notes then outstanding may, in some 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 the 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 the proceeding in its own
name as Indenture Trustee,
o the holder or holders have offered the Indenture Trustee
reasonable indemnity,
o the Indenture Trustee has for 60 days failed to institute
the proceeding and
o no direction inconsistent with the 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 the consolidation or
merger is organized under the laws of the United States,
any state or the District of Columbia,
o the 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 the 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 the merger
or consolidation, and
o the Trust Fund has received an opinion of counsel to the
effect that the consolidation or merger would have no
material adverse tax consequence to the Trust Fund or to
any noteholder or certificateholder.
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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,
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 in its capacity as trustee 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 some 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
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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
specific 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;
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 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 of the 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 these actions 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 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 the 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.
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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
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 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
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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.
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
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.
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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 some types of certificateholders
subject to special treatment under the United States federal income tax laws
(for example, tax exempt investors, banks and life insurance companies).
Accordingly, investors should consult their tax advisors regarding United States
federal, state, local, foreign and any other tax consequences to them of
investing in the Notes and Certificates.
Tax Characterization of the Trust Fund as a Partnership
Stradley, Ronon, Stevens & Young, LLP, special counsel to the Depositor
("Tax Counsel"), is of the opinion that the Trust Fund will not be an
association (or a publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion is based on the assumption that the
terms of the Trust Agreement and related documents will be complied with, and on
Tax Counsel's conclusions that
o the Trust Fund is an eligible domestic entity that is
entitled, and intends, to elect to be treated as a
partnership for federal income tax purposes, 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 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 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 that 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 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, under certain circumstances,
include the 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
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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 some features
characteristic of debt, the Certificates might be considered debt of the Trust
Fund. Characterization as debt 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 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 with respect to the Notes, servicing and other
fees, and losses or deductions upon collection or disposition of Loans. See
"Federal Income Tax Consequences--Tax Consequences to Holders of the
Certificates" in the Prospectus.
The Trust Fund expects to withhold on the portion of its taxable income
that is allocable to foreign certificateholders pursuant to Section 1446 of the
Code, as if the 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 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 those Plans. Some employee
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<PAGE>
benefit plans, like 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 those 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 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 who 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 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 those 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 the investment, any of the
underlying assets of the entity. However, the Plan Asset Regulation provides
that, if a Plan acquires an "equity interest" in an entity that is neither a
"publicly-offered security" (as defined therein) nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan investor unless on or
more exceptions apply. If the Securities were deemed to be equity interests and
no statutory, regulatory or administrative exemption applies, the Trust Fund
could be considered to hold plan assets by reason of a Plan's investment in the
Securities. Those plan assets would include an undivided interest in any assets
held by the Trust Fund. In that 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 those 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
those features would be considered "substantial," noting that the question of
whether a plan's interest has substantial equity features is an inherently
factual one, but that in making a determination it would be appropriate to take
into account whether the equity features are such that a Plan's investment would
be a practical vehicle for the indirect provision of investment management
services.
The Underwriter Exemption
The United States Department of Labor has granted an individual
administrative exemption to the Underwriter (Prohibited Transaction Exemption
___, Exemption Application No. _______, __ Fed. Reg. _____ (_______, ____) (the
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<PAGE>
"Underwriter Exemption") from some 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 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.
On July 21, 1997, the Department of Labor published in the Federal
Register an amendment to the Underwriter Exemption, which extends exemptive
relief to certain mortgage-backed and asset-backed securities transactions using
pre-funding accounts for trusts issuing pass-through certificates. The amendment
generally allows mortgage loans or other secured receivables supporting payments
to certificateholders, and having a value equal to no more than twenty-five
percent (25%) of the total principal amount of the certificates being offered by
the trust, to be transferred to the trust within a 90-day or three-month period
following the closing date, instead of requiring that all of the obligations be
either identified or transferred on or before the closing date. The relief is
available when the following conditions are met:
o The ratio of the amount allocated to the pre-funding account
to the total principal amount of the certificates being
offered (the "pre-funding limit") must not exceed
twenty-five percent (25%).
o All receivables transferred after the closing date
("additional receivables") must meet the same terms and
conditions for eligibility as the original receivables used
to create the trust, which terms and conditions have been
approved by a rating agency described in the Underwriter
Exemption (an "exemption rating agency").
o The transfer of the additional receivables to the trust
during the pre-funding period must not result in the
certificates to be covered by the Exemption receiving a
lower credit rating from an exemption rating agency upon
termination of the pre-funding period than the rating that
was obtained at the time of the initial issuance of the
certificates by the trust.
o Solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for all of the
receivables in the trust at the end of the pre-funding
period must not be more than 100 basis points lower than the
average interest rate for the receivables transferred to the
trust on the closing date.
o In order to insure that the characteristics of the
additional receivables are substantially similar to the
original receivables which were transferred to the trust
fund:
o the characteristics of the additional receivables must
be monitored by an insurer or other credit support
provider that is independent of the depositor; or
o an independent accountant retained by the depositor
must provide the depositor with a letter (with copies
provided to each exemption rating agency rating the
certificates, the related underwriter and the related
trustee) stating whether or not the characteristics of
the additional obligations conform to the
characteristics described in the related prospectus or
prospectus supplement and/or pooling and servicing
agreement. In preparing the letter, the independent
accountant must use the same type of procedures as were
applicable to the receivables transferred to the trust
as of the closing date.
o The pre-funding period must end no later than three months
or 90 days after the closing date or earlier in some cases
if the pre-funding account falls below the minimum level
specified in the pooling and servicing agreement or an event
of default occurs.
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<PAGE>
o Amounts transferred to any pre-funding account and/or
capitalized interest account used in connection with the
pre-funding may be invested only in specified permitted
investments.
o The related prospectus or prospectus supplement must
describe the pre-funding period.
o The trustee of the trust (or any agent with whom the trustee
contracts) must be a substantial financial institution or
trust company experienced in trust activities and familiar
with its duties, responsibilities and liabilities as a
fiduciary under ERISA.
o The related pooling and servicing agreement must describe
the permitted investments for the pre-funding account and/or
capitalized interest account and, if not disclosed in the
related prospectus or prospectus supplement, the terms and
conditions for eligibility of additional receivables.
On November 13, 2000, the Department of Labor published in the Federal
Register an additional amendment to the Underwriter Exemption. The amendment,
would permit Plans to invest in certain investment grade (i.e., securities which
are rated at the time of issuance in one of the four highest generic rating
categories by at least one rating agency) mortgage backed-securities and
asset-backed securities which are either senior or subordinated. The amendment
would also permit the use of eligible interest rate swaps (both ratings
dependent and non-rating dependent) under certain circumstances; permit the use
of yield supplements, which involve notional principal amounts; and make other
changes to the Underwriter Exemption that reflect the Department's current
interpretation of the Underwriter Exemption.
For a general description of the Underwriter Exemption, as amended on
July 21, 1997 and on November 13, 2000, 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 Securities 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 borrower 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 Securities. Moreover, each Plan fiduciary should determine whether
under the general fiduciary standards of investment prudence and
diversification, an investment in any of the Securities is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
LEGAL INVESTMENT 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.
S-45
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and _____________ (the "Underwriting
Agreement"), the Depositor has agreed to sell to [ ] (the "Underwriter"), and
the Underwriter has agreed to purchase from the Depositor, the Securities. The
Underwriter is obligated to purchase all the Securities offered hereby if any
are purchased. Distribution of the Securities will be made by the Underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Proceeds to the Depositor are expected to be
$______________ from the sale of the Notes and $______________ from the sale of
the Certificates, before deducting expenses payable by the Depositor of
$____________. In connection with the purchase and sale of the Securities, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts, concessions or commissions.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute payments the Underwriter may be required
to make in respect thereof The Depositor is an affiliate of the Underwriter. The
Underwriter is an affiliate of the Depositor.
LEGAL MATTERS
Certain legal matters with respect to the Securities will be passed
upon for the Depositor by Stradley, Ronon, Stevens & Young, LLP, Philadelphia,
Pennsylvania and for the Underwriter by ________________.
RATINGS
It is a condition to the issuance of the [certificates/notes] that they
be rated "____" by _____________________ ("________") and "____" 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].
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<PAGE>
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
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Administration Agreement...........................S-40 Loan Agreements....................................S-20
Administrator......................................S-40 Loans..............................................S-20
Agreement..........................................S-32 Master Servicer....................................S-15
Beneficial Owners..................................S-33 Master Servicing Agreement.........................S-16
BIF................................................S-29 Mixed Use Loan.....................................S-20
Cede...............................................S-33 Mortgage Files.....................................S-27
Certificates.......................................S-32 Net Liquidation Proceeds...........................S-31
Closing Date.......................................S-20 Note Rate..........................................S-34
Code...............................................S-41 Notes..............................................S-32
Collateral Value...................................S-20 OID................................................S-41
Collection Account.................................S-29 Owner Trustee......................................S-15
Collection Period..................................S-34 Parties in Interest................................S-42
Combined Loan-to-Value Ratio.......................S-20 Pass-Through Rate..................................S-34
Cut-off Date.......................................S-15 Plan Asset Regulation..............................S-43
Cut-off Date Pool Principal Balance................S-21 Plans..............................................S-42
Defective Loans....................................S-28 Pool Balance.......................................S-31
Definitive Certificate.............................S-33 Principal Collections..............................S-30
Depositor..........................................S-15 Purchase Agreement.................................S-20
Determination Date.................................S-29 Rating Agencies....................................S-46
DOL................................................S-43 Refinance Loan.....................................S-20
Due Date...........................................S-21 Related Documents..................................S-27
Eligible Account...................................S-29 Repurchase Price...................................S-27
Eligible Investments...............................S-29 Residential Loan...................................S-20
Eligible Substitute Loan...........................S-27 SAIF...............................................S-29
Equity One.........................................S-16 Securities.........................................S-32
Equity One Standards...............................S-16 Security Account...................................S-29
ERISA..............................................S-42 Sellers............................................S-15
FDIC...............................................S-29 Servicing Fee Rate.................................S-32
Indenture..........................................S-32 Tax Counsel........................................S-41
Indenture Trustee..................................S-32 Trust Agreement....................................S-15
Insolvency Event...................................S-39 Trust Fund.........................................S-15
Interest Accrual Period............................S-34 Underwriter........................................S-46
Interest Collections...............................S-30 Underwriter Exemption..............................S-44
Issuer.............................................S-15 Underwriting Agreement.............................S-46
Liquidation Loss Amount............................S-34 Voting Interests...................................S-39
</TABLE>
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<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in specific limited circumstances, the globally offered [notes]
[certificates] (the "Global Securities") will be available only in book-entry
form. Investors in the Global Securities may hold the Global Securities through
any of The Depository Trust Company ("DTC"), Clearstream Banking, societe
anonyme ("Clearstream, Luxembourg") or the Euroclear System ("Euroclear"). The
Global Securities will be tradable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations [and similar issues of pass-through [notes]
[certificates]].
Secondary cross-market trading between Clearstream, Luxembourg or
Euroclear and DTC participants holding Certificates will be effected on a
delivery-against-payment basis through the respective depositaries of
Clearstream, Luxembourg and Euroclear (in that capacity) and as DTC
participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless the holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect participants in DTC. As a result, Clearstream,
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective depositaries, which in turn will hold those positions
in accounts as DTC participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to similar issues of pass-through
[notes] [certificates]. Investor's securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to similar issues
of pass-through [notes] [certificates] in same-day funds.
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<PAGE>
Trading between Clearstream, Luxembourg and/or Euroclear participants.
Secondary market trading between Clearstream, Luxembourg participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC seller and Clearstream, Luxembourg or Euroclear
purchaser. When Global Securities are to be transferred from the account of a
DTC participant to the account of a Clearstream, Luxembourg participant or a
Euroclear participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg participant or
Euroclear participant at least one business day before settlement. Clearstream,
Luxembourg or Euroclear will instruct its respective depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last
distribution date to but excluding the settlement date, on the basis of either
the actual number of days in that accrual period and a year assumed to consist
of 360 days or a 360-day year of twelve 30-day months as applicable to the
related class of Global Securities. For transactions settling on the 31st of the
month, payment will include interest accrued to but excluding the first day of
the following month. Payment will then be made by the respective depositary of
the DTC participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream, Luxembourg participant's or Euroclear
participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream, Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream, Luxembourg participants and Euroclear participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global Securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended
a line of credit to them, Clearstream, Luxembourg participants or Euroclear
participants can elect not to pre-position funds and allow that credit line to
be drawn upon to finance settlement. Under this procedure, Clearstream,
Luxembourg participants or Euroclear participants purchasing Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Global Securities were credited to their accounts. However, interest on
the Global Securities would accrue from the value date. Therefore, in many cases
the investment income on the Global Securities earned during that one-day period
may substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Clearstream, Luxembourg participant's or
Euroclear participant's particular cost of funds.
Since the settlement will take place during New York business hours,
DTC participants can employ their usual procedures for sending Global Securities
to the respective European depositary for the benefit of Clearstream, Luxembourg
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to DTC participants a cross-market
transaction will settle no differently than a trade between two DTC
participants.
Trading between Clearstream, Luxembourg or Euroclear seller and DTC
purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
participants and Euroclear participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective depositary, to a DTC
participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg participant or Euroclear participant
A-2
<PAGE>
at least one business day prior to settlement. In these cases Clearstream,
Luxembourg or Euroclear will instruct the respective depositary, as appropriate,
to deliver the Global Securities to the DTC participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last distribution date to but excluding the settlement date, on
the basis of either the actual number of days in that accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 30-day months as
applicable to the related class of Global Securities. For transactions settling
on the 31st of the month, payment will include interest accrued to but excluding
the first day of the following month. The payment will then be reflected in the
account of the Clearstream, Luxembourg participant or Euroclear participant the
following day, and receipt of the cash proceeds in the Clearstream, Luxembourg
participant's or Euroclear participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Clearstream, Luxembourg participant or Euroclear participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day period.
If settlement is not completed on the intended value date (i.e., the trade
fails), receipt of the cash proceeds in the Clearstream, Luxembourg
participant's or Euroclear participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream, Luxembourg or Euroclear and
that purchase Global Securities from DTC participants for delivery to
Clearstream, Luxembourg participants or Euroclear participants should note that
these trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
(a) borrowing through Clearstream, Luxembourg or Euroclear for
one day (until the purchase side of the day trade is reflected in their
Clearstream, Luxembourg or Euroclear accounts) in accordance with the
clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their
Clearstream, Luxembourg or Euroclear account in order to settle the
sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
participant is at least one day prior to the value date for the sale to
the Clearstream, Luxembourg participant or Euroclear participant.
Certain U.S. Federal Income Tax Documentation Requirements
A Beneficial Owner of Global Securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons (as defined below) (or the 31% U.S.
backup withholding tax), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between the beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) the beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (as defined below) (Form W-8BEN).
Beneficial owners of Global Securities that are non-U.S. Persons may be able to
obtain a complete exemption from the withholding tax by filing a signed Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). If the information shown on Form W-8BEN changes, a new Form W-8BEN
must be filed within 30 days of the change.
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<PAGE>
Exemption for non-U.S. Persons with effectively connected income (Form
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, may be able to obtain an exemption
from the withholding tax by filing Form W-8ECI (Certificate of Foreign Person's
Claim for Exemption From Withholding on Income Effectively Connected With the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form W-8BEN). Non-U.S. Persons that are Beneficial Owners residing in
a country that has a tax treaty with the United States may be able to obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
W-8BEN.
Exemption for U.S. Persons (Form W-9). U.S. Persons may be able to
obtain a complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
[U.S. Federal Income Tax Reporting Procedure. The Beneficial Owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8BEN and Form W-8ECI are generally
effective for three calendar years.]
The term "U.S. Person" means:
(a) a citizen or resident of the United States;
(b) a corporation or partnership organized in or under the
laws of the United States, any state thereof or the District of Columbia (other
than a partnership that is not treated as a United States person under any
applicable Treasury regulations);
(c) an estate the income of which is includible in gross
income for United States tax purposes, regardless of its source; or
(d) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more United States persons have authority to control all substantial decisions
of the trust.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities or
with all aspects of Treasury regulations relating to tax documentation
requirements that are generally effective with respect to payments made after
________________. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities and the U.S. federal income tax documentation requirements (described
above) related to the same.
A-4
<PAGE>
$______________________________
Equity One Mortgage Loan Trust _________-_____
$_________ [] Asset-Backed Certificates, Series _________-_____
$_________ [] Asset-Backed Notes, Series _________-_____
Equity One ABS, Inc.
(Depositor)
_________________________________________________
PROSPECTUS SUPPLEMENT
____________,___________
_________________________________________________
[Underwriter's Logo]
<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 JANUARY 8, 2001
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 will be issued in one or
more classes.
<TABLE>
<CAPTION>
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<S> <C>
Before buying securities, The related prospectus supplement will set forth the specific assets of the
consider carefully the risk trust fund and the seller or sellers from whom the assets are acquired.
factors beginning on page 5
of this prospectus. Each trust fund's assets may include--
o one or more pools of
Neither the securities of
any series nor the underlying o mortgage loans secured by first and/or subordinate mortgages on
loans will be insured or
guaranteed by any governmental o one- to four-family residential properties and
agency or instrumentality, or
by any other entity. o mixed commercial/residential use properties and other
multi-family residential properties,
The securities of each
series will represent o revolving home equity loans or balances thereof secured by first
interests in the related trust and/or subordinate mortgages on one- to four-family residential
fund only and will not properties,
represent interests in or be
obligations of any other o all monies due under the above assets, which may be net of some of the amounts
entity. payable to the servicer, and
This prospectus may be used to o other funds, credit enhancements and other assets.
offer and sell any series of
securities only if it is The assets in the trust fund may be divided into one or more asset groups and
accompanied by the each class of the related series will evidence beneficial ownership of the
prospectus supplement for corresponding asset group.
that series.
The prospectus supplement will state if the trust fund will make a REMIC
election for federal income tax purposes.
------------------------------------
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful 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 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.
--------------------------------
If you require additional information, the mailing address of our
principal executive offices is Equity One, Inc., 400 Lippincott Drive, Marlton,
NJ 08053 and the telephone number is (800) 461-8643. For other means of
acquiring additional information about us or a series of securities, see
"Available Information" and "Incorporation of Certain Documents by Reference"
beginning on page 97.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
RISK FACTORS......................................................................................................5
You will have only limited recourse to sellers, depositor and servicer.........................................5
The depositor has limited assets...............................................................................5
Limited liquidity may result in delays in liquidation or lower returns.........................................6
Credit enhancement may not be sufficient to protect you from losses............................................6
Prepayments of loans and other factors may result in a lower yield on the securities...........................6
Junior liens may result in losses in foreclosure proceedings...................................................7
Declines in property values may adversely affect you...........................................................7
Delays in liquidation may adversely affect you.................................................................7
The disproportionate impact of liquidation expenses on smaller loans may adversely affect you..................7
Consumer protection laws may adversely affect you..............................................................8
Balloon payment mortgages in the trust fund may pose a higher risk of loss.....................................8
The liquidation proceeds of mixed use loans may take longer to recover.........................................9
You could be adversely affected by violations of environmental laws............................................9
The ratings of the securities do not assure their payment......................................................9
Book-entry securities may pose limitations....................................................................10
Book-entry securities may result in delayed receipt of distributions..........................................10
Bankruptcy or insolvency may affect the timing and amount of distributions on the securities..................10
The principal amount of the securities may exceed the market value of the trust fund assets...................11
You may receive a prepayment of principal from unused amounts in any pre-funding account......................11
Some of the securities may be issued with original issue discount.............................................12
THE TRUST FUND...................................................................................................13
General.......................................................................................................13
The Loans.....................................................................................................14
Substitution of Trust Fund Assets.............................................................................17
USE OF PROCEEDS..................................................................................................17
THE DEPOSITOR....................................................................................................17
LOAN PROGRAM.....................................................................................................18
Underwriting Standards........................................................................................18
Specific Underwriting Criteria; Underwriting Programs.........................................................19
Summary of Underwriting Requirements by Program...............................................................20
Qualifications of Sellers and Servicer........................................................................22
Representations by Sellers; Repurchases.......................................................................23
DESCRIPTION OF THE SECURITIES....................................................................................24
General.......................................................................................................24
Distributions on Securities...................................................................................26
Advances......................................................................................................27
Reports to Securityholders....................................................................................28
Categories of Classes of Securities...........................................................................30
Indices Applicable to Floating Rate and Inverse Floating Rate Classes.........................................32
Book-Entry Registration of Securities.........................................................................35
CREDIT ENHANCEMENT...............................................................................................38
General.......................................................................................................38
Subordination.................................................................................................39
Letter of Credit..............................................................................................39
Insurance Policies, Surety Bonds and Guaranties...............................................................40
Over-Collateralization........................................................................................40
Reserve Accounts..............................................................................................40
Pool Insurance Policies.......................................................................................42
Cross-Collateralization.......................................................................................43
YIELD AND PREPAYMENT CONSIDERATIONS..............................................................................44
THE AGREEMENTS...................................................................................................46
Assignment of the Trust Fund Assets...........................................................................46
Payments on Loans; Deposits to Security Account...............................................................47
Pre-Funding Account...........................................................................................49
Sub-Servicing by Sellers......................................................................................50
Collection Procedures.........................................................................................50
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Hazard Insurance..............................................................................................50
Realization Upon Defaulted Loans..............................................................................52
Servicing and Other Compensation and Payment of Expenses......................................................53
Evidence as to Compliance.....................................................................................53
Certain Matters Regarding the Servicer and the Depositor......................................................53
Events of Default; Rights Upon Event of Default...............................................................54
Amendment.....................................................................................................56
Termination; Optional Termination.............................................................................57
The Trustee...................................................................................................58
LEGAL ASPECTS OF THE LOANS.......................................................................................58
General.......................................................................................................58
Foreclosure/Repossession......................................................................................58
Environmental Risks...........................................................................................59
Rights of Redemption..........................................................................................61
Anti-Deficiency Legislation; Bankruptcy Laws; Tax Liens.......................................................61
Due-on-Sale Clauses...........................................................................................62
Enforceability of Prepayment and Late Payment Fees............................................................62
Equitable Limitations on Remedies.............................................................................63
Applicability of Usury Laws...................................................................................63
Soldiers' and Sailors' Civil Relief Act.......................................................................63
Junior Mortgages; Rights of Senior Mortgagees.................................................................63
The Title I Program...........................................................................................64
Consumer Protection Laws......................................................................................67
FEDERAL INCOME TAX CONSEQUENCES..................................................................................67
General.......................................................................................................67
Taxation of Debt Securities...................................................................................68
Taxation of the REMIC and its Holders.........................................................................73
REMIC Expenses; Single Class REMICs...........................................................................73
Taxation of the REMIC.........................................................................................74
Administrative Matters........................................................................................78
Financial Asset Securitization Investment Trust Qualification.................................................78
Qualification as a FASIT......................................................................................78
Consequences on failing to comply with FASIT requirements.....................................................79
Taxation of the FASIT.........................................................................................79
Taxation of Regular Interest Holders..........................................................................79
Taxation of Ownership Interest Holders........................................................................80
Tax Status as a Grantor Trust.................................................................................81
Sale or Exchange..............................................................................................83
Miscellaneous Tax Aspects.....................................................................................83
Tax Treatment of Foreign Investors............................................................................84
Tax Characterization of the Trust Fund as a Partnership.......................................................85
Tax Consequences to Holders of the Notes......................................................................85
Tax Consequences to Holders of the Certificates Issued by a Partnership.......................................87
STATE TAX CONSIDERATIONS.........................................................................................91
ERISA CONSIDERATIONS.............................................................................................91
LEGAL INVESTMENT.................................................................................................95
METHOD OF DISTRIBUTION...........................................................................................96
LEGAL MATTERS....................................................................................................96
RATING...........................................................................................................97
AVAILABLE INFORMATION............................................................................................97
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................................................98
INDEX OF DEFINED TERMS...........................................................................................99
</TABLE>
4
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of securities.
You will have only limited recourse to sellers, depositor and 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 source of funds to make the repurchase would be 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 replace 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 replace 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."
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 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.
5
<PAGE>
Limited liquidity may result in delays in liquidation or lower returns.
There will be no market for the securities of any series prior to their
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.
Credit enhancement may not be sufficient to protect you from losses.
Credit enhancement is intended to reduce the effect of loan losses.
Credit enhancements may benefit only some classes of a series of securities,
however, and the amount of any credit enhancement will be limited as described
in the applicable prospectus supplement. The amount of a credit enhancement may
decline over time pursuant to a schedule or formula or otherwise, and could be
depleted from payments or for other reasons before the securities covered by the
credit enhancement are paid in full. In addition, a credit enhancement may not
cover all potential sources of loss. For example, a credit enhancement may or
may not cover fraud or negligence by a loan originator or other parties. Also,
the trustee may be permitted to reduce, substitute for, or even eliminate all or
a portion of a credit enhancement so long as the rating agencies that have rated
the securities at the request of the depositor indicate that that would not
cause them to change adversely their rating of the securities. Consequently,
securityholders may suffer losses even though a credit enhancement exists and
its provider does not default.
We refer you to "Credit Enhancement."
Prepayments of loans and other factors may result in a lower yield on the
securities.
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."
6
<PAGE>
Junior liens may result in losses in foreclosure proceedings.
Some of the mortgages serving as collateral for your series of
securities 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
underlying property.
We refer you to "Legal Aspects of the Loans--Junior Mortgages; Rights
of Senior Mortgagees."
Declines in property values may adversely affect you.
The value of the properties underlying the loans held in the trust fund
may decline over time. Among the factors that could adversely affect the value
of the properties are:
o an overall decline in the residential real estate market in the
areas in which they are located;
o a decline in their general condition from the failure of borrowers
to maintain their property adequately; and
o natural disasters that are not covered by insurance like
earthquakes and floods.
In the case of home equity loans, declining property values could diminish or
extinguish the value of a junior mortgage before reducing the value of a senior
mortgage on the same property.
If property values decline, the actual rates of delinquencies,
foreclosures, and losses on all underlying loans could be higher than those
currently experienced in the mortgage lending industry in general. These losses,
to the extent not otherwise covered by credit enhancement, will be borne by the
holder of one or more classes of securities.
We refer you to "The Trust Fund--The Loans--Additional Information."
Delays in liquidation may adversely affect you.
Even if the properties underlying the loans held in the trust fund
provide adequate security for the loans, substantial delays could occur before
defaulted loans are liquidated and their proceeds are forwarded to investors.
Property foreclosure actions are regulated by state statutes and rules and are
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are made, sometimes requiring several years to complete.
Furthermore, in some states if the proceeds of the foreclosure are insufficient
to repay the loan, the borrower is not liable for the deficit. Thus, if a
borrower defaults, these restrictions may impede the trust's ability to dispose
of the property and obtain sufficient proceeds to repay the loan in full. In
addition, the servicer will be entitled to deduct from liquidation proceeds all
expenses reasonably incurred in attempting to recover on the defaulted loan,
including legal fees and costs, real estate taxes, and property maintenance and
preservation expenses.
We refer you to "Yield and Prepayment Considerations."
The disproportionate impact of liquidation expenses on smaller loans may
adversely affect you.
Liquidation expenses of defaulted loans generally do not vary directly
with the outstanding principal balance of the loan at the time of default.
Therefore, if a servicer takes the same steps for a defaulted loan having a
small remaining principal balance as it does for a defaulted loan having a large
remaining principal balance, the amount realized after expenses is smaller as a
percentage of the outstanding principal balance of the small loan than it is for
the defaulted loan having a large remaining principal balance.
7
<PAGE>
Consumer protection laws may adversely affect you.
State laws generally regulate interest rates and other charges, require
specified disclosures, and require licensing of mortgage loan originators and
servicers. In addition, most states have other laws and public policies for the
protection of consumers that prohibit unfair and deceptive practices in the
origination, servicing, and collection of mortgage loans. Depending on the
particular law and the specific facts involved, violations may limit the ability
to collect all or part of the principal or interest on the underlying loans held
in the trust fund. In some cases, the borrower may even be entitled to a refund
of amounts previously paid.
The loans held in the trust fund may also be subject to federal laws,
including:
o the Federal Truth in Lending Act and its regulations, which
require disclosures to the borrowers regarding the terms of any
mortgage loan;
o the Equal Credit Opportunity Act and its regulations, which
prohibit discrimination in the extension of credit 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; and
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit
experience.
Home Equity Loan Consumer Protection Act. For loans that were
originated or closed after November 7, 1989, the Home Equity Loan Consumer
Protection Act of 1988, which requires additional application disclosures,
limits changes that may be made to the loan documents without the borrower's
consent and restricts a lender's ability to declare a default or to suspend or
reduce a borrower's credit limit.
The Riegle Act. Some loans may be subject to the Riegle Community
Development and Regulatory Improvement Act of 1994, known as the Riegle Act,
which incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including the right to rescind the mortgage loan.
Some violations of these federal laws may limit the ability to collect
the principal or interest on the loans held in the trust fund, and in addition
could subject the trust fund to damages and administrative enforcement. Losses
on loans from the application of those laws that are not otherwise covered by a
credit enhancement will be borne by the holders of one or more classes of
securities.
We refer you to "Legal Aspects of the Loans."
Balloon payment mortgages in the trust fund may pose a higher risk of loss.
Some of the mortgage loans held in the trust fund may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments (that is, balloon payments) at their stated maturity. Loans
with balloon payments involve a greater degree of risk than fully amortizing
loans because typically the borrower must be able to refinance the loan or sell
the property to make the balloon payment at maturity. The ability of a borrower
to do this will depend on various factors including mortgage rates at the time
of sale or refinancing, the borrower's equity in the property, the relative
strength of the local housing market, the financial condition of the borrower,
and tax laws. Losses on these loans that are not otherwise covered by a credit
enhancement will be borne by the holders of one or more classes of certificates.
8
<PAGE>
The liquidation proceeds 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. 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."
You could be adversely affected by violations of environmental laws.
Federal, state, and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health, and safety.
In certain circumstances, these laws and regulations impose obligations on
owners or operators of residential properties like those that secure the loans
held in the trust fund. Failure to comply with these laws and regulations can
result in fines and penalties that could be assessed against the trust fund as
owner of the related property. In some states, a lien on the property due to
contamination has priority over the lien of an existing mortgage. Also, a
mortgage lender may be held liable as an 'owner' or 'operator' for costs
associated with the release of petroleum from an underground storage tank under
certain circumstances. If the trust is considered the owner or operator of a
property, it will suffer losses as a result of any liability imposed for
environmental hazards on the property.
We refer you to "Legal Aspects of the Loans--Environmental Risks."
The ratings of the securities do not assure their payment.
Any class of securities issued under this prospectus and the
accompanying prospectus supplement may be rated by one or more nationally
recognized rating agencies. A rating is based on the adequacy of the value of
the trust assets and any credit enhancement for that class, and reflects the
rating agency's assessment of how likely it is that holders of the class of
securities will receive the payments to which they are entitled. A rating does
not constitute an assessment of how likely it is that principal prepayments on
the underlying loans will be made, the degree to which the rate of prepayments
might differ from that originally anticipated, or the likelihood that the
securities will be redeemed early. A rating is not a recommendation to purchase,
hold, or sell securities because it does not address the market price of the
securities or the suitability of the securities for any particular investor.
A rating may not remain in effect for any given period of time and the
rating agency could lower or withdraw the rating entirely in the future. For
example, the rating agency could lower or withdraw its rating due to:
o a decrease in the adequacy of the value of the trust assets or any
related credit enhancement;
o an adverse change in the financial or other condition of a credit
enhancement provider; or
o a change in the rating of the credit enhancement provider's
long-term debt.
The amount, type, and nature of credit enhancement established for a
class of securities will be determined on the basis of criteria established by
each rating agency rating classes of the securities. These criteria are
sometimes based upon an actuarial analysis of the behavior of similar loans in a
larger group. That analysis is often the basis upon which each rating agency
determines the amount of credit enhancement required for a class. The historical
data supporting any actuarial analysis may not accurately reflect future
experience, and the data derived from a large pool of similar loans may not
accurately predict the delinquency, foreclosure, or loss experience of any
particular pool of mortgage loans. Mortgaged properties may not retain their
values. If residential real estate markets experience an overall decline in
property values such that the outstanding principal balances of the loans held
in a particular trust fund and any secondary financing on the related mortgaged
properties become equal to or greater than the value of the mortgaged
properties, the rates of delinquencies, foreclosures, and losses could be higher
than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions may affect timely payment by mortgagors on
their loans whether or not the conditions affect real property values and,
accordingly, the rates of delinquencies, foreclosures, and losses in any trust
fund. Losses from this that are not covered by a credit enhancement will be
borne, at least in part, by the holders of one or more classes of securities.
We refer you to "Rating."
9
<PAGE>
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."
Bankruptcy or insolvency may affect the timing and amount of distributions on
the securities.
The servicer, the sellers and the depositor will treat each conveyance
of loans by the sellers to the depositor or, in the case of subsequently
conveyed loans, the trust fund 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 or,
in the case of subsequently conveyed loans, the trust fund 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.
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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, 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.
The principal amount of the securities may exceed the market value of the trust
fund assets.
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."
You may receive a prepayment of principal from unused amounts in any pre-funding
account.
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 or the trustee (which, in turn, will acquire these loans from
the seller or sellers 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.
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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 or the
applicable seller(s) to cover 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.
Some of the 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."
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THE TRUST FUND
General
The certificates 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 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 and payments in respect of these loans, as specified in the related
prospectus supplement.1 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 securities will be entitled
to payment from the assets of the related trust fund or funds or other assets
pledged for the benefit of the securityholders, as specified in the related
prospectus supplement, and will not be entitled to payments in respect of the
assets of any other trust fund established by the depositor.
The depositor will acquire the Trust Fund Assets, either directly or
through affiliates, from originators or sellers that may be affiliates of the
depositor 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, will service the Trust Fund Assets, either
directly or through other servicing institutions called sub-servicers, 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 the trust fund 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.
---------------------------------
* 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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Unless otherwise specified in the applicable prospectus supplement, the
depositor's only obligations with respect to a series of securities will be to
obtain specific representations and warranties from Equity One, Inc., a Delaware
corporation ("Equity One"), and the sellers and to assign to the trustee for
that series of securities the depositor's rights relating 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 with respect 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
("SEC") 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. Loans will consist of
o fixed rate and variable rate mortgage loans secured by first
and/or subordinate liens on
o one- to four-family residential properties and
o mixed commercial/residential use properties and other
multi-family residential properties and
o revolving home equity loans or balances thereof secured by
first and/or subordinate liens on one- to four-family
residential properties.
Except with respect to Subsequent Loans, as described herein under "The
Agreements--Pre-Funding Account," 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:
o 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.
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o 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, called a balloon payment. Principal may
include interest that has been deferred and added to the
principal balance of the loan.
o 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.
o The loans generally may be prepaid at any time. 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, which are called 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 transfer 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.
Loans with specified Combined 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
either
o the making of a representation by the borrower at origination
of the loan 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, or
o a finding that the address of the underlying mortgaged
property is the borrower's mailing address.
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.
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Home Equity Loans. Some of the loans may be 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
o the aggregate outstanding principal balance and the average
outstanding principal balance of the loans as of the
applicable cut-off date,
o the type of property securing the loan (e.g., Single Family
Properties, Mixed Use Properties, or other real property),
o the original terms to maturity of the loans,
o the largest principal balance and the smallest principal
balance of any of the loans,
o the earliest origination date and latest maturity date of any
of the loans,
o the Combined Loan-to-Value Ratios of the loans,
o the stated interest rates or annual percentage rates ("APR")
or range of stated interest rates or APRs the loans,
o the maximum and minimum per annum interest rates, and
o 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 SEC fifteen days after the initial issuance of the
securities.
The "Combined 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.
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No assurance can be given that values of the mortgaged properties have
remained or will remain at their levels on the dates of origination of the
related loans. If the residential real estate market 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 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 pre-funding account, capitalized interest
account or 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. 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.
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LOAN PROGRAM
Except with respect to Subsequent Loans, as described herein under "The
Agreements--Pre-Funding Account," the loans will have been purchased by the
depositor, either directly or through affiliates, from the sellers. The
applicable prospectus supplement may provide for the underwriting criteria used
in originating the loans, but if it does not, 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." All of the loans will be underwritten
by Equity One's Central Credit office.
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.
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, a
full or drive by 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
o 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
o to meet other financial obligations and monthly living
expenses.
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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 Combined 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 low Combined
Loan-to-Value Ratios or other favorable credit factors. A trust fund may also
include both first and second lien loans made to a borrower at the same time on
the same mortgaged property, provided that each of those loans must separately
satisfy the Equity One Standards.
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 four types of income
documentation programs are used:
o full income documentation ("Full Doc");
o stated income ("SI");
o alternative income verification ("AIV"); and
o light income documentation ("Lite Doc").
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 SI program, the borrower is not required to submit any
income documentation. 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. Under the Lite Doc program, the borrower must
submit bank statements for the past six months. 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 SI, AIV or Lite Doc 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 SI or Lite Doc 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.
19
<PAGE>
Summary of Underwriting Requirements by Program
Grade A Credits. For Grade A Credits, the following criteria generally
apply:
o 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
o one 30 day delinquency in his or her mortgage
payment history (consecutive 30 day delinquencies
are treated as one 30 day account),
o three 30 day delinquencies on major credit cards
and installment debt, and
o four 30 day delinquencies on retail credit cards.
o Generally, the borrower must have
o been employed for not less than two years with the
same employer or
o established comparable stability in a particular
field of work.
o Combined Loan-to-Value Ratios and Debt-to-Income Ratios must
conform to the following criteria (except that the Combined
Loan-to-Value Ratio may exceed the maximum indicated below up
to a maximum of 100% solely as a result of including credit
insurance premiums and discount points financed as part of the
loan in the calculation of the ratio):
<TABLE>
<CAPTION>
Maximum Combined 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>
20
<PAGE>
Grade B Credits. For Grade B Credits, the following criteria generally
apply:
o 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 more than
o two 30 day delinquencies in his or her mortgage
payment history (consecutive 30 day delinquencies
are treated as one 30 day account),
o three 30 day delinquencies on major credit cards
and installment debt,
o four 30 day delinquencies on retail credit cards,
and
o one 60 day delinquency on retail credit cards.
o Generally, the borrower must have
o been employed for not less than two years with the
same employer or
o established comparable stability in a particular
field of work.
o Combined Loan-to-Value Ratios and Debt-to-Income Ratios must
conform to the following criteria (except that the Combined
Loan-to-Value Ratio may exceed the maximum indicated below up
to a maximum of 100% solely as a result of including credit
insurance premiums and discount points financed as part of the
loan in the calculation of the ratio):
<TABLE>
<CAPTION>
Maximum Combined 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 75% Minimum Debt
Refinance 70% Service Coverage 1.15
</TABLE>
21
<PAGE>
Grade C Credits. For Grade C Credits, the following criteria generally
apply:
o 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 four 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.
o Generally, the borrower must have
o been employed for not less than one year with the
same employer or
o established comparable stability in a particular
field of work.
o Combined Loan-to-Value Ratios and Debt-to-Income Ratios must
conform to the following criteria (except that the Combined
Loan-to-Value Ratio may exceed the maximum indicated below up
to a maximum of 90% solely as a result of including credit
insurance premiums and discount points financed as part of the
loan in the calculation of the ratio):
<TABLE>
<CAPTION>
Maximum Combined 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 75% 50%
True Second Homes 75% 50%
Non-owner occupied one- to
four-family dwellings 70% 50%
</TABLE>
If the Combined 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, known as FICO scores, in assessing borrowers
under these circumstances. If a borrower's credit score becomes relevant because
the borrower's loan has a high Combined 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. The sellers also periodically analyze the FICO
scores of borrowers after their loans have been underwritten together with the
payment history of the borrowers on their loans as part of the continuing
assessment of the accuracy and effectiveness of the Equity One Standards.
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.
22
<PAGE>
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:
o 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 the seller by or on behalf of the depositor;
o that the 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;
o 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;
o that there were no delinquent tax or assessment liens against
the mortgaged property;
o that no required payment on a loan was delinquent more than
the number of days specified in the related prospectus
supplement; and
o that each loan was made in compliance with all applicable
local, state and federal laws and regulations in all material
respects.
The servicer or the trustee, if the servicer is the seller, will
promptly notify the relevant seller (and Equity One, if it is not the servicer
or the seller) of any breach of any representation or warranty made by it in
respect of a loan which materially and adversely affects the interests of
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
o 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
o 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.
23
<PAGE>
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 certificates will be issued pursuant to either
o a Pooling and Servicing Agreement among the depositor, the
servicer, the trustee and the sellers, or
o 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 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 various parties which may include,
without limitation, the depositor, the servicer, the sellers and/or 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
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.
24
<PAGE>
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 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 the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or the Internal Revenue Code
of 1986, as amended (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
o represents that it is not, and is not purchasing on behalf of,
any plan, account or arrangement, or
o 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.
25
<PAGE>
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. 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 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.
26
<PAGE>
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,
o in the case of Accrual Securities, increased by all interest
accrued but not then distributable on the Accrual Securities,
and
o 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.
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.
27
<PAGE>
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
Prior to or concurrently with the distribution of 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
o otherwise allocable to Subordinated Securities on
that distribution date, and
o 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;
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;
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<PAGE>
o the number and aggregate principal balances of loans
o delinquent (exclusive of loans in foreclosure)
o 1 to 30 days,
o 31 to 60 days,
o 61 to 90 days, and
o 91 or more days, and
o in foreclosure and delinquent
o 1 to 30 days,
o 31 to 60 days,
o 61 to 90 days, and
o 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
o 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
o other customary information deemed necessary or desirable for
securityholders to prepare their tax returns.
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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 characteristics
but together constitute a single class. Each
component of a component class may be identified
as falling into one or more of the categories in
this chart.
Notional Amount Class................................ A class having no principal balance and bearing
interest on the related notional amount. The
notional amount is used for purposes of the
determination of interest distributions.
Planned Principal Class
(also sometimes referred to as a "PAC")............. A class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming two constant
prepayment rates for the underlying Trust Fund
Assets. These two rates are the endpoints for the
"structuring range" for the planned principal
class. The planned principal classes in any series
of securities may be subdivided into different
categories (e.g., primary planned principal
classes, secondary planned principal classes and
so forth) having different effective structuring
ranges and different principal payment priorities.
The structuring range for the secondary planned
principal class of a series of securities will be
narrower than that for the primary planned
principal class of 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.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Sequential Pay Class................................. Classes that receive principal payments in a
prescribed sequence, that do not have
predetermined principal balance schedules and that
under all circumstances receive payments of
principal continuously from the first distribution
date on which they receive principal until they
are retired. A single class that receives
principal payments before or after all other
classes in the same series of securities may be
identified as a sequential pay class.
Strip Class.......................................... A class that receives a constant proportion, or
"strip," of the principal payments on the
underlying Trust Fund Assets.
Support Class (also
sometimes referred to
as a "Companion Class").............................. A class that receives principal payments on any
distribution date only if scheduled payments have
been made on specified planned principal classes,
targeted principal classes and/or scheduled
principal classes.
Targeted Principal Class
(also sometimes
referred to as a "TAC").............................. A class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming a single constant
prepayment rate for the underlying Trust Fund
Assets. The prospectus supplement relating to
each targeted principal class will disclose the
principal balance schedule pertaining to 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.
Non-amortizing Sequential Class...................... A class that generally receives no principal
payments for a designated number of distribution
dates and then receives a disproportionately small
or large portion of the funds available for
principal payments on subsequent distribution
dates.
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 directly 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.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Variable Rate Class.................................. A class with an interest rate that resets
periodically and is calculated by reference to the
rate or rates of interest applicable to specified
assets or instruments (e.g., the 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 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. The applicable prospectus supplement may specify some other
basis for determining LIBOR, but if it does not, 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 as the calculation agent will determine
LIBOR in accordance with one of the two methods described below (which method
will be specified in the related prospectus supplement):
LIBO Method. If using this method to calculate LIBOR, the calculation
agent will determine LIBOR by reference to the quotations, as set forth on the
Reuters Screen LIBO Page (as defined in the International Swaps and Derivatives
Association, Inc. Code of Standard Wording, Assumptions and Provisions for
Swaps, 1986 Edition), offered by the principal London office of each of the
designated reference banks meeting the criteria set forth herein for making
United States dollar deposits of the applicable duration in leading banks in the
London Interbank market, as of 11:00 a.m. (London time) on the LIBOR
Determination Date. In lieu of relying on the quotations for those reference
banks that appear at that time on the Reuters Screen LIBO Page, the calculation
agent will request each of the reference banks to provide the offered quotations
at that time.
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<PAGE>
LIBOR will be established by the calculation agent on each LIBOR
Determination Date as follows:
o 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%).
o If on any LIBOR Determination Date only one or none of the
reference banks provides offered quotations, LIBOR for the
next interest accrual period shall be whichever is the higher
of
o LIBOR as determined on the previous LIBOR
Determination Date, or
o the reserve interest rate.
The reserve interest rate shall be the rate per annum which the
calculation agent determines to be either
o the arithmetic mean (rounded upwards if necessary
to the nearest whole multiple of 1/32%) of the
one-month United States dollar lending rates that
New York City banks selected by the calculation
agent are quoting, on the relevant LIBOR
Determination Date, to the principal London
offices of at least two of the reference banks to
which these quotations are, in the opinion of the
calculation agent, being so made, or
o if 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.
o 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 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
o must be a leading bank engaged in transactions in Eurodollar
deposits in the international Eurocurrency market;
o may not control, be controlled by, or be under common control
with the calculation agent, and
o 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.
BBA Method. If using this method of determining LIBOR, the calculation
agent will determine LIBOR on the basis of the British Bankers' Association
"Interest Settlement Rate" for one-month deposits in United States dollars as
found on Telerate page 3750 as of 11:00 a.m. London time on each LIBOR
Determination Date. Interest Settlement Rates currently are based on rates
quoted by eight British Bankers' Association designated banks as being, in the
view of those banks, the offered rate at which deposits are being quoted to
prime banks in the London interbank market. Interest Settlement Rates are
calculated by eliminating the two highest rates and the two lowest rates,
averaging the four remaining rates, carrying the result (expressed as a
percentage) out to six decimal places, and rounding to five decimal places.
If on any LIBOR Determination Date, the calculation agent is unable to
calculate LIBOR in accordance with the method set forth in the immediately
preceding paragraph, LIBOR for the next interest accrual period shall be
calculated in accordance with the LIBOR method described above under "--LIBO
Method."
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.
33
<PAGE>
Treasury Index. The applicable prospectus supplement may specify some
other basis for determining and defining the Treasury Index, but if it does not,
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 U.S. Treasury securities adjusted to the
"constant maturity" (as further described below) specified in the related
prospectus supplement or if no "constant maturity" is so specified, U.S.
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 U.S. Treasury securities at "constant maturity" are derived
from the U.S. Treasury's daily yield curve. This curve, which relates the yield
on a security to its time to maturity, is based on the closing market bid yields
on actively traded Treasury securities in the over-the-counter market. These
market yields are calculated from composites of quotations reported by five
leading U.S. government securities dealers to the Federal Reserve Bank of New
York. This method provides a yield for a given maturity even if no security with
that exact maturity is outstanding. 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 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.
34
<PAGE>
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 Clearstream,
Luxembourg (as defined herein) 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. Clearstream, Luxembourg and Euroclear will
hold omnibus positions on behalf of their participants through customers'
securities accounts in Clearstream, Luxembourg's and Euroclear's names on the
books of their respective 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 Clearstream, Luxembourg 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 Clearstream, Luxembourg 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
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
Clearstream, Luxembourg 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 Clearstream, Luxembourg Participants on that
business day. Cash received in Clearstream, Luxembourg or Euroclear as a result
of sales of securities by or through a Clearstream, Luxembourg 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 Clearstream,
Luxembourg 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 Clearstream, Luxembourg Participants and Euroclear
Participants will occur in accordance with their respective rules and operating
procedures.
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<PAGE>
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg Participants or Euroclear Participants, on the other, will be
effected by DTC in accordance with the Rules on behalf of Clearstream,
Luxembourg or Euroclear, as the case may be, by the Relevant Depository.
However, these cross-market transactions will require delivery of instructions
to Clearstream, Luxembourg 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, Clearstream, Luxembourg 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. Clearstream, Luxembourg 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
Securities and Exchange Act of 1934, as amended. 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 including 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 SEC.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Clearstream, Luxembourg S.A.," a company with limited liability under
Luxembourg law (a societe anonyme). Clearstream, Luxembourg S.A. subsequently
changed its name to Cedelbank. On January 10, 2000, Cedelbank's parent company,
Clearstream, Luxembourg International, societe anonyme ("CI") merged its
clearing, settlement and custody business with that of Deutsche Borse Clearing
AG ("DBC"). The merger involved the transfer by CI of substantially all of its
assets and liabilities (including its shares in Cedelbank) to a new Luxembourg
company, New Clearstream, Luxembourg International, societe anonyme ("New CI"),
which is 50% owned by CI and 50% owned by DBC's parent company Deutsche Borse
AG. The shareholders of these two entities are banks, securities dealers and
financial institutions. CI currently has 92 shareholders, including U.S.
financial institutions or their subsidiaries. No single entity may own more than
5 percent of CI's stock.
Further to the merger, the Board of Directors of New CI decided to
re-name the companies in the group in order to give them a cohesive brand name.
The new brand name that was chosen is "Clearstream." With effect from January
14, 2000 New CI has been renamed "Clearstream International, societe anonyme."
On January 18, 2000, Cedelbank was renamed "Clearstream Banking, societe
anonyme," and Clearstream, Luxembourg Global Services was renamed "Clearstream
Services, societe anonyme."
On January 17, 2000 DBC was renamed "Clearstream Banking AG." This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking," the entity
previously named "Cedelbank" and the entity previously named "Deutsche Borse
Clearing AG."
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg
Participants through electronic book-entry changes in accounts of Clearstream,
Luxembourg Participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled by Clearstream, Luxembourg in any of
36 currencies, including United States Dollars. Clearstream, Luxembourg provides
to its Clearstream, Luxembourg Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream, Luxembourg also
deals with domestic securities markets in over 30 countries through established
depository and custodial relationships. Clearstream, Luxembourg is registered as
a bank in Luxembourg and is subject to regulation by the SEC de Surveillance du
Secteur Financier, "CSSF," which supervises Luxembourg banks. Clearstream,
Luxembourg Participants are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream, Luxembourg Participants in the U.S. are
limited to securities brokers and dealers, and banks. Currently, Clearstream,
Luxembourg has approximately 2,000 Clearstream, Luxembourg Participants located
in over 80 countries, including all major European countries, Canada, and the
United States. Indirect access to Clearstream, Luxembourg is available to other
institutions that clear through or maintain a custodial relationship with a
Clearstream, Luxembourg Participant. Clearstream, Luxembourg has established an
electronic bridge with the Euroclear Operator in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and Euroclear.
36
<PAGE>
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by Euroclear Bank S.A. ("Euroclear Bank"
and, in this capacity, the "Euroclear Operator"). Euroclear Bank, a market owned
bank licensed by the Belgian Banking and Finance Commission, assumed the
operating and banking functions of the Euroclear System as of January 1, 2001.
All operations are conducted by Euroclear Bank, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
Operator. The Euroclear Operator 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.
Securities clearance accounts and cash accounts with Euroclear Bank
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.
Distributions on the Book-Entry Securities will be made on each
distribution date by the trustee to DTC. DTC will be responsible for crediting
the amount of those payments to the accounts of the applicable DTC Participants
in accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing payments to the Beneficial Owners of the Book-Entry
Securities that it represents and to each Financial Intermediary for which it
acts as agent. Each Financial Intermediary will be responsible for disbursing
funds to the Beneficial Owners of the Book-Entry Securities that it represents.
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 Clearstream, Luxembourg or Euroclear
will be credited to the cash accounts of Clearstream, Luxembourg Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant 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.
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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. Clearstream, Luxembourg 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 Clearstream, Luxembourg 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.
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, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
participants of DTC, Clearstream, Luxembourg 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.
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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 borne by the Subordinated Securities by virtue of
subordination and the amount of the distributions otherwise distributable to the
holders of Subordinated Securities that will be distributable to holders of
Senior Securities on any distribution date may be limited as specified in the
related prospectus supplement. If aggregate distributions in respect of
delinquent payments on the loans or aggregate losses in respect of 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 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
o in the order of their scheduled final distribution dates,
o in accordance with a schedule or formula,
o in relation to the occurrence of events, or
o 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, including 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 SEC as an exhibit to a Current
Report on Form 8-K to be filed within 15 days of issuance of the securities of
the related series.
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Insurance Policies, Surety Bonds and Guaranties
If so provided in the prospectus supplement for a series of securities,
deficiencies in amounts otherwise payable on 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
o maintaining timely payments or providing additional protection
against losses on the assets included in the trust fund,
o paying administrative expenses, or
o 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 SEC as an exhibit to a Current
Report on Form 8-K to be filed with the SEC 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. Reducing the principal balance of the
securities without a corresponding reduction in the principal balance of the
underlying Trust Fund Assets will result in over-collateralization.
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
o 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,
o 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
o 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
o obligations of the United States or any agency thereof,
provided these 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
related series of securities, 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,
o 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,
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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 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,
o 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,
o 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,
o repurchase obligations for 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 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,
o 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,
o 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
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 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 the ninth or tenth bullet above will be a
Permitted Investment for any pre-funding account or any
related capitalized interest account.
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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
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
o any required primary mortgage insurance policy is in effect
for the defaulted loan and a claim thereunder has been
submitted and settled,
o 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,
o 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
o 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
o 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
o 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
o restoration will increase the proceeds to securityholders on
liquidation of the loan after reimbursement of the servicer
for its expenses, and
o 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.
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The applicable prospectus supplement may provide for a pool insurance
policy covering losses resulting from defaults, but if it does not, 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,
o 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
o 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 applicable prospectus supplement may provide for a pool insurance
policy featuring a fixed amount of coverage over the life of the policy, but if
it does not, the original amount of coverage under each pool insurance policy
will be reduced over the life of the related securities by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will include 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
o 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
o 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.
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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." In addition, the servicer and its affiliates
periodically conduct mass mailings to their existing customers with respect to
the refinancing of existing mortgage loans. Although these marketing efforts are
not specifically directed to customers who have mortgage loans included in a
trust fund, these customers may receive the marketing materials as part of a
broader mailing, which may result in an increase in the rate of prepayments of
mortgage loans included in a trust fund through refinancings. 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
o 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 selected, the interest
and the fees and charges for that month, or
o 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.
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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 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.
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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 APR, the
maturity of the loan, the Combined 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 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),
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
o purchase the related loan from the trust fund at the Purchase
Price, or
o 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.
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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:
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.
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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,"
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 (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,
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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 or the applicable sellers, as the
case may be, 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 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 or the
applicable sellers, as the case may be, 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, if any, 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 a 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.
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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 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, VA 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 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.
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In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a loan by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most 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 some
cases, vandalism. The foregoing list is merely indicative of some 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
o the replacement value of the mortgaged property, or
o 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
o 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
o 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 property. If specified in the related prospectus
supplement, a special hazard insurance policy will be obtained to insure against
some 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
o that the restoration will increase the proceeds to
securityholders on liquidation of the loan after reimbursement
of the servicer for its expenses, and
o 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.
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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") some 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.
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 some 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.
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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 some 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. 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 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.
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.
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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 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.
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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
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.
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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
o the holders of 100% of the Percentage Interests of the notes
of that series consent to the sale,
o 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
o 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 specific
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 some
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,
with the consent of the provider of credit enhancement for the related series of
securities, if any, but without the consent of any of the securityholders,
o to cure any ambiguity,
o to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein, or
o to make any other revisions relating to matters or questions
arising under the Agreement which are not inconsistent with
its provisions,
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.
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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
o 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
o 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
o 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
o 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 the percentage specified in the related
prospectus supplement of the aggregate principal balance of the Trust Fund
Assets at the cut-off date for the series. The foregoing is subject to the
provision that if a REMIC election is made for a trust fund, any purchase
pursuant to the second bullet 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 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.
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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, 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.
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The Trustee
The trustee under each Agreement will be named in the applicable
prospectus supplement. The commercial bank or trust company serving as trustee
may have normal banking relationships with the depositor, the servicer and any
of their respective affiliates.
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 some 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.
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.
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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."
Environmental Risks
Real property pledged as security to a lender may be subject to
unforeseen environmental risks. Under the laws of some 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.
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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
earliest 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:
o exercises decision-making control over environmental
compliance related to the property while the borrower is still
in possession of the property or facility;
o actually participates in the management or operational affairs
of the facility; or
o 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 some 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
Some 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 some 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.
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Due-on-Sale Clauses
To the extent specified in the related prospectus supplement,
conventional loans will contain due-on-sale clauses which will generally provide
that if the mortgagor or obligor sells, transfers or conveys the mortgaged
property, the loan or contract may be accelerated by the mortgagee or secured
party. Court decisions and legislative actions have placed substantial
restriction on the right of lenders to enforce 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
o 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
o 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 some states, there are
or may be specific limitations upon the late charges which a lender may collect
from a borrower for delinquent payments. Some states also limit the amounts that
a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under some state laws, prepayment charges may not be imposed after a
specified 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.
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Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate a borrower suffering from temporary financial disability. In other
cases, courts have limited the right of a lender to realize upon the lender's
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in some cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protection to the borrower.
Applicability of Usury Laws
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. Some
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 some 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.
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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.
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. Some 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 on a simple interest
basis. The lender must assure that the note and all other documents evidencing
the loan are in compliance with applicable federal, state and local laws.
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Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD.
Under the Title I Program, the Secretary of HUD does not review or
approve for qualification for insurance the individual loans insured thereunder
at the time of approval by the lending institution (as is typical) the case with
other federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the
Secretary of HUD. In 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.
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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
o the amount of insurance claims approved for payment relating
to insured loans and
o 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 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, in addition to complying with applicable state and local notice
requirements, 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
o proceed against the property under any security instrument, or
o 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.
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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
o 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,
o 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,
o the uncollected court costs,
o the attorney's fees not to exceed $500, and
o the expenses for recording the assignment of the security to
the United States.
Consumer Protection Laws
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination, servicing
and enforcement of loans secured by Single-Family Properties. These laws include
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, 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 specified equity levels are reached. Some 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 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.
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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, or 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
o the securities of a series are classified as indebtedness for
federal income tax purposes,
o one or more elections are made to treat certain assets of the
trust fund relating to a particular series of securities as a
REMIC under the Code,
o the securities represent an ownership interest in some or all
of the assets included in the trust fund for a series, or
o for federal income tax purposes the Trust Fund relating to a
particular Series of Certificates is classified as a
partnership or is disregarded as an entity separate from its
owner.
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 SEC 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
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are 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 some 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 like the
Debt Securities.
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.
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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
reasonable remedies exist to compel timely payment or the debt instrument
otherwise provides terms and conditions that make the likelihood of late payment
(other than late payment that occurs within a reasonable grace period) or
nonpayment of interest a remote contingency. Some 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 may 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 shorter than the interval between subsequent distribution
dates, all of the additional interest will be included in the stated redemption
price at maturity and tested under the de minimis rule described below. 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 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, holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
The Internal Revenue Service (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 Securities. Additionally, the OID
Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the trustee
intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in this prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), there can be no
assurance that 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.
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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
o the present value of all payments remaining to be made on the
Pay-Through Security as of the close of the accrual period,
and
o 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:
o 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),
o events which have occurred before the end of the accrual
period, and
o 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.
Some 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 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.
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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 of OID should be calculated by including the
aggregate amount of all payments in the stated redemption price, and thus
treating none of the payments under the instrument as qualified stated interest.
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. Debt Securities may provide for interest
based on a qualified variable rate (these securities are referred to as
"Variable Rate Debt Securities"). Under the OID Regulations, interest is treated
as payable at a qualified variable rate and not as contingent interest if,
generally,
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the
total noncontingent principal payments by more than a
specified de minimis amount,
o interest is based on one or more "qualified floating rates," a
single fixed rate and one or more "qualified floating rates,"
a single "objective rate," or single fixed rate and a single
"objective rate" that is a "qualified inverse floating rate,"
where each qualified floating rate or objective rate is set at
a current value of the rate, and
o the Debt Security does not provide for any principal payments
that are contingent, as defined in the OID Regulations, except
as provided in (2) above.
In the case of Accrual Securities, certain Interest Weighted
Securities, and some 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. In the case of Variable Rate Debt Securities bearing interest at a rate
that varies directly, according to a fixed formula, with an objective index, it
appears that
o the yield to maturity of the Debt Securities, and
o 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 if the rate on the Security is a "qualified
floating rate" or "qualified inverse floating rate" or at a value that reflects
the reasonably expected yield of the Security if the rate on the Security is an
"objective rate" (other than a "qualified inverse floating rate"). 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.
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A variable rate is a qualified floating rate if variations in the value
of the rate can reasonably be expected to measure contemporaneous variations in
the cost of newly borrowed funds in the currency in which the debt instrument is
denominated. The rate may measure contemporaneous variations in borrowing costs
for the issuer of the debt instrument or for issuers in general. Generally, a
multiple of a qualified floating rate is not a qualified floating rate. If a
debt instrument provides for two or more qualified floating rates that can
reasonably be expected to have approximately the same values throughout the term
of the instrument, the qualified floating rates together constitute a single
qualified floating rate. Two or more qualified floating rates will be
conclusively presumed to meet the requirements of the preceding sentence if the
values of all rates on the issue date are within .25 percentage points of each
other.
An objective rate, for debt instruments issued on or after August 13,
1996, generally is a rate (other than a qualified floating rate) that is
determined using a single fixed formula and that is based on objective financial
or economic information. An objective rate is a qualified inverse floating rate
if the rate is equal to a fixed rate minus a qualified floating rate and the
variations in the rate can reasonably be expected to inversely reflect
contemporaneous variations in the qualified floating rate disregarding certain
restrictions on the rate.
Market Discount. A Debt Security may be a "market discount bond" for
which the holder would be taxed under the market discount rules of Sections
1276-1278 of the Code. A "market discount bond" is generally any evidence of
indebtedness, including a Debt Security, having market discount. A Debt Security
will have market discount if the stated redemption price at maturity of the Debt
Security exceeds the amount the purchaser paid to acquire it from a person other
than the original issuer. If the amount of market discount is less than .25% of
the stated redemption price at maturity of the Debt Security multiplied by the
number of complete years to maturity of the Debt Security, then the amount of
market discount is de minimus and is considered to be zero. If a Debt Security
is a market discount bond, the holder generally must recognize on its
disposition, any gain to the extent it does not exceed the accrued market
discount on the bond as ordinary income. Market discount is accrued on a ratable
basis unless the holder elects to accrue the discount under the constant yield
method. As an alternative to the rule requiring recognition of ordinary gain
treatment on the disposal of a market discount bond, the holder may elect to
currently include in income any accrued market discount. If elected, the amount
of market discount the holder must include in income is must be determined under
the constant yield method.
If a holder uses the proceeds of a loan to acquire a Debt Security
having market discount, the "net interest expense" the holder is allowed to
deduct may be limited to the excess of the amount that the net interest expense
exceeds the portion of the market discount allocable to the days during the
taxable year for which the holder held the Debt Security. A holder's "net
interest expense" is the amount of interest paid or accrued during the taxable
year on indebtedness which is incurred or continued to purchase or carry the
Debt Security over the aggregate amount of interest (including original issue
discount) includible in the holder's gross income for the taxable year with
respect to the Security. The holder generally may deduct any disallowed portion
of net interest expense in the taxable year the holder disposes of the Debt
Security in a recognition transaction unless the holder elects to deduct the
disallowed interest expense in a taxable year in which the holder realizes "net
investment income" on the Debt Security. A holder's "net investment income" is
equal to the excess of the aggregate amount of interest (including original
issue discount) includible in the holder's gross income for the taxable year
with respect to the Debt Security over the amount of interest the holder paid or
accrued during the taxable year on indebtedness which is incurred or continued
to purchase or carry the Debt Security. If the Debt Security is disposed of in a
nonrecognition transaction, special rules 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.
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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 (except
with the approval of the IRS).
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.
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)(xi)
(assuming that at least 95% of the REMIC's assets consist of cash, government
securities, "loans secured by an interest in real property," and other types of
assets described in Code Section 7701(a)(19)(C)); and (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
o 3% of the excess of adjusted gross income over the applicable
amount, or
o 80% of the amount of itemized deductions otherwise allowable
for that taxable year.
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For taxable years beginning after December 31, 1997, in the case of a
partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70 percent of that partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2
percent floor that would otherwise be applicable to individual partners. 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. Unless otherwise stated in the applicable Prospectus Supplement, the
expenses of the REMIC will be allocated to holders of the related residual
interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax, Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are taxable as
debt of the REMIC.
Tiered REMIC Structures. For some Series of Certificates, two or more
separate elections may be made to treat designated portions of the related Trust
as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the issuance
of any Series of Certificates of this type, counsel to the depositor will
deliver its opinion generally to the effect that, assuming compliance with all
provisions of the related Pooling and Servicing Agreement, the Tiered REMICs
will each qualify as a REMIC and the REMIC Certificates issued by the Tiered
REMICs, respectively, will be considered to evidence ownership of Regular
Certificates or Residual Certificates in the related REMIC within the meaning of
the REMIC provisions.
Solely for purposes of determining whether the REMIC Certificates will
be "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code,
and "loans...secured by an interest in real property" under Section
7701(a)(19)(C)(v) of the Code, and whether the income on the REMIC Certificates
is interest described in Section 856(c)(3)(B) of the Code, the Tiered REMICs
will be treated as one 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
o the gross income produced by the REMIC's assets, including
stated interest and any OID or market discount on loans and
other assets, and
o 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
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.
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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 Other Possible Taxes. 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
o subject to limited exceptions, the sale or other disposition
of any qualified mortgage transferred to the REMIC,
o subject to a limited exception, the sale or other disposition
of a cash flow investment,
o the receipt of any income from assets not permitted to be held
by the REMIC pursuant to the Code, or
o 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. REMICs also are subject to federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. "Net income
from foreclosure property" generally means gain from the sale of foreclosure
property that is inventory property, and gross income from foreclosure property
other than qualifying rents and other qualifying income for a real estate
investment trust. Unless otherwise disclosed in the related Prospectus
Supplement, it is not anticipated that any REMIC will recognize "net income from
foreclosure property" subject to federal income taxation. 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 that 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.
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In any event, because the holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will be greater or less than the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of 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 some 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 of 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.
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The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period allocable
to a Residual Interest Security, over the daily accruals for 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 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.
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Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
Financial Asset Securitization Investment Trust Qualification
The Trust Fund may elect to be a Financial Asset Securitization
Investment Trust ("FASIT") in lieu of making the election to be a REMIC. A FASIT
is a statutorily authorized vehicle that is modeled on the REMIC but is
distinguished from the REMIC based on the types of assets which it may hold (and
therefore, against which its interests may be written) among other factors. If a
FASIT election is made, the securities representing interests in the FASIT will
be designated either as "regular interests" or the ownership interest. A regular
interest, in turn, may be either "high yield" regular interest or regular
interest other than a high yield regular interest. If the regular interest is a
"high yield" regular interest, then it will be so identified in the prospectus
supplement and the certificate evidencing the interest.
Qualification as a FASIT
The provisions governing the election to be treated as a FASIT and the
federal income tax treatment of a FASIT generally are set forth in sections
860H-860L of the Code. The Treasury Department issued proposed regulations to
implement these statutory provisions in February 2000, but these proposed
regulations do not have the force and effect of law and may be revised before
they are issued in final form. At this time, it is not certain when final
regulations may be issued. To qualify as a FASIT, an entity, such as the Trust
Fund, must elect to be treated as a FASIT and must satisfy certain tests that
are briefly summarized below.
Interests. A FASIT is permitted to issue regular interests and one and
only one interest designated as the "ownership interest." The ownership interest
must at all times be held by a single "eligible corporation" which is generally
a taxable domestic "C corporation" that is not a regulated investment company, a
real estate investment trust, a REMIC, or a subchapter T cooperative. Apart from
being held by an eligible corporation and being designated as the ownership
interest, there are no other formal requirements for an ownership interest.
A FASIT regular interest is any interest a FASIT issues on or after its
startup day which is designated as a regular interest and that: (1)
unconditionally entitles the interest holder to receive a specified principal
amount (or other similar amount), (2) provides for interest payments that are
computed on a fixed rate or "permitted" variable rate, (3) has a stated maturity
(including renewal periods) of 30 years or less, (4) has an issue price not
exceeding 125 percent of its stated principal amount, and (5) has a yield to
maturity that is less than the applicable federal rate in effect for the month
the interest is issued plus five percent. A "high yield interest" is any
interest that would otherwise qualify as a regular interest but for the failure
of the interest to meet any one or more of conditions (1), (4), or (5), above,
or condition (2), above, but only if the interest payments consist of a
specified portion of the interest payments on assets the FASIT is permitted to
hold and the portion does not vary during the period the interest is
outstanding. Special rules apply to ensure that a "high yield interest" is held
only by either an eligible corporation or another FASIT.
Assets. As of the close of the third month beginning on the day after
the FASIT is created, substantially all of a FASIT's assets must be "permitted
assets." A "permitted asset" is defined to include the following categories of
assets:
o cash or cash equivalents,
o any instrument that qualifies as a debt instrument for
purposes of federal income tax law as long as any interest is
payable on the instrument at a fixed or variable rate that
satisfies the prescribed requirements for a REMIC regular
interest and the instrument is not issued by the holder of the
ownership interest or a person "related" to the holder,
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o property that is received as a result of a foreclosure on a
debt instrument the FASIT holds,
o assets that are used to guarantee the FASIT's interests or
hedge against the FASIT's risks associated with its being the
obligor on the interests the FASIT issues,
o contract rights to acquire debt instruments, guarantees, or
hedges the FASIT is otherwise permitted to hold,
o regular interests another FASIT issues, or
o regular interests a REMIC issues.
Consequences on failing to comply with FASIT requirements
If the Trust Fund makes the FASIT election but subsequently fails to
comply with the FASIT statutory requirements, and if appropriate, regulatory
requirements, during any taxable year, the Trust Fund may lose its status as a
FASIT for that year and all succeeding years. If the Trust Fund were to lose its
FASIT status, it may be taxed as a corporation.
Taxation of the FASIT
A FASIT is not subject to federal income tax. Therefore, if the Trust
Fund elects to be treated as a FASIT, it will not be subject to federal income
tax and will not be treated as a trust, partnership, or corporation for federal
income tax purposes.
Taxation of Regular Interest Holders
Assuming the Trust Fund elects and continues to qualify as a FASIT, any
regular interests the FASIT issues will be treated as debt for federal income
tax purposes. This treatment, and the treatment of regular interests issued or
acquired at discount or premium generally will accord with the treatment of
REMIC regular interests. For a more complete discussion, please see the material
under the heading "Taxation of Debt Securities."
Regular interest holders are required to report any amount includible
in the holder's gross income on an accrual method of accounting regardless of
the holder's usual method of accounting. Thus, a holder who normally uses the
cash receipts and disbursements method of accounting must nonetheless report any
interest income on the regular interest as it accrues, regardless of whether or
when the payment is actually received.
The Code contains special rules applicable to holders of "high yield"
regular interests. The taxable income of a "high yield" regular interest cannot
be less than the sum of the holder's taxable income determined solely with
respect to the interest and any excess inclusion for the taxable year. For this
purpose, taxable income determined with respect to the interest includes any
gains and losses from the sale or exchange of high yield interests. For purposes
of applying the rules on excess inclusions, the Code specifically incorporates
the rules applicable to REMIC residual interests. For a discussion on the excess
inclusion rules, please see the material under the heading "Taxation of the
Holders of Residual Interest Securities." In addition, a "high yield" interest
holder's income attributable to the interest cannot be offset by any current net
operating losses or net operating loss carryovers.
If a "high yield" regular interest is transferred to a disqualified
holder (generally any holder other than an eligible corporation or a dealer in
securities that holds the interest for sale to customers in the ordinary course
of the dealer's business), the disqualified holder does not include in income
any income other than gain attributable to the interest. Rather, any income not
included in the disqualified person's income is included in the gross income of
the last person to hold the interest that was not a disqualified person. If a
dealer in securities that is not a domestic C corporation acquires a "high
yield" regular interest but later ceases to be a dealer in securities or ceases
to hold the interest for sale to customers, the dealer may be subject to a
penalty tax.
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If a pass-through entity, such as a partnership, issues any interest
(debt or equity) in the entity that has the characteristics of a "high-yield"
regular interest, the interest in the entity is backed by a FASIT regular
interest, and the yield on the interest in the entity exceeds both the yield on
the regular interest and the applicable federal rate in effect for the month the
interest is issued plus five percent, then the entity will be subject to a
penalty tax.
Taxation of Ownership Interest Holders
The FASIT ownership interest represents the residual equity interest in
a FASIT. In determining its taxable income, the holder of the FASIT ownership
interest treats all of the FASIT's assets and liabilities as its own. The holder
of the FASIT ownership interest also must treat as its own any of the FASIT's
items of income, gain, loss, deduction and credit (other than items of income,
gain or deduction attributable to a prohibited transaction). Any interest that
would otherwise be exempt from tax under the Code must be included in the income
of the holder of the ownership interest as ordinary income. The holder of the
ownership interest must apply the constant yield method under an accrual method
of accounting in determining all interest, acquisition discount, original issue
discount, and market discount, and all premium deductions or adjustments with
respect to each debt instrument the FASIT holds. The holder of the ownership
interest is subject to the same restrictions on the use of net operating losses
and net operating loss carryovers to offset FASIT income as the holder of a
"high yield" regular interest. We refer you to "Taxation of Regular Interest
Holders," above. For purposes of the alternative minimum tax, the taxable income
of the holder of the ownership interest is determined without regard to the
minimum FASIT income. The alternative minimum taxable income of the holder of
the ownership interest also cannot be less than the FASIT income for that year,
and the alternative minimum tax net operating loss deduction is computed without
regard to the minimum FASIT income. The Code specifically makes applicable to
FASIT ownership interests the "wash sale" rules applicable to dispositions of
REMIC residual interests. Thus, any loss realized on the disposition of the
FASIT ownership interest will be disallowed where the holder acquires within the
time span of six months before or after the disposition date, an ownership
interest in another FASIT that is economically equivalent to the ownership
interest disposed.
The holder of the ownership interest will be subject to a penalty tax
on the net income derived from a prohibited transaction. The tax is equal to 100
percent of the net income derived from a prohibited transaction. A prohibited
transaction includes:
o the receipt of any income derived from any asset other than a
permitted asset,
o except for certain allowed dispositions, the disposition of a
permitted asset,
o the receipt of any income derived from any loan the FASIT
originates, and
o except as permitted, the receipt of any income representing a
fee or other compensation for services.
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.
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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
o 3% of the excess of adjusted gross income over the applicable
amount, or
o 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 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.
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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. Some 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.
In the case of any pool of debt instruments, such as Stripped
Securities and other Pass-Through Certificates, the yield on which may be
affected by reason of prepayments, the daily portion of the OID will be
determined, using a reasonable prepayment assumption, by allocating to each day
in any accrual period its ratable portion of the excess (if any) of
o the sum of the present value of all remaining payments under
the debt instrument as of the close of that period and the
payments during the accrual period of amounts included in the
stated redemption price of the debt instrument, over
o the adjusted issue price of the debt instrument at the
beginning of that period.
If the loans prepay at a rate faster than the Prepayment Assumption a
holder's recognition of income may be accelerated. If, however, the loans prepay
at a rate slower that the prepayment assumption, in some circumstances a
holder's recognition of income may be decelerated.
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
o 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,
o the non-Interest Weighted Securities are subject to the
contingent payment provisions of the Contingent Regulations,
or
o 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)(5)(B) of the Code and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; 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
o 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
o 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
o fails to furnish the trustee with its taxpayer identification
number ("TIN"),
o furnishes the trustee an incorrect TIN,
o fails to report properly interest, dividends or other
"reportable payments" as defined in the Code, or
o 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 (for example, 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 or partnership (or other entity properly treated as
a corporation or partnership for federal income tax purposes) created or
organized in or under the laws of the United States or any political subdivision
thereof, 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 persons 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"
Foreign Persons normally use Form W-8BEN to certify their status.
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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
should not be an association (or publicly traded partnership or taxable mortgage
pool) 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
o the trust fund will be eligible to be classified as a
partnership, and
o the nature of the income of the trust fund will exempt it from
the rule that certain publicly traded partnerships are taxable
as corporations or the issuance of the securities has been
structured as a private placement under an IRS safe harbor, so
that the trust fund will not be characterized as a publicly
traded partnership taxable as a corporation.
If the trust fund were taxable as a corporation for federal income tax
purposes, the trust fund would be subject to corporate income tax on its taxable
income. The trust fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any 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 their terms to maturity), 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, under certain circumstances,
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 received (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 received 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. Special
rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
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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 if the note was
held as a capital asset, except for gain representing accrued interest and
accrued market discount not previously included in income (which is ordinary in
character). 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
o 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
o 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-8BEN 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-8BEN 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.
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
o the gain is not effectively connected with the conduct of a
trade or business in the United States by the Foreign Person,
and
o 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,
including 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.
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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 some holders.
For example, income to certain tax-exempt entities (including pension funds)
might 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
limitations on their ability to deduct their share of the trust fund's expenses.
Tax Consequences to Holders of the Certificates Issued by a Partnership
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, if any, the partners of the partnership being
the certificateholders (or if there is a single Certificateholder for federal
income tax purposes, to disregard the Trust Fund as an entity separate from the
single Certificateholder). However, the proper characterization of the
arrangement involving the trust fund, the certificates, the notes, if any, 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 some features characteristic of debt, the
certificates might be considered debt of the trust fund. Generally, provided
that the certificates are issued at or close to face value, 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.
You should note that the federal tax law is unclear with respect to the
status of certificates issued by a partnership qualifying as "loans secured by
an interest in real property." A partnership may be regarded as an aggregate of
its partners or an entity separate and apart from its partners. If it is
determined that the partnership is an entity and the certificates represent
equity in the partnership, it is unlikely that the certificates will constitute
loans secured by an interest in real property under Code section 7701(a)(19)(C).
If, however, it is determined that the partnership is an aggregate of its
partners, certificates classified as equity in the partnership might constitute
loans secured by an interest in real property as defined in Code section
7701(a)(19)(C) to the extent that the assets held by the partnership qualify as
such. If the certificates are classified as debt it is unlikely that the
certificates will qualify as loans secured by an interest in real property
within the meaning of Code section 7701(a)(19)(C). 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
o 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,
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o 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,
o prepayment premium payable to the certificateholders for that
month, and
o 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.
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.
Section 708 Termination. Under Section 708 of the Code, the Trust will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sole or exchanged within a
12-month period. If a termination of this type occurs, the Trust will be
considered to contribute its assets and liabilities to a new partnership in
exchange for interests in that new partnership, and the Trust (as part of the
termination) would be treated as distributing the newly-created partnership
interests to the partners in liquidation. The Trust may not be able to comply
with technical requirements that might apply when a constructive termination
occurs due to a lack of data. As a result, the Trust may be subject to tax
penalties and may incur additional expenses if it is required to comply with
those requirements.
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.
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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.
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 by 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 information on the nominee, the Beneficial Owners
and the certificates so held. This information includes
o the name, address and taxpayer identification number of the
nominee, and
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o as to each Beneficial Owner
o the name, address and identification number of the
person,
o 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
o 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 Securities and Exchange Act of 1934, as
amended, 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 31. Nominees, brokers and
financial institutions that fail to provide the trust fund with the information
described above may be subject to penalties.
The depositor will be designated as the tax matters partner in the
related Trust Agreement and, 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-8BEN, IRS Form W-9 or the holder's
certification of foreign status signed under penalties of perjury.
Each holder who is a Foreign Person might be required to file a United
States individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the trust fund's income.
Each holder who is a Foreign Person must obtain a taxpayer identification number
from the IRS and submit that number to the trust fund on Form W-8BEN 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.
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.
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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 considerations under ERISA and the Code, which
apply only to securities of a series that are not divided into subclasses. If
securities are divided into subclasses the related prospectus supplement will
contain information concerning considerations relating to ERISA and the Code
that are applicable to 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
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
exceptions not here relevant). Some 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 governmental or church 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.
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, in general, a security that is widely held, freely
transferable and registered under the Securities and Exchange Act of 1934, as
amended. No assurance can be given to potential Plan investors that the
securities will constitute "publicly-offered securities" within the meaning of
the DOL regulations.
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.
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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 specified 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 specified 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 certificates 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
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:
o 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;
o the existence of a pool trustee who is not an affiliate of the
pool sponsor; and
o 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 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.
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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 certain underwriters individual administrative
exemptions (the "Underwriter Exemptions") from some 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 securities which are certificates in pass-through trusts that
consist of 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, as amended by the DOL on July 21, 1997 and November 13,
2000, contain an expanded definition of "security" which includes a pass-through
certificate or trust certificate that represents a beneficial ownership interest
in the assets of an issuer which is a trust which entitles the holder to
pass-through payments of principal, interest and/or other payments. The
Underwriter Exemption also provides that the term "security" includes a debt
instrument that is issued by, and is an obligation of, an issuer with respect to
which the underwriter is either (i) the sole underwriter or the manager or
co-manager of the underwriting syndicate, or (ii) a selling or placement agent.
The Underwriter Exemptions contain an expanded definition of "trust" which means
an issuer which is a trust, including an owner trust, grantor trust or a REMIC
or FASIT which is operated as a trust.
The Underwriter Exemptions defines the term "designated transaction" as
meaning a securitization transaction in which the assets of the issuer consist
of secured consumer receivables, secured credit instruments or secured
obligations that bear interest or are purchased at a discount and are:
o motor vehicle, home equity and/or manufactured housing
consumer receivables; and/or
o motor vehicle credit instruments in transactions by or
between business entities; and/or
o single-family residential, multi-family residential,
home equity, manufactured housing and/or commercial
mortgage obligations that are secured by single-family
residential, multi-family residential, commercial real
property or leasehold interests therein.
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:
o the acquisition of the securities by a Plan is on terms
(including the price for the securities) 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 securities acquired
by the Plan are not subordinated to the rights and interests
evidenced by other securities of the same issuer, unless the
securities are issued in a "designated transaction," as
defined above;
o the securities acquired by the Plan have received a rating at
the time of the acquisition that is one of the three (or in
the case of "designated transactions," four) highest generic
rating categories from Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies ("S&P"), Moody's, Duff &
Phelps Credit Rating Co. ("DCR") or Fitch ICBA, Inc. ("Fitch")
or any successors thereto;
o the trustee must not be an affiliate of any other member of
the Restricted Group as defined below;
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o the sum of all payments made to and retained by the
underwriters in connection with the distribution or placement
of the securities represents not more than reasonable
compensation for underwriting or placing the securities; the
sum of all payments made to and retained by the pool sponsor
pursuant to the assignment of the obligations (or interests
therein) to the issuer represents not more than the fair
market value of the loans; the sum of all payments made to and
retained by the servicer represents not more than reasonable
compensation for that person's services under the agreement
pursuant to which the obligations (or interests therein) are
pooled and reimbursements of that person's reasonable expenses
in connection therewith;
o the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
SEC under the Securities Act of 1933, as amended; and
o in the event that the obligations used to fund an issuer have
not been transferred to the issuer on the closing date,
additional obligations (as specified in the Underwriter
Exemptions) may be transferred to the issuer 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 securities and provided that other conditions set forth in
the Underwriter Exemptions are satisfied.
The Underwriter Exemptions provide that the term "issuer" means an
investment pool, the corpus or assets of which are held in trust (including a
grantor or owner trust) or whose assets are held by a partnership, special
purpose corporation or limited liability company (including a REMIC or FASIT);
and the corpus or assets of which consist solely of:
o secured consumer receivables that bear interest or are
purchased at a discount (including, but not limited to, home
equity loans and obligations secured by shares issued by a
cooperative housing association); and/or
o secured credit instruments that bear interest or are purchased
at a discount in transactions by or between business entities
(including, but not limited to, certain "qualified equipment
notes secured by leases"); and/or
o obligations that bear interest or are purchased at a discount
and which are secured by single-family residential,
multi-family residential and/or commercial real property
(including obligations secured by leasehold interests on
residential or commercial real property); and/or
o obligations that bear interest or are purchased at a discount
and which are secured by motor vehicles or equipment, or
certain "qualified motor vehicle leases;" and/or
o fractional undivided interests in any of the obligations
described in the four bullet clauses above; and/or
o guaranteed governmental mortgage pool certificates, as defined
in 29 CFR 2510.3-101(i)(2).
Moreover, the Underwriter Exemptions generally provide relief from
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire securities as to which the fiduciary
(or its affiliate) is an obligor on the receivables contained in the issuer
provided that, among other requirements:
o in the case of an acquisition in connection with the initial
issuance of securities, at least fifty percent (50%) of each
class of securities 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 issuer 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 or receivables contained in the issuer,
o the Plan's investment in each class of securities does not
exceed twenty-five percent (25%) of all of the securities of
that class outstanding at the time of the acquisition, and
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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 securities
representing an interest in an issuer 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 more than five percent (5%) of the fair market value of obligations
or receivables contained in the issuer, 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.
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 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").
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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, 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 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 some types of
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.
METHOD OF DISTRIBUTION
Securities are being offered hereby in series from time to time through
any of the following methods:
o by negotiated firm commitment underwriting and public
reoffering by underwriters;
o by agency placements through one or more placement agents
primarily with institutional investors and dealers, and
o 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 specified civil
liabilities, including liabilities under the Securities Act of 1933, as amended,
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.
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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 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 SEC 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 SEC. Reports and information on file with
the SEC, including the registration statement and filings made by the depositor
can be inspected without charge at the public reference facilities maintained by
the SEC or may be copied at rates prescribed by the SEC. 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;
and
o Northeast Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048.
You may obtain information on the operation of the above-listed public
reference facilities by calling the SEC at 1-800-SEC-0330. In addition, the SEC
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 SEC.
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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 SEC 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 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 SEC periodic reports
for the related trust fund following completion of the reporting period required
by Rule 15d-1 or Regulation 15D under the Securities and Exchange Act of 1934,
as amended.
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.
98
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
<S> <C> <C>
Accrual Securities.................................26 L/C Percentage.....................................40
Agreement..........................................13 Liquidation Expenses...............................48
AIV................................................19 Liquidation Proceeds...............................48
Amortizable Bond Premium Regulations...............73 Lite Doc...........................................19
APR................................................16 Loan Indices.......................................35
Beneficial Owners..................................35 Mark-to-Market Regulations.........................78
BIF................................................47 Master Servicing Agreement.........................13
Book-Entry Securities..............................35 Mixed Use Properties...............................16
CERCLA.............................................60 Moody's............................................41
CI ................................................36 Mortgage...........................................46
Claimable Amount...................................67 NCUA...............................................96
Clearstream, Luxembourg............................36 New CI.............................................36
Clearstream, Luxembourg Participants...............37 OID................................................69
Code...............................................25 OID Regulations....................................69
Collateral Value...................................16 Parties in Interest................................92
Combined Loan-to-Value Ratio.......................16 Pass-Through Certificates..........................81
Contingent Regulations.............................70 Pass-Through Rate..................................26
Cut-off Date Principal Balance.....................25 Pay-Through Security...............................70
DBC................................................36 Percentage Interests...............................54
DCR................................................94 Permitted Investments..............................41
Debt Securities....................................69 Plans..............................................91
Debt-to-Income Ratio...............................19 PNA................................................17
Definitive Security................................35 Pool Insurer.......................................42
Disqualified Organization..........................77 Pooling and Servicing Agreement....................13
DOL................................................91 Popular............................................18
DTC................................................10 Pre-Funded Amount..................................49
EPA................................................60 Prepayment Assumption..............................70
Equity One.........................................14 Prime Rate.........................................34
Equity One Standards...............................18 Principal Prepayments..............................27
ERISA..............................................25 Property Improvement Loans.........................64
Euroclear..........................................35 PTE 83-1...........................................92
Euroclear Bank.....................................37 Purchase Agreement.................................13
Euroclear Operator.................................37 Purchase Price.....................................23
Euroclear Participants.............................37 Rating Agency......................................97
European Depositories..............................35 Ratio Strip Securities.............................82
Excess Servicing...................................82 RCRA...............................................61
Fannie Mae.........................................54 Record Date........................................25
FASIT..............................................78 Refinance Loan.....................................16
Federal Reserve....................................18 Regular Interest Securities........................68
FHA................................................14 Relevant Depository................................35
FHLMC..............................................53 Relief Act.........................................63
Financial Intermediary.............................35 REMIC..............................................26
Fitch..............................................94 Residual Interest Security.........................76
FNMA...............................................54 Restricted Group...................................95
Foreign Person.....................................84 Retained Interest..................................24
Freddie Mac........................................53 Rules..............................................35
Full Doc...........................................19 S&P................................................94
Funding Period.....................................49 SAIF...............................................47
Garn-St Germain Act................................62 SEC................................................14
HUD................................................64 Secured Creditor Exclusion.........................60
Insurance Proceeds.................................48 Securities Index...................................35
Insured Expenses...................................48 Security Account...................................47
IRS................................................70 Senior Securities..................................39
L/C Bank...........................................40 Servicing Fee......................................81
</TABLE>
99
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Short-Term Note....................................86 Title I Loans......................................64
SI ................................................19 Title I Program....................................64
Single Family Properties...........................16 Title V............................................63
Single Family Securities...........................92 Treasury Index.....................................34
SMMEA..............................................95 Trust Agreement....................................13
Stripped Securities................................81 Trust Fund Assets..................................13
Subordinated Securities............................39 Underwriter Exemptions.............................93
Subsequent Loans...................................49 United States Person...............................84
Terms and Conditions...............................37 VA ................................................14
Thrift Institutions................................77 VA Guaranty........................................52
Tiered REMICs......................................74 Variable Rate Debt Securities......................71
TIN................................................84
</TABLE>
100
<PAGE>
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....................................................$264.00
Printing and Engraving Expenses..............................................**
Legal Fees and Expenses......................................................**
Trustee Fees and Expenses....................................................**
Accounting Fees and Expenses.................................................**
Blue Sky Fees and Expenses...................................................**
Rating Agency Fees...........................................................**
Miscellaneous................................................................**
Total.......................................................................$**
===
----------------------------
* 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 the 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 to be 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 reasonable 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 Delaware 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 present or
former 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., then 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
II-1
<PAGE>
for its 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)
3.2 Bylaws of the Registrant (1)
4.1 Form of Pooling and Servicing Agreement (3)
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 Exhibit
5.1 hereof)**
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.
(3) Previously filed with Amendment No. 1 to Registration Statement on Form S-3
(File No. 333-81237) originally filed July 23, 1999 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
II-2
<PAGE>
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under
the Act, each 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, as amended, 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 8th day of January,
2001.
Equity One ABS, Inc.
By /s/ Cameron E. Williams
-----------------------------------
Cameron E. Williams
President and CEO
Each person whose signature appears below hereby constitutes and
appoints Cameron E. Williams and James H. Jenkins, 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, President and CEO January 8, 2001
------------------------------------ (Chief Executive Officer)
Cameron E. Williams
/s/ James H. Jenkins Director, Senior Vice President, January 8, 2001
------------------------------------ Treasurer, Secretary and CFO
James H. Jenkins (Chief Financial/Accounting Officer)
/s/ John N. Martella Director, Executive Vice President and January 8, 2001
------------------------------------ Assistant Treasurer
John N. Martella
/s/ Gilbert B. Warren Director January 8, 2001
------------------------------------
Gilbert B. Warren
/s/ Geoffrey J. Lewis Director January 8, 2001
------------------------------------
Geoffrey J. Lewis
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- -----------------------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant (3)
3.2 Bylaws of the Registrant (1)
4.1 Form of Pooling and Servicing Agreement (3)
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 Exhibit 5.1)**
24.1 Power of Attorney (included on the signature page hereof)
</TABLE>
------------
(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.
(3) Previously filed with Amendment No. 1 to Registration Statement on Form S-3
(File No. 333-81237) originally filed July 23, 1999 and incorporated herein
by reference.
** To be filed by amendment.
