<PAGE> 1
PROSPECTUS SUPPLEMENT
(To Prospectus Dated March 10, 1997)
$700,000,000
(Approximate)
Advanta Mortgage Loan Trust 1997-2
$165,800,000 6.80% Class A-1 Fixed Rate Certificates
$109,900,000 7.05% Class A-2 Fixed Rate Certificates
$10,500,000 7.30% Class A-3 Fixed Rate Certificates
$44,445,000 7.60% Class A-4 Fixed Rate Certificates
$36,855,000 7.25% Class A-5 Fixed Rate Certificates
$280,000,000 Class A-6 Adjustable Rate Certificates
5.00% Class A-7IO Certificates*
$13,650,000 7.55% Class M-1 Fixed Rate Certificates
$24,150,000 7.70% Class M-2 Fixed Rate Certificates
$14,700,000 8.05% Class B-1 Fixed Rate Certificates
Mortgage Loan Asset-Backed Certificates, Series 1997-2
[ADVANTA LOGO] [ADVANTA LOGO]
Advanta Mortgage Conduit Services, Inc. Advanta Mortgage Corp. USA
Sponsor of the Trust Master Servicer
The Advanta Mortgage Loan Asset-Backed Certificates, Series 1997-2 will
consist of (i) the Class A-1 Fixed Rate Certificates (the "Class A-1
Certificates"), the Class A-2 Fixed Rate Certificates (the "Class A-2
Certificates"), the Class A-3 Fixed Rate Certificates (the "Class A-3
Certificates"), the Class A-4 Fixed Rate Certificates (the "Class A-4
Certificates"), the Class A-5 Fixed Rate Certificates (the "Class A-5
Certificates"), the Class A-6 Adjustable Rate Certificates (the "Class A-6
Certificates") and the Class A-7IO Certificates* (the "Class A-7IO
Certificates") (collectively, the "Class A Certificates"), (ii) the Class M-1
Fixed Rate Certificates and the Class M-2 Fixed Rate Certificates (collectively,
the "Mezzanine Certificates"), (iii) the Class B-1 Fixed Rate Certificates (the
"Class B-1 Certificates", (together with the Mezzanine Certificates, the
"Subordinate Certificates"), and (v) the residual class with respect to each
REMIC held by the Trust (the "Class R Certificates"). Only the Class A
Certificates and the Subordinate Certificates (collectively, the "Offered
Certificates") are offered hereby.
(Cover continued on next page)
See "Risk Factors" at page S-35 herein and at page 13 in the Prospectus, for
a discussion of certain risk factors which should be considered by prospective
investors in the Offered Certificates offered hereby.
------------------------
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS ONLY IN THE TRUST
CREATED BY THE POOLING AND SERVICING AGREEMENT AND DO NOT REPRESENT INTERESTS IN
OR OBLIGATIONS OF ADVANTA MORTGAGE CONDUIT SERVICES, INC., ADVANTA MORTGAGE
CORP. USA, THE TRUSTEE, OR ANY ORIGINATOR. NEITHER THE OFFERED CERTIFICATES NOR
THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Offered Certificates will be offered by the Underwriters from time to
time to the public in negotiated transactions or otherwise at varying prices to
be determined at the time of the related sale. Proceeds to the Sponsor are
anticipated to be approximately $703,340,455.00 from the sale of the Offered
Certificates, before deducting expenses payable by the Sponsor, estimated to be
$500,000. The Underwriters have agreed to reimburse the Sponsor with respect to
certain of such expenses.
The Offered Certificates are offered subject to receipt and acceptance by
the underwriters (the "Underwriters") and to the Underwriters' right to reject
any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that delivery of the Offered Certificates in
book-entry form will be made on or about June 17, 1997 only through The
Depository Trust Company ("DTC"), the Euroclear System ("Euroclear") and CEDEL,
S.A. ("CEDEL").
- ------------
* Interest will be calculated on the Class A-7IO Certificates on the basis of a
notional principal balance equal to the aggregate outstanding Principal
Balance of the Class A-5 Certificates (the "Notional Principal Balance").
MORGAN STANLEY & CO.
Incorporated
J.P. MORGAN & CO.
LEHMAN BROTHERS
SALOMON BROTHERS INC
May 22, 1997
<PAGE> 2
The Offered Certificates will represent undivided ownership interests in all
monies due under the mortgage loans (the "Mortgage Loans") on or after June 1,
1997 (the "Cut-Off Date"), security interests in the properties which secure the
Mortgage Loans, funds on deposit in certain trust accounts and certain other
property. On or prior to the Closing Date, the Sponsor will acquire the Mortgage
Loans from certain affiliated and unaffiliated originators (respectively, the
"Affiliated Originators" and the "Unaffiliated Originators") as described
herein. The Trust will be created pursuant to a Pooling and Servicing Agreement
(the "Pooling and Servicing Agreement") to be dated as of June 1, 1997, among
the Master Servicer, the Sponsor and Bankers Trust Company of California, N.A.,
as Trustee (the "Trustee").
The assets of the Trust also will include a certificate guaranty insurance
policy (the "Class A-6 Insurance Policy") from AMBAC Indemnity Corporation,
which will unconditionally and irrevocably guarantee payment of amounts due to
the Owners of the Class A-6 Certificates to the extent described herein.
[AMBAC LOGO]
The information in this Prospectus Supplement is qualified in its entirety
by the more detailed information appearing or incorporated by reference in the
accompanying Prospectus. Prior to making an investment decision with respect to
the Offered Certificates offered hereby, prospective investors should carefully
consider the information contained in this Prospectus Supplement and the
Prospectus.
There currently is no secondary market for the Offered Certificates. The
Underwriters intend to make a market in the Offered Certificates but have no
obligation to do so. There is no assurance that one will develop or, if one does
develop, that it will continue until the Notes are paid in full.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT AFFECT THE PRICE OF THE OFFERED CERTIFICATES. SUCH TRANSACTIONS MAY INCLUDE
THE PURCHASE OF NOTES TO COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF
THESE TRANSACTIONS, SEE "UNDERWRITING."
UNTIL 90 DAYS FROM THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS AND A PROSPECTUS
SUPPLEMENT. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS AND A PROSPECTUS SUPPLEMENT WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
AVAILABLE INFORMATION
The Sponsor has filed a Registration Statement under the Securities Act of
1933, as amended (the "1933 Act"), with the Securities and Exchange Commission
(the "Commission") on behalf of the Trust with respect to the Offered
Certificates offered pursuant to the Prospectus dated March 10, 1997 and this
Prospectus Supplement. For further information, reference is made to the
Registration Statement and amendments thereof and to the exhibits thereto, which
are available for inspection without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
7 World Trade Center, 13th Floor, New York, New York 10048, and at The
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The Commission maintains a site on the World Wide Web at
http://www.sec.gov containing reports, proxy materials, information statements
and other items. Copies of the Registration Statement and amendments thereof and
exhibits thereto may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
S-2
<PAGE> 3
REPORTS TO THE CERTIFICATEHOLDERS
So long as the Offered Certificates are in book-entry form, monthly and
annual reports concerning the Certificates and the Trust will be sent by the
Trustee to Cede & Co., as the nominee of DTC and as registered holder of the
Offered Certificates pursuant to the Pooling and Servicing Agreement. DTC will
supply such reports to Beneficial Owners in accordance with its procedures. See
"Risk Factors," "Description of the Securities -- Form of Securities" and " --
Reports to Securityholders" in the Prospectus. To the extent required by the
Securities Exchange Act of 1934, as amended, the Trust will provide financial
information to the Owners which has been examined and reported upon, with an
opinion expressed by an independent public accountant; to the extent not so
required, such financial information will be unaudited. The Trust will be formed
to own the Mortgage Loans, and to issue the Certificates. The Trust will have no
assets or obligations prior to issuance of the Certificates and will engage in
no activities other than those described herein. Accordingly, no financial
statements with respect to the Trust are included in this Prospectus Supplement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The consolidated financial statements of AMBAC Indemnity Corporation
("AMBAC" or the "Class A-6 Insurer") and its subsidiaries as of December 31,
1996 and December 31, 1995 and for the three years ended December 31, 1996,
prepared in accordance with generally accepted accounting principles, included
in the Current Report on Form 8-K of AMBAC Inc. (which was filed with the
Commission on March 12, 1997, Commission File No. 1-10777) and the consolidated
financial statements of AMBAC and its subsidiaries as of March 31, 1997 and for
the periods ending March 31, 1997 and March 31, 1996 included in the Quarterly
Report on Form 10-Q of AMBAC Inc. for the period ended March 31, 1997 (which was
filed with the Commission on May 15, 1997) are hereby incorporated by reference
into this Prospectus Supplement and shall be deemed to be a part hereof. Any
statement contained in a document incorporated herein by reference shall be
modified or superseded for the purposes of this Prospectus Supplement to the
extent that a statement contained herein by reference herein also modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus Supplement.
All financial statements of AMBAC and its subsidiaries included in
documents filed by AMBAC Inc. with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Offered 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 such documents.
The Sponsor will provide, without charge, to any person to whom this
Prospectus Supplement is delivered, upon oral or written request of such person,
a copy of any or all of the foregoing financial statements incorporated by
reference. Requests for such copies should be sent to Advanta Mortgage Conduit
Services, Inc., Attention: Law Department, 500 Office Center Drive, Suite 400,
Fort Washington, Pennsylvania 19304, (215) 283-4200.
S-3
<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the Prospectus. Reference is made to the Index of Principal Defined Terms for
the location in the Prospectus of the definitions of certain capitalized terms.
Issuer Advanta Mortgage Loan Trust 1997-2 (the
"Trust").
Sponsor Advanta Mortgage Conduit Services, Inc., a
Delaware corporation. The Sponsor's principal
executive offices are located at 16875 West
Bernardo Drive, San Diego, California 92127,
and its phone number is (619) 674-1800.
Master Servicer Advanta Mortgage Corp. USA, a Delaware
corporation. The Master Servicer's principal
executive offices are located at 16875 West
Bernardo Drive, San Diego, California 92127.
Originators The Mortgage Loans to be acquired by the Trust
from the Sponsor will be acquired by the
Sponsor from Affiliated Originators or from one
or more Unaffiliated Originators.
Certain of the Mortgage Loans have been
acquired by the Sponsor in bulk acquisitions.
See "The Mortgage Loan Pool" herein.
Class A-6 Insurer AMBAC Indemnity Corporation, a
Wisconsin-domiciled stock insurance company.
Trustee Bankers Trust Company of California, N.A., a
national banking association (the "Trustee").
Cut-Off Date June 1, 1997 (opening of business).
Closing Date June 17, 1997.
The Certificates The Mortgage Loan Asset-Backed Certificates,
Series 1997-2 (the "Certificates") will consist
of the Offered Certificates and the Class R
Certificates; the Class R Certificates are not
offered hereby. The Certificates will be issued
pursuant to the Pooling and Servicing
Agreement. Only the Offered Certificates are
offered hereby.
The assets of the Trust will include two pools
of closed-end mortgage loans secured by
mortgages on one-to-four family residential
properties to be conveyed to the Trust on the
Closing Date. All of the Mortgage Loans in the
fixed rate pool (the "Fixed Rate Group") and in
the adjustable rate
S-4
<PAGE> 5
pool (the "Adjustable Rate Group" together with
the Fixed Rate Group, "Groups" and each a
"Group") have remaining terms to maturity of 30
years or less and are secured by Mortgages
which may be either in a first or in a junior
lien position, together with certain other
rights.
The Offered Certificates are issuable in
original principal amounts of $1,000 and
integral multiples thereof, except that one
certificate for each Class (as defined below)
of Offered Certificates may be issued in a
lesser amount.
Pass-Through Rates
and Balances $700,000,000 Mortgage Loan Asset-Backed
Certificates, Series 1997-2, to be issued in
the following Classes (each, a "Class") and
original Certificate Principal Balances (each,
a "Certificate Principal Balance"), as set
forth below:
<TABLE>
<CAPTION>
Pass-Through Original Certificate
Class Rate Balance
----- ------------ --------------------
<S> <C> <C> <C>
Class A-1 Certificates 6.80% $165,800,000
Class A-2 Certificates 7.05% $109,900,000
Class A-3 Certificates 7.30%(1) $ 10,500,000
Class A-4 Certificates 7.60%(1) $ 44,445,000
Class A-5 Certificates 7.25% $ 36,855,000
Class A-6 Certificates (2) $280,000,000
Class A-7IO Certificates 5.00% (3)
Class M-1 Certificates 7.55%(1) $ 13,650,000
Class M-2 Certificates 7.70%(1) $ 24,150,000
Class B-1 Certificates 8.05%(1) $ 14,700,000
</TABLE>
(1) The Pass-Through Rate with respect to the
Class A-3, Class A-4, Class M-1, Class M-2 and
Class B-1 Certificates will on any Payment Date
equal the lesser of (x) the Pass-Through Rate
for such Class set forth above and (y) the
Fixed Rate Group Available Funds Cap Rate
applicable to such Payment Date.
(2) On each Payment Date, the "Class A-6
Pass-Through Rate" will be equal to the lesser
of (x) with respect to any Payment Date which
occurs on or prior to the Clean-up Call Date
(as defined herein), LIBOR plus 0.24% per annum
(the "Class A-6 Formula Pass-Through Rate") and
for any Payment Date thereafter, LIBOR plus
0.48% per annum, and (y) the Adjustable Rate
Group Available Funds Cap Rate applicable to
such Payment Date.
(3) Interest will be calculated on the Class
A-7IO Certificates on each Payment Date on the
basis of a Notional Principal Balance equal to
(x) for the first 30 Payment Dates, the
outstanding Certificate Principal Balance of
the Class A-5 Certificates and (y) thereafter,
zero, with the
S-5
<PAGE> 6
result that the Owners of the Class A-7IO
Certificates will receive no distributions
after the 30th Payment Date. Reference to the
Notional Principal Balance of the Class A-7IO
Certificates is solely for convenience with
respect to certain calculations and does not
represent the right to receive any distribution
allocable to principal.
The Pooling and Servicing Agreement defines the
"Fixed Rate Group Available Funds Cap Rate," as
of any Payment Date, to be an amount, expressed
as a per annum rate, equal to (a)(i) the
aggregate amount of interest due and collected
(or advanced) on all of the Mortgage Loans in
the Fixed Rate Group for the related Remittance
Period minus (ii) the aggregate of the
Servicing Fee and the Trustee's Fee, in each
case relating to the Fixed Rate Group, on such
Payment Date and minus (iii) an amount equal to
the interest amount payable to the Class A-7IO
Certificates divided by (b) the aggregate
Principal Balance of the Mortgage Loans in the
Fixed Rate Group immediately prior to such
Payment Date, calculated on the basis of a
360-day year assumed to consist of twelve
30-day months. As of any date of determination,
the "Principal Balance" with respect to each
Mortgage Loan, is the outstanding principal
balance thereof.
The Pooling and Servicing Agreement defines the
"Adjustable Rate Group Available Funds Cap
Rate," as of any Payment Date, to be an amount,
expressed as a per annum rate, equal to (a)(i)
the aggregate amount of interest due and
collected (or advanced) on all of the Mortgage
Loans in the Adjustable Rate Group for the
related Remittance Period minus (ii) the
aggregate of the Servicing Fee, the Premium and
the Trustee's Fee, in each case relating to the
Adjustable Rate Group, on such Payment Date and
minus (iii) commencing on the 10th Payment Date
following the Closing Date, an amount equal to
0.75% per annum times the aggregate Principal
Balance of the Mortgage Loans in the Adjustable
Rate Group as of the beginning of such related
Remittance Period, divided by (b) the aggregate
Principal Balance of the Mortgage Loans in the
Adjustable Rate Group immediately prior to such
Payment Date, calculated on the basis of a 360
day year and the actual number of days elapsed.
The excess, if any, of (x) the interest due on
the Class A-6 Certificates on any Payment Date
calculated at the Class A-6 Formula
Pass-Through Rate applicable to such Class over
(y) the interest due on the Class A-6
Certificates calculated at the Adjustable Rate
Group Available Funds Cap Rate applicable to
such Payment Date is the "Supplemental
S-6
<PAGE> 7
Interest Amount" applicable to the Class A-6
Certificates for such Payment Date.
If, on any Payment Date, there is a
Supplemental Interest Amount due, the Owners of
certain of the Class R Certificates have agreed
to pay such amount from the sources of funds
specified in the Pooling and Servicing
Agreement, including amounts which would
otherwise be distributed to such Owners by the
Trust on such Payment Date. If the full amount
of the Supplemental Interest Amount is not paid
on a Payment Date, then the unpaid amount will
accrue interest at the Class A-6 Pass-Through
Rate until such amount is paid. If the Master
Servicer, acting directly or through a
permitted designee, exercises its right to an
optional termination ("Optional Termination"),
the Supplemental Interest Amount may not be
paid in full.
The Class A-6 Insurer does not guarantee the
payment of, nor do the ratings assigned to the
Class A-6 Certificates address the likelihood
of the payment of, any Supplemental Interest
Amount.
The Class A Certificates (other than the Class
A-6 Certificates), the Mezzanine Certificates
and the Class B-1 Certificates are collectively
referred to as the "Fixed Rate Group
Certificates" and the Class A-6 Certificates
are also referred to as the "Adjustable Rate
Group Certificates."
On any date after the Closing Date, the
"Aggregate Certificate Principal Balance" is
the sum of the Certificate Principal Balance of
all Classes of the Offered Certificates. The
Aggregate Certificate Principal Balance for a
particular Mortgage Loan Group is the sum of
the Certificate Principal Balances of all
Classes of the Offered Certificates relating to
such Group.
The Mortgage Loans The statistical information presented in this
Prospectus Supplement concerning the pools of
Mortgage Loans is as of May 9, 1997 (such date,
the "Statistic Calculation Date"). The
aggregate principal balance as of the Statistic
Calculation Date for the Fixed Rate Group is
$283,210,170.64 and with respect to the
Adjustable Rate Group is $200,661,062.31. The
Sponsor expects that the actual pools as of the
Closing Date will represent approximately
$420,000,000 in Mortgage Loans in the Fixed
Rate Group and approximately $280,000,000 in
Mortgage Loans in the Adjustable Rate Group.
The additional Mortgage Loans will represent
Mortgage Loans acquired or
S-7
<PAGE> 8
to be acquired by the Sponsor prior to the
Closing Date. In addition, with respect to the
pools as of the Statistic Calculation Date as
to which statistical information is presented
herein, some amortization of the Mortgage Loans
in such pools will occur prior to the Closing
Date. Certain loans included in the pools as of
the Statistic Calculation Date may prepay in
full, or may be determined not to meet the
eligibility requirements for the final pools
and as a result may not be included in the
final pools. As a result of the foregoing, the
statistical distribution of such
characteristics as of the Closing Date in the
final Mortgage Loan pools will vary somewhat
from the statistical distribution of such
characteristics as of the Statistic Calculation
Date as presented in this Prospectus
Supplement, although such variance will not be
material. In the event that the Sponsor does
not, as of the Closing Date, have the full
amount of Mortgage Loans which the Sponsor
expects to sell to the Trust on such date,
(i.e., approximately $420,000,000 with respect
to the Fixed Rate Group and approximately
$280,000,000 with respect to the Adjustable
Rate Group) the Sponsor will reduce the size of
the offering (which, if such reduction relates
to the Fixed Rate Group Certificates, will be a
pro rata reduction in each class of Offered
Certificates); the Sponsor does not expect that
the original principal amount of any class will
increase or decrease by more than 5% as a
result of such non-delivery. Even if the full
expected amount of Mortgage Loans is delivered,
certain adjustments (plus or minus 5%) may
occur among the Class sizes.
Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are
measured by the aggregate principal balance of
the related Mortgage Loans as of the Statistic
Calculation Date.
The Mortgage Loans will be predominantly home
equity loans, i.e., loans used (x) to refinance
an existing mortgage loan on more favorable
terms, (y) to consolidate debt, or (z) to
obtain cash proceeds by borrowing against the
Mortgagor's equity in the related Mortgaged
Property. The Mortgage Loans to be sold to the
Trust by the Sponsor consisted, as of the
Statistic Calculation Date, of 6,439 Mortgages
and the related Notes on one-to-four family
residential properties, including investment
properties (which may be condominiums,
townhouses or homes in one-to-four family
residences), located in 49 states and the
District of Columbia. The Mortgage Loans are
secured by Mortgages of which 95.22% by
principal balance as of the Statistic
S-8
<PAGE> 9
Calculation Date are first mortgages or deeds
of trust and 4.78% by principal balance as of
the Statistic Calculation Date are secured by
junior mortgages or deeds of trust. The
Mortgage Loans are all closed-end mortgage
loans in that the mortgagee is not required to
make future advances thereunder.
Less than 0.10% of the Mortgage Loans are
insured by primary mortgage insurance policies.
There is no pool insurance insuring any of the
Mortgage Loans.
The Mortgage Loans are not guaranteed by the
Sponsor, the Master Servicer, any Affiliated
Originator or Unaffiliated Originator or any of
their respective affiliates. The Mortgage Loans
are required to be serviced by the Master
Servicer in accordance with accepted servicing
practices and with reasonable care, using that
degree of skill and attention that the Master
Servicer exercises with respect to comparable
mortgage loans that it services for itself and
others. See "Description of the Securities --
Collection and Other Servicing Procedures" in
the Prospectus.
Final Scheduled Payment Dates The final scheduled Payment Dates (the "Final
Scheduled Payment Dates") for each of the
respective Classes of Offered Certificates are
as described below, although it is anticipated
that the actual final Payment Date for each
Class (other than the Class A-7IO Certificates)
will occur earlier than the Final Scheduled
Payment Date. See "Prepayment and Yield
Considerations" herein.
<TABLE>
<CAPTION>
Final Scheduled
Class Payment Date
----- ------------
<S> <C> <C>
Class A-1 Certificates: 2/25/12
Class A-2 Certificates: 5/25/21
Class A-3 Certificates: 10/25/22
Class A-4 Certificates: 6/25/27
Class A-5 Certificates: 6/25/27
Class A-6 Certificates: 5/25/27
Class A-7IO Certificates 6/25/27
Class M-1 Certificates: 6/25/27
Class M-2 Certificates: 6/25/27
Class B-1 Certificates: 6/25/27
</TABLE>
Distributions--General On the 25th day of each month, or, if such day
is not a Business Day, then the next succeeding
Business Day, commencing July 25, 1997 (each
such day being a "Payment
S-9
<PAGE> 10
Date"), the Trustee will be required, subject
to the availability of amounts therefor and,
pursuant to the cashflow priorities hereinafter
described, to distribute to the Owners of the
Fixed Rate Group Certificates of record as of
the last Business Day of the calendar month
immediately preceding the calendar month in
which such Payment Date occurs and to the Owner
of the Adjustable Rate Group Certificates of
record as of the Business Day immediately
preceding such Payment Date (each such date,
the "Record Date") the Class Distribution
Amount for the related Class. The "Class
Distribution Amount" shall be an amount equal
to the sum of (x) the related Current Interest
(as defined below) for such Class, (y) the
related Interest Carry Forward Amount and (z)
except in the case of the Class A-7IO
Certificates, the related Principal
Distribution Amount (as defined herein) for
such Class. A "Business Day" is any day other
than a Saturday, Sunday or a day on which
banking institutions in New York City or in the
city in which the corporate trust office of the
Trustee is located are authorized or obligated
by law or executive order to close.
"Current Interest" with respect to each Class
of Offered Certificates means, with respect to
any Payment Date (i) the aggregate amount of
interest accrued during the preceding Accrual
Period on the Certificate Principal Balance of
the related Class of Offered Certificates or,
in the case of the Class A-7IO Certificates, on
the Notional Principal Balance of the Class
A-7IO Certificates plus (ii) with respect to
the Class A-6 Certificates only, the Preference
Amount (as defined herein) as it relates to
interest previously paid on the Class A-6
Certificates prior to such Payment Date. The
Current Interest does not include any
Supplemental Interest Amounts or any Interest
Carry Forward Amount.
The "Interest Carry Forward Amount" with
respect to any Class of the Offered
Certificates for any Payment Date is the sum of
(x) the amount, if any, by which (i) the
Current Interest for such Class as of the
immediately preceding Payment Date plus any
Interest Carry Forward Amount for such Class
and outstanding on such immediately preceding
Payment Date exceeded (ii) the amount of the
actual distribution with respect to interest
made to the Owners of such Class of Offered
Certificates on such immediately preceding
Payment Date plus (y) interest on such amount
calculated for the related Accrual Period at
the related Pass-Through Rate in effect with
respect to such Class of Offered Certificates.
S-10
<PAGE> 11
For each Payment Date, interest due with
respect to the Fixed Rate Group Certificates
will be interest which has accrued on the
related Certificate Principal Balance during
the calendar month immediately preceding the
month in which such Payment Date occurs.
Calculations of interest on the Fixed Rate
Group Certificates will be made on the basis of
a 360-day year assumed to consist of twelve
30-day months.
The interest due with respect to the Adjustable
Rate Group Certificates will be the interest
which has accrued thereon at the applicable
Pass-Through Rate from the preceding Payment
Date (or from the Closing Date in the case of
the first Payment Date) to and including the
date prior to the current Payment Date.
Calculations of interest on the Adjustable Rate
Group Certificates will be made on the basis of
the actual number of days elapsed in the
accrual period and a 360-day year.
Each period referred to above relating to the
accrual of interest is the "Accrual Period" for
the related Class of Offered Certificates.
Interest On each Payment Date, the Interest Remittance
Amount with respect to the related Mortgage
Loan Group will be distributed in the following
order of priority:
First, to the Trustee, the trustee's fee (the
"Trustee's Fee");
Second, with respect to the Adjustable Rate
Group, the premium then due to the Class A-6
Insurer (the "Premium");
Third, to the Owners of the Class A
Certificates related to such Mortgage Loan
Group, the related Class A Current Interest
plus the Interest Carry Forward Amount with
respect to each such Class of Class A
Certificates without any priority among such
Class A Certificates; provided, that if the
Interest Remittance Amount less the Trustee's
Fee (and less the Premium with respect to the
Adjustable Rate Group only) (such amount, the
"Interest Amount Available") is not sufficient
to make a full distribution of interest with
respect to all Classes of the Class A
Certificates, the Interest Amount Available
will be distributed among the outstanding
Classes of Class A Certificates pro rata based
on the aggregate amount of interest due on each
such Class, and the amount of such shortfall
will be carried forward with accrued interest;
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<PAGE> 12
Fourth, with respect to the Fixed Rate Group,
to the extent of the Interest Amount Available
with respect to the Fixed Rate Group then
remaining, to the Owners of the Class M-1
Certificates, the Class M-1 Current Interest;
Fifth, with respect to the Fixed Rate Group, to
the extent of the Interest Amount Available
with respect to the Fixed Rate Group then
remaining, to the Owners of the Class M-2
Certificates, the Class M-2 Current Interest;
Sixth, with respect to the Fixed Rate Group, to
the extent of the Interest Amount Available
with respect to the Fixed Rate Group then
remaining, to the Owners of the Class B-1
Certificates, the Class B-1 Current Interest;
and
Seventh, the sum of (x) the amount, if any, of
the Interest Amount Available remaining in the
Certificate Account with respect to such
Mortgage Loan Group after application with
respect to the priorities set forth above plus
(y) the amount of any Overcollateralization
Release Amount (as defined herein) with respect
to such Mortgage Loan Group for such Payment
Date (such amounts, together for such Mortgage
Loan Group, the "Monthly Excess Cashflow
Amount" for a Payment Date) shall be applied as
described below under "Credit
Enhancement--Application of Monthly Excess
Cashflow Amounts" in this Summary.
The "Interest Remittance Amount" means, with
respect to each Mortgage Loan Group, as of any
Monthly Remittance Date, the sum, without
duplication, of (i) all interest collected, or
advanced, by the Master Servicer during or in
respect of the related Remittance Period on the
Mortgage Loans in such Mortgage Loan Group
(less the Servicing Fee), (ii) all Compensating
Interest paid by the Master Servicer on such
Monthly Remittance Date with respect to such
Mortgage Loan Group and (iii) the portion of
any Substitution Amount relating to interest
with respect to such Mortgage Loan Group.
Principal GENERAL. The Fixed Rate Group Certificates and
the Adjustable Rate Group Certificates will
generally receive principal distributions on
each Payment Date which are based on principal
collections and Realized Losses (to the extent
that Monthly Excess Interest Amounts are
available), with respect to the related
Mortgage Loan Group. In addition, the
overcollateralization feature of the Trust
results in accelerated payments of principal
with respect to each Mortgage Loan Group to
achieve, and thereafter maintain,
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<PAGE> 13
a specified level of overcollateralization with
respect to such Mortgage Loan Group. Such
accelerated principal will generally be funded
from excess interest with respect to the
related Mortgage Loan Group.
With respect to each Mortgage Loan Group, the
following terms have the following meanings:
"Class A Principal Distribution Amount" as
of any Payment Date means (X) with respect
to the Fixed Rate Group (a) prior to the
related Stepdown Date or with respect to
which a Fixed Rate Group Trigger Event is in
effect, 100% of the Principal Distribution
Amount for the Fixed Rate Group and (b) on
or after the related Stepdown Date and as
long as a Fixed Rate Group Trigger Event is
not in effect, (x) the aggregate Certificate
Principal Balance of the Class A
Certificates related to the Fixed Rate Loan
Group immediately prior to such Payment Date
minus (y) the product of (i) 69.70% and (ii)
the outstanding Principal Balance of the
Mortgage Loans in the Fixed Rate Group as of
the last day of the related Remittance
Period and (Y) with respect to the
Adjustable Rate Group, 100% of the Principal
Distribution Amount for the Adjustable Rate
Group.
"Extra Principal Distribution Amount" means,
for a Mortgage Loan Group and as of any
Payment Date, the lesser of (x) the Monthly
Excess Interest Amount for such Mortgage
Loan Group and Payment Date and (y) the
Overcollateralization Deficiency for such
Mortgage Loan Group and Payment Date.
A "Liquidated Mortgage Loan" is, in general,
a defaulted Mortgage Loan as to which the
Master Servicer has determined that all
amounts that it expects to recover on such
Mortgage Loan have been recovered (exclusive
of any possibility of a deficiency
judgment).
A "Monthly Remittance Date" is any date on
which funds on deposit in the Principal and
Interest Account are remitted to the
Certificate Account, which is the 18th day
of each month or, if such day is not a
Business Day, the next succeeding Business
Day, commencing in the month following the
month in which the Closing Date occurs.
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<PAGE> 14
"Overcollateralization Amount" means with
respect to a Mortgage Loan Group and as of
any Payment Date the difference between (x)
the Principal Balance of the Mortgage Loans
in such Mortgage Loan Group as of the last
day of the immediately preceding Remittance
Period and (y) the Certificate Principal
Balance of all Classes of Offered
Certificates related to such Mortgage Loan
Group (after taking into account all
distributions of principal on such Payment
Date).
"Overcollateralization Deficiency" means,
for a Mortgage Loan Group and as of any
Payment Date, the excess, if any, of (x) the
Targeted Overcollateralization Amount for
such Mortgage Loan Group and Payment Date
over (y) the Overcollateralization Amount
for such Mortgage Loan Group and Payment
Date, calculated for this purpose after
taking into account the reduction on such
Payment Date of the Certificate Principal
Balance of all Classes of the Offered
Certificates related to such Mortgage Loan
Group resulting from the distribution of the
related Principal Remittance Amount (but not
the related Extra Principal Distribution
Amount) on such Payment Date, but prior to
taking into account any related Applied
Realized Loss Amount on such Payment Date.
"Overcollateralization Release Amount"
means, for a Mortgage Loan Group and as of
any Payment Date, the lesser of (x) the
related Principal Remittance Amount for such
Payment Date and (y) the excess of (i) the
related Overcollateralization Amount for
such Payment Date, assuming that 100% of the
related Principal Remittance Amount is
applied on such Payment Date to the payment
of principal on the Offered Certificates
related to such Mortgage Loan Group and (ii)
the Targeted Overcollateralization Amount
for such Mortgage Loan Group and Payment
Date.
"Principal Distribution Amount" means, with
respect to either Mortgage Loan Group and as
of any Payment Date, the sum of (i) the
Principal Remittance Amount with respect to
such Mortgage Loan Group minus, for Payment
Dates occurring on and after the related
Stepdown Date (and, with respect to the
Fixed Rate Group, as to which a Fixed Rate
Group Trigger Event is not in effect), the
Overcollateralization Release Amount with
respect to such Mortgage Loan Group, if any,
and (ii) the Extra Principal Distribution
Amount with respect
S-14
<PAGE> 15
to such Mortgage Loan Group, if any and
(iii) in the case of the Adjustable Rate
Group only, the principal portion of any
Insured Payment (as defined herein) made by
the Class A-6 Insurer.
"Principal Remittance Amount" means, for a
Mortgage Loan Group and as of any Monthly
Remittance Date, the sum, without
duplication, of (i) the principal actually
collected by the Master Servicer on the
Mortgage Loans in such Mortgage Loan Group
during the related Remittance Period, (ii)
the Principal Balance of each Mortgage Loan
in such Mortgage Loan Group that was
repurchased from the Trust during the
related Remittance Period, (iii) any
Substitution Amount relating to principal
delivered by the Sponsor in connection with
a substitution of a Mortgage Loan in such
Mortgage Loan Group during the related
Remittance Period, and (iv) all Net
Liquidation Proceeds actually collected by
the Master Servicer during the related
Remittance Period with respect to Mortgage
Loans in such Mortgage Loan Group (to the
extent such Net Liquidation Proceeds related
to principal).
The "Remittance Period" with respect to any
Monthly Remittance Date is the calendar
month immediately preceding the calendar
month in which the Monthly Remittance Date
occurs.
"Stepdown Date" means, (i) with respect to
the Fixed Rate Group, the latest to occur of
(x) the Payment Date in July 2000, (y) the
date on which principal equal to 50% of the
aggregate Principal Balance of the Mortgage
Loans in the Fixed Rate Group as of the
Cut-Off Date has been received by the Trust
and (z) the first Payment Date on which the
Fixed Rate Group Senior Enhancement
Percentage equals 30.30%, and (ii) with
respect to the Adjustable Rate Group, the
later to occur of (x) the 30th Payment Date
from the Closing Date and (y) the date on
which principal equal to 50% of the
aggregate Principal Balance of the Mortgage
Loans in the Adjustable Rate Group as of the
Cut-Off Date have been received by the
Trust.
"Targeted Overcollateralization Amount"
means, for the Fixed Rate Group and as of
any Payment Date, (x) prior to the related
Stepdown Date, in the case of the Fixed Rate
Group, 2.65% of the initial Certificate
Principal Balance of the Fixed Rate Group
Certificates and (y) on
S-15
<PAGE> 16
and after the related Stepdown Date, the
greater of (i) in the case of the Fixed Rate
Group, (a) if no Fixed Rate Group Trigger
Event is in effect, 5.30% of the aggregate
outstanding Principal Balance of the
Mortgage Loans in the Fixed Rate Group or
(b) if a Fixed Rate Group Trigger Event is
in effect, 2.65% of the initial Certificate
Principal Balance of the Fixed Rate Group
Certificates, in each case as of the last
day of the related Remittance Period and
(ii) $2,100,000 in the case of the Fixed
Rate Group and in the case of the Adjustable
Rate Group, an amount required by the Class
A-6 Insurer pursuant to the Pooling and
Servicing Agreement.
ADJUSTABLE RATE GROUP-PRINCIPAL DISTRIBUTIONS.
On each Payment Date, principal will be
distributed to the Owners of the Class A-6
Certificates in an amount equal to the
Adjustable Rate Group Principal Distribution
Amount until the Class A-6 Certificate
Principal Balance has been reduced to zero.
FIXED RATE GROUP-PRINCIPAL DISTRIBUTIONS. With
respect to the Fixed Rate Group and on each
Payment Date (a) before the related Stepdown
Date or (b) with respect to which a Fixed Rate
Group Trigger Event is in effect, Owners of the
Class A Fixed Rate Group Certificates (other
than the Class A-7IO Certificates) will be
entitled to receive payment of 100% of the
Principal Distribution Amount with respect to
the Fixed Rate Group for such Payment Date as
follows: first, to the Owners of the Class A-5
Certificates, the Class A-5 Lockout
Distribution Amount and then to the Owners of
the Class A Fixed Rate Group Certificates
(other than the Class A-7IO Certificates), in
sequential order until the Certificate
Principal Balance of each such Class of Class A
Fixed Rate Group Certificates has been reduced
to zero.
In addition to the terms defined above, the
discussion below makes use of a number of
defined terms which are defined under
"Description of the Offered
Certificates--Distributions" herein.
With respect to the Fixed Rate Group and on
each Payment Date (a) on or after the related
Stepdown Date and (b) as long as a Fixed Rate
Group Trigger Event is not in effect and is not
continuing, the Owners of all Classes of the
Fixed Rate Group Certificates (other than the
Class A-7IO Certificates) will be entitled to
receive payments of principal, in the order of
priority, in the amounts set forth
S-16
<PAGE> 17
below and to the extent of the Principal
Distribution Amount with respect to the Fixed
Rate Group as follows:
First, the lesser of (x) the Fixed Rate
Group Principal Distribution Amount and (y)
the Class A Principal Distribution Amount
shall be distributed to the Owners of the
Class A-5 Certificates, in an amount equal
to the Class A-5 Lockout Distribution
Amount, with the remainder paid to the
Owners of the Class A Fixed Rate Group
Certificates (other than the Class A-7IO
Certificates), in sequential order until the
Certificate Principal Balance of each such
Class of Class A Fixed Rate Group
Certificates has been reduced to zero;
Second, the lesser of (x) the excess of (i)
the Fixed Rate Group Principal Distribution
Amount over (ii) the amount distributed to
the Owners of the Class A Fixed Rate Group
Certificates in clause First above and (y)
the Class M-1 Principal Distribution Amount
shall be distributed to the Owners of the
Class M-1 Certificates, until the Class M-1
Certificate Principal Balance has been
reduced to zero;
Third, the lesser of (x) the excess of (i)
the Fixed Rate Group Principal Distribution
Amount over (ii) the sum of the amount
distributed to the Owners of the Class A
Fixed Rate Group Certificates in clause
First above and the amount distributed to
the Owners of the Class M-1 Certificates in
clause Second above and (y) the Class M-2
Principal Distribution Amount shall be
distributed to the Owners of the Class M-2
Certificates, until the Class M-2
Certificate Principal Balance has been
reduced to zero;
Fourth, the lesser of (x) the excess of (i)
the Fixed Rate Group Principal Distribution
Amount over (ii) the sum of the amount
distributed to the Owners of the Class A
Fixed Rate Group Certificates pursuant to
clause First above, the amount distributed
to the Owners of the Class M-1 Certificates
pursuant to clause Second above and the
amount distributed to the Owners of the
Class M-2 Certificates pursuant to clause
Third above and (y) the Class B-1 Principal
Distribution Amount shall be distributed to
the Owners of the Class B-1 Certificates,
until the Class B-1 Certificate Principal
Balance has been reduced to zero; and,
S-17
<PAGE> 18
Fifth, the lesser of (x) any amount of the
Fixed Rate Group Principal Distribution
Amount with respect to the Fixed Rate Group
remaining after making all of the
distributions in clauses First, Second,
Third and Fourth above and (y) the positive
difference, if any, of (A) $2,100,000 minus
(B) the Target Overcollateralization Amount
for the Fixed Rate Group for such Payment
Date shall be applied as a payment of
principal with respect to the Subordinate
Certificates in reverse order of seniority
(i.e., first to the Class B-1 Certificates,
second to the Class M-2 Certificates, third
to the Class M-1 Certificates and fourth, to
the Class A Fixed Rate Group Certificates)
until their respective Certificate Principal
Balances have been reduced to zero; and
Sixth, any amount of the Principal
Distribution Amount with respect to the
Fixed Rate Group remaining after making all
of the distributions in clauses First,
Second, Third, Fourth and Fifth above shall
be distributed as part of the Monthly Excess
Cashflow Amount with respect to the Fixed
Rate Group and shall be applied as described
below under "Credit Enhancement--Application
of Monthly Excess Cashflow Amounts" in this
summary.
Notwithstanding the foregoing, in the event
that the Certificate Principal Balance of all
of the Class A Fixed Rate Group Certificates
have been reduced to zero, all amounts of
principal that would have been distributed to
such Class A Fixed Rate Group Certificates will
be distributed to the Subordinate Certificates
sequentially in the following order: first, to
the Class M-1 Certificates, second, to the
Class M-2 Certificates and third, to the Class
B-1 Certificates. Similarly, if the Certificate
Principal Balance of the Class M-1 Certificates
has been reduced to zero, all amounts of
principal that would have been distributed to
such Class M-1 Certificates will be distributed
to the Class M-2 and Class B-1 Certificates in
that order. Finally, if the Certificate
Principal Balance of the Class M-2 Certificates
has been reduced to zero, all amounts of
principal that would have been distributed on
such Class M-2 Certificates will be distributed
to the Class B-1 Certificates.
The Class A Fixed Rate Group Certificates
(other than the Class A-5 Certificates and the
Class A-7IO Certificates) are "sequential pay"
classes such that the Owners of the Class A-4
Certificates will receive no payments of
principal until the Class A-3 Certificate
Principal Balance has been reduced
S-18S
<PAGE> 19
to zero, the Owners of the Class A-3
Certificates will receive no payments of
principal until the Class A-2 Certificate
Principal Balance has been reduced to zero, and
the Owners of the Class A-2 Certificates will
receive no payments of principal until the
Class A-1 Certificate Principal Balance has
been reduced to zero; provided, however, that
on any Payment Date on which the sum of the
Certificate Principal Balance of the
Subordinate Certificates and the
Overcollateralization Amount related to the
Fixed Rate Group is zero, any amounts of
principal payable to the Owners of the Class A
Fixed Rate Group Certificates on such Payment
Date shall be distributed pro rata and not
sequentially.
The Owners of the Class A-5 Certificates are
entitled to receive payments of the Class A-5
Lockout Distribution Amount specified herein;
provided, that if on any Payment Date the Class
A-4 Certificate Principal Balance is zero, the
Owners of the Class A-5 Certificates will be
entitled to receive the entire Class A
Principal Distribution Amount for such Payment
Date.
The "Class A-5 Lockout Distribution Amount" for
any Payment Date will be the product of (i) the
applicable Class A-5 Lockout Percentage for
such Payment Date and (ii) the Class A-5
Lockout Pro Rata Distribution Amount for such
Payment Date.
The "Class A-5 Lockout Percentage" for each
Payment Date is as follows:
<TABLE>
<CAPTION>
Payment Dates Lockout Percentage
----------------------- ------------------
<S> <C> <C>
July 1997 - June 2000 0%
July 2000 - June 2002 45%
July 2002 - June 2003 80%
July 2003 - June 2004 100%
July 2004 and thereafter 300%
</TABLE>
In no event shall the Class A-5 Lockout
Distribution Amount for a Payment Date exceed
the Principal Distribution Amount for the Fixed
Rate Group for such Payment Date.
The "Class A-5 Lockout Pro Rata Distribution
Amount" for any Payment Date will be an amount
equal to the product of (x) a fraction, the
numerator of which is the Certificate Principal
Balance of the Class A-5 Certificates
immediately prior to such Payment Date and the
denominator of which
S-19
<PAGE> 20
is the aggregate Certificate Principal Balance
of all Classes of the Class A Certificates
relating to the Fixed Rate Group immediately
prior to such Payment Date and (y) the Class A
Principal Distribution Amount with respect to
the Fixed Rate Group for such Payment Date.
The Class A-7IO Certificates are interest-only
certificates and are not entitled to receive
distributions of principal.
A "Fixed Rate Group Trigger Event" has occurred
with respect to the Fixed Rate Group and a
Payment Date if the percentage obtained by
dividing (x) the principal amount of 60+ Day
Delinquent Loans in the Fixed Rate Group by (y)
the aggregate outstanding Principal Balance of
the Mortgage Loans in the Fixed Rate Group as
of the last day of the immediately preceding
Remittance Period equals or exceeds 50% of the
Fixed Rate Group Senior Enhancement Percentage.
"Class M-1 Principal Distribution Amount"
means, with respect to the Fixed Rate Group and
as of any Payment Date on or after the related
Stepdown Date and as long as a Fixed Rate Group
Trigger Event is not in effect, the excess of
(x) the sum of (i) the aggregate Certificate
Principal Balance of the Class A Fixed Rate
Group Certificates (after taking into account
the payment of the Class A Principal
Distribution Amount for the Fixed Rate Group on
such Payment Date) and (ii) the Class M-1
Certificate Principal Balance immediately prior
to such Payment Date over (y) the product of
(i) 76.20% and (ii) the outstanding Principal
Balance of the Mortgage Loans in the Fixed Rate
Group as of the last day of the related
Remittance Period.
"Class M-2 Principal Distribution Amount"
means, with respect to the Fixed Rate Group and
as of any Payment Date on or after the Stepdown
Date and as long as a Fixed Rate Group Trigger
Event is not in effect, the excess of (x) the
sum of (i) the aggregate Certificate Principal
Balance of the Class A Fixed Rate Group
Certificates (after taking into account the
payment of the Class A Principal Distribution
Amount for the Fixed Rate Group on such Payment
Date), (ii) the Class M-1 Certificate Principal
Balance (after taking into account the payment
of the Class M-1 Principal Distribution Amount
on such Payment Date) and (iii) the Class M-2
Certificate Principal Balance immediately prior
to such Payment Date over (y) the product of
(i) 87.70% and (ii) the outstanding aggregate
Principal Balance of the
S-20
<PAGE> 21
Mortgage Loans in the Fixed Rate Group as of
the last day of the related Remittance Period.
"Class B-1 Principal Distribution Amount"
means, with respect to the Fixed Rate Group and
as of any Payment Date on or after the Stepdown
Date and as long as a Fixed Rate Group Trigger
Event is not in effect, the excess of (x) the
sum of (i) the aggregate Certificate Principal
Balance of the Class A Fixed Rate Group
Certificates related to the Fixed Rate Group
(after taking into account the payment of the
Class A Principal Distribution Amount for the
Fixed Rate Group on such Payment Date), (ii)
the Class M-1 Certificate Principal Balance
(after taking into account the payment of the
Class M-1 Principal Distribution Amount on such
Payment Date), (iii) the Class M-2 Certificate
Principal Balance (after taking into account
the payment of the Class M-2 Principal
Distribution Amount on such date) and (iv) the
Class B-1 Certificate Principal Balance
immediately prior to such Payment Date over (y)
the product of (i) 94.70% and (ii) the
outstanding aggregate Principal Balance of the
Mortgage Loans in the Fixed Rate Group as of
the last day of the related Remittance Period.
"Fixed Rate Group Senior Enhancement
Percentage" with respect to any Payment Date is
the percentage obtained by dividing (x) the sum
of (i) the aggregate Certificate Principal
Balance of the Subordinate Certificates and
(ii) the Fixed Rate Group Overcollateralization
Amount, in each case after taking into account
the distribution of the Fixed Rate Group
Principal Distribution Amount on such Payment
Date by (y) the aggregate Principal Balance of
the Mortgage Loans in the Fixed Rate Group as
of the last day of the related Remittance
Period.
"Fixed Rate Group Senior Specified Enhancement
Percentage" means, on any date of determination
thereof, 30.30%.
Credit Enhancement FIXED RATE GROUP. The Credit Enhancement
provided for the benefit of the Owners of the
Class A Fixed Rate Group Certificates consists
of the subordination of the Subordinate
Certificates, the priority of application of
Realized Losses, and the application of the
Fixed Rate Monthly Excess Cashflow Amounts.
The initial aggregate Certificate Principal
Balance of the Subordinate Certificates related
to the Fixed Rate Group will
S-21
<PAGE> 22
equal 12.50% of the initial aggregate
Certificate Principal Balance of the Fixed Rate
Group Certificates.
ADJUSTABLE RATE GROUP. The Credit Enhancement
provided for the benefit of the Owners of the
Class A-6 Certificates consists of the Class
A-6 Insurance Policy, the application of the
Adjustable Rate Group Monthly Excess Cashflow
Amounts and the cross-collateralization feature
of the Trust. The Class A-6 Certificates will
have the benefit of certain levels of
overcollateralization as required by the Class
A-6 Insurer.
Application of Realized Losses (Fixed and
Adjustable Rate Groups). The Pooling and
Servicing Agreement provides that if a Mortgage
Loan becomes a liquidated loan ("Liquidated
Loan") during a Remittance Period, the Net
Liquidation Proceeds relating thereto and
allocated to principal may be less than the
Principal Balance of such Mortgage Loan. The
amount of such insufficiency is a "Realized
Loss". Realized Losses which occur in a
Mortgage Loan Group will, in effect, be
absorbed first, by the Class R Certificates
(both through the application of the Monthly
Excess Interest Amount to fund such deficiency
and through a reduction in the related
Overcollateralization Amount). In the case of
the Fixed Rate Group, any remaining deficiency
after absorption by the Class R Certificates
will be absorbed, second, by the Owners of the
Class B-1 Certificates, third, by the Owners of
the Class M-2 Certificates, and, fourth, by the
Owners of the Class M-1 Certificates. In the
case of the Adjustable Rate Group, any
remaining deficiency will be covered by the
Class A-6 Insurance Policy.
To the extent that a Mortgage Loan Group
experiences Realized Losses, such Realized
Losses will reduce the aggregate outstanding
Principal Balance of the Mortgage Loans in such
Mortgage Loan Group (i.e., a reduction in the
collateral balance will occur). Since the
Overcollateralization Amount with respect to a
Mortgage Loan Group is the excess, if any, of
the related collateral balance over the related
Aggregate Certificate Principal Balance,
Realized Losses, to the extent experienced,
will in the first instance reduce the related
Overcollateralization Amount.
The Pooling and Servicing Agreement requires
that the Overcollateralization Amount with
respect to a Mortgage Loan Group be initially
increased to, and thereafter
S-22
<PAGE> 23
maintained at, the related Targeted
Overcollateralization Amount. This increase and
subsequent maintenance is intended to be
accomplished by the application of related
Monthly Excess Interest Amounts to the funding
of the related Extra Principal Distribution
Amount. Such Extra Principal Distribution
Amounts, since they are funded from interest
collections on the collateral but are
distributed as principal on the Offered
Certificates, will increase the related
Overcollateralization Amount.
If, on any Payment Date and with respect to
either Mortgage Loan Group, after taking into
account all Realized Losses experienced with
respect to such Mortgage Loan Group during the
prior Remittance Period and after taking into
account the distribution of principal
(including the Extra Principal Distribution
Amount) with respect to the related
Certificates on such Payment Date, the
Aggregate Certificate Principal Balance with
respect to the related Group exceeds the
aggregate Principal Balance of the Mortgage
Loans in the related Group as of the end of the
related Remittance Period (i.e., if the level
of overcollateralization is negative), such
excess is an "Applied Realized Loss Amount"
with respect to the related Group. In the case
of the Fixed Rate Group, such an Applied
Realized Loss Amount will be applied as a
reduction in the Certificate Principal Balance
of the Subordinate Certificates in reverse
order of seniority (i.e., first against the
Class B-1 Certificate Principal Balance until
it is reduced to zero, then against the Class
M-2 Certificate Balance until it is reduced to
zero and then against the Class M-1 Certificate
Principal Balance until it is reduced to zero).
In the case of the Adjustable Rate Group, the
Trustee will make a claim under the Class A-6
Insurance Policy with respect to an Applied
Realized Loss Amount with respect to the
Adjustable Rate Group. The Pooling and
Servicing Agreement does not permit the "write
down" of the Certificate Principal Balance of
any Class A Certificate.
Once the Certificate Principal Balance of a
Class of Subordinate Certificates has been
"written down," the amount of such write down
will no longer bear interest, nor will such
amount thereafter be "reinstated" or "written
up," although the amount of such write down
may, on future Payment Dates be paid to Owners
of the Subordinate Certificates which
experienced the write down, in direct order of
seniority (i.e., first, the Class M-1
Certificates, second, the Class M-2
Certificates and, third, the Class B-1
Certificates). The source of funding of such
payments will
S-23
<PAGE> 24
be the amount, if any, of the Monthly Excess
Cashflow Amount remaining on such future
Payment Dates after the funding of the Extra
Principal Distribution Amount and after the
payment of Interest Carry Forward Amounts with
respect to the Subordinate Certificates on such
Payment Date.
Application of Monthly Excess Cashflow Amounts
-- Overcollateralization Mechanics (Fixed and
Adjustable Rate Groups). The weighted average
net coupon rate ("Coupon Rate") for the
Mortgage Loans in each Mortgage Loan Group is
generally expected to be higher than the
weighted average of the Pass-Through Rates on
the Offered Certificates related to such
Mortgage Loan Group, thus generating certain
excess interest collections which, in the
absence of losses will not be necessary to fund
interest distributions on the Offered
Certificates. The Pooling and Servicing
Agreement provides that this excess interest be
applied to the extent available, to make
accelerated payments of principal (i.e., the
Extra Principal Distribution Amount) to the
Class or Classes then entitled to receive
distributions of principal; such application
will cause the Aggregate Certificate Balance
with respect to a Mortgage Loan Group to
amortize more rapidly than the Mortgage Loans
in such Mortgage Loan Group, resulting in
Overcollateralization. This excess interest for
a Remittance Period and with respect to a
Mortgage Loan Group, together with interest on
the related Overcollateralization Amount
itself, on the related Payment Date is the
"Monthly Excess Interest Amount" for such
Payment Date and Mortgage Loan Group.
The required level of overcollateralization for
any Mortgage Loan Group and Payment Date is the
Targeted Overcollateralization Amount for such
Mortgage Loan Group and Payment Date. The
Targeted Overcollateralization Amount is
initially (i.e., prior to the related Stepdown
Date) $11,130,000 with respect to the Fixed
Rate Group and, with respect to the Adjustable
Rate Group, an amount required by the Class A-6
Insurer. Since the actual level of the
Overcollateralization Amount with respect to
each Mortgage Loan Group as of the Closing Date
is less than the related Targeted
Overcollateralization Amount, in the early
months of the transaction, subject to the
availability of Monthly Excess Interest
Amounts, Extra Principal Distribution Amounts
will be paid, with the result that the
Overcollateralization Amount with respect to
each Mortgage Loan Group will increase to the
level of the related Targeted
Overcollateralization Amount.
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<PAGE> 25
If, once the Targeted Overcollateralization
Amount with respect to each Mortgage Loan Group
has been reached, Realized Losses occur in such
Mortgage Loan Group, such Realized Losses will
result in an Overcollateralization Deficiency
(since such Realized Losses reduce the
Principal Balance of the related Mortgage Loans
without giving rise to a corresponding
reduction of the related Aggregate Certificate
Principal Balance). The cashflow priorities of
the Trust require that, in this situation, an
Extra Principal Distribution Amount be paid
(subject to the availability of any Monthly
Excess Interest Amount) for the purpose of
re-establishing the Overcollateralization
Amount at the then-required Targeted
Overcollateralization Amount.
On and after the related Stepdown Date, the
Targeted Overcollateralization Amount with
respect to the Fixed Rate Group and the
Adjustable Rate Group, respectively, is
permitted to decrease or "step-down" below
their initial levels (which, in the case of the
Fixed Rate Group is $11,130,000, and which, in
the case of the Adjustable Rate Group, is an
amount required by the Class A-6 Insurer) to
levels equal to specified percentages (which in
the case of the Fixed Rate Group is 5.30%, and
which, in the case of the Adjustable Rate Group
is a level required by the Class A-6 Insurer)
of the then current aggregate outstanding
Principal Balance of the related Mortgage Loan
Group (subject to a floor of $2,100,000 for the
Fixed Rate Group and, with respect to the
Adjustable Rate Group, an amount required by
the Class A-6 Insurer) and, provided, further,
that, in the case of the Fixed Rate Group, if a
Fixed Rate Group Trigger Event is in effect,
the Targeted Overcollateralization Amount with
respect to the Fixed Rate Group will be its
original $11,130,000 level. If the Targeted
Overcollateralization Amount with respect to
each Mortgage Loan Group is permitted to
"stepdown" on a Payment Date, the Pooling and
Servicing Agreement permits a portion of the
related Principal Remittance Amount for such
Payment Date not to be passed through as a
distribution of principal on such Payment Date.
This has the effect of decelerating the
amortization of the Offered Certificates with
respect to each Mortgage Loan Group relative to
the aggregate outstanding Principal Balance of
the Mortgage Loans, thereby reducing the actual
level of the related Overcollateralization
Amount to the new, lower Targeted
Overcollateralization Amount. This portion of
the Principal Remittance Amount not distributed
as principal on the related Certificates
therefore releases overcollateralization from
the Trust with respect to the related Mortgage
Loan
S-25
<PAGE> 26
Group. The amount of such releases are the
"Overcollateralization Release Amounts."
A. On any Payment Date, the sum of the Fixed
Rate Group Monthly Excess Interest Amount
and the Fixed Rate Group
Overcollateralization Release Amount is
the Fixed Rate Group Monthly Excess
Cashflow Amount, which is required to be
applied in the following order of
priority on such Payment Date:
(1) to fund the Class A Interest Carry
Forward Amount, if any, with respect to
the Fixed Rate Group;
(2) to fund the Extra Principal Distribution
Amount for such Payment Date with respect
to the Fixed Rate Group;
(3) to fund the Class M-1 Interest Carry
Forward Amount, if any;
(4) to fund the Class M-1 Realized Loss
Amortization Amount for such Payment
Date, if any;
(5) to fund the Class M-2 Interest Carry
Forward Amount, if any;
(6) to fund the Class M-2 Realized Loss
Amortization Amount for such Payment
Date, if any;
(7) to fund the Class B-1 Interest Carry
Forward Amount, if any;
(8) to fund the Class B-1 Realized Loss
Amortization Amount for such Payment
Date, if any;
(9) to fund any amounts listed in clauses (1)
and (2) above for such Payment Date with
respect to the Adjustable Rate Group to
the extent that such amounts have not
been funded in full through the
application of the Adjustable Rate
Group's Monthly Excess Cashflow Amount on
such Payment Date; and
(10) to the Master Servicer to the extent of
any unreimbursed Delinquency Advances or
Servicing Advances including
Nonrecoverable Delinquency Advances and
Nonrecoverable Servicing Advances.
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<PAGE> 27
B. On any Payment Date, the sum of the
Adjustable Rate Group Monthly Excess
Interest Amount and the Adjustable Rate
Group Overcollateralization Release
Amount is the Adjustable Rate Group
Monthly Excess Cashflow Amount, which is
required to be applied in the following
order of priority on such Payment Date:
(1) to fund the Class A Interest Carry
Forward Amount, if any, with respect to
the Adjustable Rate Group;
(2) to reimburse the Class A-6 Insurer for
prior, unreimbursed Insured Payments,
subject to certain limits;
(3) to fund the Extra Principal Distribution
Amount for such Payment Date with respect
to the Adjustable Rate Group;
(4) to reimburse the Class A-6 Insurer for
any remaining prior, unreimbursed Insured
Payments;
(5) to the Master Servicer to the extent of
any unreimbursed Delinquency Advances or
Servicing Advances including
Nonrecoverable Delinquency Advances and
Nonrecoverable Servicing Advances; and
(6) to make payment of any Supplemental
Interest Amount then due to the Owners of
the Class A-6 Certificates or otherwise
to fund a distribution to Owners of the
Class R Certificates.
A consequence of the foregoing rules with
respect to the application of Monthly Excess
Cashflow is that the Adjustable Rate Group
benefits from a limited amount of
cross-collateralization from the Fixed Rate
Group (as provided in clause A(9) above),
although the Fixed Rate Group does not benefit
from any corresponding cross- collateralization
from the Adjustable Rate Group.
Subordination of Subordinate Certificates
(Fixed Rate Group). The rights of the Owners of
the Subordinate Certificates and the Class R
Certificates to receive distributions with
respect to the Mortgage Loans in the Fixed Rate
Group will be subordinated, to the extent
described herein, to such rights of the Owners
of the Class A Fixed Rate Group Certificates.
This subordination is intended to enhance the
likelihood of regular receipt by the
S-27
<PAGE> 28
Owners of the Class A Fixed Rate Group
Certificates of the full amount of their
scheduled monthly payment of interest and
principal and to afford such Owners protection
against Realized Losses allocated against the
Fixed Rate Group.
The protection afforded to the Owners of the
Class A Fixed Rate Group Certificates by means
of the subordination of the Subordinate
Certificates and the Class R Certificates will
be accomplished by the preferential right of
the Owners of the Class A Fixed Rate Group
Certificates to receive, prior to any
distribution being made on a Payment Date in
respect of such Subordinate Certificates and
the Class R Certificates, the amounts of
interest due them and principal available for
distribution on such Payment Date, and, if
necessary, by the right of the Owners of the
Class A Fixed Rate Group Certificates to
receive future distributions of amounts that
would otherwise be payable to the Owners of
such Subordinate Certificates and the Class R
Certificates.
In addition, the rights of the Owners of the
Class M-2, Class B-1 and Class R Certificates
to receive distributions will be subordinated,
to the extent described herein, to such rights
of the Owners of the Class A Fixed Rate Group
Certificates and Class M-1 Certificates. This
subordination is intended to enhance the
likelihood of regular receipt by the Owners of
the Class A Fixed Rate Group Certificates and
the Class M-1 Certificates of the amount of
interest due them and principal available for
distribution and to afford such Owners with
protection against Realized Losses.
The rights of the Owners of the Class B-1 and
the Class R Certificates to receive
distributions will be subordinated in the same
manner to such rights of the Owners of the
Class A Fixed Rate Group Certificates, Class
M-1 and Class M-2 Certificates and the rights
of Owners of the Class R Certificates to
receive distributions will be subordinated in
the same manner to such rights of the Owners of
the Fixed Rate Certificates.
The Class A-6 Insurance Policy. The Sponsor
will obtain a certificate insurance policy (the
"Class A-6 Insurance Policy"), with respect to
the Class A-6 Certificates, which is
noncancelable, in favor of the Trustee on
behalf of the Owners of the Class A-6
Certificates. On each Payment Date, the Class
A-6 Insurer will be required to make available
to the Trustee the amount, if any, by which the
Class A-6 Required Payments exceed the Net
Available Distribution Amount as of such
Payment Date. The Class
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<PAGE> 29
A-6 Insurance Policy does not guarantee to
owners of the Class A-6 Certificates any
specified rate of Prepayments. See "The Class
A-6 Insurance Policy" and "The Class A-6
Insurer" herein and "Description of Credit
Enhancement" in the Prospectus.
The Subordinate Certificates do not support the
Class A-6 Certificates and the Class A-6
Insurance Policy does not guarantee any
payments of principal and interest of the Fixed
Rate Group Certificates.
Nature of Class A-7IO General Character as an Interest-Only Security.
Certificates: As the owners of interest-only strip
securities, the Owners of the Class A-7IO
Certificates will be entitled to receive
monthly distributions only of interest, as
described herein. Because they will not receive
any distributions of principal, the Owners of
the Class A-7IO Certificates will be affected
by prepayments, liquidations and other
dispositions (including optional redemptions
described herein) of the Mortgage Loans in the
Fixed Rate Group to a greater degree than will
the Owners of the other Classes of Fixed Rate
Group Certificates. In addition, the Notional
Principal Balance applicable to interest
calculations on the Class A-7IO Certificates is
(x) through the 30th Payment Date, the Class
A-5 Certificate Principal Balance and (y)
thereafter, zero. Since the Class A-5
Certificates will amortize in accordance with
the distribution of the Class A-5 Lockout
Distribution Amount, the performance of the
Class A-7IO Certificates is likely to be more
stable than if such Notional Principal Balance
were calculated using the underlying Fixed Rate
Group Mortgage Loans directly, and
consequently, the yield sensitivity of such
Certificates will only be impacted at extremely
high CPRs. In addition, since the pool of Fixed
Rate Mortgage Loans as of the Statistic
Calculation Date contains 4,518 Mortgage Loans,
the prepayment experience of any one of the
Fixed Rate Mortgage Loans will not be material
to an investor's overall return.
In general, losses due to limitations,
repurchases by the Master Servicer and other
dispositions of Fixed Rate Mortgage Loans from
the Trust will have the same effect on the
Owners of the Class A-7IO Certificates as do
prepayments of principal and are collectively
referred to as "Prepayments."
Generally, because the yield to the Owners of
the Class A- 7IO Certificates is more sensitive
to rates of prepayment, it is advisable for
potential investors in the Class A-7IO
S-29
<PAGE> 30
Certificates to consider carefully, and to make
their own evaluation of, the effect of any
particular assumption regarding the rates and
the timing of prepayments. In general, when
interest rates decline, prepayments in a pool
of receivables such as the Fixed Rate Mortgage
Loans will increase as borrowers seek to
refinance at lower rates. This will have the
effect of reducing the future stream of
payments available to an owner of an
interest-only security based on such
receivables pool, thus adversely affecting such
investor's yield. Conversely, when interest
rates increase, prepayments will tend to
decrease (because attractive refinancing
opportunities are not available) and the future
stream of payments available to such an owner
of an interest-only security may not decline as
rapidly as originally anticipated, thus
positively affecting such investor's yield.
Since the amortization of the Class A-7IO
Certificates is tied to the Notional Principal
Balance, and the Notional Principal Balance
will amortize in accordance with the
distribution of the Class A-5 Lockout
Distribution Amount, the performance of the
Class A-7IO Certificates is expected to be more
stable as described herein. See "Prepayment and
Yield Considerations -- Yield Sensitivity of
the Class A-7IO Certificates" herein for other
factors which may also influence prepayment
rates.
Applicability of Credit Enhancement to the
Class A-7IO Certificates. As described above
under "Credit Enhancement," the Trust includes
provisions which subordinate the distributions
on the Subordinate Certificates and the Class R
Certificates for each Payment Date for the
purpose, inter alia, of funding the full amount
used on each Class of the Class A Fixed Rate
Certificates, including the Class A-7IO
Certificates, on each Payment Date.
In general, the protection afforded by such
subordination and overcollateralization
features is for credit risk and not for
prepayment risk. These features do not
guarantee or insure that any particular rate of
prepayment is experienced by the Trust. If the
entire pool of Fixed Rate Mortgage Loans were
to prepay in the initial month, with the result
that the Owners of the Class A-7IO Certificates
receive only a single month's interest and thus
suffer a nearly complete loss on their
investments, no amounts would be available from
the overcollateralization feature to mitigate
such loss.
Accrual of "Original Issue Discount." The Class
A-7IO Certificates will be issued with
"original issue discount" within the meaning of
the Code. As a result, in certain
S-30
<PAGE> 31
rapid prepayment environments the effect of the
rules governing the accrual of original issue
discount may require Owners of the Class A-7IO
Certificates to accrue original issue discount
at a rate in excess of the rate at which
distributions are received by such Owners. See
"Certain Federal Income Tax Consequences"
herein and in the Prospectus.
Delinquency Advances, The Master Servicer will be obligated to make
Compensating Interest and Delinquency Advances to the extent that such
Servicing Advances Delinquency Advances, in the Master Servicer's
reasonable judgment, are recoverable from the
related Mortgage Loan. Delinquency Advances are
recoverable from (i) future collections on the
Mortgage Loan which gave rise to the
Delinquency Advance, (ii) Liquidation
Proceeds for such Mortgage Loan and (iii) from
certain excess cash flows not applied for any
other purpose. "Delinquency Advances" are
amounts deposited in the Principal and Interest
Account by the Master Servicer equal to the sum
of the interest portions (net of the Servicing
Fees and certain other administrative amounts,
if any) due, but not collected with respect to
delinquent Mortgage Loans during the related
Remittance Period. No Delinquency Advance will
be required to be made by the Master Servicer
if, in the good faith judgment of the Master
Servicer, such Delinquency Advance would not
ultimately be recoverable from the related
Mortgage Loan (any such advance, a
"Nonrecoverable Delinquency Advance"); and if
previously made by the Master Servicer, a
Nonrecoverable Delinquency Advance will be
reimbursable from any amounts in the Principal
and Interest Account prior to any distributions
being made to Certificateholders.
The Master Servicer will also be obligated to
make advances with respect to certain taxes and
insurance premiums not paid by Mortgagors on a
timely basis. No Servicing Advance will be
required to be made by Master Servicer, if in
the good faith judgment of the Master Servicer,
such Servicing Advance would not be recoverable
from the related Mortgage Loan (any such
advance, a "Nonrecoverable Servicing Advance");
and if previously made by the Master Servicer,
a Nonrecoverable Servicing Advance will be
reimbursable from any amounts in the Principal
and Interest Account prior to any distribution
being made to Certificateholders.
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<PAGE> 32
In addition, the Master Servicer will also
be required to deposit Compensating
Interest in the Principal and Interest
Account with respect to any full Prepayment
received on a Mortgage Loan during the
related Remittance Period out of its own
funds without any right of reimbursement
therefor. "Compensating Interest" is an
amount equal to the difference between (x)
30 days' interest at the Mortgage Loan's
coupon rate on the principal balance as of
the first day of the related Remittance
Period and (y) to the extent not previously
advanced, the interest paid by the
Mortgagor with respect to the Mortgage
Loan. The Master Servicer will not be
required to pay Compensating Interest with
respect to any Remittance Period in an
amount in excess of the aggregate Servicing
Fee received by the Master Servicer for
such Remittance Period.
Book-Entry Registration The Offered Certificates will initially be
of the Offered Certificates issued in book-entry form. Persons
acquiring beneficial ownership interests in
such Offered Certificates ("Beneficial
Owners") may elect to hold their interests
through DTC, in the United States, or CEDEL
or Euroclear in Europe. Transfers within
DTC, CEDEL or Euroclear, as the case may
be, will be in accordance with the rules
and operating procedures of the relevant
system. See "Description of the Offered
Certificates -- Book-Entry Registration of
the Offered Certificates" herein, and
"Description of the Certificates--
Book-Entry Registration" in the Prospectus.
Servicing Fee Advanta Mortgage Corp. USA
will retain a Servicing Fee
equal to 0.50% per annum.
Optional Termination The Master Servicer, acting directly or
through a permitted designee, will have the
right to purchase from the Trust all the
Mortgage Loans then held by the Trust at a
price at least equal to par plus accrued
interest net of the Servicing Fee and any
amounts owed to the Master Servicer, on any
Remittance Date after the Remittance Period
during which the outstanding aggregate
principal balances of the Mortgage Loans in
the Trust had declined to 10% or less of
the aggregate principal balance of the
Mortgage Loans as of the Closing Date. The
first such Remittance Date on which such
option may be exercised is the "Clean-up
Call Date".
Ratings It is a condition to the issuance of the
Offered Certificates that each Class of the
Offered Certificates receive ratings from
Moody's Investors Service, Inc.
("Moody's"). Fitch
S-32
<PAGE> 33
Investors Service, L.P. ("Fitch") and Standard & Poor's Corporation ("Standard &
Poor's") as set forth below:
<TABLE>
<CAPTION>
Standard
Moody's Fitch & Poor's
Class Rating Rating Rating
- ----- ------ ------ ------
<S> <C> <C> <C>
Class A-1 Aaa AAA AAA
Class A-2 Aaa AAA AAA
Class A-3 Aaa AAA AAA
Class A-4 Aaa AAA AAA
Class A-5 Aaa AAA AAA
Class A-6 Aaa AAA AAA
Class A-7IO Aaa AAA AAAr
Class M-1 Aa2 AA AA
Class M-2 A2 A A
Class B-1 Baa2 BBB BBB
</TABLE>
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 entity. The "r" of
the "AAAr" rating of the Class A-7IO
Certificates by Standard's Poor's is
attached to highlight derivative, hybrid,
and certain other obligations that Standard
& Poor's believes may experience high
volatility or high variability in expected
returns due to non-credit risks. The Class
A-6 Insurer does not guarantee the payment
of, nor do the ratings address the
likelihood of the payment of, any
Supplemental Interest Amounts. See
"Prepayment and Yield Considerations" and
"Ratings" herein.
Federal Tax Aspects For federal income tax purposes, an
election will be made to treat certain
assets of the Trust as one or more REMICs.
Each of the Fixed Rate Group Certificates
will be a "regular interest" in a REMIC
which will be treated as a debt instrument
of the Trust for federal income tax
purposes. The Class A-6 Certificates will
be comprised of a "regular" interest in a
REMIC and the right to receive Supplemental
Interest Payments, which right has the tax
characteristics described herein. A class
of Class R Certificates will be designated
as the "residual interest" with respect to
each
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<PAGE> 34
REMIC election made by the Trust. See
"Certain Federal Income Tax Consequences"
herein and in the Prospectus.
ERISA Considerations The Class A Certificates may
be purchased by employee benefit plans that
are subject to ERISA. The Subordinate
Certificates may not be purchased by
employee benefit plans that are subject to
ERISA except as provided herein. See "ERISA
Considerations" herein and in the
Prospectus.
Legal Investment The Offered Certificates will not
Considerations constitute "mortgage related securities"
for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA").
In addition, institutions whose activities
are subject to review by federal or state
regulatory authorities may be or may become
subject to restrictions, which may be
retroactively imposed by such regulatory
authorities, on the investment by such
institutions in certain forms of mortgage
related securities. All investors whose
investment authority is subject to legal
restrictions should consult their own legal
advisors to determine whether, and to what
extent, the Certificates will constitute
legal investments for them.
Certain Legal Matters Certain legal matters relating to the
validity of the issuance of the
Certificates will be passed upon by Dewey
Ballantine, New York, New York.
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<PAGE> 35
RISK FACTORS
Prospective investors in the Offered Certificates should consider the
following factors, as well as the factors set forth under "Risk Factors" in the
Prospectus, in connection with the purchase of the Offered Certificates.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments.
14.53% of the Mortgage Loans as of the Statistic Calculation Date by aggregate
principal balance are Balloon Loans. See "Risk Factors -- Risk of Losses
Associated with Balloon Loans" in the Prospectus.
Fixed Rate Group Subordination--Limited Protection Afforded to Class A
Certificates. The rights of the Owners of the Class M-1 Certificates to receive
distributions with respect to the Mortgage Loans will be subordinate to the
rights of the holders of the Class A Fixed Rate Group Certificates to receive
such distributions, the rights of Owners of the Class M-2 Certificates to
receive distributions with respect to the Mortgage Loans will be subordinate to
the rights of the Owners of the Class A Fixed Rate Group Certificates and the
Class M-1 Certificates to receive such distributions and the rights of the
Owners of the Class B-1 Certificates to receive distributions with respect to
the Mortgage Loans will be subordinate to the rights of the Owners of the Class
A Fixed Rate Group Certificates, Class M-1 and Class M-2 Certificates to receive
such distributions. The subordination of the Subordinate Certificates relative
to the Class A Fixed Rate Group Certificates (and of the more lower-ranking
Classes of the Subordinate Certificates to the less higher-ranking Classes
thereof) is intended to enhance the likelihood of regular receipt by the Owners
of such Class A Fixed Rate Group Certificates (and such higher-ranking Classes)
of the full amount of the monthly distributions allocable to them, and to afford
such Owners protection against losses.
Fixed Rate Group Subordination--Allocation of Losses to Subordinate
Certificates. The rights of the Owners of each Class of Subordinate Certificates
to receive distributions of principal with respect to the Mortgage Loans will be
subordinate to the rights of the Owners of the Class A Fixed Rate Group
Certificates to receive such distributions and to the rights of the Owners of
each higher-ranking Class of Subordinate Certificates to receive such
distributions. See "Credit Enhancement--Subordination of Subordinate
Certificates" herein.
The yields to maturity on the Mezzanine Certificates and Class B-1
Certificates will be sensitive, in varying degrees, to defaults on the Mortgage
Loans (and the timing thereof). Investors should fully consider the risks
associated with an investment in the Mezzanine Certificates or Class B-1
Certificates, including the possibility that such investors may not fully
recover their initial investment as a result of Realized Losses on the Mortgage
Loans. See "Credit Enhancement--Application of Realized Losses" and "Prepayment
and Yield Considerations--Projected Payment and Yield for Offered Certificates"
herein.
Special Risks Associated with the Class A-7IO Certificates. As the
owners of interest-only strip securities, the Owners of the Class A-7IO
Certificates will be entitled to receive monthly distributions only of interest,
as described herein. Because they will not receive any distributions of
principal, the Owners of the Class A-7IO Certificates will be affected by
prepayments, liquidations and other dispositions (including optional redemptions
described herein) of the Mortgage Loans in the Fixed Rate Group to a greater
degree than will the Owners of the other Classes of Fixed Rate Group
Certificates. In addition, the Notional Principal Balance applicable to interest
calculations on the Class A-7IO Certificates is (x) through the 30th Payment
Date, the Class A-5 Certificate Principal Balance and (y) thereafter, zero.
Since the Class A-5 Certificates will amortize in accordance with the
distribution of the Class A-5 Lockout Distribution Amount, the performance of
the Class A-7IO Certificates is likely to be more stable than if such Notional
Principal Balance were calculated using the underlying Fixed Rate Group Mortgage
Loans directly, and consequently, the yield sensitivity of such Certificates
will only be impacted at extremely high CPRs.
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<PAGE> 36
Nature of Security. Since the Mortgage Loans are secured in certain
cases by junior liens subordinate to the rights of the mortgagee or beneficiary
under the related senior mortgage(s) or deed(s) of trust, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the outstanding balance of such a junior Mortgage Loan only to the extent that
the claims of such senior mortgagee(s) or beneficiary(ies) 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 mortgage(s), in which case it must either pay
the entire amount due on the senior mortgage(s) to the senior mortgagee(s) at or
prior to the foreclosure sale or undertake the obligation to make payments on
the senior mortgage(s) in the event the mortgagor is in default thereunder. In
servicing junior mortgages in its portfolio, it is generally the Master
Servicer's practice to satisfy the senior mortgage(s) at or prior to the
foreclosure sale. The Master Servicer may also advance funds to keep the senior
mortgage(s) current until such time as the Master Servicer satisfies the senior
mortgage(s). The Trust will have no source of funds (and may not be permitted
under the REMIC provisions of the Code) to satisfy the senior mortgage(s) or
make payments due to the senior mortgagee(s). The Master Servicer will be
required to advance such amounts in accordance with the Pooling and Servicing
Agreement.
Information is provided under "The Mortgage Loan Pool -- General" with
respect to the LTVs and the CLTVs of the Mortgage Loans, as of the Statistic
Calculation Date. As discussed in the Prospectus under "Risk Factors," the value
of the Mortgaged Properties underlying such loans could be adversely affected by
a number of factors. As a result, despite the amortization of the junior and
senior mortgage loans on such Mortgaged Properties, there can be no assurance
that the CLTVs of such loans, determined as of a date subsequent to the
origination date, will be the same or lower than the CLTVs for such loans,
determined as of the origination date.
Even assuming that the Mortgaged Properties provided adequate security
for the Mortgage Loans, substantial delay could be encountered in connection
with the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of such proceeds by the Trust could occur. Further, the Master Servicer
will be entitled to deduct from liquidation proceeds received in respect of a
fully liquidated Mortgage Loan all expenses incurred in attempting to recover
amounts due on such Mortgage Loan and not yet repaid, including payments to
senior mortgagees, legal fees, real estate taxes, and maintenance and
preservation expenses, thereby reducing collections available to the Trust.
Liquidation expenses with respect to defaulted Mortgage Loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be smaller as a
percentage of the outstanding principal balance of the smaller mortgage loan
than would be the case with a larger loan. Because the average outstanding
principal balances of the Mortgage Loans are small relative to the size of the
loans in a typical pool of purchase-money first mortgages, realizations net of
liquidation expenses on defaulted Mortgage Loans may also be smaller as a
percentage of the principal amount of the Mortgage Loans than would such net
realizations in the case of a typical pool of purchase-money first mortgage
loans.
Investor-owned properties represent (based solely upon statements made
by the borrowers at the time of origination of the related Mortgage Loan), as a
percentage of the aggregate principal balance of the Mortgage Loans, as of the
Statistic Calculation Date, 6.04% of the Mortgage Loans. It is possible that the
rate of delinquencies, foreclosures and losses on mortgage loans secured by
non-owner occupied properties could be higher than for loans secured by the
primary residence of the borrower.
S-36
<PAGE> 37
Developments Relating to Advanta Corp. During 1997. Certain
developments have occurred during 1997 with respect to Advanta Corp., the
ultimate corporate parent of the Sponsor and of the Master Servicer. The
consequences, if any, of such developments may positively, or may adversely,
affect the financial ability of the Sponsor and/or the Master Servicer to
perform their financial obligations, or to service the Mortgage Loan pool. See
"The Sponsor and the Master Servicer - Recent Developments related to Advanta
Parent".
Risk of Mortgage Loan Rates Reducing the Pass-Through Rate on the
Adjustable Rate Group Certificates. The calculation of the Pass-Through Rate on
the Adjustable Rate Group Certificates is based upon (i) the value of an index
(LIBOR) which is different from the value of the index applicable to the
Mortgage Loans in the Adjustable Rate Group as described under "The Mortgage
Loan Pool -- Mortgage Loans -- Adjustable Rate Group" (either as a result of the
use of a different index, rate determination date or rate adjustment date) and
(ii) the weighted average of the Coupon Rates of the Mortgage Loans in the
Adjustable Rate Group which are subject to periodic adjustment caps, maximum
rate caps, minimum rate floors, various resets and reset frequencies. 93.48% of
the Mortgage Loans in the Adjustable Rate Group by aggregate Principal Balance
as of the Statistic Calculation Date adjust semi-annually based upon the London
interbank offered rate for six-month United States dollar deposits ("Six-Month
LIBOR") and 6.52% adjust annually based upon the one-year constant maturity
treasury (the "CMT"), whereas the Pass-Through Rate on the Adjustable Rate Group
Certificates adjusts monthly based upon LIBOR as described under "Description of
the Offered Certificates -- Calculation of LIBOR" herein, subject to the
Adjustable Rate Group Available Funds Cap (unless Supplemental Interest Amounts,
the payment of which is not rated, are paid in full). Consequently, the interest
which becomes due on the Mortgage Loans in the Adjustable Rate Group (net of the
Servicing Fee, the Trustee Fee, the Premium and certain required reductions)
during any - Period may not equal the amount of interest that would accrue at
LIBOR plus the margin on the Adjustable Rate Group Certificates during the
related Accrual Period. 40.77% of the Mortgage Loans in the Adjustable Rate
Group by aggregate Principal Balance as of the Statistic Calculation Date are
2/28 Loans that provide for a fixed interest rate for a period of approximately
two years following origination. 12.69% of the Mortgage Loans in the Adjustable
Rate Group by aggregate Principal Balance as of the Statistic Calculation Date
are 3/27 Loans that provide for a fixed interest rate for a period of
approximately three years following origination. 23.63% of the Mortgage Loans in
the Adjustable Rate Group by aggregate Principal Balance as of the Statistic
Calculation Date are 5/25 Loans that provide for a fixed interest rate for a
period of approximately five years following origination. Thereafter, such
Mortgage Loans provide for interest rate and payment adjustments in a manner
similar to the Six-Month LIBOR Loans and one-year CMT Loans. In particular, the
Pass-Through Rate on the Adjustable Rate Group Certificates adjusts monthly,
while the interest rates of the Mortgage Loans in the Adjustable Rate Group
adjust less frequently with the result that the Adjustable Rate Group Available
Funds Cap may limit increases in the Pass-Through Rate on the Adjustable Rate
Group Certificates for extended periods in a rising interest rate environment.
In addition, LIBOR, Six-Month LIBOR and one-year CMT may respond to different
economic and market factors, and there is not necessarily a correlation between
them. Thus, it is possible, for example, that LIBOR may rise during periods in
which Six-Month LIBOR or one-year CMT is stable or is falling or that, even if
LIBOR, Six-Month LIBOR and one-year CMT rise during the same period, LIBOR may
rise more rapidly than Six-Month LIBOR or the one-year CMT. Furthermore, if the
Adjustable Rate Group Available Funds Cap determines the Pass-Through Rate on
the Adjustable Rate Group Certificates for a Payment Date, the value of the
Adjustable Rate Group Certificates will be temporarily or permanently reduced.
S-37
<PAGE> 38
THE PORTFOLIO OF MORTGAGE LOANS
The Mortgage Loan Pool includes loans which were either originated
directly by the Affiliated Originators or purchased by the Affiliated
Originators from others on a loan-by-loan basis and in either case acquired by
the Sponsor. The Sponsor also acquires loans from Unaffiliated Originators in
acquisitions from Conduit Participants or in bulk acquisitions of loan
portfolios. Such loans are originated by Unaffiliated Originators either
directly or purchased by the Unaffiliated Originators from others on a
loan-by-loan basis.
The Originators which are affiliated with the Sponsor are Advanta
Mortgage Corp. USA, Advanta National Bank USA, Advanta Mortgage Corp.
Midatlantic, Advanta Mortgage Corp. Midatlantic II, Advanta Mortgage Corp.
Midwest, Advanta Mortgage Corp. of New Jersey, Advanta Mortgage Corp. Northeast
and Advanta Finance Corp.
UNAFFILIATED ORIGINATORS
MCA. The Sponsor acquired approximately 7.84% of the Mortgage Loans as
of the Statistic Calculation Date from Mortgage Corporation of America, an
Unaffiliated Originator (such mortgage loans, the "MCA Loans"). Mortgage
Corporation of America is headquartered in Southfield, Michigan and is engaged
in originating mortgage loans through retail and wholesale channels. The MCA
Loans consist of 582 Mortgage Loans representing an aggregate principal balance
of $37,947,917.39 as of the Statistic Calculation Date. Approximately 55.55% (by
aggregate principal balance as of the Statistic Calculation Date) of the MCA
Loans are included in the Fixed Rate Group and approximately 44.45% of the MCA
Loans are included in the Adjustable Rate Group. The MCA Loans are related to
properties located in 18 states.
Prior to its purchase of the MCA Loans, the Sponsor performed or caused
to be performed an operational review of the origination and servicing practices
of MCA.
The weighted average CLTV of the MCA Loans as of the Statistic
Calculation Date was 77.42%; the weighted average Mortgage Rate was 11.46% per
annum; the weighted average original term to stated maturity was 279 months; the
weighted average remaining term to stated maturity was 278 months; and 98.95% of
the MCA Loans were secured by first mortgages.
PAM. The Sponsor acquired approximately 24.43% of the Mortgage Loans as
of the Statistic Calculation Date from PacificAmerica Money Center, Inc., an
Unaffiliated Originator (such mortgage loans, the "PAM Loans." PacificAmerica
Money Center, Inc. is headquartered in Woodland Hills, CA and is engaged in
originating mortgage loans through retail and wholesale channels. The PAM Loans
consist of 1,204 Mortgage Loans representing an aggregate principal balance of
$118,198,474.82 as of the Statistic Calculation Date. Approximately 39.79% (by
aggregate principal balance as of the Statistic Calculation Date) of the PAM
Loans are included in the Fixed Rate Group and approximately 60.21% of the PAM
Loans are included in the Adjustable Rate Group. The PAM Loans are related to
properties located in 34 states and the District of Columbia.
Prior to its purchase of the PAM Loans, the Sponsor performed or caused
to be performed an operational review of the origination practices of PAM. The
Sponsor has been acquiring Mortgage Loans from PAM since mid-1995.
The weighted average CLTV of the PAM Loans as of the Statistic
Calculation Date was 75.18%, the weighted average Mortgage Rate was 10.88% per
annum; the weighted average original term to stated maturity was 347 months; the
weighted average remaining term to stated maturity was 347 months and 95.97% of
the PAM Loans were secured by first mortgages.
S-38
<PAGE> 39
Goodrich & Pennington. The Sponsor acquired approximately 2.71% of the
Mortgage Loans as of the Statistic Calculation Date from Goodrich & Pennington
Mortgage Fund, Inc., an Unaffiliated Originator (such mortgage loans, the "G&P
Loans"). Goodrich & Pennington Mortgage Fund, Inc. is headquartered in Rohnert
Park, CA and is engaged in originating mortgage loans through retail and
wholesale channels. The G&P Loans consist of 112 Mortgage Loans representing an
aggregate principal balance of $13,114,411.53 as of the Statistic Calculation
Date. Approximately 44.14% (by aggregate principal balance as of the Statistic
Calculation Date) of the G&P Loans are included in the Fixed Rate Group and
approximately 55.86% of the G&P Loans are included in the Adjustable Rate Group.
The G&P Loans are related to properties located in 9 states.
Prior to its purchase of the G&P Loans, the Sponsor performed or caused
to be performed an operational review of the origination practices of Goodrich &
Pennington Mortgage Fund, Inc.
As of the Statistic Calculation Date, the weighted average CLTV of the
G&P Loans was 73.44%; the weighted average Mortgage Rate was 10.19% per annum;
the weighted average original term to stated maturity was 340 months; the
weighted average remaining term to stated maturity was 339 months and 99.18% of
the G&P Loans were secured by first mortgages.
McGuire Mortgage Company. The Sponsor acquired approximately 1.21% of
the Mortgage Loans as of the Statistic Calculation Date from McGuire Mortgage
Company, an Unaffiliated Originator (such mortgage loans, the "McGuire Loans").
McGuire Mortgage Company is headquartered in Prairie Village, Kansas and is
engaged in originating mortgage loans through retail channels. The McGuire Loans
consist of 101 Mortgage Loans representing an aggregate principal balance of
$5,865,726.06 as of the Statistic Calculation Date. Approximately 100% (by
aggregate principal balance as of the Statistic Calculation Date) of the McGuire
Loans are included in the Fixed Rate Group. The McGuire Loans are related to
properties located in 7 states.
Prior to its purchase of the McGuire Loans, the Sponsor performed or
caused to be performed an operational review of the origination and servicing
practices of McGuire Mortgage Company.
The weighted average CLTV of the McGuire Loans as of the Statistic
Calculation Date was 77.77%; the weighted average Mortgage Rate was 11.85% per
annum; the weighted average original term to stated maturity was 196 months; the
weighted average remaining term to stated maturity was 195 months; and 90.75% of
the McGuire Loans were secured by first mortgages.
The MCA Loans, the G&P Loans, the PAM Loans and the McGuire Loans are
collectively referred to herein as the "Unaffiliated Originator Loans."
All of the Mortgage Loans purchased by the Sponsor from the
Unaffiliated Originators were originated in accordance with the Sponsor's
underwriting guidelines for Unaffiliated Originators. See "Mortgage Loan Program
- -- Underwriting Guidelines" in the Prospectus.
BULK ACQUISITIONS
Loans representing 8.66 % of the aggregate principal balance of
Mortgage Loans as of the Statistic Calculation Date were purchased in Bulk
Acquisitions by the Sponsor in the first quarter of 1997 and such loans were
originated in accordance with the Sponsor's Bulk Guidelines. See "Mortgage Loan
Program --Underwriting Guidelines -- Bulk Guidelines" in the Prospectus. All of
the loans acquired in these transactions were acquired "servicing released";
i.e., Advanta Mortgage Corp. USA acts as the Master
S-39
<PAGE> 40
Servicer. All Mortgage Loans so purchased or to be so purchased are hereinafter
referred to as the "Bulk Loans."
DELINQUENCIES
Owned and Managed Servicing Portfolio. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience of
the Master Servicer for its servicing portfolio, excluding certain loans
serviced by the Master Servicer that were not originated or purchased and
reunderwritten by the Sponsor or its Affiliated Originators (the "Owned and
Managed Servicing Portfolio"), of fixed and adjustable rate mortgage loans as of
March 31, 1997, and for each of the four prior years ended December 31. The
Owned and Managed Servicing Portfolio includes, but is not limited to, the
Mortgage Loans acquired on or prior to March 31, 1997, which are contained in
the Mortgage Loan Pool, as of the Statistic Calculation Date. In addition to the
Owned and Managed Servicing Portfolio, the Master Servicer serviced, as of March
31, 1997, approximately 86,700 mortgage loans with an aggregate principal
balance as of such date of approximately $5.6 billion; such loans were not
originated by the Sponsor or its Affiliated Originators and are being serviced
for third parties on a contract servicing basis (the "Third-Party Servicing
Portfolio"). No loans in the Third-Party Servicing Portfolio are included in the
tables set forth below.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE
MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS
<TABLE>
<CAPTION>
THREE MONTHS ENDING YEAR ENDING DECEMBER 31,
-------------------- ----------------------------------------------------------------------
MARCH 31, 1997 1996 1995 1994
-------------------- ------------------- -------------------- --------------------
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR
OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT
LOANS (000) LOANS (000) LOANS (000) LOANS (000)
------- ---------- ------- --------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio 49,998 $3,102,904 43,303 $2,595,981 32,592 $1,797,582 26,446 $1,346,100
Delinquency
percentage(1)
30-59 days 2.58% 2.46% 3.07% 2.90% 2.67% 2.44% 2.01% 1.57%
60-89 days 0.72% 0.72% 0.85% 0.90% 0.72 0.71 0.57 0.45
90 days or more 1.45% 1.80% 1.45% 1.26% 1.69 1.23 1.85 1.51
---- ---- ---- ---- ---- ---- ---- ----
Total 4.75% 4.98% 5.37% 5.06% 5.08% 4.38% 4.43% 3.53%
Foreclosure
rate(2) 1.58% 1.78% 1.62% 1.92% 1.29% 1.53% 1.35% 1.38%
REO
properties(3) 0.37% -- 0.42% -- 0.52% -- 0.47% --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-----------------------
1993
-----------------------
NUMBER DOLLAR
OF AMOUNT
LOANS (000)
------- ------------
<S> <C> <C>
Portfolio 25,460 $1,149,864
Delinquency
percentage(1)
30-59 days 2.43% 2.22%
60-89 days 0.77 0.63
90 days or more 2.19 2.12
---- ----
Total 5.39% 4.97%
Foreclosure
rate(2) 1.32% 1.62%
REO
properties(3) 0.42% --
</TABLE>
- ----------------
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude
loans in foreclosure.
(2) "Foreclosure Rate" is the number of mortgage loans or the dollar amount
of mortgage loans in foreclosure as a percentage of the total number of
mortgage loans or the dollar amount of mortgage loans, as the case may
be, as of the date indicated.
(3) REO Properties (i.e., "real estate owned" properties -- properties
relating to mortgages foreclosed or for which deeds in lieu of
foreclosure have been accepted, and held by the Master Servicer pending
disposition) percentages are calculated using the number of loans, not
the dollar amount.
S-40
<PAGE> 41
LOAN LOSS EXPERIENCE
OF THE MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS*
<TABLE>
<CAPTION>
THREE MONTHS ENDING YEAR ENDING DECEMBER 31,
------------------- ----------------------------------------------------------------
MARCH 31, 1997 1996 1995 1994 1993
------------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount outstanding(1) $2,799,224 $2,102,643 $1,540,238 $1,225,529 $1,049,447
Gross losses(2) $ 3,966 $ 15,184 $ 13,978 $ 20,886 $ 14,115
Recoveries(3) $ 21 $ 117 $ 148 $ 179 $ 123
Net losses(4) $ 3,945 $ 15,067 $ 13,830 $ 20,707 $ 13,992
Net losses as a percentage of
average amount outstanding(5) 0.56% 0.72% 0.90% 1.69% 1.33%
</TABLE>
- ----------
(1) "Average Amount Outstanding" during the period is the arithmetic average
of the principal balances of the mortgage loans outstanding on the last
business day of each month during the period.
(2) "Gross Losses" are amounts which have been determined to be uncollectible
relating to mortgage loans for each respective period.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" represents "Gross Losses" minus "Recoveries".
(5) March 31, 1997 percentage has been based on annualized net losses.
The Master Servicer experienced an increase in the net loss rate on its
Owned and Managed Portfolio during the period 1990 through 1994. It believes
that such increase was due to four primary factors: the seasoning of its
portfolio, economic conditions, a decline in property values in certain regions
and the acceleration of charge-offs on loans in 1994. In addition, the level of
net losses during such period was negatively impacted by the performance of the
Non-Income Verification ("NIV") loan program. The net loss rates as a percentage
of the average amount outstanding on its Owned and Managed Portfolio, excluding
NIV loans, are 1.42% and 0.88% for the periods ending December 31, 1994 and
December 31, 1993, respectively.*
- --------
* Managed portfolio statistics restated to exclude interest advances on
serviced portfolio to be consistent with presentation of owned portfolio.
S-41
<PAGE> 42
THE MORTGAGE LOAN POOL
GENERAL
The statistical information presented in this Prospectus Supplement
concerning the pool of Mortgage Loans is based on the pool as of the Statistic
Calculation Date. Unless otherwise noted, all statistical percentages in this
Prospectus Supplement are measured by the aggregate principal balance of the
related Mortgage Loans as of the Statistic Calculation Date.
The Mortgage Loans will be predominantly home equity loans, i.e., loans
used (x) to refinance an existing mortgage loan on more favorable terms, (y) to
consolidate debt, or (z) to obtain cash proceeds by borrowing against the
Mortgagor's equity in the related Mortgaged Property.
The Mortgage Loans to be sold by the Sponsor to the Trust consisted, as
of the Statistic Calculation Date, of 6,439 loans evidenced by promissory notes
(the "Notes") secured by Mortgages on the Mortgaged Properties, which are
located in 49 states and the District of Columbia. The Mortgaged Properties
securing the Mortgage Loans consist primarily of single-family residences (which
may be detached, part of a two-to four-family dwelling, a condominium unit or a
unit in a planned unit development). The Mortgaged Properties may be
owner-occupied (which includes second and vacation homes) and non-owner occupied
investment properties.
The Mortgage Loans will be required to satisfy the following criteria
as of the Statistic Calculation Date: have remaining terms to maturity of no
greater than 30 years; will not be 30 or more days delinquent (except that
certain Mortgage Loans, representing in the aggregate not in excess of 1.30% of
the aggregate principal balance of all Mortgage Loans as of the Statistic
Calculation Date, may be 30-59 days delinquent and no more than 0.03% of the
aggregate principal balance of all Mortgage Loans as of the Statistic
Calculation Date may be 60-89 days delinquent) and, with respect to fixed-rate
Mortgage Loans, have a Mortgage Rate as of the Statistic Calculation Date of at
least 7.45%. Neither the Sponsor nor the Master Servicer have reason to believe
that the delinquency and loss experience of the Mortgage Loans will differ in
any material respect from that of the Master Servicer's total servicing
portfolio, although there can be no assurance that this will be the case.
Less than 12.00% of the Mortgage Loans (as a percentage of the
aggregate principal balance of all Mortgage Loans as of the Statistic
Calculation Date) are "simple interest" or "date of payment" loans, with the
remainder "actuarial" or "pre-computed" loans. A "simple interest" loan provides
that interest which has accrued to date is paid first and the remaining payment
is applied to reduce the unpaid principal balance. An "actuarial" loan provides
for amortization of the loan over a series of fixed level monthly installments.
95.22% of the Mortgage Loans are secured by first lien mortgages on the related
Mortgaged Properties and 4.78% of the Mortgage Loans are secured by junior liens
on the related Mortgaged Properties.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups (the "Fixed Rate Group" and the "Adjustable Rate Group",
respectively, and each a "Mortgage Loan Group"). Each of the Mortgage Loans
contained in Fixed Rate Group will be secured by a Mortgage having either a
first or junior lien position with respect to the related Mortgaged Property and
will have a maximum remaining term to maturity of 30 years. The Mortgage Loans
contained in the Adjustable Rate Group will be secured by a Mortgage having
either a first or a junior lien position with respect to the related Mortgaged
Property and will have a maximum remaining term to maturity of 30 years. The
Fixed Rate Group Certificates represent undivided ownership interests in all
Mortgage Loans contained or to be contained
S-42
<PAGE> 43
in the Fixed Rate Group and the Adjustable Rate Group Certificates represent
undivided ownership interests in all Mortgage Loans contained or to be contained
in the Adjustable Rate Group.
The CLTVs and LTVs described herein were calculated based upon the
appraised values of the related Mortgaged Properties at the time of origination
(the "Appraised Values"). In general, for purchase money loans, the CLTVs and
LTVs were calculated using the lower of the purchase price or appraised values
of the related Mortgaged Properties at the time of origination. No assurance can
be given that such appraised values of the Mortgaged Properties have remained or
will remain at their levels on the dates of origination of the related Mortgage
Loans. If property values decline such that the outstanding balances of the
Mortgage Loans, together with the outstanding balances of any Senior Liens,
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 heretofore experienced by the Master Servicer, as set forth above under
"The Portfolio of Mortgage Loans," and in the mortgage lending industry.
Difference between Statistic Calculation Date Pools and Closing Date
Pools.
The statistical information presented in this Prospectus Supplement is
based on the pools as of the Statistic Calculation Date. These pools aggregated
$283,210,170.64 with respect to the Fixed Rate Group and $200,661,062.31 with
respect to the Adjustable Rate Group. The Sponsor expects that the actual pools
as of the Closing Date will represent approximately $420,000,000 in Mortgage
Loans in the Fixed Rate Group and approximately $280,000,000 in Mortgage Loans
in the Adjustable Rate Group. The additional Mortgage Loans to be included in
the final pools will represent Mortgage Loans acquired or to be acquired by the
Sponsor on or prior to the Closing Date. In addition, with respect to the pools
as of the Statistic Calculation Date, as to which statistical information is
presented herein, some amortization of the Mortgage Loans contained in such
pools will occur prior to the Closing Date. Moreover, certain loans included in
the pools as of the Statistic Calculation Date may prepay in full or may be
determined not to meet the eligibility requirements for the final pools and as a
result may not be included in the final pools. As a result of the foregoing, the
statistical distribution of characteristics as of the Closing Date for the final
Mortgage Loan pools will vary somewhat from the statistical distribution of such
characteristics as of the Statistic Calculation Date as presented in this
Prospectus Supplement, although such variance will not be material. In the event
that the Sponsor does not, as of the Closing Date, have the full amount of
Mortgage Loans which the Sponsor expects to sell to the Trust on such date,
(i.e., approximately $420,000,000 with respect to Fixed Rate Group and
approximately $280,000,000 with respect to the Adjustable Rate Group) the
Sponsor will reduce the size of the offering (which, if such reduction relates
to the Fixed Rate Group Certificates will be a pro rata reduction in each class
of Offered Certificates). The Sponsor does not expect that the original
principal amount of any class will increase or decrease by more than 5% as a
result of such non-delivery. Even if the full expected amount of Mortgage Loans
is delivered, certain adjustments (plus or minus 5%) may occur between the class
sizes.
THE FIXED RATE GROUP
The Mortgage Loans in the Fixed Rate Group as of the Statistic
Calculation Date consist of 4,518 Mortgage Loans under which the related
Mortgaged Properties are located in 48 states and the District of Columbia, as
set forth herein. The Fixed Rate Group had an aggregate principal balance of
$283,210,170.64 and the minimum principal balance of any of the Mortgage Loans
in the Fixed Rate Group as of the Statistic Calculation Date was $6,092.25 the
maximum principal balance thereof was $510,000 and the average principal balance
of such Mortgage Loans was approximately $62,685. The Mortgage Rates on the
Mortgage Loans in the Fixed Rate Group ranged from 7.45% to 17.45% per annum,
and the weighted average Mortgage Rate of such Mortgage Loans was 10.83% per
annum. The original term to stated maturity of the Mortgage Loans in the Fixed
Rate Group ranged from 36 months
S-43
<PAGE> 44
to 360 months, the remaining term to stated maturity ranged from 35 months to
360 months, the weighted average original term to stated maturity was 253
months, the weighted average remaining term to stated maturity was 251 months
and the weighted average seasoning was 2 months. No Mortgage Loan in the Fixed
Rate Group had a stated maturity later than May 20, 2027. 75.35% of the Mortgage
Loans in the Fixed Rate Group by aggregate principal balance require monthly
payments of principal that will fully amortize the Mortgage Loans by their
respective maturity dates, and 24.65% of such Mortgage Loans by aggregate
principal balance are Balloon Loans.
The weighted average CLTV of the Mortgage Loans included in the Fixed
Rate Group was 74.07%. The weighted average Junior Lien Ratio (as defined below)
of the Mortgage Loans in the Fixed Rate Group was 33.95%; the weighted average
LTV was 69.96%. Approximately 92% of the Mortgage Loans in the Fixed Rate Group
by aggregate principal balance were secured by first mortgages and approximately
8% by junior mortgages.
The "Junior Lien Ratio" of a Mortgage Loan which is in a junior lien
position is equal to the ratio (expressed as a percentage) of the original
principal balance of such Mortgage Loan to the sum of (i) the original principal
balance of such Mortgage Loan and (ii) the principal balance at the time of
origination of the Mortgage Loan of any Senior Liens (computed at the time of
origination of such Mortgage Loan).
The following tables describe the Fixed Rate Group Mortgage Loans and
the related Mortgaged Properties based upon the Fixed Rate Group as of the
Statistic Calculation Date.
S-44
<PAGE> 45
FIXED RATE GROUP
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Alabama.................. 33 $ 1,012,786.53 0.36%
Arizona.................. 94 5,526,649.22 1.95
Arkansas................. 25 1,102,485.27 0.39
California............... 306 32,160,281.83 11.34
Colorado................. 110 7,792,710.72 2.75
Connecticut.............. 32 3,179,264.48 1.12
Delaware................. 30 1,883,528.80 0.67
District of Columbia..... 13 1,057,771.87 0.37
Florida.................. 375 23,052,683.60 8.14
Georgia.................. 128 7,520,676.09 2.66
Hawaii................... 4 647,735.63 0.23
Idaho.................... 23 1,376,878.33 0.49
Illinois................. 185 11,833,927.77 4.18
Indiana.................. 224 10,408,261.27 3.68
Iowa..................... 21 893,931.92 0.32
Kansas................... 74 3,870,896.06 1.37
Kentucky................. 30 1,886,465.92 0.67
Louisiana................ 61 2,911,877.81 1.03
Maine.................... 9 460,218.46 0.16
Maryland................. 128 8,895,187.82 3.14
Massachusetts............ 93 6,610,236.81 2.33
Michigan................. 253 13,045,709.21 4.61
Minnesota................ 51 2,729,488.68 0.96
Mississippi.............. 29 1,397,787.15 0.49
Missouri................. 175 8,062,460.88 2.85
Montana.................. 11 510,038.31 0.18
Nebraska................. 27 1,628,252.61 0.57
Nevada................... 58 5,342,201.60 1.89
New Hampshire............ 12 847,822.20 0.30
New Jersey............... 129 10,345,817.36 3.65
New Mexico............... 20 1,239,320.15 0.44
New York................. 234 18,577,492.53 6.56
North Carolina........... 158 8,400,003.22 2.97
North Dakota............. 1 50,374.07 0.02
Ohio..................... 266 14,146,131.18 4.99
Oklahoma................. 48 2,556,272.02 0.90
Oregon................... 80 6,719,866.60 2.37
Pennsylvania............. 321 15,162,547.37 5.35
Rhode Island............. 24 1,778,887.26 0.63
South Carolina........... 120 6,080,526.91 2.15
South Dakota............. 10 607,197.45 0.21
Tennessee................ 56 3,036,195.58 1.07
Texas.................... 13 756,121.23 0.27
Utah..................... 96 6,424,293.01 2.27
Vermont.................. 13 778,365.59 0.27
Virginia................. 109 5,800,722.74 2.05
Washington............... 132 9,472,611.55 3.34
West Virginia............ 31 1,318,568.65 0.47
Wisconsin................ 35 1,896,186.39 0.67
Wyoming.................. 8 414,452.93 0.15
----- --------------- ------
TOTAL................ 4,518 $283,210,170.64 100.00%
===== =============== ======
</TABLE>
S-45
<PAGE> 46
FIXED RATE GROUP
DISTRIBUTION OF CLTVS
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
CLTV RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------- -------------- ----------------- -----------------
<S> <C> <C> <C>
95.01 - 100.00%........... 1 $ 31,378.72 0.01%
90.01 - 95.00............ 10 514,043.30 0.18
85.01 - 90.00............ 172 14,077,996.49 4.97
80.01 - 85.00............ 1,106 69,342,691.69 24.48
75.01 - 80.00............ 1,042 71,292,507.45 25.19
70.01 - 75.00............ 645 41,728,867.99 14.73
65.01 - 70.00............ 463 29,844,360.09 10.54
60.01 - 65.00............ 308 19,039,215.12 6.72
55.01 - 60.00............ 231 13,831,150.54 4.88
50.01 - 55.00............ 131 6,776,952.01 2.39
00.01 - 50.00............ 409 16,731,007.24 5.91
----- --------------- ------
TOTAL................. 4,518 $283,210,170.64 100.00%
===== =============== ======
</TABLE>
FIXED RATE GROUP
DISTRIBUTION OF LTVS
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
LTV RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------- -------------- ----------------- -----------------
<S> <C> <C> <C>
95.01 - 100.00%........... 1 $ 31,378.72 0.01%
90.01 - 95.00............ 10 514,043.30 0.18
85.01 - 90.00............ 138 12,953,736.08 4.57
80.01 - 85.00............ 802 60,179,975.17 21.25
75.01 - 80.00............ 904 66,966,053.64 23.64
70.01 - 75.00............ 555 38,700,959.51 13.67
65.01 - 70.00............ 422 28,487,674.67 10.06
60.01 - 65.00............ 274 18,271,887.76 6.45
55.01 - 60.00............ 217 13,248,999.32 4.68
50.01 - 55.00............ 123 6,537,358.60 2.31
00.01 - 50.00............ 1,072 37,318,103.87 13.18
----- --------------- ------
TOTAL................. 4,518 $283,210,170.64 100.00%
===== =============== ======
</TABLE>
S-46
<PAGE> 47
FIXED RATE GROUP
DISTRIBUTION OF JUNIOR LIEN RATIOS
(JUNIOR LIENS ONLY)
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
JUNIOR LIEN RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
0.00 - 10.00%......... 20 $ 335,778.17 1.46%
10.01 - 20.00.......... 142 3,560,059.66 15.49
20.01 - 30.00.......... 258 7,800,468.95 33.96
30.01 - 40.00.......... 166 5,806,244.27 25.27
40.01 - 50.00.......... 69 2,432,346.34 10.58
50.01 - 60.00.......... 18 655,547.56 2.85
60.01 - 70.00.......... 23 901,693.82 3.92
70.01 - 80.00.......... 15 746,564.51 3.25
80.01 - 90.00.......... 10 442,144.11 1.92
90.01 - 100.00.......... 5 299,814.52 1.30
--- -------------- ------
TOTAL............... 726 $22,980,661.91 100.00%
=== ============== ======
</TABLE>
FIXED RATE GROUP
DISTRIBUTION OF MORTGAGE RATES
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
7.01 - 8.00%......... 12 $ 1,271,356.76 0.45%
8.01 - 9.00.......... 395 29,558,648.88 10.44
9.01 - 10.00......... 971 73,310,647.03 25.89
10.01 - 11.00......... 997 70,750,806.06 24.98
11.01 - 12.00......... 920 53,704,117.17 18.96
12.01 - 13.00......... 658 31,414,910.51 11.09
13.01 - 14.00......... 374 15,620,778.00 5.52
14.01 - 15.00......... 147 5,417,934.63 1.91
15.01 - 16.00......... 33 1,536,049.31 0.54
16.01 - 17.00......... 9 579,420.80 0.20
17.01 - 18.00......... 2 45,501.49 0.02
----- --------------- ------
TOTAL............. 4,518 $283,210,170.64 100.00%
===== =============== ======
</TABLE>
S-47
<PAGE> 48
FIXED RATE GROUP
REMAINING TERM TO MATURITY DISTRIBUTION
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
MONTHS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------ -------------- ----------------- -----------------
<S> <C> <C> <C>
25 - 36................. 2 $ 52,314.19 0.02%
37 - 48................. 1 14,730.47 0.01
49 - 60................. 42 1,148,329.53 0.41
61 - 72................. 5 166,870.93 0.06
73 - 84................. 44 1,157,492.52 0.41
85 - 96................. 16 439,748.55 0.16
97 - 108................. 8 286,708.35 0.10
109 - 120................. 254 9,434,076.25 3.33
121 - 132................. 3 175,910.24 0.06
133 - 144................. 34 1,745,052.43 0.62
145 - 156................. 7 266,638.22 0.09
157 - 168................. 8 526,191.39 0.19
169 - 180................. 2,292 128,218,198.40 45.25
181 - 192................. 9 398,287.47 0.14
193 - 204................. 3 134,226.30 0.05
205 - 216................. 6 287,727.88 0.10
217 - 228................. 126 8,290,630.83 2.93
229 - 240................. 317 18,653,413.54 6.59
265 - 276................. 2 125,642.63 0.04
289 - 300................. 10 660,448.00 0.23
325 - 336................. 1 185,440.79 0.07
337 - 348................. 16 1,190,516.38 0.42
349 - 360................. 1,312 109,651,575.35 38.72
----- --------------- ------
TOTAL................. 4,518 $283,210,170.64 100.00%
===== =============== ======
</TABLE>
S-48
<PAGE> 49
FIXED RATE GROUP
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 5,001 - 10,000.......... 13 $ 114,357.93 0.04%
10,001 - 15,000.......... 111 1,476,066.54 0.52
15,001 - 20,000.......... 212 3,853,248.35 1.36
20,001 - 25,000.......... 274 6,294,791.90 2.22
25,001 - 30,000.......... 351 9,798,403.95 3.46
30,001 - 35,000.......... 336 11,054,963.48 3.90
35,001 - 40,000.......... 335 12,738,920.38 4.50
40,001 - 45,000.......... 325 13,944,138.33 4.92
45,001 - 50,000.......... 319 15,251,944.75 5.39
50,001 - 55,000.......... 286 15,063,905.75 5.32
55,001 - 60,000.......... 246 14,183,259.95 5.01
60,001 - 65,000.......... 210 13,177,684.62 4.65
65,001 - 70,000.......... 170 11,524,137.88 4.07
70,001 - 75,000.......... 152 11,068,298.70 3.91
75,001 - 80,000.......... 116 9,014,209.44 3.18
80,001 - 85,000.......... 123 10,183,822.41 3.60
85,001 - 90,000.......... 100 8,789,867.34 3.10
90,001 - 95,000.......... 82 7,610,252.02 2.69
95,001 - 100,000.......... 100 9,788,152.77 3.46
100,001 - 150,000.......... 438 52,722,984.06 18.60
150,001 - 200,000.......... 131 22,463,273.77 7.93
200,001 - 250,000.......... 49 10,918,223.49 3.86
250,001 - 300,000.......... 25 6,886,220.06 2.43
300,001 - 350,000.......... 7 2,285,815.95 0.81
350,001 - 400,000.......... 3 1,090,565.19 0.39
450,001 - 500,000.......... 3 1,402,661.63 0.50
500,001 - 550,000.......... 1 510,000.00 0.18
----- --------------- ------
TOTAL................... 4,518 $283,210,170.64 100.00%
===== =============== ======
</TABLE>
S-49
<PAGE> 50
FIXED RATE GROUP
DISTRIBUTION OF PROPERTY TYPES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
SF Detached/De Min PUD.................... 4,002 $254,183,366.75 89.75%
SF Row House/Townhouse/Condo.............. 209 10,767,974.36 3.80
Two to Four Family Homes.................. 177 12,330,538.45 4.35
Prefabricated SF.......................... 127 5,568,502.84 1.97
Other..................................... 3 359,788.24 0.13
----- --------------- ------
TOTAL................................. 4,518 $283,210,170.64 100.00%
===== =============== ======
</TABLE>
FIXED RATE GROUP
DISTRIBUTION OF OCCUPANCY STATUS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner occupied*......................... 4,175 $265,646,174.93 93.80%
Investor owned.......................... 343 17,563,995.71 6.20
----- --------------- ------
TOTAL............................... 4,518 $283,210,170.64 100.00%
===== =============== ======
</TABLE>
- ------------------
* Includes vacation and second homes.
FIXED RATE GROUP
DISTRIBUTION OF SEASONING
<TABLE>
<CAPTION>
MONTHS
ELAPSED SINCE NUMBER OF AGGREGATE % OF AGGREGATE
ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0 - 6................ 4,260 $265,094,659.81 93.60%
7 - 12................ 236 16,662,474.88 5.88
13 - 24................ 18 1,188,143.20 0.42
25 - 36................ 1 185,440.79 0.07
61 - 72................ 1 26,648.28 0.01
97 - 108................ 2 52,803.68 0.02
----- --------------- ------
TOTAL............... 4,518 $283,210,170.64 100.00%
===== =============== ======
</TABLE>
S-50
<PAGE> 51
THE ADJUSTABLE RATE GROUP
The Mortgage Loans in the Adjustable Rate Group as of the Statistic
Calculation Date consist of 1,921 loans under which the related Mortgaged
Properties are located in 48 states and the District of Columbia, as set forth
herein. The Mortgage Loans in the Adjustable Rate Group had an aggregate
principal balance of $200,661,062.31, the minimum principal balance of any of
such Mortgage Loans was $14,492.54, the maximum principal balance thereof was
$829,469.65 and the average principal balance of such Mortgage Loans was
approximately $104,456.57. The weighted average current Mortgage Rate of the
Mortgage Loans in the Adjustable Rate Group was 10.46% and the weighted average
margin was 6.15%.
The Mortgage Loans in the Adjustable Rate Group have original terms to
stated maturity from 72 months to 360 months, remaining terms to stated maturity
from 72 months to 360 months, a weighted average remaining term to stated
maturity of 350 months, a weighted average original term to stated maturity of
351 months and a weighted average seasoning of 1 month. No Mortgage Loan in the
Adjustable Rate Group had a stated maturity later than June 5, 2027. 99.74% of
the Mortgage Loans in the Adjustable Rate Group by aggregate principal balance
require monthly payments of principal that will fully amortize such Mortgage
Loans by their respective maturity dates. 0.26% of the Mortgage Loans by
aggregate principal balance are represented by balloons loans.
The weighted average CLTV of the Mortgage Loans included in the
Adjustable Rate Group was 76.79%. 99.92% of the Mortgage Loans in the Adjustable
Rate Group were secured by first mortgages.
93.48% of the Mortgage Loans in the Adjustable Rate Group bear interest
(in some instances, following an initial fixed-rate period) at a six-month LIBOR
rate, plus a margin. 0.09% are indexed on the average of the six-month LIBOR
rates based on quotations at five major banks as set forth in the "Money Rates"
section of The Wall Street Journal, Western Edition, on the 15th day of the
month; 89.53% are indexed on the average of the six-month LIBOR rates based on
quotations at five major banks as set forth in the "Money Rates" section of The
Wall Street Journal, Western Edition, on the first business day of the month;
0.28% are indexed on the average of the six-month LIBOR rates based on
quotations of major banks, as published by the Federal National Mortgage
Association ("FNMA"), on the first business day of the month; 3.41% are indexed
on the average of the six-month LIBOR rates based on quotations at five major
banks as set forth in the "Money Rates" section of the Wall Street Journal,
Western Edition, on the most recent daily quote available; 0.17% are indexed on
the average of the six-month LIBOR rates based on quotations at five major banks
as set forth in the "Money Rates" section of The Wall Street Journal, Western
Edition, on the last Business Day of the month. 6.52% are indexed on the weekly
average of the one-year constant maturity treasury.
With respect to the Mortgage Loans in the Adjustable Rate
Group, 40.77% of such Mortgage Loans bear interest at a fixed rate of interest
for a two-year period following origination, 12.69% of such Mortgage Loans bear
interest at a fixed rate of interest for a three-year period following
origination, and 23.63% of such Mortgage Loans bear interest at a fixed rate of
interest for a five year period following origination; after such initial
periods, such Mortgage Loans bear interest at adjustable rates, as described
above.
93.48% of the loans in the Adjustable Rate Group have semi-annual
interest rate and semi-annual payment adjustment frequencies. 6.52% of the loans
in the Adjustable Rate Group have annual interest rate and annual payment
adjustment frequencies. The Mortgage Loans in the Adjustable Rate Group have a
weighted average margin of 6.15%. The margins for the Mortgage Loans in the
Adjustable Rate Group range from 2.99% to 11.24%. 58.94% of the Mortgage Loans
in the Adjustable Rate Group have a
S-51
<PAGE> 52
periodic rate adjustment cap of 1.00%; 34.06% of such Mortgage Loans have a
periodic rate adjustment cap of 1.5%; 6.67% of the Mortgage Loans in the
Adjustable Rate Group have a periodic rate adjustment cap of 2.00%; .24% have a
periodic rate adjustment cap of 3.00%; and 0.09% have other periodic rate
adjustment caps. 56.62% of the Mortgage Loans in the Adjustable Rate Group have
a lifetime cap of 7.00%; 11.88% have a lifetime cap of 6.00%; 31.50% have a
lifetime cap of 6.50%. The weighted average number of months until the next
reset date is approximately 29 months. The weighted average maximum Mortgage
Rate was approximately 17.18%, with maximum Mortgage Rates that range from
12.75% to 22.50%. The weighted average minimum Mortgage Rate was approximately
9.59%, with minimum Mortgage Rates that range from 3.00% to 16.00%.
S-52
<PAGE> 53
The following tables describe the Adjustable Rate Group Mortgage Loans
and the related Mortgaged Properties based upon the Adjustable Rate Group as of
the Statistic Calculation Date.
ADJUSTABLE RATE GROUP
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Alabama................... 3 $ 131,056.92 0.07%
Arizona................... 69 6,234,327.88 3.11
Arkansas ................. 1 76,449.95 0.04
California ............... 209 34,425,960.09 17.17
Colorado ................. 70 7,472,902.12 3.72
Connecticut............... 7 690,174.56 0.34
Delaware ................. 10 967,261.65 0.48
District of Columbia ..... 2 163,951.58 0.08
Florida................... 109 8,831,105.93 4.40
Georgia................... 40 5,196,469.46 2.59
Hawaii ................... 4 881,978.62 0.44
Idaho..................... 7 697,771.06 0.35
Illinois ................. 145 13,184,503.10 6.57
Indiana................... 48 3,795,706.38 1.89
Iowa ..................... 2 126,587.51 0.06
Kansas ................... 7 334,323.08 0.17
Kentucky ................. 10 636,710.70 0.32
Louisiana................. 1 174,318.63 0.09
Maine..................... 5 410,354.92 0.20
Maryland ................. 50 5,019,452.26 2.50
Massachusetts............. 38 4,637,011.91 2.31
Michigan ................. 84 6,834,251.74 3.41
Minnesota................. 23 1,955,449.95 0.97
Mississippi............... 2 175,653.98 0.09
Missouri ................. 33 2,735,977.81 1.36
Montana................... 1 84,110.74 0.04
Nebraska ................. 2 142,075.00 0.07
Nevada ................... 34 5,422,917.60 2.70
New Hampshire............. 3 486,702.15 0.24
New Jersey ............... 112 14,463,491.69 7.21
New Mexico ............... 13 963,586.91 0.48
New York ................. 88 9,628,447.59 4.80
North Carolina ........... 27 2,247,624.76 1.12
North Dakota ............. 1 27,312.65 0.01
Ohio ..................... 119 8,246,476.05 4.11
Oklahoma ................. 37 3,143,644.41 1.57
Oregon ................... 73 7,992,513.01 3.98
Pennsylvania ............. 96 7,973,483.93 3.97
Rhode Island ............. 3 291,609.28 0.15
South Carolina ........... 8 560,207.28 0.28
South Dakota ............. 1 65,450.00 0.03
Tennessee................. 3 129,850.00 0.06
Texas..................... 19 1,524,812.68 0.76
Utah ..................... 90 8,852,505.93 4.41
Vermont................... 5 934,500.00 0.47
Virginia ................. 44 4,129,314.96 2.06
Washington ............... 141 15,898,016.56 7.92
West Virginia............. 9 538,460.00 0.27
Wisconsin................. 13 1,124,237.34 0.56
----- --------------- ------
TOTAL................. 1,921 $200,661,062.31 100.00%
===== =============== ======
</TABLE>
S-53
<PAGE> 54
ADJUSTABLE RATE GROUP
DISTRIBUTION OF CLTVS
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
CLTV RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------- -------------- ----------------- -----------------
<S> <C> <C> <C>
90.01 - 95.00%........... 4 $ 428,604.72 0.21%
85.01 - 90.00............ 110 12,907,912.06 6.43
80.01 - 85.00............ 562 59,749,239.98 29.79
75.01 - 80.00............ 502 57,162,770.26 28.49
70.01 - 75.00............ 248 25,518,520.01 12.72
65.01 - 70.00............ 150 14,737,877.73 7.34
60.01 - 65.00............ 188 17,143,922.39 8.54
55.01 - 60.00............ 53 4,277,043.48 2.13
50.01 - 55.00............ 27 2,686,870.00 1.34
00.01 - 50.00............ 77 6,048,301.68 3.01
----- --------------- ------
TOTAL............... 1,921 $200,661,062.31 100.00%
===== =============== ======
</TABLE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF LTVS
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
LTV RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------- -------------- ----------------- -----------------
<S> <C> <C> <C>
90.01 - 95.00%........... 4 $ 428,604.72 0.21%
85.01 - 90.00............ 110 12,907,912.06 6.43
80.01 - 85.00............ 561 59,671,239.98 29.75
75.01 - 80.00............ 501 57,110,989.14 28.46
70.01 - 75.00............ 248 25,518,520.01 12.72
65.01 - 70.00............ 150 14,737,877.73 7.34
60.01 - 65.00............ 189 17,234,122.03 8.59
55.01 - 60.00............ 53 4,277,043.48 2.13
50.01 - 55.00............ 27 2,686,870.00 1.34
00.01 - 50.00............ 78 6,087,883.16 3.03
----- --------------- ------
TOTAL............... 1,921 $200,661,062.31 100.00%
===== =============== ======
</TABLE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF JUNIOR LIEN RATIOS
(JUNIOR LIENS ONLY)
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
JUNIOR LIEN RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
70.01 - 80.00%......... 3 $169,362.60 100.00%
- ----------- -------
TOTAL........... 3 $169,362.60 100.00%
= =========== =======
</TABLE>
S-54
<PAGE> 55
ADJUSTABLE RATE GROUP
DISTRIBUTION OF CURRENT MORTGAGE RATES
<TABLE>
<CAPTION>
RANGE OF CURRENT NUMBER OF AGGREGATE % OF AGGREGATE
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
6.01 - 7.00%............ 3 $ 563,902.12 0.28%
7.01 - 8.00 ............ 40 4,310,823.59 2.15
8.01 - 9.00 ............ 289 34,591,424.99 17.24
9.01 - 10.00 ............ 504 57,224,080.83 28.52
10.01 - 11.00 ............ 443 47,059,662.07 23.45
11.01 - 12.00 ............ 282 26,317,550.97 13.12
12.01 - 13.00 ............ 196 17,804,171.55 8.87
13.01 - 14.00 ............ 77 5,608,141.74 2.79
14.01 - 15.00 ............ 72 6,147,536.08 3.06
15.01 - 16.00 ............ 15 1,033,768.37 0.52
----- --------------- ------
TOTAL................. 1,921 $200,661,062.31 100.00%
===== =============== ======
</TABLE>
ADJUSTABLE RATE GROUP
REMAINING TERM TO MATURITY DISTRIBUTION
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
MONTHS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------ -------------- ----------------- -----------------
<S> <C> <C> <C>
61 - 72 ................ 1 $ 36,000.00 0.02%
73 - 84 ................ 8 340,060.00 0.17
109 - 120................. 9 567,169.97 0.28
121 - 132................. 1 108,000.00 0.05
133 - 144................. 1 45,159.91 0.02
169 - 180................. 53 3,957,161.15 1.97
193 - 204................. 1 103,522.65 0.05
217 - 228................. 9 797,618.84 0.40
229 - 240................. 57 4,663,797.31 2.32
241 - 252................. 1 67,294.85 0.03
289 - 300................. 6 554,062.05 0.28
325 - 336................. 4 587,167.48 0.29
337 - 348................. 3 344,863.24 0.17
349 - 360................. 1,767 188,489,184.86 93.95
----- --------------- ------
TOTAL................. 1,921 $200,661,062.31 100.00%
===== =============== ======
</TABLE>
S-55
<PAGE> 56
ADJUSTABLE RATE GROUP
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 10,001- 15,000.................... 1 $ 14,492.54 0.01%
15,001- 20,000................... 5 96,736.45 0.05
20,001- 25,000................... 10 230,787.95 0.12
25,001- 30,000................... 41 1,139,279.19 0.57
30,001- 35,000................... 46 1,513,408.65 0.75
35,001- 40,000................... 60 2,267,069.21 1.13
40,001- 45,000................... 66 2,815,025.15 1.40
45,001- 50,000................... 83 3,968,527.17 1.98
50,001- 55,000................... 72 3,788,647.89 1.89
55,001- 60,000................... 99 5,724,908.83 2.85
60,001- 65,000................... 83 5,213,406.22 2.60
65,001- 70,000................... 85 5,756,829.72 2.87
70,001- 75,000................... 110 8,008,666.10 3.99
75,001- 80,000................... 95 7,379,449.41 3.68
80,001- 85,000................... 81 6,691,751.44 3.33
85,001- 90,000................... 72 6,342,650.25 3.16
90,001- 95,000................... 68 6,325,283.89 3.15
95,001- 100,000................... 80 7,828,713.03 3.90
100,001- 150,000................... 433 52,404,942.28 26.13
150,001- 200,000................... 173 29,826,447.56 14.86
200,001- 250,000................... 77 17,038,800.77 8.49
250,001- 300,000................... 44 12,260,844.24 6.11
300,001- 350,000................... 23 7,513,597.05 3.74
350,001- 400,000................... 4 1,512,067.95 0.75
400,001- 450,000................... 6 2,493,059.72 1.24
450,001- 500,000................... 1 456,000.00 0.23
550,001- 600,000................... 1 581,000.00 0.29
600,001- 650,000................... 1 639,200.00 0.32
800,001- 850,000................... 1 829,469.65 0.41
----- --------------- ------
TOTAL.......................... 1,921 $200,661,062.31 100.00%
===== =============== ======
</TABLE>
S-56
<PAGE> 57
ADJUSTABLE RATE GROUP
DISTRIBUTION OF PROPERTY TYPES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PROPERTY DESCRIPTION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
SF Detached/De Min PUD............. 1,683 $178,112,372.77 88.76%
SF Row House/Townhouse/Condo....... 84 6,618,773.16 3.30
Two to Four Family Homes........... 111 11,715,770.86 5.84
Prefabricated SF................... 37 2,727,344.43 1.36
Other.............................. 6 1,486,801.09 0.74
----- --------------- ------
TOTAL......................... 1,921 $200,661,062.31 100.00%
===== =============== ======
</TABLE>
ADJUSTABLE RATE GROUP
DISTRIBUTION OF OCCUPANCY STATUS
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner occupied*.................... 1,785 $188,995,100.18 94.19%
Investor owned..................... 136 11,665,962.13 5.81
------ --------------- ------
TOTAL.......................... 1,921 $200,661,062.31 100.00%
===== =============== ======
</TABLE>
- -------------
* Includes vacation and second homes.
ADJUSTABLE RATE GROUP
DISTRIBUTION OF SEASONING
<TABLE>
<CAPTION>
MONTHS ELAPSED NUMBER OF AGGREGATE % OF AGGREGATE
SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0 - 6............................ 1,908 $199,070,471.66 99.21%
7 - 12........................... 7 767,557.36 0.38
13 - 24........................... 1 190,705.90 0.10
25 - 36........................... 4 587,167.48 0.29
37 - 48........................... 1 45,159.91 0.02
----- --------------- ------
TOTAL......................... 1,921 $200,661,062.31 100.00%
===== =============== ======
</TABLE>
S-57
<PAGE> 58
ADJUSTABLE RATE GROUP
DISTRIBUTION OF MAXIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
RANGE OF MAXIMUM NUMBER OF AGGREGATE % OF AGGREGATE
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
12.50 to 12.99%............ 1 $ 206,281.06 0.10%
13.00 to 13.49............. 3 414,776.43 0.21
13.50 to 13.99............. 3 297,455.82 0.15
14.00 to 14.49............. 14 1,785,366.42 0.89
14.50 to 14.99............. 54 5,874,290.29 2.93
15.00 to 15.49............. 114 14,207,917.80 7.08
15.50 to 15.99............. 230 28,330,565.81 14.12
16.00 to 16.49............. 196 23,021,300.81 11.47
16.50 to 16.99............. 288 31,176,721.62 15.53
17.00 to 17.49............. 213 23,661,372.13 11.79
17.50 to 17.99............. 211 19,577,155.52 9.76
18.00 to 18.49............. 131 12,198,444.56 6.08
18.50 to 18.99............. 139 12,738,059.19 6.35
19.00 to 19.49............. 81 7,899,797.28 3.94
19.50 to 19.99............. 97 8,034,437.15 4.00
20.00 to 20.49............. 45 3,478,794.88 1.73
20.50 to 20.99............. 42 3,307,906.38 1.65
21.00 to 21.49............. 42 3,308,883.04 1.65
21.50 to 21.99............. 11 804,786.12 0.40
22.00 to 22.49............. 4 251,550.00 0.13
22.50 to 22.99............. 2 85,200.00 0.04
----- --------------- ------
TOTAL................. 1,921 $200,661,062.31 100.00%
===== =============== ======
</TABLE>
S-58
<PAGE> 59
ADJUSTABLE RATE GROUP
DISTRIBUTION OF MINIMUM MORTGAGE RATES
<TABLE>
<CAPTION>
RANGE OF MINIMUM NUMBER OF AGGREGATE % OF AGGREGATE
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
3.00 to 3.49%............ 1 $ 206,281.06 0.10%
3.50 to 3.99............. 1 72,250.00 0.04
4.00 to 4.49............. 6 708,735.79 0.35
4.50 to 4.99............. 1 195,276.54 0.10
5.00 to 5.49............. 37 4,098,341.85 2.04
5.50 to 5.99............. 45 4,044,666.36 2.02
6.00 to 6.49............. 54 5,582,827.91 2.78
6.50 to 6.99............. 45 3,916,932.35 1.95
7.00 to 7.49............. 36 3,219,474.95 1.60
7.50 to 7.99............. 46 5,119,861.03 2.55
8.00 to 8.49............. 65 7,705,146.30 3.84
8.50 to 8.99............. 506 52,634,165.28 26.24
9.00 to 9.49............. 163 18,259,289.03 9.10
9.50 to 9.99............. 231 27,610,331.40 13.76
10.00 to 10.49............. 154 16,324,388.29 8.14
10.50 to 10.99............. 151 16,534,186.05 8.24
11.00 to 11.49............. 78 6,989,172.55 3.48
11.50 to 11.99............. 67 6,572,325.72 3.28
12.00 to 12.49............. 48 4,606,971.02 2.30
12.50 to 12.99............. 48 4,560,608.02 2.27
13.00 to 13.49............. 22 2,273,424.89 1.13
13.50 to 13.99............. 30 2,376,510.41 1.18
14.00 to 14.49............. 20 1,994,172.66 0.99
14.50 to 14.99............. 47 3,546,581.82 1.77
15.00 to 15.49............. 8 886,142.58 0.44
15.50 to 15.99............. 9 537,798.45 0.27
16.00 to 16.49............. 2 85,200.00 0.04
----- --------------- ------
TOTAL................. 1,921 $200,661,062.31 100.00%
===== =============== ======
</TABLE>
S-59
<PAGE> 60
ADJUSTABLE RATE GROUP
DISTRIBUTION OF MARGINS
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------- -------------- ----------------- -----------------
<S> <C> <C> <C>
2.001 to 3.000%........ 15 $ 1,982,727.05 0.99%
3.001 to 4.000......... 71 8,350,052.54 4.16
4.001 to 5.000......... 350 37,064,351.44 18.47
5.001 to 6.000......... 429 46,318,380.71 23.08
6.001 to 7.000......... 572 62,289,843.27 31.04
7.001 to 8.000......... 310 29,716,574.28 14.81
8.001 to 9.000......... 133 11,409,214.38 5.69
9.001 to 10.000......... 32 2,632,627.68 1.31
10.001 to 11.000......... 8 824,290.96 0.41
11.001 to 12.000......... 1 73,000.00 0.04
----- --------------- ------
TOTAL................. 1,921 $200,661,062.31 100.00%
===== =============== ======
</TABLE>
S-60
<PAGE> 61
ADJUSTABLE RATE GROUP
NEXT INTEREST ADJUSTMENT DATE DISTRIBUTION
<TABLE>
<CAPTION>
NEXT INTEREST NUMBER OF AGGREGATE % OF AGGREGATE
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
June, 1997................ 4 $ 754,004.41 0.38%
July, 1997................ 7 634,648.47 0.32
August, 1997.............. 24 2,910,560.38 1.45
September, 1997........... 111 13,984,306.57 6.97
October, 1997............. 134 14,337,439.21 7.15
November, 1997............ 51 5,987,223.62 2.98
December, 1997............ 5 511,016.90 0.25
January, 1998............. 4 720,304.18 0.36
February, 1998............ 10 1,059,278.79 0.53
March, 1998............... 11 1,525,014.57 0.76
April, 1998............... 25 2,735,190.27 1.36
May, 1998................. 12 1,401,770.00 0.70
June, 1998................ 3 335,515.00 0.17
October, 1998............. 2 68,310.76 0.03
November, 1998............ 1 111,748.09 0.06
December, 1998............ 2 157,479.40 0.08
January, 1999............. 6 928,036.70 0.46
February, 1999............ 31 3,398,704.64 1.69
March, 1999............... 275 29,362,501.88 14.63
April, 1999............... 333 32,459,676.68 16.18
May, 1999................. 123 14,396,765.25 7.17
September, 1999........... 2 169,782.78 0.08
October, 1999............. 1 35,985.69 0.02
November, 1999............ 2 183,699.25 0.09
December, 1999............ 2 626,260.94 0.31
January, 2000............. 2 178,711.17 0.09
February, 2000............ 18 2,000,879.33 1.00
March, 2000............... 57 6,462,083.12 3.22
April, 2000............... 94 8,819,265.32 4.40
May, 2000................. 75 6,818,095.79 3.40
June, 2000................ 1 161,500.00 0.08
March, 2002............... 100 9,448,679.97 4.71
April, 2002............... 265 24,766,714.22 12.34
May, 2002................. 127 13,159,758.96 6.56
June, 2002................ 1 50,150.00 0.02
----- --------------- ------
TOTAL................. 1,921 $200,661,062.31 100.00%
===== =============== ======
</TABLE>
S-61
<PAGE> 62
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par, the
yield to maturity on an Offered Certificate will be directly related to the rate
of payment of principal of the Mortgage Loans in the related Mortgage Loan
Group, including for this purpose voluntary payment in whole or in part of
Mortgage Loans in the Mortgage Loan Group prior to stated maturity (a
"Prepayment"), liquidations due to defaults, casualties and condemnations, and
repurchases of Mortgage Loans in the related Mortgage Loan Group by the Sponsor,
the Originators or the Master Servicer. The actual rate of principal prepayments
on pools of mortgage loans is influenced by a variety of economic, tax,
geographic, demographic, social, legal and other factors and has fluctuated
considerably in recent years. In addition, the rate of principal prepayments may
differ among pools of mortgage loans at any time because of specific factors
relating to the mortgage loans in the particular pool, including, among other
things, the age of the mortgage loans, the geographic locations of the
properties securing the loans and the extent of the mortgagors' equity in such
properties, and changes in the mortgagors' housing needs, job transfers and
unemployment.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. In general, the
earlier the payment of principal of the Mortgage Loans the greater the effect on
an investor's yield to maturity. As a result, the effect on an investor's yield
of prepayments occurring at a rate higher (or lower) than the rate anticipated
by the investor during the period immediately following the issuance of the
Offered Certificates will not be offset by a subsequent like reduction (or
increase) in the rate of principal prepayments. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase any of the Offered Certificates. The Sponsor makes no
representations or warranties as to the rate of prepayment or the factors to be
considered in connection with such determination.
PROJECTED PREPAYMENTS AND YIELDS FOR OFFERED CERTIFICATES (OTHER THAN THE CLASS
A-7IO CERTIFICATES)
If purchased at other than par, the yield to maturity on an Offered
Certificate will be affected by the rate of the payment of principal of the
Mortgage Loans in the related Mortgage Loan Group. If the actual rate of
payments on the Mortgage Loans in the related Mortgage Loan Group is slower than
the rate anticipated by an investor who purchases an Offered Certificate of the
related class at a discount, the actual yield to such investor will be lower
than such investor's anticipated yield. If the actual rate of payments on the
Mortgage Loans in the related Mortgage Loan Group is faster than the rate
anticipated by an investor who purchases an Offered Certificate of the related
class at a premium, the actual yield to such investor will be lower than such
investor's anticipated yield.
The Mortgage Loans in the Fixed Rate Group are primarily fixed-rate
mortgage loans. The rate of prepayments with respect to conventional fixed rate
mortgage loans has fluctuated significantly in recent years. In general, if
prevailing interest rates fall significantly below the interest rates on fixed
rate mortgage loans, such mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rate
on such mortgage loans. However, the monthly payment on mortgage loans similar
to the Mortgage Loans is often smaller than the monthly payment on a
purchase-money first mortgage loan. Consequently, a decrease in the interest
rate payable as a result of a refinancing would result in a relatively small
reduction in the amount of the Mortgagor's monthly payment, as a result of the
relatively small loan balance. Conversely, if prevailing interest rates rise
appreciably above the interest rates on fixed rate mortgage loans, such mortgage
loans are likely to experience a lower prepayment rate than if prevailing rates
remain at or below the interest rates on such
S-62
<PAGE> 63
mortgage loans. 60.46% of the Mortgage Loans in the Fixed Rate Group by
aggregate principal balance had prepayment penalties.
All of the Mortgage Loans in Adjustable Rate Group are adjustable rate
mortgage loans. As is the case with conventional fixed rate mortgage loans,
adjustable rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable rate mortgage loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed-rate mortgage loans at competitive
interest rates may encourage mortgagors to refinance their adjustable rate
mortgage loans to "lock in" a lower fixed interest rate. However, no assurance
can be given as to the level of prepayments that the Mortgage Loans will
experience. 68.19% of the Mortgage Loans in the Adjustable Rate Group as of the
Statistic Calculation Date by aggregate principal balance had prepayment
penalties.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of the
Offered Certificates of each class will be influenced by the rate at which
principal payments on the Mortgage Loans in the related Mortgage Loan Pool are
paid, which may be in the form of scheduled amortization, accelerated
amortization or prepayments (for this purpose, the term "prepayment" includes
Prepayments and liquidations due to default) or as a result of an early
termination of the Trust.
The model used in this Prospectus Supplement is a prepayment assumption
(the "Prepayment Assumption") which represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. The "100% Prepayment
Assumption" assumes a conditional prepayment rate of 3% per annum of the then
outstanding principal balance of the Mortgage Loans in the first month of the
life of the Mortgage Loans and an additional 1.55% (precisely, 17/11%) per annum
in each month thereafter until the twelfth month. Beginning in the twelfth month
and in each month thereafter during the life of the Mortgage Loans, the 100%
Prepayment Assumption assumes a conditional prepayment rate of 20% per annum
each month. As used in the table below, 0% Prepayment Assumption assumes
prepayment rates equal to 0% of the Prepayment Assumption, i.e., no prepayments
on the synthetic mortgage loans having the characteristics described below.
Correspondingly, 100% Prepayment Assumption assumes prepayment rates equal to
100% of the Prepayment Assumption, and so forth. The Prepayment Assumption does
not purport to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the related Mortgage Loans. The Sponsor believes that no existing
statistics of which it is aware provide a reliable basis for holders of Offered
Certificates to predict the amount or the timing of receipt of prepayments on
the Mortgage Loans.
The tables below were prepared on the basis of the assumptions in the
following paragraph and there are discrepancies between the characteristics of
the actual Mortgage Loans and the characteristics of the Mortgage Loans assumed
in preparing the tables. Any such discrepancy may have an effect upon the
percentages of the Class A Certificate Principal Balances outstanding and
weighted average lives of the Offered Certificates set forth in the tables. In
addition, since the actual Mortgage Loans in each Mortgage Loan Group have
characteristics which differ from those assumed in preparing the tables set
forth below, the distributions of principal on the Offered Certificates may be
made earlier or later than as indicated in the tables.
S-63
<PAGE> 64
For the purpose of the tables below, it is assumed that:
(i) the Mortgage Loans consist of synthetic mortgage
loans having the characteristics set forth below,
(ii) the Closing Date is June 17, 1997,
(iii) distributions on the Certificates are made on the
25th day of each month regardless of the day on which
the Payment Date actually occurs, commencing in July,
1997, in accordance with the priorities described
herein,
(iv) all prepayments are prepayments in full and include
30 days' interest thereon,
(v) no early termination of the Trust occurs,
(vi) no Mortgage Loan is ever delinquent,
(vii) the assumed levels of one-month LIBOR, six-month
LIBOR, and one year CMT are 5.6875%, 5.96875% and
5.870%, respectively,
(viii) the Offered Certificates have the respective
pass-through rates and original principal balances as
set forth herein, and
(ix) all of the additional Mortgage Loans are delivered to
the Trust by the Closing Date.
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Group(1)........ 0% 50% 100% 115% 150% 175% 250%
Adjustable Rate Group(2)... 0% 10% 20% 25% 30% 40% 50%
</TABLE>
- ------------
(1) As a percentage of the Prepayment Assumption.
(2) As a conditional prepayment rate (CPR) percentage.
FIXED RATE GROUP
<TABLE>
<CAPTION>
ORIGINAL REMAINING
GROSS TERM TO TERM TO
COUPON MATURITY MATURITY ORIGINAL BALLOON
PRINCIPAL BALANCE RATE (MONTHS) (MONTHS) MONTHS INDEX
----------------- ---- -------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
$106,152,401.59 11.3680% 359 176 180 Balloon
$ 915,661.73 12.0880% 334 79 81 Balloon
$ 17,155,341.94 10.8980% 111 109 0 ______
$ 90,072,765.14 10.8570% 178 176 0 ______
$ 40,157,037.67 10.4070% 235 233 0 ______
$165,131,852.34 10.6050% 359 356 0 ______
$ 414,939.59 9.7320% 181 180 0 ______
</TABLE>
S-64
<PAGE> 65
<TABLE>
<CAPTION>
ADJUSTABLE RATE GROUP
ORIGINAL REMAINING
GROSS TERM TO TERM TO MONTHS TO PERIODIC CAP PERIODIC CAP
PRINCIPAL COUPON MATURITY MATURITY COUPON (FIRST RESET (SUBSEQUENT
BALANCE RATE (MONTHS) (MONTHS) ADJUSTMENT INDEX MARGIN DATE) RESET DATES)
------- ------ -------- -------- ---------- ----- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,040,640.57 10.0910% 341 330 1 6 month LIBOR 6.04% 1.53% 1.53%
$ 4,469,140.52 10.3460% 360 356 2 6 month LIBOR 6.73% 1.30% 1.12%
$ 21,002,242.05 10.2840% 359 356 3 6 month LIBOR 6.42% 1.24% 1.21%
$ 19,778,022.73 10.5540% 358 356 4 6 month LIBOR 6.45% 1.28% 1.28%
$ 7,902,128.26 10.0940% 360 357 5 6 month LIBOR 5.97% 1.40% 1.25%
$ 1,221,979.56 9.7280% 322 315 6 6 month LIBOR 5.37% 1.37% 1.37%
$107,340,777.83 10.7390% 358 356 22 6 month LIBOR 6.91% 2.94% 1.32%
$ 32,189,758.39 9.9060% 353 351 34 6 month LIBOR 5.17% 2.83% 1.00%
$ 62,753,412.91 10.5020% 332 331 58 1 year CMT 5.14% 1.59% 1.00%
$ 1,269,681.61 9.9800% 355 347 4 1 year CMT 6.62% 2.00% 2.00%
$ 12,180,288.60 9.4010% 360 358 9 1 year CMT 6.01% 1.99% 2.00%
$ 8,548,080.86 10.0230% 360 357 33 1 year CMT 5.95% 3.08% 2.00%
$ 303,846.11 8.3540% 323 321 58 1 year CMT 4.75% 3.00% 2.00%
<CAPTION>
LIFE RESET
CAP FREQUENCY
----- ---------
<S> <C>
16.38% 6
17.02% 6
16.95% 6
17.19% 6
16.68% 6
15.58% 6
17.27% 6
16.87% 6
17.45% 6
16.91% 12
16.35% 12
16.31% 12
15.35% 12
</TABLE>
S-65
<PAGE> 66
The following tables set forth the percentages of the initial principal
amount of the Offered Certificates that would be outstanding after each of the
dates shown, based on prepayment scenarios described in the table entitled
"Prepayment Scenarios". The percentages have been rounded to the nearest 1%.
PERCENTAGE OF INITIAL CLASS A-1 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
----- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
06/25/1997 100 100 100 100 100 100 100
06/25/1998 90 71 51 46 32 23 0
06/25/1999 86 44 7 0 0 0 0
06/25/2000 82 21 0 0 0 0 0
06/25/2001 77 1 0 0 0 0 0
06/25/2002 72 0 0 0 0 0 0
06/25/2003 66 0 0 0 0 0 0
06/25/2004 60 0 0 0 0 0 0
06/25/2005 55 0 0 0 0 0 0
06/25/2006 49 0 0 0 0 0 0
06/25/2007 44 0 0 0 0 0 0
06/25/2008 37 0 0 0 0 0 0
06/25/2009 30 0 0 0 0 0 0
06/25/2010 22 0 0 0 0 0 0
06/25/2011 13 0 0 0 0 0 0
06/25/2012 0 0 0 0 0 0 0
06/25/2013 0 0 0 0 0 0 0
06/25/2014 0 0 0 0 0 0 0
06/25/2015 0 0 0 0 0 0 0
06/25/2016 0 0 0 0 0 0 0
06/25/2017 0 0 0 0 0 0 0
06/25/2018 0 0 0 0 0 0 0
06/25/2019 0 0 0 0 0 0 0
06/25/2020 0 0 0 0 0 0 0
06/25/2021 0 0 0 0 0 0 0
06/25/2022 0 0 0 0 0 0 0
06/25/2023 0 0 0 0 0 0 0
06/25/2024 0 0 0 0 0 0 0
06/25/2025 0 0 0 0 0 0 0
06/25/2026 0 0 0 0 0 0 0
06/25/2027 0 0 0 0 0 0 0
Weighted
Average Life
(years):(1) 8.38 1.93 1.14 1.02 0.84 0.75 0.59
Weighted
Average Life
(years):(2) 8.38 1.93 1.14 1.02 0.84 0.75 0.59
</TABLE>
(1) To Maturity
(2) To 10% Call
(3) This assumes that an optional termination is exercised by the Master
Servicer when the aggregate principal balance has declined to 10% or less of
the aggregate principal balance of the Mortgage Loans as of the Closing
Date.
The weighted average life of each indicated class of Offered Certificates has
been determined by (i) multiplying the amount of each principal payment by the
number of years from the date of issuance to the related Payment Date, (ii)
adding the results and (iii) dividing the sum of the initial respective
Certificate Principal Balance for the related Offered Certificates as of the
Closing Date.
S-66
<PAGE> 67
PERCENTAGE OF INITIAL CLASS A-2 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
----- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
06/25/1997 100 100 100 100 100 100 100
06/25/1998 100 100 100 100 100 100 90
06/25/1999 100 100 100 94 58 34 0
06/25/2000 100 100 56 36 0 0 0
06/25/2001 100 100 28 14 0 0 0
06/25/2002 100 75 8 0 0 0 0
06/25/2003 100 54 0 0 0 0 0
06/25/2004 100 41 0 0 0 0 0
06/25/2005 100 33 0 0 0 0 0
06/25/2006 100 25 0 0 0 0 0
06/25/2007 100 17 0 0 0 0 0
06/25/2008 100 9 0 0 0 0 0
06/25/2009 100 2 0 0 0 0 0
06/25/2010 100 0 0 0 0 0 0
06/25/2011 100 0 0 0 0 0 0
06/25/2012 47 0 0 0 0 0 0
06/25/2013 42 0 0 0 0 0 0
06/25/2014 37 0 0 0 0 0 0
06/25/2015 32 0 0 0 0 0 0
06/25/2016 25 0 0 0 0 0 0
06/25/2017 20 0 0 0 0 0 0
06/25/2018 16 0 0 0 0 0 0
06/25/2019 11 0 0 0 0 0 0
06/25/2020 5 0 0 0 0 0 0
06/25/2021 0 0 0 0 0 0 0
06/25/2022 0 0 0 0 0 0 0
06/25/2023 0 0 0 0 0 0 0
06/25/2024 0 0 0 0 0 0 0
06/25/2025 0 0 0 0 0 0 0
06/25/2026 0 0 0 0 0 0 0
06/25/2027 0 0 0 0 0 0 0
Weighted
Average Life
(years):(1) 16.98 7.12 3.47 3.00 2.21 1.90 1.34
Weighted
Average Life
(years):(2) 16.98 7.12 3.47 3.00 2.21 1.90 1.34
</TABLE>
(1) To Maturity
(2) To 10% Call
(3) This assumes that an optional termination is exercised by the Master
Servicer when the aggregate principal balance has declined to 10% or less of
the aggregate principal balance of the Mortgage Loans as of the Closing
Date.
The weighted average life of each indicated class of Offered Certificates has
been determined by (i) multiplying the amount of each principal payment by the
number of years from the date of issuance to the related Payment Date, (ii)
adding the results and (iii) dividing the sum of the initial respective
Certificate Principal Balance for the related Offered Certificates as of the
Closing Date.
S-67
<PAGE> 68
PERCENTAGE OF INITIAL CLASS A-3 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
----- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
06/25/1997 100 100 100 100 100 100 100
06/25/1998 100 100 100 100 100 100 100
06/25/1999 100 100 100 100 100 100 0
06/25/2000 100 100 100 100 56 0 0
06/25/2001 100 100 100 100 0 0 0
06/25/2002 100 100 100 37 0 0 0
06/25/2003 100 100 35 0 0 0 0
06/25/2004 100 100 0 0 0 0 0
06/25/2005 100 100 0 0 0 0 0
06/25/2006 100 100 0 0 0 0 0
06/25/2007 100 100 0 0 0 0 0
06/25/2008 100 100 0 0 0 0 0
06/25/2009 100 100 0 0 0 0 0
06/25/2010 100 41 0 0 0 0 0
06/25/2011 100 0 0 0 0 0 0
06/25/2012 100 0 0 0 0 0 0
06/25/2013 100 0 0 0 0 0 0
06/25/2014 100 0 0 0 0 0 0
06/25/2015 100 0 0 0 0 0 0
06/25/2016 100 0 0 0 0 0 0
06/25/2017 100 0 0 0 0 0 0
06/25/2018 100 0 0 0 0 0 0
06/25/2019 100 0 0 0 0 0 0
06/25/2020 100 0 0 0 0 0 0
06/25/2021 93 0 0 0 0 0 0
06/25/2022 23 0 0 0 0 0 0
06/25/2023 0 0 0 0 0 0 0
06/25/2024 0 0 0 0 0 0 0
06/25/2025 0 0 0 0 0 0 0
06/25/2026 0 0 0 0 0 0 0
06/25/2027 0 0 0 0 0 0 0
Weighted
Average Life
(years):(1) 24.68 12.95 5.95 5.00 3.39 2.63 1.80
Weighted
Average Life
(years):(2) 24.68 12.95 5.95 5.00 3.39 2.63 1.80
</TABLE>
(1) To Maturity
(2) To 10% Call
(3) This assumes that an optional termination is exercised by the Master
Servicer when the aggregate principal balance has declined to 10% or less of
the aggregate principal balance of the Mortgage Loans as of the Closing
Date.
The weighted average life of each indicated class of Offered Certificates has
been determined by (i) multiplying the amount of each principal payment by the
number of years from the date of issuance to the related Payment Date, (ii)
adding the results and (iii) dividing the sum of the initial respective
Certificate Principal Balance for the related Offered Certificates as of the
Closing Date.
S-68
<PAGE> 69
PERCENTAGE OF INITIAL CLASS A-4 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
----- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
06/25/1997 100 100 100 100 100 100 100
06/25/1998 100 100 100 100 100 100 100
06/25/1999 100 100 100 100 100 100 54
06/25/2000 100 100 100 100 100 52 0
06/25/2001 100 100 100 100 86 43 0
06/25/2002 100 100 100 100 47 13 0
06/25/2003 100 100 100 79 28 4 0
06/25/2004 100 100 84 59 19 3 0
06/25/2005 100 100 78 56 19 3 0
06/25/2006 100 100 66 47 18 3 0
06/25/2007 100 100 54 37 14 3 0
06/25/2008 100 100 42 28 10 2 0
06/25/2009 100 100 33 21 5 0 0
06/25/2010 100 100 25 15 2 0 0
06/25/2011 100 93 19 11 0 0 0
06/25/2012 100 51 8 3 0 0 0
06/25/2013 100 43 5 1 0 0 0
06/25/2014 100 37 3 0 0 0 0
06/25/2015 100 31 1 0 0 0 0
06/25/2016 100 26 0 0 0 0 0
06/25/2017 100 22 0 0 0 0 0
06/25/2018 100 18 0 0 0 0 0
06/25/2019 100 15 0 0 0 0 0
06/25/2020 100 12 0 0 0 0 0
06/25/2021 100 10 0 0 0 0 0
06/25/2022 100 6 0 0 0 0 0
06/25/2023 87 4 0 0 0 0 0
06/25/2024 66 1 0 0 0 0 0
06/25/2025 44 0 0 0 0 0 0
06/25/2026 18 0 0 0 0 0 0
06/25/2027 0 0 0 0 0 0 0
Weighted
Average Life
(years):(1) 27.71 17.29 10.76 9.15 6.08 3.98 2.09
Weighted
Average Life
(years):(2) 27.32 15.25 8.98 7.31 5.16 3.76 2.09
</TABLE>
(1) To Maturity
(2) To 10% Call
(3) This assumes that an optional termination is exercised by the Master
Servicer when the aggregate principal balance has declined to 10% or less of
the aggregate principal balance of the Mortgage Loans as of the Closing
Date.
The weighted average life of each indicated class of Offered Certificates has
been determined by (i) multiplying the amount of each principal payment by the
number of years from the date of issuance to the related Payment Date, (ii)
adding the results and (iii) dividing the sum of the initial respective
Certificate Principal Balance for the related Offered Certificates as of the
Closing Date.
S-69
<PAGE> 70
PERCENTAGE OF INITIAL CLASS A-5 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
----- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
06/25/1997 100 100 100 100 100 100 100
06/25/1998 100 100 100 100 100 100 100
06/25/1999 100 100 100 100 100 100 100
06/25/2000 100 100 100 100 100 100 0
06/25/2001 99 93 89 89 92 96 0
06/25/2002 98 86 80 79 78 79 0
06/25/2003 95 75 65 63 57 55 0
06/25/2004 92 65 51 47 39 34 0
06/25/2005 81 43 23 19 19 20 0
06/25/2006 69 27 10 8 6 11 0
06/25/2007 60 18 5 3 2 4 0
06/25/2008 51 11 2 1 0 0 0
06/25/2009 42 7 1 0 0 0 0
06/25/2010 34 4 0 0 0 0 0
06/25/2011 25 2 0 0 0 0 0
06/25/2012 0 0 0 0 0 0 0
06/25/2013 0 0 0 0 0 0 0
06/25/2014 0 0 0 0 0 0 0
06/25/2015 0 0 0 0 0 0 0
06/25/2016 0 0 0 0 0 0 0
06/25/2017 0 0 0 0 0 0 0
06/25/2018 0 0 0 0 0 0 0
06/25/2019 0 0 0 0 0 0 0
06/25/2020 0 0 0 0 0 0 0
06/25/2021 0 0 0 0 0 0 0
06/25/2022 0 0 0 0 0 0 0
06/25/2023 0 0 0 0 0 0 0
06/25/2024 0 0 0 0 0 0 0
06/25/2025 0 0 0 0 0 0 0
06/25/2026 0 0 0 0 0 0 0
06/25/2027 0 0 0 0 0 0 0
Weighted
Average Life
(years):(1) 11.05 7.86 6.78 6.63 6.47 6.55 2.66
Weighted
Average Life
(years):(2) 11.05 7.86 6.71 6.44 5.76 4.96 2.66
</TABLE>
(1) To Maturity
(2) To 10% Call
(3) This assumes that an optional termination is exercised by the Master
Servicer when the aggregate principal balance has declined to 10% or less of
the aggregate principal balance of the Mortgage Loans as of the Closing
Date.
The weighted average life of each indicated class of Offered Certificates has
been determined by (i) multiplying the amount of each principal payment by the
number of years from the date of issuance to the related Payment Date, (ii)
adding the results and (iii) dividing the sum of the initial respective
Certificate Principal Balance for the related Offered Certificates as of the
Closing Date.
S-70
<PAGE> 71
PERCENTAGE OF INITIAL CLASS A-6 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
----- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
06/25/1997 100 100 100 100 100 100 100
06/25/1998 95 86 76 71 66 57 47
06/25/1999 95 76 59 52 44 32 21
06/25/2000 94 68 46 38 31 20 11
06/25/2001 94 60 37 28 22 12 6
06/25/2002 93 53 29 21 15 7 3
06/25/2003 92 47 23 16 10 4 1
06/25/2004 92 42 18 12 7 2 0
06/25/2005 91 37 15 9 5 1 0
06/25/2006 90 33 12 6 3 0 0
06/25/2007 88 30 9 5 2 0 0
06/25/2008 87 26 7 3 1 0 0
06/25/2009 86 23 6 2 1 0 0
06/25/2010 84 21 4 2 0 0 0
06/25/2011 82 18 3 1 0 0 0
06/25/2012 80 16 2 1 0 0 0
06/25/2013 77 14 2 0 0 0 0
06/25/2014 75 12 1 0 0 0 0
06/25/2015 72 10 1 0 0 0 0
06/25/2016 68 9 1 0 0 0 0
06/25/2017 64 8 0 0 0 0 0
06/25/2018 60 6 0 0 0 0 0
06/25/2019 55 5 0 0 0 0 0
06/25/2020 49 4 0 0 0 0 0
06/25/2021 43 3 0 0 0 0 0
06/25/2022 37 2 0 0 0 0 0
06/25/2023 30 2 0 0 0 0 0
06/25/2024 21 1 0 0 0 0 0
06/25/2025 13 0 0 0 0 0 0
06/25/2026 5 0 0 0 0 0 0
06/25/2027 0 0 0 0 0 0 0
Weighted
Average Life
(years):(1) 20.68 7.69 4.07 3.21 2.62 1.86 1.38
Weighted
Average Life
(years):(2) 20.56 6.99 3.72 2.97 2.41 1.75 1.28
</TABLE>
(1) To Maturity
(2) To 10% Call
(3) This assumes that an optional termination is exercised by the Master
Servicer when the aggregate principal balance has declined to 10% or less of
the aggregate principal balance of the Mortgage Loans as of the Closing
Date.
The weighted average life of each indicated class of Offered Certificates has
been determined by (i) multiplying the amount of each principal payment by the
number of years from the date of issuance to the related Payment Date, (ii)
adding the results and (iii) dividing the sum of the initial respective
Certificate Principal Balance for the related Offered Certificates as of the
Closing Date.
S-71
<PAGE> 72
PERCENTAGE OF INITIAL CLASS M-1 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
----- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
06/25/1997 100 100 100 100 100 100 100
06/25/1998 100 100 100 100 100 100 100
06/25/1999 100 100 100 100 100 100 100
06/25/2000 100 100 100 100 100 100 81
06/25/2001 100 100 81 70 49 37 81
06/25/2002 100 100 63 53 34 24 81
06/25/2003 100 97 49 40 23 15 37
06/25/2004 100 84 38 30 16 9 10
06/25/2005 100 73 29 22 11 6 0
06/25/2006 100 63 23 16 7 2 0
06/25/2007 100 55 17 12 5 0 0
06/25/2008 100 47 13 9 0 0 0
06/25/2009 100 41 10 6 0 0 0
06/25/2010 100 34 8 5 0 0 0
06/25/2011 100 29 6 0 0 0 0
06/25/2012 73 15 0 0 0 0 0
06/25/2013 69 13 0 0 0 0 0
06/25/2014 66 11 0 0 0 0 0
06/25/2015 61 9 0 0 0 0 0
06/25/2016 56 8 0 0 0 0 0
06/25/2017 53 7 0 0 0 0 0
06/25/2018 49 6 0 0 0 0 0
06/25/2019 46 5 0 0 0 0 0
06/25/2020 42 2 0 0 0 0 0
06/25/2021 37 0 0 0 0 0 0
06/25/2022 32 0 0 0 0 0 0
06/25/2023 26 0 0 0 0 0 0
06/25/2024 20 0 0 0 0 0 0
06/25/2025 13 0 0 0 0 0 0
06/25/2026 6 0 0 0 0 0 0
06/25/2027 0 0 0 0 0 0 0
Weighted
Average Life
(years):(1) 21.08 11.58 6.94 6.15 4.98 4.60 5.5
Weighted
Average Life
(years):(2) 20.96 11.04 6.43 5.58 4.57 4.18 3.43
</TABLE>
(1) To Maturity
(2) To 10% Call
(3) This assumes that an optional termination is exercised by the Master
Servicer when the aggregate principal balance has declined to 10% or less of
the aggregate principal balance of the Mortgage Loans as of the Closing
Date.
The weighted average life of each indicated class of Offered Certificates has
been determined by (i) multiplying the amount of each principal payment by the
number of years from the date of issuance to the related Payment Date, (ii)
adding the results and (iii) dividing the sum of the initial respective
Certificate Principal Balance for the related Offered Certificates as of the
Closing Date.
S-72
<PAGE> 73
PERCENTAGE OF INITIAL CLASS M-2 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
----- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
06/25/1997 100 100 100 100 100 100 100
06/25/1998 100 100 100 100 100 100 100
06/25/1999 100 100 100 100 100 100 100
06/25/2000 100 100 100 100 100 100 100
06/25/2001 100 100 81 70 49 37 63
06/25/2002 100 100 63 53 34 24 6
06/25/2003 100 97 49 40 23 15 0
06/25/2004 100 84 38 30 16 9 0
06/25/2005 100 73 29 22 11 4 0
06/25/2006 100 63 23 16 6 0 0
06/25/2007 100 55 17 12 1 0 0
06/25/2008 100 47 13 9 0 0 0
06/25/2009 100 41 10 5 0 0 0
06/25/2010 100 34 7 1 0 0 0
06/25/2011 100 29 3 0 0 0 0
06/25/2012 73 15 0 0 0 0 0
06/25/2013 69 13 0 0 0 0 0
06/25/2014 66 11 0 0 0 0 0
06/25/2015 61 9 0 0 0 0 0
06/25/2016 56 8 0 0 0 0 0
06/25/2017 53 5 0 0 0 0 0
06/25/2018 49 3 0 0 0 0 0
06/25/2019 46 1 0 0 0 0 0
06/25/2020 42 0 0 0 0 0 0
06/25/2021 37 0 0 0 0 0 0
06/25/2022 32 0 0 0 0 0 0
06/25/2023 26 0 0 0 0 0 0
06/25/2024 20 0 0 0 0 0 0
06/25/2025 13 0 0 0 0 0 0
06/25/2026 3 0 0 0 0 0 0
06/25/2027 0 0 0 0 0 0 0
Weighted
Average Life
(years):(1) 21.06 11.47 6.91 6.08 4.87 4.40 4.32
Weighted
Average Life
(years):(2) 20.96 11.04 6.43 5.57 4.51 4.02 3.52
</TABLE>
(1) To Maturity
(2) To 10% Call
(3) This assumes that an optional termination is exercised by the Master
Servicer when the aggregate principal balance has declined to 10% or less of
the aggregate principal balance of the Mortgage Loans as of the Closing
Date.
The weighted average life of each indicated class of Offered Certificates has
been determined by (i) multiplying the amount of each principal payment by the
number of years from the date of issuance to the related Payment Date, (ii)
adding the results and (iii) dividing the sum of the initial respective
Certificate Principal Balance for the related Offered Certificates as of the
Closing Date.
S-73
<PAGE> 74
PERCENTAGE OF INITIAL CLASS B-1 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
DATES SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4 SCENARIO 5 SCENARIO 6 SCENARIO 7
----- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
06/25/1997 100 100 100 100 100 100 100
06/25/1998 100 100 100 100 100 100 100
06/25/1999 100 100 100 100 100 100 100
06/25/2000 100 100 100 100 100 100 100
06/25/2001 100 100 81 70 49 37 11
06/25/2002 100 100 63 53 34 24 0
06/25/2003 100 97 49 40 23 12 0
06/25/2004 100 84 38 30 13 2 0
06/25/2005 100 73 29 22 4 0 0
06/25/2006 100 63 23 14 0 0 0
06/25/2007 100 55 16 7 0 0 0
06/25/2008 100 47 9 1 0 0 0
06/25/2009 100 41 4 0 0 0 0
06/25/2010 100 34 0 0 0 0 0
06/25/2011 100 29 0 0 0 0 0
06/25/2012 73 13 0 0 0 0 0
06/25/2013 69 9 0 0 0 0 0
06/25/2014 66 5 0 0 0 0 0
06/25/2015 61 2 0 0 0 0 0
06/25/2016 56 0 0 0 0 0 0
06/25/2017 53 0 0 0 0 0 0
06/25/2018 49 0 0 0 0 0 0
06/25/2019 46 0 0 0 0 0 0
06/25/2020 42 0 0 0 0 0 0
06/25/2021 37 0 0 0 0 0 0
06/25/2022 32 0 0 0 0 0 0
06/25/2023 26 0 0 0 0 0 0
06/25/2024 20 0 0 0 0 0 0
06/25/2025 9 0 0 0 0 0 0
06/25/2026 0 0 0 0 0 0 0
06/25/2027 0 0 0 0 0 0 0
Weighted
Average Life
(years):(1) 20.98 11.12 6.69 5.88 4.66 4.16 3.59
Weighted
Average Life
(years):(2) 20.95 11.00 6.43 5.57 4.46 3.92 3.45
</TABLE>
(1) To Maturity
(2) To 10% Call
(3) This assumes that an optional termination is exercised by the Master
Servicer when the aggregate principal balance has declined to 10% or less of
the aggregate principal balance of the Mortgage Loans as of the Closing
Date.
The weighted average life of each indicated class of Offered Certificates has
been determined by (i) multiplying the amount of each principal payment by the
number of years from the date of issuance to the related Payment Date, (ii)
adding the results and (iii) dividing the sum of the initial respective
Certificate Principal Balance for the related Offered Certificates as of the
Closing Date.
S-74
<PAGE> 75
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the tables set forth above,
which only demonstrate how the Mortgage Loans may behave under varying
prepayment scenarios. It is unlikely that the Mortgage Loans will prepay at the
same levels of CPR or in accordance with the Prepayment Assumptions. Moreover,
the varying remaining terms to maturity of the Mortgage Loans could produce
slower or faster principal payments then indicated in the foregoing tables.
YIELD SENSITIVITY OF THE CLASS A-7IO CERTIFICATES
As the owners of interest-only strip securities, the Owners of the
Class A-7IO Certificates will be entitled to receive monthly distributions only
of interest, as described herein. Because they will not receive any
distributions of principal, the Owners of the Class A-7IO Certificates will be
affected by prepayments, liquidations and other dispositions (including optional
redemptions described herein) of the Mortgage Loans in the Fixed Rate Group to a
greater degree than will the Owners of the other Classes of Fixed Rate Group
Certificates. In addition, the Notional Principal Balance applicable to interest
calculations on the Class A-7IO Certificates is (x) through the 30th Payment
Date, the Class A-5 Certificate Principal Balance and (y) thereafter, zero.
Since the Class A-5 Certificates will amortize in accordance with the
distribution of the Class A-5 Lockout Distribution Amount, the performance of
the Class A-7IO Certificates is likely to be more stable than if such Notional
Principal Balance were calculated using the underlying Fixed Rate Group Mortgage
Loans directly; consequently, the yield sensitivity of such Certificates will
only be impacted at extremely high CPRs.
PAYMENT LAG FEATURE OF FIXED RATE GROUP CERTIFICATES
Pursuant to the Pooling and Servicing Agreement, an amount equal to
Mortgagor payments with respect to each Mortgage Loan (net of the Servicing Fee)
received by the Master Servicer during each Remittance Period is to be remitted
to the Trustee on or prior to the related Monthly Remittance Date; the Trustee
will not be required to distribute any such amounts to the Owners until the next
succeeding Payment Date. As a result, the monthly distributions to the Owners
generally reflect Mortgagor payments during the prior calendar month, and the
first Payment Date will not occur until July 25, 1997. Thus, the effective yield
to the Owners of the Fixed Rate Group Certificates will be below that otherwise
produced by the related Pass-Through Rate because distributions to Owners of the
Fixed Rate Group Certificates in respect of any given month will not be made
until on or after the 25th day of the following month.
USE OF PROCEEDS
The Sponsor will cause the Trust to acquire the Mortgage Loans
concurrently with the sale of the Offered Certificates. The net proceeds from
the sale of the Offered Certificates will be paid over to the Originators in
consideration of the transfer of the Mortgage Loans. Such amount will be
determined as a result of the pricing of the Offered Certificates through the
offering described in this Prospectus Supplement. The net proceeds to be
received from the sale of the Mortgage Loans will be added to the Originators'
general funds and will be available for general corporate purposes, including
the repayment of debt and the purchase of new mortgage loans.
S-75
<PAGE> 76
THE SPONSOR AND THE MASTER SERVICER
The Sponsor, Advanta Mortgage Conduit Services, Inc. is a direct
subsidiary of Advanta Mortgage Corp. USA, the Master Servicer, and is an
indirect subsidiary of Advanta Corp., a Delaware corporation ("Advanta Parent"),
a publicly-traded company based in Horsham, Pennsylvania with assets as of March
31, 1997 in excess of $6.2 billion. Advanta Parent, through its subsidiaries
(including the Master Servicer) managed assets (including mortgage loans) in
excess of $20.1 billion as of March 31, 1997. See "The Sponsor and the
Transferor" in the Prospectus.
As of March 31, 1997, the Master Servicer and its subsidiaries were
servicing approximately 50,000 Mortgage Loans in the Owned and Managed Servicing
Portfolio representing an aggregate outstanding principal balance of
approximately $3.1 billion, and approximately 86,700 mortgage loans in the
Third-Party Servicing Portfolio representing an aggregate outstanding principal
balance of approximately $5.6 billion. See "The Master Servicer" in the
Prospectus.
As of March 31, 1997, the Sponsor or its affiliates have issued, and
the Master Servicer services, 31 issues of mortgage pass-through securities with
an original balance of approximately $4.6 billion.
The Master Servicer may resign or be removed, only in accordance with
the terms of the Pooling and Servicing Agreement. No removal or resignation
shall become effective until the Trustee or a successor servicer shall have
assumed the Master Servicer's responsibilities and obligations in accordance
therewith. See "The Pooling and Servicing Agreement -- Removal and Resignation
of the Master Servicer" in the Prospectus.
The Master Servicer may not assign its obligations under the Pooling
and Servicing Agreement, in whole or in part, unless it shall have first
obtained the written consent of the Trustee and of the Class A-6 Insurer, which
consent is required not to be unreasonably withheld; provided, however, that any
assignee must meet the eligibility requirements for a successor servicer set
forth in the Pooling and Servicing Agreement. See "The Pooling and Servicing
Agreement -- Removal and Resignation of the Master Servicer" in the Prospectus.
The Master Servicer may enter into Sub-Servicing Agreements with
qualified Sub-Servicers with respect to the servicing of all or any portion of
the Mortgage Loans. The Pooling and Servicing Agreement will provide that
affiliates of the Master Servicer which are qualified to service mortgage loans
are qualified Sub-Servicers. No Sub-Servicing Agreements discharge the Master
Servicer from its servicing obligations. See "Mortgage Loan Program --
Sub-Servicers" in the Prospectus.
Upon removal or resignation of the Master Servicer, the Trustee may
solicit bids for a successor servicer and, pending the appointment of a
successor Master Servicer as a result of soliciting such bids, will be required
to serve as Master Servicer. If the Trustee is unable to obtain a qualifying bid
and is prevented by law from acting as servicer, the Trustee will be required to
appoint, or petition a court of competent jurisdiction to appoint, an eligible
successor. Any successor is required to be a housing and home finance
institution, bank or mortgage servicing institution which is acceptable to the
Trustee and shall assume all or any part of the responsibilities, duties or
liabilities of the Master Servicer.
The Offered Certificates will not represent an interest in or
obligation of, nor are the Mortgage Loans guaranteed by, the Sponsor, the Master
Servicer or Advanta Parent, nor will they be insured or guaranteed by the
Federal Deposit Insurance Corporation (the "FDIC") or any other governmental
agency or instrumentality.
S-76
<PAGE> 77
RECENT DEVELOPMENTS RELATED TO ADVANTA PARENT
On March 17, 1997, Advanta Parent announced that it expects to report
1997 results well below previous expectations. On April 16, 1997, Advanta Parent
reported a loss of $19.8 million for the first quarter of 1997. Such results are
attributed to a number of factors, including continuing increases in consumer
bankruptcies and charge-offs and lower receivables balances than originally
anticipated in its credit card business. On March 17, 1997, Advanta Parent also
announced it expects to report a net profit for full year 1997, with estimated
full year earnings of approximately $1.50 per share.
On March 17, 1997, Advanta Parent also announced that it has retained
BT Wolfensohn, a division of Bankers Trust New York Corporation, to explore all
strategic alternatives that build upon the historic strength and success of
Advanta Parent as a whole and of its business units, including the Sponsor
and/or the Master Servicer, with the aim of maximizing Advanta Parent's value.
The strategic alternatives that might be considered by Advanta Parent include,
but are not limited to, a strategic alliance with another company, an alliance
or initial public offering involving one or more of Advanta Parent's operating
units, or a merger or sale involving Advanta Parent as a whole. There is no
assurance that any such event will occur. The result of pursuing such
alternatives may positively, or may adversely, affect the financial ability of
the Sponsor and/or the Master Servicer to perform their financial and other
obligations, or to service the Mortgage Loan pool. In the event that such
effects on the Sponsor and/or the Master Servicer are adverse, losses and
delinquencies on the Mortgage Loan pool may increase.
Advanta Parent has reported that its overall charge-off rate on all
managed receivables (for which the mortgage loan portfolio represented
approximately 20% at March 31, 1997), for the three months ended at March 31,
1997, was 5.3%, compared to 2.8% for the first quarter of 1996. Advanta Parent
has further reported that its overall delinquency ratio (30 days or more) for
all managed receivables at March 31, 1997 was 5.5%, compared to 3.2% at March
31, 1996.
The ability of Advanta Parent's subsidiaries to honor their financial
and other obligations is to some extent influenced by the financial condition of
Advanta Parent. Such obligations of the Sponsor and the Master Servicer, insofar
as they relate to the Trust and the Offered Certificates, primarily consist of
the Sponsor's obligation to repurchase defective Mortgage Loans and the Master
Servicer's obligation to service the Mortgage Loan pool. To the extent that the
Sponsor and/or the Master Servicer's ability to perform such obligations is
adversely affected, the Mortgage Loan pool may experience an increased level of
delinquencies and losses. The credit enhancement available to the Trust,
however, will be available, under the circumstances described herein under
"Credit Enhancement" to absorb certain losses, as described herein.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Persons in whose name an Offered Certificate is registered in the
Register maintained by the Trustee are the "Owners" of the Offered Certificates.
For so long as the Offered Certificates are in book-entry form with DTC, the
only "Owner" of the Offered Certificates as the term "Owner" is used in the
Pooling and Servicing Agreement will be Cede. No Beneficial Owner will be
entitled to receive a Definitive Certificate representing such person's interest
in the Trust, except in the event that Definitive Certificates are issued under
limited circumstances set forth in the Pooling and Servicing Agreement. All
references herein to the Owners of Offered Certificates shall mean and include
the rights of Beneficial Owners, as such rights may be exercised through DTC and
its participating organizations, except as otherwise specified in the Pooling
and Servicing Agreement. See "Description of the Securities -- Form of
Securities" in the Prospectus.
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Each class of Offered Certificates will evidence the right to receive
on each Payment Date such Class' Distribution Amount for such class of Offered
Certificates, in each case until the related Certificate Principal Balance has
been reduced to zero. The Owners of the class of Class R Certificates will be
entitled to receive distributions of residual Net Monthly Excess Cashflow not
required for other purposes pursuant to the Pooling and Servicing Agreement.
REMITTANCE DATES
The Pooling and Servicing Agreement will require that the Trustee
create and maintain a Certificate Account. See "Description of the Securities --
Payments on Mortgage Loans" in the Prospectus.
On the eighteenth day of each month (or, if such day is not a Business
Day, the immediately preceding Business Day) (the "Remittance Date") the Master
Servicer is required to withdraw from the Principal and Interest Account and
remit to the Trustee, for deposit in the Certificate Account, the Monthly
Remittance Amount. The Monthly Remittance Amount is the sum of the amounts
collected by the Master Servicer in respect of the Mortgage Loans during the
period beginning on the first day of the calendar month immediately preceding
the month in which the related Remittance Date occurs and ending on the last day
of such month (the "Remittance Period") plus any related Loan Purchase Prices,
Substitution Amounts, Delinquency Advances and Compensating Interest, less the
sum of certain amounts the Master Servicer is permitted to withdraw from the
Principal and Interest Account, as described under "Description of the
Securities -- Withdrawals from the Principal and Interest Account."
BOOK ENTRY REGISTRATION OF THE OFFERED CERTIFICATES
The Offered Certificates will be book-entry certificates (the
"Book-Entry Certificates"). The Beneficial Owners may elect to hold their
Offered Certificates through DTC in the United States, or CEDEL or Euroclear in
Europe if they are participants of such systems ("Participants"), or indirectly
through organizations which are Participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates per class of Offered
Certificates which in the aggregate equal the principal balance of such Offered
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and Morgan
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Investors
may hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $1,000 and in integral multiples
in excess thereof. Except as described below, no Beneficial Owner will be
entitled to receive a Definitive Certificate. Unless and until Definitive
Certificates are issued, it is anticipated that the only "Owner" of such Offered
Certificates will be Cede & Co., as nominee of DTC. Beneficial Owners will not
be Owners as that term is used in the Pooling and Servicing Agreement.
Beneficial Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's Ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
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Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Certificates from the Trustee through DTC and DTC
Participants. While such Offered Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Offered Certificates.
Participants and indirect participants with whom Beneficial Owners have accounts
with respect to Offered Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess 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
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Offered Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Offered Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Offered
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Offered Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- Foreign Investors" and " -- Backup Withholding" in
the Prospectus and "Global Clearance, Settlement and Tax Documentation
Procedures -- Certain U.S. Federal Income Tax Documentation Requirements" in
Annex I to this Prospectus Supplement.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
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DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("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 now be settled in any of 27 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
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Distributions on the Book-Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Offered Certificates held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Because DTC can
only act on behalf of Financial Intermediaries, the ability of a Beneficial
Owner to pledge Book-Entry Certificates, to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust provided by the Trustee 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 the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. CEDEL or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling and
Servicing Agreement on behalf of a CEDEL Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Offered Certificates which conflict with actions taken with
respect to other Offered Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Sponsor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Sponsor or the
Trustee is unable to locate a qualified successor, (b) the Sponsor, at its sole
option, elects to terminate a book-entry system through DTC or (c) DTC, at the
direction of the Beneficial Owners representing a majority of the outstanding
Percentage Interests of the Offered Certificates, advises the Trustee in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will
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issue Definitive Certificates, at the Sponsor's expense and thereafter the
Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among Participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
Neither the Sponsor, the Master Servicer nor the Trustee will have any
liability for any actions taken by DTC or its nominee, Euroclear, or CEDEL,
including, without limitation, actions for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Offered
Certificates held by Euroclear, Cedel or Cede & Co., as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
PAYMENT DATES
Distributions on the Certificates are required to be made on each
Payment Date, commencing on July 25, 1997, to the Owners on each Record Date in
an amount equal to the product of such Owner's Percentage Interest and the
amount distributed in respect of such Certificateholders' class of such
Certificates on such Payment Date. See "Description of the Securities --
Distributions" in the Prospectus.
On each Payment Date, the Owners of each Class of the Offered
Certificates will be entitled to receive from amounts then on deposit in the
certificate account established and maintained by the Trustee in accordance with
the Pooling and Servicing Agreement (the "Certificate Account") and until the
Certificate Principal Balance of such Class of Offered Certificates is reduced
to zero, and to the extent funds are available therefor, the related Current
Interest, any Interest Carry Forward Amount and the portion of the Principal
Distribution Amount, if any, allocated therefor as of such Payment Date,
allocated among the Classes of the Offered Certificates as described below.
Distributions will be made in immediately available funds to Owners of Offered
Certificates by wire transfer or otherwise, to the account of such Owner at a
domestic bank or other entity having appropriate facilities therefor, if such
Owner has so notified the Trustee, or by check mailed to the address of the
person entitled thereto as it appears on the register (the "Register")
maintained by the Trustee as registrar (the "Registrar"). Beneficial Owners may
experience some delay in the receipt of their payments due to the operations of
DTC. See "Risk Factors--Book-Entry Registration" in the Prospectus and
"Description of the Offered Certificates--Book Entry Registration of the Offered
Certificates" herein and "Description of the Certificates--Book Entry
Registration" in the Prospectus.
The Pooling and Servicing Agreement will provide that an Owner, upon
receiving the final distribution on such Owner's Certificate, will be required
to send such Certificate to the Trustee.
Each Owner of record of the related Class of the Offered Certificates
will be entitled to receive such Owner's Percentage Interest in the amounts due
such Class on such Payment Date. The "Percentage Interest" of an Offered
Certificate as of any date of determination will be equal to the percentage
obtained by dividing the principal balance of such Certificate as of the Cut-Off
Date by the Certificate Principal Balance for the related Class of the Offered
Certificates as of the Cut-Off Date.
DISTRIBUTIONS
Upon receipt, the Trustee will be required to deposit into the
Certificate Account with respect to each Mortgage Loan Group (i) the total of
the principal and interest collections on the Mortgage Loans, including any Net
Liquidation Proceeds and any amounts advanced by the Master Servicer, remitted
by
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the Master Servicer, together with any Substitution Amount and any Loan Purchase
Price amount and (ii) the proceeds of any liquidation of the Trust Estate.
The Pooling and Servicing Agreement establishes a pass-through rate on
each Class of the Offered Certificates (each, a "Pass-Through Rate") as set
forth in the Summary of Terms herein.
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from monies then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement with respect to interest and principal:
Interest: On each Payment Date the Interest Remittance Amount
with respect to the related Mortgage Loan Group will be distributed in the
following order of priority:
First, to the Trustee, the Trustee's Fee;
Second, with respect to the Adjustable Rate Group, the Premium then due
to the Class A-6 Insurer;
Third, to the Owners of the Class A Certificates related to such
Mortgage Loan Group, the related Class A Current Interest plus the
related Class A Interest Carry Forward Amount with respect to each such
Class of Class A Certificates without any priority among such Class A
Certificates; provided, that if the Interest Amount Available (less the
Trustee's Fee (and less the Premium with respect to the Adjustable Rate
Group only), is not sufficient to make a full distribution of interest
with respect to all Classes of the Class A Certificates, the Interest
Amount Available will be distributed among the outstanding Classes of
Class A Certificates pro rata based on the aggregate amount of interest
due on each such Class, and the amount of the shortfall will be carried
forward with accrued interest;
Fourth, with respect to the Fixed Rate Group, to the extent of the
Interest Amount Available with respect to the Fixed Rate Group then
remaining, to the Owners of the Class M-1 Certificates, the Class M-1
Current Interest;
Fifth, with respect to the Fixed Rate Group, to the extent of the
Interest Amount Available with respect to the Fixed Rate Group then
remaining, to the Owners of the Class M-2 Certificates, the Class M-2
Current Interest;
Sixth, with respect to the Fixed Rate Group, to the extent of the
Interest Amount Available with respect to the Fixed Rate Group then
remaining, to the Owners of the Class B-1 Certificates, the Class B-1
Current Interest; and
Seventh, the Monthly Excess Cashflow Amount with respect to such
Mortgage Loan Group shall be applied as described under "Credit
Enhancement--Application of Monthly Excess Cashflow Amount."
PRINCIPAL: GENERAL. The Fixed Rate Group Certificates and the
Adjustable Rate Group Certificates will generally receive principal
distributions on each Payment Date which are based on principal collections, and
Realized Losses, with respect to the related Mortgage Loan Group. In addition,
the overcollateralization feature of the Trust results in accelerated payments
of principal with respect to each Mortgage Loan Group to achieve, and thereafter
maintain, a specialized level of overcollateralization with respect to such
Mortgage Loan Group. Such accelerated principal will generally be funded from
excess interest with respect to the related Mortgage Loan Group.
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ADJUSTABLE RATE GROUP-PRINCIPAL DISTRIBUTIONS. On each Payment Date,
principal will be distributed to the Owners of the Class A-6 Certificates in an
amount equal to the Adjustable Rate Group Principal Distribution Amount until
the Class A-6 Certificate Principal Balance has been reduced to zero.
FIXED RATE GROUP-PRINCIPAL DISTRIBUTIONS. With respect to the Fixed
Rate Group and on each Payment Date (a) before the related Stepdown Date or (b)
with respect to which a Fixed Rate Group Trigger Event is in effect Owners of
the Class A Certificates (other than the Class A-7IO Certificates) will be
entitled to receive payment of 100% of the Principal Distribution Amount with
respect to the Fixed Rate Group for such Payment Date as follows: first, to the
Owners of the Class A-5 Certificates, the Class A-5 Lockout Distribution Amount
and then to the Owners of the Class A Fixed Rate Group Certificates (other than
the Class A-7IO Certificates), in sequential order until the Certificate
Principal Balance of each such Class of Class A Fixed Rate Group Certificates
has been reduced to zero.
With respect to the Fixed Rate Group and on each Payment Date (a) on or
after the related Stepdown Date and (b) as long as a Fixed Rate Group Trigger
Event is not in effect and is not continuing, the Owners of all Classes of the
Fixed Rate Group Certificates (other than the Class A-7IO Certificates) will be
entitled to receive payments of principal, in the order of priority, in the
amounts set forth below and to the extent of the Principal Distribution Amount
with respect to the Fixed Rate Group as follows:
First, the lesser of (x) the Fixed Rate Group Principal
Distribution Amount and (y) the Class A Principal Distribution Amount
shall be distributed to the Owners of the Class A-5 Certificates, in an
amount equal to the Class A-5 Lockout Distribution Amount, with the
remainder paid to the Owners of the Class A Fixed Rate Group
Certificates (other than the Class A-7IO Certificates), in sequential
order until the Certificate Principal Balance of each such Class of
Class A Fixed Rate Group Certificates has been reduced to zero;
Second, the lesser of (x) the excess of (i) the Fixed Rate
Group Principal Distribution Amount over (ii) the amount distributed to
the Owners of the Class A Fixed Rate Group Certificates in clause First
above and (y) the Class M-1 Principal Distribution Amount shall be
distributed to the Owners of the Class M-1 Certificates, until the
Class M-1 Certificate Principal Balance has been reduced to zero;
Third, the lesser of (x) the excess of (i) the Fixed Rate
Group Principal Distribution Amount over (ii) the sum of the amount
distributed to the Owners of the Class A Fixed Rate Group Certificates
in clause First above and the amount distributed to the Owners of the
Class M-1 Certificates in clause Second above and (y) the Class M-2
Principal Distribution Amount shall be distributed to the Owners of the
Class M-2 Certificates, until the Class M-2 Certificate Principal
Balance has been reduced to zero;
Fourth, the lesser of (x) the excess of (i) the Fixed Rate
Group Principal Distribution Amount over (ii) the sum of the amount
distributed to the Owners of the Class A Fixed Rate Group Certificates
pursuant to clause First above, the amount distributed to the Owners of
the Class M-1 Certificates pursuant to clause Second above and the
amount distributed to the Owners of the Class M-2 Certificates pursuant
to clause Third above and (y) the Class B-1 Principal Distribution
Amount shall be distributed to the Owners of the Class B-1
Certificates, until the Class B-1 Certificate Principal Balance has
been reduced to zero; and,
Fifth, the lesser of (x) any amount of the Fixed Rate Group
Principal Distribution Amount remaining after making all of the
distributions in clauses First, Second, Third and Fourth above and (y)
the positive difference, if any, of (A) $2,100,000 minus (B) the Target
Overcollateralization Amount for the Fixed Rate Group for such Payment
Date shall be applied as a payment of principal with respect to the
Subordinate Certificates in reverse order of seniority
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(i.e., first to the Class B-1 Certificates, second to the Class M-2
Certificates, third to the Class M- 1 Certificates and fourth, to the
Class A Fixed Rate Group Certificates) until their respective
Certificate Principal Balances have been reduced to zero; and
Sixth, any amount of the Fixed Rate Group Principal
Distribution Amount remaining after making all of the distributions in
clauses First, Second, Third, Fourth and Fifth above shall be
distributed as part of the Monthly Excess Cashflow Amount with respect
to the Fixed Rate Group and shall be applied as described below under
"Credit Enhancement--Application of Monthly Excess Cashflow Amounts" in
this summary.
The Class A Fixed Rate Group Certificates (other than the Class A-5
Certificates and the Class A-7IO Certificates) are "sequential pay" classes such
that the Owners of the Class A-4 Certificates will receive no payments of
principal until the Class A-3 Certificate Principal Balance has been reduced to
zero, the Owners of the Class A-3 Certificates will receive no payments of
principal until the Class A-2 Certificate Principal Balance has been reduced to
zero, and the Owners of the Class A-2 Certificates will receive no payments of
principal until the Class A-1 Certificate Principal Balance has been reduced to
zero; provided, however, that on any Payment Date on which the sum of the
Certificate Principal Balance of the Subordinate Certificates and the
Overcollateralization Amount related to the Fixed Rate Group is zero, any
amounts of principal payable to the Owners of the Class A Fixed Rate Group
Certificates on such Payment Date shall be distributed pro rata and not
sequentially.
Notwithstanding the foregoing, in the event that the Certificate
Principal Balance of all of the Class A Fixed Rate Group Certificates have been
reduced to zero, all amounts of principal that would have been distributed to
such Class A Fixed Rate Group Certificates will be distributed to the
Subordinate Certificates sequentially in the following order: first, to the
Class M-1 Certificates, second, to the Class M-2 Certificates and third, to the
Class B-1 Certificates. Similarly, if the Certificate Principal Balance of the
Class M-1 Certificates has been reduced to zero, all amounts of principal that
would have been distributed to such Class M-1 Certificates will be distributed
to the Class M-2 and Class B-1 Certificates in that order. Finally, if the
Certificate Principal Balance of the Class M-2 Certificates has been reduced to
zero, all amounts of principal that would have been distributed on such Class
M-2 Certificates will be distributed to the Class B-1 Certificates.
CALCULATION OF LIBOR
On the second business day preceding each Payment Date or, in the case
of the first Payment Date, on the second business day preceding the Closing Date
(each such date, an "Interest Determination Date"), the Trustee will determine
the London interbank offered rate for one-month U.S. dollar deposits ("LIBOR")
for the next Accrual Period for the Adjustable Rate Group Certificates on the
basis of the offered rates of the Reference Banks for one-month U.S. dollar
deposits, as such rates appear on the Telerate Page 3750 as of 11:00 a.m.
(London time) on such Interest Determination Date. As used in this section,
"business day" means a day on which banks are open for dealing in foreign
currency and exchange in London and New York City; Telerate Page 3750 means the
display page so designated on the Dow Jones Telerate Service (or such other page
on that service for the purpose of displaying comparable rates or prices); and
"Reference Banks" means four leading banks selected by the Master Servicer and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market (i) with an established place of business in London, (ii) whose
quotations appear on the Telerate Page 3750 on the Interest Determination Date
in question, (iii) which have been designated as such by the Trustee and (iv)
not controlling, controlled by, or be under common control with, the Sponsor.
On each Interest Determination Date, LIBOR for the related Accrual
Period for the Adjustable Rate Group Certificates will be established by the
Trustee as follows:
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(a) If on such Interest Determination Date two or more Reference
Banks provides such offered quotations, LIBOR for the related Accrual Period for
the Adjustable Rate Group Certificates shall be the arithmetic mean of such
offered quotations (rounded upwards if necessary to the nearest 1/100,000 of 1%
(0.0000001), with five one-millionths of a percentage point rounded upward, of
all such quotations.
(b) If on such Interest Determination Date fewer than two
Reference Banks provide such offered quotations, LIBOR for the related Accrual
Period for the Adjustable Rate Group Certificates shall be the rate for that day
will be the arithmetic mean, rounded upward, if necessary, to the nearest
1/100,000 of 1% (0.0000001), with five one-millionths of a percentage point
rounded upward, of the offered per annum rates that one or more leading banks in
New York City, selected by the Indenture Trustee, are quoting as of
approximately 11:00 a.m., New York City time, on such LIBOR Determination Date
to leading European banks for United States dollar deposits for the Index
Maturity; provided that if the banks selected as aforesaid are not quoting as
mentioned in this sentence, LIBOR in effect for the applicable Interest Period
will be LIBOR in effect for the previous Interest Period.
The establishment of LIBOR on each Interest Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable to
the Adjustable Rate Group Certificates for the related Accrual Period shall (in
the absence of manifest error) be final and binding. Each such rate of interest
may be obtained by telephoning the Trustee at 1-800-735-7777.
CERTAIN ACTIVITIES
The Trust has not and will not: (i) issue securities (except for
the Certificates); (ii) borrow money; (iii) make loans; (iv) invest in
securities for the purpose of exercising control; (v) underwrite securities;
(vi) except as provided in the Pooling and Servicing Agreement, engage in the
purchase and sale (or turnover) of investments; (vii) offer securities in
exchange for property (except Certificates for the Mortgage Loans); or (viii)
repurchase or otherwise reacquire its securities. See "Description of the
Securities -- Reports To The Securityholders" in the Prospectus for information
regarding reports to the Owners.
CREDIT ENHANCEMENT
FIXED RATE GROUP. The Credit Enhancement provided for the benefit
of the Owners of the Class A Fixed Rate Group Certificates consists of the
subordination of the Subordinate Certificates, the priority of application of
Realized Losses, and the application of the Fixed Rate Monthly Excess Cashflow
Amounts.
ADJUSTABLE RATE GROUP. The Credit Enhancement provided for the
benefit of the Owners of the Class A-6 Certificates consists of the Class A-6
Insurance Policy, the application of the Adjustable Rate Group Monthly Excess
Cashflow Amounts and the cross-collateralization feature of the Trust. The Class
A-6 Certificates will have the benefit of certain levels of
overcollateralization as required by the Class A-6 Insurer.
Application of Realized Losses (Fixed Rate and Adjustable Rate
Groups). The Pooling and Servicing Agreement provides that if a Mortgage Loan
becomes a Liquidated Loan during a Remittance Period, the Net Liquidation
Proceeds relating thereto and allocated to principal may be less than the
Principal Balance of such Mortgage Loan. The amount of such insufficiency is a
"Realized Loss". Realized Losses which occur in a Mortgage Loan Group will, in
effect, be absorbed first, by the Class R Certificates (both through the
application of the Monthly Excess Interest Amount to fund such deficiency and
through a reduction in the related Overcollateralization Amount). In the case of
the Fixed Rate Group, any remaining deficiency after absorption by the Class R
Certificates will be absorbed, second,
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by the Owners of the Class B-1 Certificates, third, by the Owners of the Class
M-2 Certificates, and, fourth, by the Owners of the Class M-1 Certificates. In
the case of the Adjustable Rate Group, any remaining deficiency will be covered
by the Class A-6 Insurance Policy.
To the extent that a Mortgage Loan Group experiences Realized
Losses, such Realized Losses will reduce the aggregate outstanding Principal
Balance of the Mortgage Loans in such Mortgage Loan Group (i.e., a reduction in
the collateral balance will occur). Since the Overcollateralization Amount with
respect to a Mortgage Loan Group is the excess, if any, of the related
collateral balance over the related Aggregate Certificate Principal Balance,
Realized Losses, to the extent experienced, will in the first instance reduce
the related Overcollateralization Amount.
The Pooling and Servicing Agreement requires that the
Overcollateralization Amount with respect to a Mortgage Loan Group be initially
increased to, and thereafter maintained at, the related Targeted
Overcollateralization Amount. This increase and subsequent maintenance is
intended to be accomplished by the application of related Monthly Excess
Interest Amounts to the funding of the related Extra Principal Distribution
Amount. Such Extra Principal Distribution Amounts, since they are funded from
interest collections on the collateral but are distributed as principal on the
Offered Certificates, will increase the related Overcollateralization Amount.
If, on any Payment Date and with respect to either Mortgage Loan
Group, after taking into account all Realized Losses experienced with respect to
such Mortgage Loan Group during the prior Remittance Period and after taking
into account the distribution of principal (including the Extra Principal
Distribution Amount) with respect to the related Certificates on such Payment
Date, the Aggregate Certificate Principal Balance with respect to the related
Group exceeds the aggregate Principal Balance of the Mortgage Loans in the
related Group as of the end of the related Remittance Period (i.e., if the level
of overcollateralization is negative), such excess is an "Applied Realized Loss
Amount" with respect to the related Group. In the case of the Fixed Rate Group,
such an Applied Realized Loss Amount will be applied as a reduction in the
Certificate Principal Balance of the Subordinate Certificates in reverse order
of seniority (i.e., first against the Class B-1 Certificate Principal Balance
until it is reduced to zero, then against the Class M-2 Certificate Balance
until it is reduced to zero and then against the Class M-1 Certificate Principal
Balance until it is reduced to zero). In the case of the Adjustable Rate Group,
the Trustee will make a claim under the Class A-6 Insurance Policy with respect
to an Applied Realized Loss Amount with respect to the Adjustable Rate Group.
The Pooling and Servicing Agreement does not permit the "write down" of the
Certificate Principal Balance of any Class A Certificate.
Once the Certificate Principal Balance of a Class of Subordinate
Certificates has been "written down," the amount of such write down will no
longer bear interest, nor will such amount thereafter be "reinstated" or
"written up," although the amount of such write down may, on future Payment
Dates be paid to Owners of the Subordinate Certificates which experienced the
write down, in direct order of seniority (i.e., first, the Class M-1
Certificates, second, the Class M-2 Certificates and, third, the Class B-1
Certificates). The source of funding of such payments will be the amount, if
any, of the Monthly Excess Cashflow Amount remaining on such future Payment
Dates after the funding of the Extra Principal Distribution Amount and after the
payment of Interest Carry Forward Amounts with respect to the Subordinate
Certificates on such Payment Date.
Application of Monthly Excess Cashflow Amounts --
Overcollateralization Mechanics (Fixed and Adjustable Rate Groups). The weighted
average net Coupon Rate for the Mortgage Loans in each Mortgage Loan Group is
generally expected to be higher than the weighted average of the Pass-Through
Rates on the Offered Certificates related to such Mortgage Loan Group, thus
generating certain excess interest collections which, in the absence of losses
will not be necessary to fund interest distributions on the Offered
Certificates. The Pooling and Servicing Agreement provides that this excess
interest be applied to the extent available, to make accelerated payments of
principal (i.e., the Extra Principal
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Distribution Amount) to the Class or Classes then entitled to receive
distributions of principal; such application will cause the Aggregate
Certificate Balance with respect to a Mortgage Loan Group to amortize more
rapidly than the Mortgage Loans in such Mortgage Loan Group, resulting in
Overcollateralization. This excess interest for a Remittance Period and with
respect to a Mortgage Loan Group, together with interest on the related
Overcollateralization Amount itself, on the related Payment Date is the "Monthly
Excess Interest Amount" for such Payment Date and Mortgage Loan Group.
The required level of overcollateralization for any Mortgage Loan
Group and Payment Date is the Targeted Overcollateralization Amount for such
Mortgage Loan Group and Payment Date. The Targeted Overcollateralization Amount
is initially (i.e., prior to the related Stepdown Date) $11,130,000 with respect
to the Fixed Rate Group and with respect to the Adjustable Rate Group, an amount
required by the Class A-6 Insurer. Since the actual level of the
Overcollateralization Amount with respect to each Mortgage Loan Group as of the
Closing Date is less than the related Targeted Overcollateralization Amount, in
the early months of the transaction, subject to the availability of Monthly
Excess Interest Amounts, Extra Principal Distribution Amounts will be paid, with
the result that the Overcollateralization Amount with respect to each Mortgage
Loan Group will increase to the level of the related Targeted
Overcollateralization Amount.
If, once the Targeted Overcollateralization Amount with respect
to each Mortgage Loan Group has been reached, Realized Losses occur in such
Mortgage Loan Group, such Realized Losses will result in an
Overcollateralization Deficiency (since such Realized Losses reduce the
Principal Balance of the related Mortgage Loans without giving rise to a
corresponding reduction of the related Aggregate Certificate Principal Balance).
The cashflow priorities of the Trust require that, in this situation, an Extra
Principal Distribution Amount be paid (subject to the availability of any
Monthly Excess Interest Amount) for the purpose of re-establishing the
Overcollateralization Amount at the then-required Targeted Overcollateralization
Amount.
On and after the related Stepdown Date, the Targeted
Overcollateralization Amount with respect to the Fixed Rate Group and the
Adjustable Rate Group, respectively, is permitted to decrease or "step-down"
below the $11,130,000 levels to equal 5.30% of the then current aggregate
outstanding Principal Balance of the related Mortgage Loan Group (subject to a
floor of $2,100,000 for the Fixed Rate Group). If the Targeted
Overcollateralization Amount with respect to each Mortgage Loan Group is
permitted to "stepdown" on a Payment Date, the Pooling and Servicing Agreement
permits a portion of the related Principal Remittance Amount for such Payment
Date not to be passed through as a distribution of principal on such Payment
Date. This has the effect of decelerating the amortization of the Offered
Certificates with respect to each Mortgage Loan Group relative to the aggregate
outstanding Principal Balance of the Mortgage Loans, thereby reducing the actual
level of the related Overcollateralization Amount to the new, lower Targeted
Overcollateralization Amount. This portion of the Principal Remittance Amount
not distributed as principal on the related Certificates therefore releases
overcollateralization from the Trust with respect to the related Mortgage Loan
Group. The amount of such releases are the Overcollateralization Release
Amounts.
A. On any Payment Date, the sum of the Fixed Rate Group Monthly
Excess Interest Amount and the Fixed Rate Group Overcollateralization Release
Amount is the Fixed Rate Group Monthly Excess Cashflow Amount, which is required
to be applied in the following order of priority on such Payment Date:
(1) to fund the Class A Interest Carry Forward Amount, if any,
with respect to the Fixed Rate Group;
(2) to fund the Extra Principal Distribution Amount for such
Payment Date with respect to the Fixed Rate Group;
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(3) to fund the Class M-1 Interest Carry Forward Amount, if any;
(4) to fund the Class M-1 Realized Loss Amortization Amount for
such Payment Date, if any;
(5) to fund the Class M-2 Interest Carry Forward Amount, if any;
(6) to fund the Class M-2 Realized Loss Amortization Amount for
such Payment Date, if any;
(7) to fund the Class B-1 Interest Carry Forward Amount, if any;
(8) to fund the Class B-1 Realized Loss Amortization Amount for
such Payment Date, if any;
(9) to fund any amounts listed in clauses (1) and (2) above for
such Payment Date with respect to the Adjustable Rate Group
to the extent that such amounts have not been funded in full
through the application of the Adjustable Rate Group's
Monthly Excess Cashflow Amount on such Payment Date; and
(10) to the Master Servicer to the extent of any unreimbursed
Delinquency Advances or Servicing Advances including
Nonrecoverable Delinquency Advances and Nonrecoverable
Servicing Advances.
B. On any Payment Date, the sum of the Adjustable Rate Group
Monthly Excess Interest Amount and the Adjustable Rate Group
Overcollateralization Release Amount is the Adjustable Rate Group Monthly Excess
Cashflow Amount, which is required to be applied in the following order of
priority on such Payment Date:
(1) to fund the Class A Interest Carry Forward Amount, if any,
with respect to the Adjustable Rate Group;
(2) to reimburse the Class A-6 Insurer for prior, unreimbursed
Insured Payments, subject to certain limits;
(3) to fund the Extra Principal Distribution Amount for such
Payment Date with respect to the Adjustable Rate Group;
(4) to reimburse the Class A-6 Insurer for any remaining prior,
unreimbursed Insured Payments;
(5) to the Master Servicer to the extent of any unreimbursed
Delinquency Advances or Servicing Advances including
Nonrecoverable Delinquency Advances and Nonrecoverable
Servicing Advances; and
(6) to make payment of any Supplemental Interest Amount then due
to the Owners of the Class A-6 Certificates, or otherwise to
fund a distribution to Owners of the Class R Certificates.
A consequence of the foregoing rules with respect to the
application of Monthly Excess Cashflow is that the Adjustable Rate Group
benefits from a limited amount of cross-collateralization from the Fixed Rate
Group (as provided in clause A(9) above), although the Fixed Rate Group does not
benefit from any corresponding cross-collateralization from the Adjustable Rate
Group.
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Subordination of Subordinate Certificates (Fixed Rate Group). The
rights of the Owners of the Subordinate Certificates and the Class R
Certificates to receive distributions with respect to the Mortgage Loans in the
Fixed Rate Group will be subordinated, to the extent described herein, to such
rights of the Owners of the Class A Fixed Rate Group Certificates. This
subordination is intended to enhance the likelihood of regular receipt by the
Owners of the Class A Fixed Rate Group Certificates of the full amount of their
scheduled monthly payment of interest and principal and to afford such Owners
protection against Realized Losses allocated against the Fixed Rate Group.
The protection afforded to the Owners of the Class A Fixed Rate
Group Certificates by means of the subordination of the Subordinate Certificates
and the Class R Certificates will be accomplished by the preferential right of
the Owners of the Class A Fixed Rate Group Certificates to receive, prior to any
distribution being made on a Payment Date in respect of such Subordinate
Certificates and the Class R Certificates, the amounts of interest due them and
principal available for distribution on such Payment Date, and, if necessary, by
the right of the Owners of the Class A Fixed Rate Group Certificates to receive
future distributions of amounts that would otherwise be payable to the Owners of
such Subordinate Certificates and the Class R Certificates.
In addition, the rights of the Owners of the Class M-2, Class B-1
and Class R Certificates to receive distributions will be subordinated, to the
extent described herein, to such rights of the Owners of the Class A Fixed Rate
Group Certificates and Class M-1 Certificates. This subordination is intended to
enhance the likelihood of regular receipt by the Owners of the Class A Fixed
Rate Group Certificates and the Class M-1 Certificates of the amount of interest
due them and principal available for distribution and to afford such Owners with
protection against Realized Losses.
The rights of the Owners of the Class B-1 and the Class R
Certificates to receive distributions will be subordinated in the same manner to
such rights of the Owners of the Class A Fixed Rate Group Certificates, Class
M-1 and Class M-2 Certificates and the rights of Owners of the Class R
Certificates to receive distributions will be subordinated in the same manner to
such rights of the Owners of the Fixed Rate Certificates.
The Class A-6 Insurance Policy. The Sponsor will obtain a
certificate insurance policy (the "Class A-6 Insurance Policy"), with respect to
the Class A-6 Certificates, which is noncancelable, in favor of the Trustee on
behalf of the Owners of the Class A-6 Certificates. On each Payment Date, the
Class A-6 Insurer will be required to make available to the Trustee the amount,
if any, by which the Class A-6 Required Payments exceeds the Net Available
Distribution Amount as of such Payment Date. The Class A-6 Insurance Policy does
not guarantee to owners of the Class A-6 Certificates any specified rate of
Prepayments. See "The Class A-6 Insurance Policy" and "The Class A-6 Insurer"
herein and "Description of Credit Enhancement" in the Prospectus.
The Certificate Principal Balance of any Class of the Class A
Certificates (except the Class A-7IO certificates, is the Original Certificate
Principal Balance of such Class as reduced by all amounts actually distributed
to the Owners of such Class of Class A Certificates on all prior Payment Dates.
"Class B-1 Applied Realized Loss Amount" means, as to the Class
B-1 Certificates and as of any Payment Date, the lesser of (x) the Class B-1
Certificate Principal Balance (after taking into account the distribution of the
Fixed Rate Group Principal Distribution Amount on such Payment Date, but prior
to the application of the Class B-1 Applied Realized Loss Amount, if any, on
such Payment Date) and (y) the Fixed Rate Group Applied Realized Loss Amount as
of such Payment Date.
"Class B-1 Certificate Principal Balance" means, as to the Class
B-1 Certificates and as of any date of determination, the Original Class B-1
Certificate Principal Balance of such Class as reduced by the sum of (x) all
amounts actually distributed to the Owners of the Class B-1 Certificates on all
prior Payment
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Dates on account of principal and (y) the aggregate, cumulative amount of Class
B-1 Applied Realized Loss Amounts on all prior Payment Dates.
"Class B-1 Realized Loss Amortization Amount" means, as to the
Class B-1 Certificates and as of any Payment Date, the lesser of (x) the Class
B-1 Unpaid Realized Loss Amount as of such Payment Date and (y) the excess of
(i) the Fixed Rate Group Monthly Excess Cashflow Amount over (ii) the sum of the
Fixed Rate Group Extra Principal Distribution Amount, the Class M-1 Realized
Loss Amortization Amount, the Class M-2 Realized Loss Amortization Amount, the
Class M-1 Interest Carry Forward Amount, the Class M-2 Interest Carry Forward
Amount and the Class B-1 Interest Carry Forward Amount in each case for such
Payment Date.
"Class M-1 Applied Realized Loss Amount" means, as to the Class
M-1 Certificates and as of any Payment Date, the lesser of (x) the Class M-1
Certificate Principal Balance (after taking into account the distribution of the
Fixed Rate Group Principal Distribution Amount on such Payment Date, but prior
to the application of the Class M-1 Applied Realized Loss Amount, if any, on
such Payment Date) and (y) the excess of (i) the Fixed Rate Group Applied
Realized Loss Amount as of such Payment Date over (ii) the sum of the Class M-2
Applied Realized Loss Amount and the Class B-1 Applied Realized Loss Amount, in
each case as of such Payment Date.
"Class M-1 Certificate Principal Balance" means, as to the Class
M-1 Certificates and as of any date of determination, the Original Class M-1
Certificate Principal Balance of such Class as reduced by the sum of (x) all
amounts actually distributed to the Owners of the Class M-1 Certificates on all
prior Payment Dates on account of principal and (y) the aggregate, cumulative
amount of Class M-1 Applied Realized Loss Amounts on all prior Payment Dates.
"Class M-1 Realized Loss Amortization Amount" means, as to the
Class M-1 Certificates of any Payment Date, the lesser of (x) the Class M-1
Unpaid Realized Loss Amount as of such Payment Date and (y) the excess of (i)
the Fixed Rate Group Monthly Excess Cashflow Amount over (ii) the sum of the
Fixed Rate Group Extra Principal Distribution Amount and the Class M-1 Interest
Carry Forward Amount, in each case for such Payment Date.
"Class M-2 Applied Realized Loss Amount" means, as to the Class
M-2 Certificates and as of any Payment Date, the lesser of (x) the Class M-2
Certificate Principal Balance (after taking into account the distribution of the
Fixed Rate Group Principal Distribution Amount on such Payment Date, but prior
to the application of the Class M-2 Applied Realized Loss Amount, if any, on
such Payment Date) and (y) the excess of (i) the Fixed Rate Group Applied
Realized Loss Amount as of such Payment Date over (ii) the Class B Applied
Realized Loss Amount as of such Payment Date.
"Class M-2 Certificate Principal Balance" means, as to the Class
M-2 Certificates and as of any date of determination, the Original Class M-2
Certificate Principal Balance as reduced by the sum of (x) all amounts actually
distributed to the Owners of the Class M-2 Certificates on all prior Payment
Dates on account of principal and (y) the aggregate, cumulative amount of Class
M-2 Applied Realized Loss Amounts on all prior Payment Dates.
"Class M-2 Realized Loss Amortization Amount" means, as to the
Class M-2 Certificates and as of any Payment Date, the lesser of (x) the Class
M-2 Unpaid Realized Loss Amount as of such Payment Date and (y) the excess of
(i) the Fixed Rate Group Monthly Excess Cashflow Amount over (ii) the sum of the
Fixed Rate Group Extra Principal Distribution Amount, the Class M-1 Realized
Loss Amortization Amount, the Class M-1 Interest Carry Forward Amount and the
Class M-2 Interest Carry Forward Amount, in each case for such Payment Date.
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"Unpaid Realized Loss Amount" means for any Class of the
Subordinate Certificates and as to any Payment Date, the excess of (x) the
aggregate cumulative amount of Fixed Rate Group Applied Realized Loss Amounts
with respect to such Class for all prior Payment Dates over (y) the aggregate,
cumulative amount of Fixed Rate Group Realized Loss Amortization Amounts with
respect to such Class for all prior Payment Dates.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing
Agreement summarized elsewhere in this Prospectus Supplement and the Prospectus,
there is set forth below a summary of certain other provisions of the Pooling
and Servicing Agreement.
FORMATION OF THE TRUST
The Trust will be created and established pursuant to the Pooling
and Servicing Agreement on the Closing Date. On such date, the Sponsor will
cause the Trust to acquire the Mortgage Loans, and the Trust will issue the
Offered Certificates to the Owners thereof.
The property of the Trust shall include all money, instruments
and other property to the extent such money, instruments and other property are
subject or intended to be held in trust for the benefit of the Owners, and all
proceeds thereof, including, without limitation, (i) the Mortgage Loans, (ii)
such amounts, including Eligible Investments, as from time to time may be held
by the Trustee in the Certificate Account and by the Master Servicer in the
Principal and Interest Account (except as otherwise provided in the Pooling and
Servicing Agreement), each to be created pursuant to the Pooling and Servicing
Agreement, (iii) any Mortgaged Property, the ownership of which has been
effected on behalf of the Trust as a result of foreclosure or acceptance by the
Master Servicer of a deed in lieu of foreclosure and that has not been withdrawn
from the Trust, (iv) any insurance policies relating to the Mortgage Loans and
any rights of the Sponsor or the affiliated Originators under any insurance
policies, and (v) Net Liquidation Proceeds with respect to any Liquidated Loan
(collectively, the "Trust Estate").
SALE OF MORTGAGE LOANS
Not later than the Closing Date the Sponsor will cause the
Originators to transfer the Mortgage Loans pursuant to one or more Master
Mortgage Loan Transfer Agreements between the Originators and the Sponsor (the
"Master Transfer Agreements"). In the Master Transfer Agreements the Originators
will make certain representations and warranties; the Sponsor will assign its
rights to enforce such representations and warranties to the Trustee.
Pursuant to the Pooling and Servicing Agreement, the Sponsor on
the Closing Date will cause the Trust to acquire all right, title and interest
of the Originators in each Mortgage Loan listed on the schedule delivered to the
Trustee on the Closing Date (the "Schedule of Mortgage Loans") and all their
right, title and interest in all principal collected and all interest due on
each such Mortgage Loan on or after the Cut-Off Date.
In connection with the sale of the Mortgage Loans on the Closing
Date, the Originators will be required to deliver to the Trustee a file (a
"Mortgage Loan File") consisting of, among other things, (i) the original Notes
or certified copies thereof, endorsed by the Originator thereof in blank or to
the order of the holder, (ii) originals of all intervening assignments, showing
a complete chain of title from origination to the applicable Originators, if
any, including warehousing assignments, with evidence of recording thereon,
(iii) originals of all assumption and modification agreements if any, and,
unless such Mortgage Loan is covered by a counsel's opinion as described in the
next paragraph, (iv) either: (a) the original
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Mortgage, with evidence of recording thereon, (b) a true and accurate copy of
the Mortgage where the original has been transmitted for recording, until such
time as the original is returned by the public recording office or (c) a copy of
the Mortgage certified by the public recording office in those instances where
the original recorded Mortgage has been lost. The Trustee will agree, for the
benefit of the Owners, to review each such file within 90 days after the Closing
Date to ascertain that all required documents (or certified copies of documents)
have been executed and received.
The Originators are additionally required to cause to be prepared
and recorded, within 75 business days of the Closing Date (or, if original
recording information is unavailable, within such later period as is permitted
by the Pooling and Servicing Agreement) assignments of the Mortgages from the
Originators to the Trustee, in the appropriate jurisdictions in which such
recordation is necessary to perfect the lien thereof as against creditors of or
purchasers from the Originators; provided, however, that such requirements may
be waived to the extent that the Sponsor delivers to the Trustee an acceptable
opinion of counsel to the effect that the preparation and recordation of such
assignments in certain jurisdictions is not necessary to protect the Trust's
interest in the related Mortgage Loans.
GOVERNING LAW
The Pooling and Servicing Agreement and each Offered Certificate
will be construed in accordance with and governed by the laws of the State of
New York applicable to agreements made and to be performed therein.
TERMINATION OF THE TRUST
The Pooling and Servicing Agreement will provide that the Trust
will terminate upon the earlier of (i) the payment to the Owners of all Offered
Certificates of all amounts required to be paid such Owners upon the later to
occur of (a) the final payment or other liquidation (or any advance made with
respect thereto) of the last Mortgage Loan or (b) the disposition of all
property acquired in respect of any Mortgage Loan remaining in the Trust Estate,
or (ii) any time when a Qualified Liquidation of the Trust Estate is effected.
REPORTING REQUIREMENTS
On each Payment Date the Trustee is required to report in writing
to each Owner:
(i) the amount of the distribution with respect to the each
Class of Certificates (based on a Certificate in the original
principal amount of $1,000);
(ii) the amount of such distribution allocable to principal
on the related Mortgage Loans in each Mortgage Loan Group,
separately identifying the aggregate amount of any Prepayments or
other recoveries of principal included therein;
(iii) the amount of such distribution allocable to interest
on the related Mortgage Loans in each Mortgage Loan Group (based
on a Certificate in the original principal amount of $1,000);
(iv) the Interest Carry Forward Amount for each Class;
(v) the principal amount (or Notional Principal Balance) of
each Class of the Offered Certificates (based on a Certificate in
the original principal (or notional principal) amount of $1,000)
which will be outstanding after giving effect to any payment of
principal on such Payment Date;
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(vi) the aggregate Principal Balance of all Mortgage Loans
and the aggregate Principal Balance of the Mortgage Loans in each
Mortgage Loan Group after giving effect to any payment of
principal on such Payment Date;
(vii) based upon information furnished by the Sponsor such
information as may be required by Section 6049(d)(7)(C) of the
Code and the regulations promulgated thereunder to assist the
Owners in computing their market discount;
(viii) the total of any Substitution Amounts or Loan
Purchase Price amounts included in such distribution with respect
to Mortgage Loan Group;
(ix) the weighted average Coupon Rate of the Mortgage Loans
in each Mortgage Loan Group;
(x) whether a Fixed Rate Group Trigger Event has occurred;
(xi) the Fixed Rate Group Senior Enhancement Percentage;
(xii) the Overcollateralization Amount for each Mortgage
Loan Group and the Certificate Principal Balance of each Class of
the Offered Certificates then outstanding after giving effect to
any payment of principal on such Payment Date; and
(xiii) the amount of any Applied Realized Loss Amount,
Realized Loss Amortization Amount and Unpaid Realized Loss Amount
for each Class as of the close of such Payment Date.
Certain obligations of he Trustee to provide information to the
Owners are conditioned upon such information being received from the Master
Servicer.
In addition, on each Payment Date the Trustee will be required to
distribute to each Owner, together with the information described above, the
following information prepared by the Master Servicer and furnished to the
Trustee for such purpose and with respect to each Mortgage Loan Group;
(a) the number and aggregate Principal Balance of Mortgage
Loans (i) 30-59 days delinquent, (ii) 60-89 days delinquent and
(iii) 90 or more days delinquent, as of the close of business on
the last business day of the calendar month next preceding the
Payment Date and the number and aggregate Principal Balances of
the Mortgage Loans and related data;
(b) the number and aggregate Principal Balance of all
Mortgage Loans in foreclosure proceedings as of the close of
business on the last business day of the calendar month preceding
such Payment Date;
(c) the number of Mortgagors and the aggregate Principal
Balance of the related Mortgagors involved in bankruptcy
proceedings as of the close of business on the last business day
of the calendar month next preceding such Payment Date;
(d) the existence and status of any Properties as to which
title has been taken in the name of, or on behalf of the Trustee,
as of the close of business of the last business day of the month
next preceding the Payment Date;
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(e) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure as of the
close of business on the last business day of the calendar month
next preceding the Payment Date;
(f) the amount of cumulative Realized Losses; and
(g) the aggregate Principal Balance of 60 + Day Delinquent
Loans.
TERMINATION OF THE TRUST
The Pooling and Servicing Agreement provides that the Trust will
terminate upon the payment to the Owners of all Certificates of all amounts
required to be paid to such Owners upon the last to occur of (a) the final
payment or other liquidation (or any advance made with respect thereto) of the
last Mortgage Loan, (b) the disposition of all property acquired in respect of
any Mortgage Loan remaining in the Trust Estate and (c) at any time when a
Qualified Liquidation of the Trust Estate is effected as described below. To
effect a termination pursuant to clause (c) above, the Owners of all
Certificates then outstanding will be required (i) unanimously to direct the
Trustee on behalf of the Trust to adopt a plan of complete liquidation, as
contemplated by Section 860F(a)(4) of the Code and (ii) to furnish to the
Trustee an opinion of counsel experienced in federal income tax matters
acceptable to the Trustee to the effect that such liquidation constitutes a
Qualified Liquidation.
OPTIONAL TERMINATION
By the Master Servicer. At its option, the Master Servicer acting
directly or through one or more affiliates may determine to purchase from the
Trust all of the Mortgage Loans and other property then held by the Trust, and
thereby effect early retirement of the Offered Certificates, on any Remittance
Date on and after the Clean-up Call Date.
Termination Upon Loss of REMIC Status. Following a final
determination by the Internal Revenue Service or by a court of competent
jurisdiction, in either case from which no appeal is taken within the permitted
time for such appeal, or if any appeal is taken, following a final determination
of such appeal from which no further appeal can be taken, to the effect that the
Trust does not and will no longer qualify as a "REMIC" pursuant to Section 860D
of the Code (the "Final Determination"), at any time on or after the date which
is 30 calendar days following such Final Determination, the Owners of a majority
in Percentage Interests represented by the Offered Certificates then Outstanding
may direct the Trustee on behalf of the Trust to adopt a plan of complete
liquidation, as contemplated by Section 860F(a)(4) of the Code.
THE CLASS A-6 INSURER
AMBAC is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and Guam. AMBAC primarily insures newly issued
municipal and structured finance obligations. AMBAC is a wholly-owned subsidiary
of AMBAC Inc., a 100% publicly-held company. Moody's, Standard & Poor's and
Fitch have each assigned a triple-A claims-paying ability rating to AMBAC.
The consolidated financial statements of AMBAC and its
subsidiaries as of December 31, 1996 and December 31, 1995 and for the three
years ended December 31, 1996, prepared in accordance with generally accepted
accounting principles, included in the Current Report on Form 8-K of AMBAC Inc.
(which was filed with the Commission on March 12, 1997, Commission File No.
1-10777) and the consolidated financial statements of AMBAC and its subsidiaries
as of March 31, 1997 and for the periods
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ending March 31, 1997 and March 31, 1996 included in the Quarterly Report on
Form 10-Q of AMBAC Inc. for the period ended March 31, 1997 (which was filed
with the Commission on May 15, 1997) are hereby incorporated by reference into
this Prospectus Supplement and shall be deemed to be a part hereof. Any
statement contained in a document incorporated herein by reference shall be
modified or superseded for the purposes of this Prospectus Supplement to the
extent that a statement contained herein by reference herein also modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus Supplement.
All financial statements of AMBAC and its subsidiaries included
in documents filed by AMBAC Inc. with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Offered 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 such documents.
The following table sets forth the capitalization of AMBAC as of
December 31, 1994, December 31, 1995, December 31, 1996 and March 31, 1997,
respectively, in conformity with generally accepted accounting principles.
AMBAC INDEMNITY CORPORATION
CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995 December 31, 1996 March 31, 1997
(audited) (audited) (audited) (unaudited)
----------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Unearned premiums ..................... $ 840 $ 906 $ 995 $1,003
Other liabilities ..................... 136 295 259 243
------- ------ ------ ------
Total liabilities ..................... 976 1,201 1,254 1,246
------- ------ ------ ------
Stockholder's equity:
Common stock ........................ 82 82 82 82
Additional paid-in capital .......... 444 481 515 519
Unrealized gains (losses)
on investments,
net of tax .......................... (46) 87 66 30
Retained earnings ................... 782 907 992 1,034
------- ------ ------ ------
Total stockholder's equity ............ 1,262 1,557 1,655 1,665
------- ------ ------ ------
Total liabilities and stockholder's
equity .............................. $ 2,238 $2,758 $2,909 $2,911
======= ====== ====== ======
</TABLE>
For additional financial information concerning AMBAC, see the
audited financial statements of AMBAC incorporated by reference herein. Copies
of the financial statements of AMBAC incorporated herein by reference and copies
of AMBAC's annual statement for the year ended December 31, 1996 prepared in
accordance with statutory accounting standards are available, without charge
from AMBAC. The address of AMBAC's administrative offices and its telephone
number are One State Street Plaza, 17th Floor, New York, New York, 10004 and
(212) 668-0340.
AMBAC makes no representation regarding the Certificates or the
advisability of investing in the Certificates and makes no representation
regarding, nor has it participated in the preparation of, this
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Prospectus Supplement other than the information supplied by AMBAC and presented
under the heading "The Class A-6 Insurance Policy" and "The Class A-6 Insurer"
and in the financial statements incorporated herein by reference.
THE CLASS A-6 INSURANCE POLICY
The Class A-6 Insurer, in consideration of the payment of the
premium and subject to the terms of the Class A-6 Insurance Policy, agrees
unconditionally and irrevocably to pay to the Trustee for the benefit of the
Holders of the Insured Obligations, that portion of the Insured Amounts which
shall become Due for Payment but shall be unpaid by reason of Nonpayment.
The Class A-6 Insurer will make such payments to the Trustee from
its own funds on the later of (a) three Business Days following delivery of the
Notice to the Class A-6 Insurer of Nonpayment or (b) the Business Day on which
the Insured Amounts are Due for Payment. The Class A-6 Insurer shall be
subrogated to all the Holders' rights to payment on the Insured Obligations to
the extent of the insurance disbursements so made. Once payments of the Insured
Amounts have been made to the Trustee, the Class A-6 Insurer shall have no
further obligation in respect of such Insured Amounts. Payment of Insured
Amounts shall be made only at the time set forth in the Class A-6 Insurance
Policy and no accelerated payment of Insured Amounts shall be made regardless of
any acceleration of the Class A-6 Certificates, unless such acceleration is at
the sole option of the Class A-6 Insurer.
Notwithstanding the foregoing paragraph, the Class A-6 Insurance
Policy does not cover shortfalls, if any, attributable to the liability of the
Trust or the Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability), any prepayment penalty or other
accelerated payment which at any time may become due on or with respect to any
Insured Obligation, other than at the sole option of the Class A-6 Insurer, nor
against any risk other than Nonpayment, including failure of the Trustee to make
any payment due the Holders of the Insured Obligations.
The Class A-6 Insurer will pay any Insured Payment that is a
Preference Amount on the Business Day following receipt on a Business Day of a
certified copy of the order requiring the return of a preference payment, and
such other documentation as is reasonably required by the Class A-6 Insurer,
such documentation being in a form satisfactory to the Class A-6 Insurer,
provided that if such documents are received after 12:00 noon New York City time
on such Business Day, they will be deemed to be received on the following
Business Day.
Insured Payments due under the Class A-6 Insurance Policy unless
otherwise stated therein will be disbursed by the Class A-6 Insurer to the
Trustee on behalf of the Holders by wire transfer of immediately available funds
in the amount of the Insured Payment.
As used herein, the following terms shall have the following
meanings:
"Deficiency Amount" means the excess, if any, of Required
Payments over the Net Available Distribution Amount for such Payment Date.
"Due for Payment" shall mean with respect to an Insured Amount,
the Payment Date on which Insured Amounts are due or, with respect to an Insured
Payment which is a Preference Amount, the Business Day on which the required
documentation referred to above has been received by the Class A-6 Insurer.
"Holder" shall mean any person who is the registered owner or
beneficial owner of any Insured Obligation.
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"Insured Amounts" shall mean, with respect to any Payment Date,
the Deficiency Amount (including any amounts paid in respect of an Insufficiency
Amount) for such Payment Date.
"Insured Obligations" shall mean the Class A-6 Certificates.
"Insured Payments" shall mean, the aggregate amount actually paid
by the Class A-6 Insurer to the Trustee in respect of (i) Insured Amounts for a
Payment Date and (ii) Preference Amounts for any given Business Day.
"Net Available Distribution Amount" means, with respect to any
Payment Date, the sum of (i) the amount on deposit in the Certificate Account on
such Payment Date with respect to the Adjustable Rate Group, minus the Trustee's
Fee with respect to the Adjustable Rate Group and minus the premium then due to
the Class A-6 Insurer, plus (ii) any Monthly Excess Cashflow available from the
Fixed Rate Group.
"Nonpayment" shall mean, with respect to any Distribution Date, a
Deficiency Amount owing in respect of such Distribution Date.
"Notice" means the notice sent in writing by telecopy,
substantially in the form of Exhibit A attached to the Certificate Insurance
Policy, from the Trustee specifying the Insured Amount which shall be due and
owing on the applicable Distribution Date.
"Preference Amount" means any payment of principal or interest on
an Insured Obligation which has become Due for Payment and which is made to a
Holder by or on behalf of the Trustee which has been deemed a preferential
transfer and theretofore recovered from its Holder pursuant to the United States
Bankruptcy Code in accordance with a final, nonappealable order of a court of
competent jurisdiction.
"Required Payments" shall mean, as of any Payment Date, the sum
of (i) the Class A-6 Current Interest plus any Class A-6 Interest Carry-Forward
Amount and (ii) any Adjustable Rate Group Applied Realized Loss Amount.
Any notice under the Class A-6 Insurance Policy may be made at
the address listed below for the Class A-6 Insurer or such other address as the
Class A-6 Insurer shall specify in writing to the Trustee.
The notice address of the Class A-6 Insurer is One State Street
Plaza, New York, New York 10004 Attention: General Counsel, or such other
address as the Class A-6 Insurer shall specify to the Trustee in writing. The
Class A-6 Insurance Policy is being issued under and pursuant to, and shall be
construed under, the laws of the State of California, without giving effect to
the conflict of laws principles thereof.
THE INSURANCE PROVIDED BY THE CLASS A-6 INSURANCE POLICY IS NOT
COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76
OF THE NEW YORK INSURANCE LAW.
CLAIMS ARISING UNDER THE CLASS A-6 INSURANCE POLICY WOULD BE
EXCLUDED FROM COVERAGE BY THE CALIFORNIA INSURANCE GUARANTY ASSOCIATION
ESTABLISHED PURSUANT TO THE LAWS OF CALIFORNIA.
The Class A-6 Insurance Policy is not cancelable for any reason.
The premium on the Class A-6 Insurance Policy is not refundable for any reason.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Offered Certificates is to be considered only in connection with "Certain
Federal Income Tax Consequences" in the Prospectus. The discussion herein and in
the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Offered Certificates.
REMIC ELECTIONS
The Trustee will cause one or more REMIC elections to be made
with respect to certain specified assets of the Trust for federal income tax
purposes. Qualification as a REMIC requires ongoing compliance with certain
conditions. Dewey Ballantine, special tax counsel, will advise that, in its
opinion, for federal income tax purposes, assuming the REMIC elections are made
and compliance with the Pooling and Servicing Agreement, the Trust will be
treated as a REMIC for federal income tax purposes. Each of the Fixed Rate Group
Certificates will be a "regular interest" in a REMIC, which will be treated as a
debt instrument of the Trust for federal income tax purposes. Each of the
Adjustable Rate Certificates and the related rights to receive Supplemental
Interest Payments will be comprised of (i) a "regular interest" in a REMIC and
(ii) the right to receive Supplemental Interest Payments having the
characteristics described below.
For federal income tax purposes, regular interests in a REMIC are
treated as debt instruments issued by the REMIC on the date on which those
interests are created, and not as ownership interests in the REMIC or its
assets. Owners of Offered Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to such
Offered Certificates under an accrual method. The Offered Certificates may be
issued with "original issue discount" for federal income tax purposes. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount on the Offered Certificates is 100% of the "Prepayment
Assumption". See "Payment and Yield Considerations -- Projected Prepayments and
Yields for Offered Certificates" herein. No representation is made that any of
the Mortgage Loans will prepay at such rates or any other rate. See "Payment and
Yield Considerations -- Projected Prepayments and Yields for Offered
Certificates" herein and "Certain Federal Income Tax Consequences -- Discount
and Premium" in the Prospectus.
SPECIAL TAX ATTRIBUTES
The Offered Certificates possess certain special tax attributes
by virtue of the REMIC provisions of the Code. See "Certain Federal Income Tax
Consequences -- REMIC Securities -- Special Tax Attributes" in the Prospectus.
The Small Business Job Protection Act of 1996 repeals the bad debt reserve
method of accounting for mutual savings banks and domestic building and loan
associations for tax years beginning after December 31, 1995. As a result,
Section 593(d) of the Code is no longer applicable to treat REMIC regular
interests, including the Certificates, as "qualifying real property loans."
SUPPLEMENTAL INTEREST AMOUNTS
The Beneficial Owners of the Adjustable Rate Group Certificates
and the related rights to receive Supplemental Interest Amounts will be treated
for tax purposes as owning two separate investments: (i) the respective
Adjustable Rate Group Certificates without the right to receive Supplemental
Interest Amounts and (ii) the right to receive the Supplemental Interest
Amounts. The Owners of the respective Adjustable Rate Group Certificates must
allocate the purchase price of their Certificates between these two
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investments based on their relative fair market values. The purchase price
allocated to the first investment will be the issue price of the respective
Adjustable Rate Group Certificates for calculating accruals of original issue
discount. See "Certain Federal Income Tax Consequences -- Discount and Premium"
in the Prospectus.
A Beneficial Owner of an Adjustable Rate Group Certificate and
the related rights to receive Supplemental Interest Amounts will be treated for
federal income tax purposes as having entered into a notional principal contract
on the date that it purchases its Certificate. Treasury Regulations under
Section 446 of the Code relating to notional principal contracts (the "Notional
Principal Contract Regulations") provide that taxpayers, regardless of their
method of accounting, generally must recognize the ratable daily portion of a
periodic payment for the taxable year to which that portion relates. Any
Supplemental Interest Amounts will be periodic payments. Income with respect to
periodic payments under a notional principal contract for a taxable year should
constitute ordinary income. The purchase price allocated to the right to receive
the related Supplemental Interest Amounts will be treated as a nonperiodic
payment under the Notional Principal Contract Regulations. Such a nonperiodic
payment may be amortized using several methods, including the level payment
method described in the Notional Principal Contract Regulations.
The right to receive the Supplemental Interest Amounts will not
constitute: (i) a "real estate asset" within the meaning of section 858(c)(5)(A)
of the Internal Revenue Code (the "Code") if held by a real estate investment
trust; (ii) a "qualified mortgage" within the meaning of section 860G(a)(3) of
the Code or a "permitted investment" within the meaning of section 860G(a)(5) of
the code if held by a REMIC; or (iii) assets described in section
7701(a)(19)(C)(xi) of the Code if held by a thrift. Moreover, other special
rules may apply to certain investors, including dealers in securities and
dealers in notional principal contracts.
If the Master Servicer, acting directly or through a permitted
designee, exercises its right to an Optional Termination, the Supplemental
Interest Amount may not be paid in full.
TAXATION OF FOREIGN INVESTORS
In general, foreign investors will not be subject to U.S.
withholding on income from the Supplemental Interest Amounts. See "Certain
Federal Income Tax Consequences -- Foreign Investors -- Grantor Trust Securities
and REMIC Regular Securities" in the Prospectus.
ERISA CONSIDERATIONS
CLASS A CERTIFICATES
Section 406 of ERISA and Section 4975 of the Code prohibit a
pension, profit sharing or other employee benefit plan (the "Plans") from
engaging in certain transactions involving "plan assets" with persons that are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to the Plan unless a statutory or administrative exemption applies to
the transaction. ERISA also imposes certain duties on persons who are
fiduciaries of Plans subject to ERISA. A violation of these "prohibited
transaction" rules may generate excise tax and other liabilities under ERISA and
the Code for such persons. In addition, 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.
The United States Department of Labor (the "DOL") has issued a
regulation (the "Plan Asset Regulation") describing what constitutes the assets
of a Plan when the Plan acquires an equity interest in
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another entity. The Plan Asset Regulation states that, unless an exception
described in the regulation is applicable, the underlying assets of a
corporation, partnership or trust in which a Plan makes an equity investment
will be considered, for purposes of ERISA, to be assets of the investing Plan.
Pursuant to the Plan Asset Regulation, if the assets of the Trust were deemed to
be plan assets by reason of a Plan's investment in any Offered Certificates,
such plan assets would include an undivided interest in any assets held in such
Trust. Therefore, in the absence of an exemption, the purchase, sale or holding
of any Offered Certificate by a Plan (including certain individual retirement
arrangements) subject to Section 406 of ERISA or Section 4975 of the Code might
result in prohibited transactions and the imposition of excise taxes and civil
penalties.
The DOL has issued to the Underwriters individual prohibited
transaction exemptions, (the "Exemptions"), which generally exempt from the
application of the prohibited transaction provisions of Section 406(a), Section
406(b)(1), Section 406(b)(2) and Section 407(a) of ERISA and the excise taxes
imposed pursuant to Sections 4975(a) and (b) of the Code, certain transactions
with respect to the initial purchase, the holding and the subsequent resale by
Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemptions. The loans covered by the Exemptions include
mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemptions to
apply are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an unrelated party;
(2) the rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests evidenced
by other certificates of the trust;
(3) the certificates acquired by the Plan have received a rating
at the time of such acquisition that is one of the three highest generic rating
categories from either Standard & Poor's, Moody's, Duff & Phelps Credit Rating
Co. ("D&P") or Fitch;
(4) the Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
Underwriters in connection with the distribution of the certificates represents
not more than reasonable compensation for underwriting the certificates; the sum
of all payments made to and retained by the Originator and the Sponsor pursuant
to the assignment of the loans to the Trust Estate represents not more than the
fair market value of such loans; the sum of all payments made to and retained by
any Master Servicer represents not more than reasonable compensation for such
person's services under the Pooling and Servicing Agreement and reimbursement of
such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission under
the Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist solely of assets
of the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been
rated in one of the three highest rating categories of Standard & Poor's,
Moody's, Fitch or D&P for at least one year prior to the Plan's acquisition of
certificates; and
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(iii) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at least one
year prior to the Plan's acquisition of certificates.
Moreover, the Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust;
provided that, among other requirements, (i) in the case of an acquisition in
connection with the initial issuance of certificates, at least fifty percent of
each class of certificates in which Plans have invested is acquired by persons
independent of the Restricted Group and at least fifty percent of the aggregate
interest in the trust is acquired by persons independent of the Restricted
Group; (ii) such fiduciary (or its affiliate) is an obligor with respect to five
percent or less of the fair market value of the obligations contained in the
trust; (iii) the Plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding at the
time of the acquisition; and (iv) immediately after the acquisition, no more
than twenty-five percent of the assets of the Plan with respect to which such
person is a fiduciary are invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
Exemptions do not apply to Plans sponsored by the Sponsor, the Underwriters, the
Trustee, the Master Servicer, any other servicer, any obligor with respect to
Mortgage Loans included in the Trust Estate constituting more than five percent
of the aggregate unamortized principal balance of the assets in the Trust
Estate, or any affiliate of such parties (the "Restricted Group").
As of the date hereof, there is no single Mortgage Loan included
in the Trust Estate that constitutes more than five percent of the aggregate
unamortized principal balance of the assets of the Trust Estate. Before
purchasing a Class A Certificate based on the Exemptions (and, in the case of
the Class A-6 Certificates, an administrative exemption with respect to
Supplemental Interest Amounts), a fiduciary of a Plan should itself confirm (1)
that such Class A Certificate constitutes a "certificate" for purposes of the
Exemptions and (2) that the conditions and other requirements set forth in the
Exemptions would be satisfied.
Prospective Plan investors in the Class A Certificates should
consult with their legal advisors concerning the impact of ERISA and the Code,
the applicability of the Exemptions, and the potential consequences in their
specific circumstances, prior to making an investment in the Class A
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in 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.
In addition to the matters described above, purchasers of a Class
A Certificate that are insurance companies should consult with their counsel
with respect to the recent United States Supreme Court case interpreting the
fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance Co.
v. Harris Trust and Savings Bank, 114 S.Ct. 517 (1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be "plan assets" for ERISA purposes under certain
circumstances. Prospective purchasers using insurance company general account
assets should determine whether the decision affects their ability to make
purchases of the Offered Certificates.
Any person purchasing a Class A-6 Certificate and the related
right to receive Supplemental Interest Amounts will have acquired, for purposes
of ERISA and for federal income tax purposes, such Class A-6 Certificate without
the right to receive the Supplemental Interest Amounts, together with the right
to receive the Supplemental Interest Amounts. The Exemptions do not apply to the
acquisition, holding or resale of the right to receive the Supplemental Interest
Amounts. Accordingly, the acquisition of the right to receive the Supplemental
Interest Amounts by a Plan could result in a prohibited transaction unless
another administrative exemption to ERISA's prohibited transaction rules is
applicable. One or
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more alternative exemptions may be available with respect to certain prohibited
transaction rules of ERISA that might apply in connection with the initial
purchase, holding and resale of the right to receive the Supplemental Interest
Amounts, including, but not limited to: (i) Prohibited Transaction Class
Exemption ("PTCE") 91-38, regarding investments by bank collective investment
funds; (ii) PTCE 90-1, regarding investments by insurance company pooled
separate accounts; (iii) PTCE 84-14, regarding transactions negotiated by
qualified professional asset managers; or (iv) PTCE 75-1, Part II, regarding
principal transactions by broker-dealers (the "Principal Transactions
Exemption"). It is believed that the conditions of the Principal Transactions
Exemption will be met with respect to the acquisition of a right to receive the
Supplemental Interest Amounts by a Plan, so long as the related Underwriter is
not a fiduciary with respect to the Plan (and is not a party in interest with
respect to the Plan by reason of being a participating employer or affiliate
thereof).
SUBORDINATE CERTIFICATES
The Exemptions do not apply to the initial purchase, the holding
or the subsequent resale of the Mezzanine Certificates and Class B-1
Certificates because such Certificates are subordinate to certain other Classes
of the Certificates. Accordingly, PLANS MAY NOT PURCHASE THE SUBORDINATE
CERTIFICATES, except that any insurance company may purchase such Certificates
with assets of its general account if the exemptive relief granted by the DOL
for transactions involving insurance company general accounts in Prohibited
Transaction Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995) is available
with respect to such investment. Any insurance company proposing to purchase
such Certificates for its general account should consider whether such relief
would be available.
RATINGS
It is a condition of issuance of the Offered Certificates that
each Class of the Offered Certificates receive ratings from Moody's Investors
Service, Inc. ("Moody's"), Fitch Investors Service, L.P. ("Fitch") and Standard
& Poor's Corporation ("Standard & Poor's") as set forth below:
<TABLE>
<CAPTION>
Moody's Fitch Standard &
Class Rating Rating Poor's
----- ------ ------ Rating
------
<S> <C> <C> <C>
Class A-1 Aaa AAA AAA
Class A-2 Aaa AAA AAA
Class A-3 Aaa AAA AAA
Class A-4 Aaa AAA AAA
Class A-5 Aaa AAA AAA
Class A-6 Aaa AAA AAA
Class A-7IO Aaa AAA AAAr
Class M-1 Aa2 AA AA
Class M-2 A2 A A
Class B-1 Baa2 BBB BBB
</TABLE>
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Explanations of the significance of such ratings may be obtained
from Moody's, 99 Church Street, New York, New York 10007, Fitch, One State
Street Plaza, 33rd Floor, New York, New York 10004 and Standard & Poor's, 25
Broadway, New York, New York 10006. Such ratings will be the views only of such
rating agencies. There is no assurance that such ratings will continue for any
period of time or that such ratings will not be revised or withdrawn. Any such
revision or withdrawal of such ratings may have an adverse effect on the market
price of the Offered Certificates. A security rating is not a recommendation to
buy, sell or hold securities.
The "r" of the "AAAr" rating of the Class A-7IO Certificates by
Standard & Poor's is attached to highlight derivative, hydrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swap and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
The Class A-6 Insurer does not guarantee the payment of, nor do
the ratings assigned to the Class A-6 Certificates address the likelihood of the
payment of any Supplemental Interest Amounts.
The ratings assigned by Fitch to pass-through certificates
address the likelihood of the receipt by the Owners of all distributions to
which such Owners are entitled. The ratings assigned by Fitch to pass-through
certificates address the likelihood of the receipt by the Owners of all
distributions (other than the payment of Supplemental Interest Amounts) to which
such Owners are entitled. Fitch's ratings address the structural and legal
aspects associated with the Certificates, including the nature of the underlying
loans and the credit quality of the credit support provider. Fitch's ratings on
home equity pass-through Certificates do not represent any assessment of the
likelihood or rate of principal prepayments. The ratings do not address the
possibility that Owners might suffer a lower than anticipated yield.
The ratings of Moody's on home equity pass-through certificates
address the likelihood of the receipt by the Owners of all distributions to
which such Owners are entitled. Moody's rating opinions address the structural
and legal issues and tax-related aspects associated with the Certificates,
including the nature of the underlying home equity loans and the credit quality
of the credit support provider, if any. Moody's ratings on pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments may differ from those originally anticipated.
Such ratings do not address the possibility that, as a result of
principal prepayments, certificateholders may receive a lower than anticipated
yield.
The ratings of the Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency.
The Sponsor has not requested a rating of the Offered
Certificates offered hereby by any rating agency other than Moody's, Fitch and
Standard & Poor's and the Sponsor has not provided information relating to the
Offered Certificates or the Mortgage Loans to any rating agency other than
Moody's, Fitch and Standard & Poor's. There can be no assurance as to whether
any other rating agency will rate the Offered Certificates offered hereby or, if
another rating agency rates such Offered Certificates, what rating would be
assigned to such Offered Certificates by such rating agency. Any such
unsolicited rating assigned by another rating agency to the Offered Certificates
offered hereby may be lower than the rating assigned to such Offered
Certificates by Moody's, Fitch and Standard & Poor's.
S-104
<PAGE> 105
LEGAL INVESTMENT CONSIDERATIONS
No class of the Offered Certificates will constitute "mortgage
related securities" for purposes of SMMEA.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated May 22, 1997 (the "Underwriting Agreement"), the Sponsor has
agreed to cause the Trust to sell the Offered Certificates to the Underwriters
and the Underwriters have agreed to purchase the Offered Certificates.
In the Underwriting Agreement, the Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase the entire
principal amount of each class of Offered Certificates in the amounts with
respect to each Underwriter as set forth below:
Class A-1 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
- ------------ ----------------
<S> <C>
Morgan, Stanley & Co. Incorporated $41,450,000
J.P. Morgan Securities, Inc. $41,450,000
Lehman Brothers Inc. $41,450,000
Salomon Brothers Inc $41,450,000
</TABLE>
Class A-2 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
- ------------ ----------------
<S> <C>
Morgan, Stanley & Co. Incorporated $27,475,000
J.P. Morgan Securities, Inc. $27,475,000
Lehman Brothers Inc. $27,475,000
Salomon Brothers Inc $27,475,000
</TABLE>
Class A-3 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
- ------------ ----------------
<S> <C>
Morgan, Stanley & Co. Incorporated $2,625,000
J.P. Morgan Securities, Inc. $2,625,000
Lehman Brothers Inc. $2,625,000
Salomon Brothers Inc $2,625,000
</TABLE>
Class A-4 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
- ------------ ----------------
<S> <C>
Morgan, Stanley & Co. Incorporated $11,111,250
J.P. Morgan Securities, Inc. $11,111,250
Lehman Brothers Inc. $11,111,250
Salomon Brothers Inc $11,111,250
</TABLE>
Class A-5 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
- ------------ ----------------
<S> <C>
Morgan, Stanley & Co. Incorporated $9,213,750
J.P. Morgan Securities, Inc. $9,213,750
Lehman Brothers Inc. $9,213,750
Salomon Brothers Inc $9,213,750
</TABLE>
S-105
<PAGE> 106
Class A-6 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
- ------------ ----------------
<S> <C>
Morgan, Stanley & Co. Incorporated $70,000,000
J.P. Morgan Securities, Inc. $70,000,000
Lehman Brothers Inc. $70,000,000
Salomon Brothers Inc $70,000,000
</TABLE>
Class A-7IO Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
- ------------ ----------------
<S> <C>
Morgan, Stanley & Co. Incorporated $0*
</TABLE>
* No principal payments are distributed with respect to the Class A-7IO
Certificates. Interest will be distributed and calculated on the basis of the
Notional Principal Balance of the Class A-5 Certificates. Morgan Stanley & Co.
Incorporated is the sole underwriter with respect to the Class A-7IO
Certificates.
Class M-1 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
- ------------ ----------------
<S> <C>
Morgan, Stanley & Co. Incorporated $3,412,500
J.P. Morgan Securities, Inc. $3,412,500
Lehman Brothers Inc. $3,412,500
Salomon Brothers Inc $3,412,500
</TABLE>
Class M-2 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
- ------------ ----------------
<S> <C>
Morgan, Stanley & Co. Incorporated $6,037,500
J.P. Morgan Securities, Inc. $6,037,500
Lehman Brothers Inc. $6,037,500
Salomon Brothers Inc $6,037,500
</TABLE>
Class B-1 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
- ------------ ----------------
<S> <C>
Morgan, Stanley & Co. Incorporated $3,675,000
J.P. Morgan Securities, Inc. $3,675,000
Lehman Brothers Inc. $3,675,000
Salomon Brothers Inc $3,675,000
</TABLE>
The Underwriters have agreed to reimburse the Sponsor for certain
expenses in connection with the issuance and distribution of the Offered
Certificates.
The Underwriters have informed the Sponsor that they propose to
offer the Offered 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 Underwriters may effect such
transactions by selling the Offered Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters. In connection with the sale of
the Offered Certificates, the Underwriters may be deemed to have received
compensation from the Sponsor in the form of underwriting compensation. The
Underwriters and any dealers that participate with the Underwriters in the
distribution of the Offered Certificates may be deemed to be underwriters and
any commissions received by them and any profit on the resale of the Offered
Certificates by them may be deemed to be underwriting discounts and commissions
under the 1933 Act.
S-106
<PAGE> 107
Advanta Mortgage Conduit Services, Inc. has agreed to indemnify
the Underwriters against certain liabilities including liabilities under the
1933 Act.
In connection with this offering and in compliance with
applicable law and industry practice, the Underwriters may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Offered Certificates at a level above that which might otherwise prevail in
the open market, including stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid, or the effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of a security. A syndicate covering transaction means the
placing of any bid on behalf of the underwriting syndicate or the effecting of
any purchase to reduce a short position created in connection with the offering.
A penalty bid means an arrangement that permits Morgan Stanley, as managing
underwriter, to reclaim a selling concession from a syndicate member in
connection with the offering when Offered Certificates originally sold by the
syndicate member are purchased in syndicate covering transactions. The
Underwriters are not required to engage in any of these activities. Any such
activities, if commenced, may be discontinued at any time.
The Sponsor has been advised by the Underwriters that the
Underwriters presently intend to make a market in the Offered Certificates, as
permitted by applicable laws and regulations. The Underwriters are not
obligated, however, to make a market in the Offered Certificates and such
market-making may be discontinued at any time at the sole discretion of the
Underwriters. Accordingly, no assurance can be given as to the liquidity of any
trading markets for the Offered Certificates.
EXPERTS
The consolidated financial statements of the Class A-6 Insurer,
AMBAC Indemnity Corporation, as of December 31, 1996 and 1995 and for each of
the years in the three-year period ended December 31, 1996 are incorporated by
reference herein and in the registration statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, incorporated
by reference herein, and upon the authority of said firm as experts in
accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of
the Offered Certificates will be passed upon for the Sponsor and the
Underwriters by Dewey Ballantine, New York, New York.
S-107
<PAGE> 108
INDEX OF PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1933 Act ........................................................... 2
Accrual Period ..................................................... 11
Actuarial loan ..................................................... 42
Adjustable Rate Group .............................................. 5, 42
Adjustable Rate Group Available Funds Cap Rate ..................... 6
Adjustable Rate Group Certificates ................................. 7
Advanta Parent ..................................................... 76
Affiliated Originators ............................................. 2
Aggregate Certificate Principal Balance ............................ 7
AMBAC .............................................................. 3, 95
Applied Realized Loss Amount ....................................... 23, 87
Appraised Values ................................................... 43
Average Amount Outstanding ......................................... 41
Beneficial Owners .................................................. 32
Book-Entry Certificates ............................................ 78
Bulk Loans ......................................................... 40
Business Day ....................................................... 10, 85
CEDEL .............................................................. 1
CEDEL Participants ................................................. 80
Certificate Account ................................................ 82
Certificate Principal Balance ...................................... 5
Certificates ....................................................... 4
Class .............................................................. 5
Class A Certificates ............................................... 1
Class A Principal Distribution Amount .............................. 13
Class A-1 Available Funds Pass-Through Rate ........................ 6
Class A-1 Certificates ............................................. 1
Class A-2 Certificates ............................................. 1
Class A-2 Supplemental Interest Amount ............................. 6
Class A-3 Certificates ............................................. 1
Class A-4 Certificates ............................................. 1
Class A-5 Certificates ............................................. 1
Class A-5 Lockout Distribution Amount .............................. 19
Class A-5 Lockout Percentage ....................................... 19
Class A-5 Lockout Pro Rata Distribution Amount ..................... 19
Class A-6 Certificates ............................................. 1
Class A-6 Formula Pass-Through Rate ................................ 5
Class A-6 Insurance Policy ......................................... 2, 28, 90
Class A-6 Insurer .................................................. 2, 3
Class A-6 Pass-Through Rate ........................................ 5
Class A-7IO Certificates ........................................... 1
</TABLE>
S-108
<PAGE> 109
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Class B-1 Applied Realized Loss Amount ......................... 90
Class B-1 Certificate Principal Balance ........................ 90
Class B-1 Certificates ......................................... 1
Class B-1 Principal Distribution Amount ........................ 21
Class B-1 Realized Loss Amortization Amount .................... 91
Class Distribution Amount ...................................... 10
Class M-1 Applied Realized Loss Amount ......................... 91
Class M-1 Certificate Principal Balance ........................ 91
Class M-1 Principal Distribution Amount ........................ 20
Class M-1 Realized Loss Amortization Amount .................... 91
Class M-2 Applied Realized Loss Amount ......................... 91
Class M-2 Certificate Principal Balance ........................ 91
Class M-2 Principal Distribution Amount ........................ 20
Class M-2 Realized Loss Amortization Amount .................... 91
Class R Certificates ........................................... 1, 4
Clean-up Call Date ............................................. 32
Closing Date ................................................... 4
CMT ............................................................ 37
Code ........................................................... 100
Commission ..................................................... 2
Compensating Interest .......................................... 32
Cooperative .................................................... 80
Coupon Rate .................................................... 24
Current Interest ............................................... 10
Cut-Off Date ................................................... 2, 4
D&P ............................................................ 101
Date of payment loan ........................................... 42
Deficiency Amount .............................................. 97
Delinquency Advances ........................................... 31
DOL ............................................................ 100
DTC ............................................................ 1
DTC Participants ............................................... 80
Due for Payment ................................................ 97
Euroclear ...................................................... 1
Euroclear Operator ............................................. 80
Euroclear Participants ......................................... 80
European Depositaries .......................................... 78
Exemptions ..................................................... 101
Extra Principal Distribution Amount ............................ 13
FDIC ........................................................... 76
Final Determination ............................................ 95
Final Scheduled Payment Dates .................................. 9
Financial Intermediary ......................................... 78
Fitch .......................................................... 33, 103
Fixed Rate Group ............................................... 4, 42
Fixed Rate Group Certificates .................................. 7
Fixed Rate Group Senior Enhancement Percentage ................. 21
Fixed Rate Group Senior Specified Enhancement Percentage ....... 21
</TABLE>
S-109
<PAGE> 110
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fixed Rate Group Trigger Event ................................ 20
FNMA .......................................................... 51
Foreclosure Rate .............................................. 40
G&P Loans ..................................................... 39
Gross Losses .................................................. 41
Group ......................................................... 5
Groups ........................................................ 5
Holder ........................................................ 97
Insured Amounts ............................................... 98
Insured Obligations ........................................... 98
Insured Payments .............................................. 98
Interest Amount Available ..................................... 11
Interest Carry Forward Amount ................................. 10
Interest Determination Date ................................... 85
Interest Remittance Amount .................................... 12
Junior Lien Ratio ............................................. 44
LIBOR ......................................................... 85
Liquidated Home Equity Loan ................................... 13
Liquidated Loan ............................................... 22
Master Transfer Agreements .................................... 92
MCA Loans ..................................................... 38
McGuire Loans ................................................. 39
Mezzanine Certificates ........................................ 1
Monthly Excess Cashflow Amount ................................ 12
Monthly Excess Interest Amount ................................ 24, 88
Monthly Remittance Date ....................................... 13
Moody's ....................................................... 32, 103
Mortgage Loan File ............................................ 92
Mortgage Loan Group ........................................... 42
Mortgage Loans ................................................ 2
Net Available Distribution Amount ............................. 98
Net Losses .................................................... 41
NIV ........................................................... 41
Nonpayment .................................................... 98
Nonrecoverable Delinquency Advance ............................ 31
Nonrecoverable Servicing Advance .............................. 31
Notes ......................................................... 42
Notice ........................................................ 98
Notional Principal Balance .................................... 1
Notional Principal Contract Regulations ....................... 100
Offered Certificates .......................................... 1
Optional Termination .......................................... 7
Original Issue Discount ....................................... 99
Overcollateralization Amount .................................. 14
Overcollateralization Deficiency .............................. 14
Overcollateralization Release Amount .......................... 14
Overcollateralization Release Amounts ......................... 26
Owned and Managed Servicing Portfolio ......................... 40
</TABLE>
S-110
<PAGE> 111
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Owner(s) ............................................................... 77
PAM .................................................................... 38
PAM Loans .............................................................. 38
Participants ........................................................... 78
Pass-Through Rate ...................................................... 83
Payment Date ........................................................... 9
Percentage Interest .................................................... 82
Plan Asset Regulation .................................................. 100
Plans .................................................................. 100
Pooling and Servicing Agreement ........................................ 2
Pre-computed loan ...................................................... 42
Preference Amount ...................................................... 98
Premium ................................................................ 11
Prepayment ............................................................. 62
Prepayment Assumption .................................................. 63, 99
Principal Balance ...................................................... 6
Principal Distribution Amount .......................................... 14
Principal Remittance Amount ............................................ 15
Principal Transactions Exemption ....................................... 103
PTCE ................................................................... 103
Realized Loss .......................................................... 22, 86
Record Date ............................................................ 10
Recoveries ............................................................. 41
Reference Banks ........................................................ 85
Register ............................................................... 82
Registrar .............................................................. 82
Regular interest ....................................................... 33
Relevant Depositary .................................................... 78
Remittance Date ........................................................ 78
Remittance Period ...................................................... 15, 78
Required Payments ...................................................... 98
Residual interest ...................................................... 33
Restricted Group ....................................................... 102
Reuters Screen LIBO page ............................................... 85
Rules .................................................................. 79
Schedule of Mortgage Loans ............................................. 92
Simple interest loan ................................................... 42
Six-Month LIBOR ........................................................ 37
SMMEA .................................................................. 34
Standard & Poor's ...................................................... 33, 103
Statistic Calculation Date ............................................. 7
Stepdown Date .......................................................... 15
Subordinate Certificates ............................................... 1
Targeted Overcollateralization Amount .................................. 15
Terms and Conditions ................................................... 80
Third-Party Servicing Portfolio ........................................ 40
Trust .................................................................. 4
Trust Estate ........................................................... 92
</TABLE>
S-111
<PAGE> 112
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Trustee ................................................................ 2, 4
Trustee's Fee .......................................................... 11
Unaffiliated Originator Loans .......................................... 38, 39
Unaffiliated Originators ............................................... 2
Underwriters ........................................................... 1
Underwriting Agreement ................................................. 105
Unpaid Realized Loss Amount ............................................ 92
Weighted average life .................................................. 63
</TABLE>
S-112
<PAGE> 113
PROSPECTUS
MORTGAGE LOAN ASSET-BACKED SECURITIES, ISSUABLE IN SERIES
[Logo] [Logo]
Sponsor of the Trust Master Servicer
This Prospectus describes certain Mortgage Loan Asset-Backed Securities
(the "Securities") that may be issued from time to time in series and certain
classes of which may be offered hereby from time to time as described in the
related Prospectus Supplement. Each series of Securities will be issued by a
separate trust (each, a "Trust"). The primary assets of each Trust will consist
of a segregated pool (a "Mortgage Pool") of conventional one- to four-family
residential mortgage loans, multi-family residential mortgage loans, mixed use
mortgage loans, revolving home equity loans or certain balances thereof secured
by mortgages primarily on one- to four-family residential properties, or
certificates of interest or participation therein (collectively, the "Mortgage
Loans"), to be acquired by such Trust from Advanta Mortgage Conduit Services,
Inc. (the "Sponsor"). The Sponsor will acquire the Mortgage Loans from one or
more affiliated or unaffiliated institutions (the "Originators"). In connection
with the establishment of certain Trusts the Sponsor may first transfer the
related Trust Estate to Advanta Mortgage Receivables Inc. (the "Transferor") and
the Transferor will then transfer such Trust Estate to the related Trust. The
use of the Transferor will not affect the obligations of the Sponsor with
respect to the related Trust or the related Securities. If the Transferor is to
be involved in a particular offering the related Prospectus Supplement will
describe its role in such offering; for purposes of this Prospectus the role of
the Transferor is subsumed in the role of the Sponsor. See "The Mortgage Pools."
The Mortgage Loans in each Mortgage Pool and certain other assets
described herein and in the related Prospectus Supplement (collectively with
respect to each Trust, the "Trust Estate") and in the related Prospectus
Supplement will be held by the related Trust for the benefit of the holders of
the related series of Securities (the "Securityholders") pursuant to a Pooling
and Servicing Agreement to the extent and as more fully described herein and in
the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, each Mortgage Pool will consist of one or more of the
various types of Mortgage Loans described under "The Mortgage Pools."
THE ASSETS OF THE RELATED TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
SPONSOR, THE MASTER SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT
AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE
SECURITIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SPONSOR, THE MASTER
SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE
RELATED PROSPECTUS SUPPLEMENT. SEE ALSO "RISK FACTORS" PAGE 13.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Offers of the Securities may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Methods of Distribution" and in the related Prospectus Supplement. There will
be no secondary market for any series of Securities prior to the offering
thereof. There can be no assurance that a secondary market for any of the
Securities will develop or, if it does develop, that it will offer sufficient
liquidity of investment or will continue.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
The date of this Prospectus is March 10, 1997.
<PAGE> 114
(Cover continued from previous page)
Each series of Securities will include one or more classes. The
Securities of any particular class may represent beneficial ownership interests
in the related Mortgage Loans held by the related Trust, or may represent debt
secured by such Mortgage Loans, as described herein and in the related
Prospectus Supplement. A series may include one or more classes of Securities
entitled to principal distributions, with disproportionate, nominal or no
interest distributions, or to interest distributions, with disproportionate,
nominal or no principal distributions. The rights of one or more classes of
Securities of any series may be senior or subordinate to the rights of one or
more of the other classes of Securities. A series may include two or more
classes of Securities which differ as to the timing, sequential order, priority
of payment, interest rate or amount of distributions of principal or interest or
both. Information regarding each class of Securities of a series, and certain
characteristics of the Mortgage Loans to be evidenced by such Securities, will
be set forth in the related Prospectus Supplement.
THE SPONSOR'S AND THE RELATED ORIGINATORS' ONLY OBLIGATIONS WITH
RESPECT TO A SERIES OF SECURITIES WILL BE PURSUANT TO THE SERVICING REQUIREMENTS
RELATING THERETO, AND PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES MADE BY
THE SPONSOR OR BY SUCH ORIGINATORS, EXCEPT AS OTHERWISE DESCRIBED IN THE RELATED
PROSPECTUS SUPPLEMENT. THE PROSPECTUS SUPPLEMENT FOR EACH SERIES OF SECURITIES
WILL NAME ADVANTA MORTGAGE CORP. USA AS MASTER SERVICER (THE "MASTER SERVICER")
WHICH WILL ACT, DIRECTLY OR THROUGH ONE OR MORE SUBSERVICERS (THE
"SUBSERVICER(S)"). THE PRINCIPAL OBLIGATIONS OF THE MASTER SERVICER WILL BE
PURSUANT TO ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH MAY INCLUDE A LIMITED
OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF DELINQUENCIES IN PAYMENTS ON
THE MORTGAGE LOANS AND INTEREST SHORTFALLS DUE TO PREPAYMENT OF MORTGAGE LOANS).
SEE "DESCRIPTION OF THE SECURITIES."
If so specified in the related Prospectus Supplement, the Trust Estate
for a series of Securities may include any combination of a mortgage pool
insurance policy, letter of credit, financial guaranty insurance policy,
bankruptcy bond, special hazard insurance policy, reserve fund or other form of
Credit Enhancement. In addition to or in lieu of the foregoing, Credit
Enhancement with respect to certain classes of Securities of any series may be
provided by means of subordination, cross-support among Mortgage Assets, as
defined herein, or over-collateralization. See "Description of Credit
Enhancement."
The rate of payment of principal of each class of Securities entitled
to principal payments will depend on the priority of payment of such class and
the rate of payment (including prepayments, defaults, liquidations and
repurchases of Mortgage Loans) of the related Mortgage Loans. A rate of
principal payment lower or higher than that anticipated may affect the yield on
each class of Securities in the manner described herein and in the related
Prospectus Supplement. The various types of Securities, the different classes of
such Securities and certain types of Mortgage Loans in a given Mortgage Pool may
have different prepayment risks and credit risks. The Prospectus Supplement for
a series of Securities or the related Current Report on Form 8-K will contain
information as to (i) types, maturities and certain statistical information
relating to credit risks of the Mortgage Loans in the related Mortgage Pool,
(ii) the effect of certain rates of prepayment, based upon certain specified
assumptions for a series of Securities and (iii) priority of payment and
maturity dates of the Securities. AN INVESTOR SHOULD CAREFULLY REVIEW THE
INFORMATION IN THE RELATED PROSPECTUS SUPPLEMENT CONCERNING THE DIFFERENT
CONSEQUENCES OF THE RISKS ASSOCIATED WITH THE DIFFERENT TYPES AND CLASSES OF
SECURITIES. See "Yield Considerations." A Trust may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement.
One or more separate elections may be made to treat a Trust, or one or
more segregated pools of assets held by such Trust, as a real estate mortgage
investment conduit ("REMIC") or a Financial Asset Securitization Investment
Trust ("FASIT") for federal income tax purposes. If applicable, the Prospectus
Supplement for a series of Securities will specify which class or classes of the
related series of Securities will be considered to be regular interests in a
REMIC or FASIT and which classes of Securities or other interests will be
designated as the residual interest in a REMIC or as high-yield interests or the
ownership interest in a FASIT. Alternatively, a Trust may be treated as a
grantor trust or as a partnership for federal income tax purposes, or may be
treated for federal income tax purposes as a mere security device which
constitutes a collateral arrangement for the issuance of secured debt. See
"Certain Federal Income Tax Consequences" herein.
No dealer, salesman, or any other person has been authorized to give
any information, or to make any representations, other than those contained in
this Prospectus or the related Prospectus Supplement, and, if given or made,
such information must not be relied upon as having been authorized by the
Company or any dealer, salesman,
2
<PAGE> 115
or any other person. Neither the delivery of this Prospectus or the related
Prospectus Supplement nor any sale made hereunder or thereunder shall under any
circumstances create an implication that there has been no change in the
information herein or therein since the date hereof. This Prospectus and the
related Prospectus Supplement are not an offer to sell or a solicitation of an
offer to buy any security in any jurisdiction in which it is unlawful to make
such offer or solicitation.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Summary of Prospectus........................ 4
Risk Factors................................. 13
Risks of the Mortgage Loans............. 14
The Trusts................................... 18
The Mortgage Pools........................... 25
General................................. 25
The Mortgage Pools...................... 25
Mortgage Loan Program........................ 27
Underwriting Guidelines................. 27
Qualifications of Originators........... 31
Sub-Servicers........................... 32
Representations by Originators.......... 32
Sub-Servicing by Originators............ 33
Description of the Securities................ 34
General................................. 34
Form of Securities...................... 36
Assignment of Mortgage Loans............ 38
Forward Commitments; Pre-Funding........ 39
Payments on Mortgage Loans; Deposits to
Distribution Account.................. 40
Withdrawals from the Principal and
Interest Account...................... 43
Distributions........................... 44
Principal and Interest on the Securities 44
Advances................................ 45
Reports to Securityholders.............. 46
Collection and Other Servicing
Procedures............................ 47
Realization Upon Defaulted Mortgage
Loans................................. 48
Subordination................................ 49
Description of Credit Enhancement............ 50
Hazard Insurance; Claims Thereunder.......... 55
Hazard Insurance Policies............... 56
The Sponsor and the Transferor............... 56
The Master Servicer.......................... 56
The Pooling and Servicing Agreement..........
Servicing and Other Compensation and
Payment of Expenses; Originator's
Retained Yield........................ 57
Evidence as to Compliance............... 57
Removal and Resignation of the Master
Servicer.............................. 58
Amendments.............................. 59
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Termination; Retirement of Securities... 59
The Trustee............................. 60
Yield Considerations......................... 62
Maturity and Prepayment
Considerations............................. 64
Certain Legal Aspects of Mortgage Loans
and Related Matters........................ 65
General................................. 65
Cooperative Loans....................... 66
Foreclosure............................. 67
Foreclosure on Shares of Cooperatives... 67
Rights of Redemption.................... 68
Anti-Deficiency Legislation and Other
Limitations on Lenders................ 68
Environmental Legislation............... 69
Enforceability of Certain Provisions.... 70
Certain Provisions of California Deeds
of Trust.............................. 70
Applicability of Usury Laws............. 71
Alternative Mortgage Instruments........ 71
Soldiers' and Sailors' Civil Relief
Act of 1940........................... 72
Certain Federal Income Tax Consequences...... 72
General................................. 72
Grantor Trust Securities................ 72
REMIC Securities........................ 74
Special Tax Attributes.................. 74
Debt Securities......................... 80
Discount and Premium.................... 80
Backup Withholding...................... 83
Foreign Investors....................... 83
ERISA Considerations......................... 84
Plan Asset Regulations.................. 84
Prohibited Transaction Class Exemption.. 85
Tax Exempt Investors.................... 86
Consultation With Counsel............... 87
Legal Investment Matters..................... 87
Use of Proceeds.............................. 88
Methods of Distribution...................... 88
Legal Matters................................ 89
Financial Information........................ 89
Additional Information....................... 89
Index of Principal Definitions............... 90
Annex I...................................... A-1
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS AND THE
RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Securities contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. Capitalized terms used
in this summary that are not otherwise defined shall have the meanings ascribed
thereto in this Prospectus. An index indicating where certain terms used herein
are defined appears at the end of this Prospectus.
Securities Offered
Mortgage Loan Asset-Backed Securities.
Sponsor
Advanta Mortgage Conduit Services, Inc. See "The Sponsor and The Transferor."
Originators
The Sponsor will acquire the Mortgage Loans from one or more institutions
affiliated with the Sponsor ("Affiliated Originators") or institutions
unaffiliated with the Sponsor ("Unaffiliated Originators") (the Affiliated
Originators and the Unaffiliated Originators are collectively referred to as the
"Originators"). The Sponsor will transfer the related Trust Estate to the
related Trust. In connection with the establishment of certain Trusts the
Sponsor may first transfer the related Trust Estate to the Transferor and the
Transferor will then transfer such Trust Estate to the related Trust. The use of
the Transferor will not affect the obligations of the Sponsor with respect to
the related Trust or the related Securities. If the Transferor is to be involved
in a particular offering the related Prospectus Supplement will describe its
role in such offering; for purposes of this Prospectus the role of the
Transferor is subsumed in the role of the Sponsor.
Master Servicer
Advanta Mortgage Corp. USA. See "The Master Servicer" and "The Pooling and
Servicing Agreement--Removal and Resignation of the Master Servicer."
Sub-Servicers
Originators may act as Sub-Servicers for Mortgage Loans acquired by the Sponsor
from such Originators unless all servicing duties relating to such Mortgage
Loans have been transferred to the Master Servicer or to a third-party,
unaffiliated contract servicer approved by the Master Servicer. See "Mortgage
Loan Program--Sub-Servicers."
Trustee
The trustee (the "Trustee") for each series of Securities will be specified in
the related Prospectus Supplement.
The Securities
Issuance of Securities.
Each series of Securities will be issued at the direction of the Sponsor by a
separate Trust (each, a "Trust"). The primary assets of each Trust will consist
of a segregated pool (each, a "Mortgage Pool") of conventional, one- to
four-family residential mortgage loans or multi- family residential mortgage
loans (the "Mortgage Loans") or certificates of interest or participation
therein, acquired by such Trust from the Sponsor. The Sponsor will acquire the
Mortgage Loans from one or more of the Originators. The Securities issued by any
Trust may represent beneficial ownership interests in the related Mortgage Loans
held by the related Trust, or may represent debt secured by such Mortgage Loans,
as described herein and in the related
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Prospectus Supplement. Securities which represent beneficial ownership interests
in the related Trust will be referred to as "Certificates" in the related
Prospectus Supplement; Securities which represent debt issued by the related
Trust will be referred to as "Notes" in the related Prospectus Supplement.
Each Trust will be established pursuant to an agreement (each, a "Trust
Agreement") by and between the Sponsor and the Trustee named therein. Each Trust
Agreement will describe the related pool of assets to be held in trust (each
such asset pool, the "Trust Estate"), which will include the related Mortgage
Loans and, if so specified in the related Prospectus Supplement, may include any
combination of a mortgage pool insurance policy, letter of credit, financial
guaranty insurance policy, special hazard policy, reserve fund or other form of
Credit Enhancement.
The Mortgage Loans held by each Trust will be master serviced by the Master
Servicer pursuant to a servicing agreement (each, a "Servicing Agreement") by
and between the Master Servicer and the related Trustee.
With respect to Securities that represent debt issued by the related Trust, the
related Trust will enter into an indenture (each, an "Indenture") by and between
such Trust and the trustee named on such Indenture (the "Indenture Trustee"), as
set forth in the related Prospectus Supplement. Securities that represent
beneficial ownership interests in the related Trust will be issued pursuant to
the related Trust Agreement.
In the case of any individual Trust, the contractual arrangements relating to
the establishment of the Trust, the servicing of the related Mortgage Loans and
the issuance of the related Securities may be contained in a single agreement,
or in several agreements which combine certain aspects of the Trust Agreement,
the Servicing Agreement and the Indenture described above (for example, a
pooling and servicing agreement, or a servicing and collateral management
agreement). For purposes of this Prospectus, the term "Pooling and Servicing
Agreement" as used with respect to a Trust means, collectively, and except as
otherwise specified, any and all agreements relating to the establishment of the
related Trust, the servicing of the related Mortgage Loans and the issuance of
the related Securities.
Securities Will Be Recourse to the Assets of the Related Trust Only.
The sole source of payment for any series of Securities will be the assets of
the related Trust (i.e., the related Trust Estate). The Securities will not be
obligations, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the Sponsor,
the Master Servicer, any Sub-Servicer, any Originator or any Person other than
the related Trust. In the case of Securities that represent beneficial ownership
interest in the related Trust Estate, such Securities will represent the
ownership of such Trust Estate; with respect to Securities that represent debt
issued by the related Trust, such Securities will be secured by the related
Trust Estate. Notwithstanding the foregoing, and as to be described in the
related Prospectus Supplement, certain
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types of Credit Enhancement, such as a financial guaranty insurance policy or a
letter of credit, may constitute a full recourse obligation of the issuer of
such Credit Enhancement.
General Nature of the Securities as Investments.
The Securities will consist of two basic types: (i) Securities of the
fixed-income type ("Fixed-Income Securities") and (ii) Securities of the equity
participation type ("Equity Securities"). No Class of Equity Securities will be
offered pursuant to this Prospectus or any Prospectus Supplement related hereto.
Fixed-Income Securities will generally be styled as debt instruments, having a
principal balance and a specified interest rate ("Interest Rate"). Fixed-Income
Securities may be either beneficial ownership interests in the related Mortgage
Loans held by the related Trust, or may represent debt secured by such Mortgage
Loans. Each series or class of Fixed-Income Securities may have a different
Interest Rate, which may be a fixed or adjustable Interest Rate. The related
Prospectus Supplement will specify the Interest Rate for each series or class of
Fixed-Income Securities, or the initial Interest Rate and the method for
determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities ("Strip
Securities") entitled (i) to principal distributions, with disproportionate,
nominal or no interest distributions, or (ii) to interest distributions, with
disproportionate, nominal or no principal distributions. In addition, a series
may include two or more classes of Fixed-Income Securities that differ as to
timing, sequential order, priority of payment, Interest Rate or amount of
distributions of principal or interest or both, or as to which distributions of
principal or interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula, or on the basis of
collections from designated portions of the related Mortgage Pool, which series
may include one or more classes of Fixed-Income Securities ("Accrual
Securities"), as to which certain accrued interest will not be distributed but
rather will be added to the principal balance (or nominal principal balance, in
the case of Accrual Securities which are also Strip Securities) thereof on each
Payment Date, as hereinafter defined and in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series of Securities may
include one or more other classes of Fixed-Income Securities (collectively, the
"Senior Securities") that are senior to one or more other classes of
Fixed-Income Securities (collectively, the "Subordinate Securities") in respect
of certain distributions of principal and interest and allocations of losses on
Mortgage Loans.
In addition, certain classes of Senior (or Subordinate) Securities may be senior
to other classes of Senior (or Subordinate) Securities in respect of such
distributions or losses.
Equity Securities will represent the right to receive the proceeds of the
related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior
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<PAGE> 119
Securities and Subordinate Securities), and following any required deposits to
any reserve account which may be established for the benefit of the Fixed-Income
Securities. Equity Securities may constitute what are commonly referred to as
the "residual interest," "seller's interest" or the "general partnership
interest," depending upon the treatment of the related Trust for federal income
tax purposes. As distinguished from the Fixed-Income Securities, the Equity
Securities will not be styled as having principal and interest components. Any
losses suffered by the related Trust will first be absorbed by the related class
of Equity Securities, as described herein and in the related Prospectus
Supplement.
No Class of Equity Securities will be offered pursuant to this Prospectus or any
Prospectus Supplement related hereto. Equity Securities may be offered on a
private placement basis or pursuant to a separate Registration Statement to be
filed by the Sponsor. In addition, the Sponsor and its affiliates may initially
or permanently hold any Equity Securities issued by any Trust.
General Payment Terms of Securities.
As provided in the related Pooling and Servicing Agreement and as described in
the related Prospectus Supplement, Securityholders will be entitled to receive
payments on their Securities on specified dates (each, a "Payment Date").
Payment Dates with respect to Fixed-Income Securities will occur monthly,
quarterly or semi-annually, as described in the related Prospectus Supplement;
Payment Dates with respect to Equity Securities will occur as described in the
related Prospectus Supplement.
The related Prospectus Supplement will describe a date (the "Record Date")
preceding such Payment Date, as of which the Trustee or its paying agent will
fix the identity of the Securityholders for the purpose of receiving payments on
the next succeeding Payment Date. Unless otherwise described in the related
Prospectus Supplement, the Payment Date will be the twenty-fifth day of each
month (or, in the case of quarterly-pay Securities, the twenty-fifth day of
every third month; and in the case of semi-annual pay Securities, the
twenty-fifth day of every sixth month) and the Record Date will be the close of
business as of the last day of the calendar month that precedes the calendar
month in which such Payment Date occurs.
Each Pooling and Servicing Agreement will describe a period (each, a "Remittance
Period") antecedent to each Payment Date (for example, in the case of
monthly-pay Securities, the calendar month preceding the month in which a
Payment Date occurs or such other specified period). Unless otherwise provided
in the related Prospectus Supplement, collections received on or with respect to
the related Mortgage Loans during a Remittance Period will be required to be
remitted by the Master Servicer to the related Trustee prior to the related
Payment Date and will be used to fund payments to Securityholders on such
Payment Date. As may be described in the related Prospectus Supplement, the
related Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by
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the related Trustee to the acquisition of additional Mortgage Loans during a
specified period (rather than be used to fund payments of principal to
Securityholders during such period) with the result that the related securities
will possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus Supplement, the
related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Mortgage Loans) for a specified period prior to
being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of such
principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current
distribution of principal payments to the specified Securityholders and an
acceleration of the amortization of such Securities.
Unless otherwise specified in the related Prospectus Supplement, neither the
Securities nor the underlying Mortgage Loans will be guaranteed or insured by
any governmental agency or instrumentality or the Sponsor, the Master Servicer,
any Sub-Servicer, any Originator or any of their affiliates.
No Investment
Companies
Neither the Sponsor nor any Trust will register as an "investment company" under
the Investment Company Act of 1940, as amended (the "Investment Company Act").
Cross-Collateralization
Unless otherwise provided in the related Pooling and Servicing Agreement and
described in the related Prospectus Supplement, the source of payment for
Securities of each series will be the assets of the related Trust Estate only.
However, as may be described in the related Prospectus Supplement, a Trust
Estate may include the right to receive moneys from a common pool of Credit
Enhancement which may be available for more than one series of Securities, such
as a master reserve account or a master insurance policy. Notwithstanding the
foregoing, unless specifically described otherwise in the related Prospectus
Supplement, no collections on any Mortgage Loans held by any Trust may be
applied to the payment of Securities issued by any other Trust (except to the
limited extent that certain collections in excess of amounts needed to pay the
related Securities may be deposited in a common, master reserve account that
provides Credit Enhancement for more than one series of Securities).
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The Mortgage Pools
Unless otherwise specified in the related Prospectus Supplement, each Trust
Estate will consist primarily of Mortgage Loans secured by liens on one- to
four-family residential or multi-family properties ("Mortgages"), located in any
one of the fifty states, the District of Columbia, Puerto Rico or any other
Territories of the United States. All Mortgage Loans will have been acquired by
the related Trust from the Sponsor. All Mortgage Loans will have been originated
either by (x) one or more institutions affiliated with the Sponsor (such
affiliated institutions, the "Affiliated Originators") or (y) one or more
institutions not affiliated with the Sponsor (such unaffiliated institutions,
the "Unaffiliated Originators"). The Mortgage Loans originated by the Affiliated
Originators generally will have been originated pursuant to the standard
underwriting guidelines (the "Sponsor's Guidelines") set forth in the Sponsor's
guide for originators (the "Sponsor's Originator Guide"), as modified from time
to time. The Mortgage Loans originated by the Unaffiliated Originators may be
originated either (i) generally pursuant to the Sponsor's Guidelines; (ii)
generally pursuant to such Unaffiliated Originators' underwriting guidelines as
approved by the Sponsor ("Approved Guidelines"); or (iii) generally pursuant to
such Originators' underwriting guidelines and purchased by the Sponsor in a bulk
acquisition ("Bulk Acquisition"). See "Mortgage Loan Program." For a description
of the types of Mortgage Loans that may be included in the Mortgage Pools, see
"The Mortgage Pools--The Mortgage Loans."
A Current Report on Form 8-K will be available to purchasers or underwriters of
the related series of Securities and will generally be filed, together with the
related Pooling and Servicing Agreement, with the Securities and Exchange
Commission within fifteen days after the initial issuance of such series.
Forward Commitments;
Pre-Funding
A Trust may enter into an agreement (each, a "Forward Purchase Agreement") with
the Sponsor whereby the Sponsor will agree to transfer additional Mortgage Loans
(the "Subsequent Mortgage Loans") to such Trust following the date on which such
Trust is established and the related Securities are issued. Any Forward Purchase
Agreement will require that any Mortgage Loans so transferred to a Trust conform
to the requirements specified in such Forward Purchase Agreement. In addition,
the Forward Purchase Agreement states that the Depositor shall only transfer the
Subsequent Mortgage Loans upon the satisfaction of certain conditions including
that the Depositor shall have delivered to the Certificate Insurer, the Rating
Agencies and the Trustee opinions of counsel (including bankruptcy, corporate
and tax opinions) with respect to the transfer of the Subsequent Mortgage Loans.
If a Forward Purchase Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the related Trustee will be
required to deposit in a segregated account (each, a "Pre-Funding Account") all
or a portion of the proceeds received by the Trustee in connection with the sale
of one or more classes of Securities of the related series; subsequently, the
additional Mortgage Loans will be transferred to the related Trust in exchange
for money released to the Sponsor from the related Pre- Funding Account in one
or more transfers. Each Forward Purchase
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Agreement will set a specified period during which any such transfers must
occur. The Forward Purchase Agreement or the related Pooling and Servicing
Agreement will require that, if all moneys originally deposited to such
Pre-Funding Account are not so used by the end of such specified period, then
any remaining moneys will be applied as a mandatory prepayment of the related
class or classes of Securities as specified in the related Prospectus
Supplement.
Credit Enhancement
If so specified in the Prospectus Supplement, the Trust Estate with respect to
any series of Securities may include any one or any combination of a letter of
credit, mortgage pool insurance policy, special hazard insurance policy,
bankruptcy bond, financial guaranty insurance policy, reserve fund or other type
of Credit Enhancement to provide full or partial coverage for certain defaults
and losses relating to the Mortgage Loans. Credit support also may be provided
in the form of the related class of Equity Securities, and/or by subordination
of one or more classes of Fixed-Income Securities in a series under which losses
in excess of those absorbed by any related class of Equity Securities are first
allocated to any Subordinate Securities up to a specified limit, cross-support
among groups of Mortgage Assets or overcollateralization. Unless otherwise
specified in the related Prospectus Supplement, any mortgage pool insurance
policy will have certain exclusions from coverage thereunder, which will be
described in the related Prospectus Supplement, which may be accompanied by one
or more separate Credit Enhancements that may be obtained to cover certain of
such exclusions. To the extent not set forth herein, the amount and types of
coverage, the identification of any entity providing the coverage, the terms of
any subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Securities. See "Description of Credit
Enhancement" and "Subordination."
Advances
As to be described in the related Prospectus Supplement, the Master Servicer may
be obligated to make certain advances with respect to payments of delinquent
scheduled interest and/or principal on the Mortgage Loans, but only to the
extent that the Master Servicer believes that such amounts will be recoverable
by it. Any such advance made by the Master Servicer with respect to a Mortgage
Loan is recoverable by it as provided herein under "Description of the
Securities--Advances" either from recoveries on the specific Mortgage Loan or,
with respect to any such advance subsequently determined to be nonrecoverable,
out of funds otherwise distributable to the holders of the related series of
Securities, which may include the holders of any Senior Securities of such
series.
As to be described in the related Prospectus Supplement, the Master Servicer may
be required to pay Compensating Interest as defined hereafter under "Description
of the Securities--Advances."
In addition, unless otherwise specified in the related Prospectus Supplement,
the Master Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, but only to
the extent that the Master Servicer reasonably believes that such amounts will
increase Net Liquidation Proceeds on
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the related Mortgage Loan. See "Description of the Securities--Advances."
Optional Termination
The Master Servicer, the Sponsor, or, if specified in the related Prospectus
Supplement, the holders of the related class of Equity Securities or the Credit
Enhancer may at their respective option effect early retirement of a series of
Securities through the purchase of the Mortgage Loans and other assets in the
related Trust Estate under the circumstances and in the manner set forth herein
under "The Pooling and Servicing Agreement--Termination; Retirement of
Securities" and in the related Prospectus Supplement.
Mandatory Termination
The Trustee, the Master Servicer or certain other entities specified in the
related Prospectus Supplement may be required to effect early retirement of a
series of Securities by soliciting competitive bids for the purchase of the
related Trust Estate or otherwise, under other circumstances and in the manner
specified in "The Pooling and Servicing Agreement--Termination; Retirement of
Securities" and in the related Prospectus Supplement.
Legal Investment
Not all of the Mortgage Loans in a particular Mortgage Pool may represent first
liens. Accordingly, as disclosed in the related Prospectus Supplement, certain
classes of Securities offered hereby and by the related Prospectus Supplement
may not constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") and, if so, will not be legal
investments for certain types of institutional investors under SMMEA.
Institutions whose investment activities are subject to legal investment laws
and regulations or to review by certain regulatory authorities may be subject to
additional restrictions on investment in certain classes of Securities. Any such
institution should consult its own legal advisors in determining whether and to
what extent a class of Securities constitutes legal investments for such
investors. See "Legal Investment" herein.
ERISA Considerations
A fiduciary of an employee benefit plan and certain other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans, and collective investment funds and separate accounts in which such
plans, accounts, annuities or arrangements are invested, that is subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code (each such entity, a "Plan") should carefully review
with its legal advisors whether the purchase or holding of Securities could give
rise to a transaction that is prohibited or is not otherwise permissible either
under ERISA or Section 4975 of the Code. Investors are advised to consult their
counsel and to review "ERISA Considerations" herein.
Certain Federal Income
Tax Consequences
Securities of each series offered hereby will, for federal income tax purposes,
constitute either (i) interests ("Grantor Trust Securities") in a Trust treated
as a grantor trust under applicable provisions of the Code, (ii) "regular
interests" ("REMIC Regular Securities") or "residual interests" ("REMIC Residual
Securities") in a Trust treated as a REMIC (or, in certain instances, containing
one or more
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REMIC's) under Sections 860A through 860G of the Code, (iii) debt issued by a
Trust ("Debt Securities") (iv) interests in a Trust which is treated as a
partnership ("Partnership Interests"), or, on or after September 1, 1997, (v)
"regular interests" ("FASIT Regular Securities"), "high-yield interests" ("FASIT
High-Yield Securities") or an ownership interest in a Trust treated as a FASIT
(or, in certain circumstances containing one or more FASITs under Sections 860H
through 860L of the Code.
Investors are advised to consult their tax advisors and to review "Certain
Federal Income Tax Consequences" herein and in the related Prospectus
Supplement.
Registration of Securities
Securities may be represented by global securities registered in the name of
Cede & Co. ("Cede"), as nominee of The Depository Trust Company ("DTC"), or
another nominee. In such case, Securityholders will not be entitled to receive
definitive securities representing such Holders' interests, except in certain
circumstances described in the related Prospectus Supplement. See "Description
of the Securities-- Form of Securities" herein.
Ratings
Each class of Fixed-Income Securities offered pursuant to the related Prospectus
Supplement will be rated in one of the four highest rating categories by one or
more "national statistical rating organizations," as defined in the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and commonly referred to
as "Rating Agencies." Such ratings will address, in the opinion of such Rating
Agencies, the likelihood that the related Trust will be able to make timely
payment of all amounts due on the related Fixed-Income Securities in accordance
with the terms thereof. Such ratings will neither address any prepayment or
yield considerations applicable to any Securities nor constitute a
recommendation to buy, sell or hold any Securities.
Equity Securities will not be rated.
The ratings expected to be received with respect to any Securities will be set
forth in the related Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity. There can be no assurance that a secondary market
for the Securities of any series or class will develop or, if it does develop,
that it will provide Securityholders with liquidity of investment or that it
will continue for the life of the Securities of any series. The Prospectus
Supplement for any series of Securities may indicate that an underwriter
specified therein intends to establish a secondary market in such Securities;
however, no underwriter will be obligated to do so. Unless otherwise specified
in the related Prospectus Supplement, the Securities will not be listed on any
securities exchange.
Limited Obligations. The Securities will not represent an interest in
or obligation, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the Sponsor,
the Master Servicer, any Originator (as defined herein) or any person other than
the related Trust. The only obligations of the foregoing entities with respect
to the Securities or the Mortgage Loans will be the obligations (if any) of the
Sponsor, the related Originators and the Master Servicer pursuant to certain
limited representations and warranties made with respect to the Mortgage Loans,
the Master Servicer's servicing obligations under the related Pooling and
Servicing Agreement (including its limited obligation, if any, to make certain
advances in the event of delinquencies on the Mortgage Loans, but only to the
extent deemed recoverable) and, if and to the extent expressly described in the
related Prospectus Supplement, certain limited obligations of the Sponsor,
Master Servicer, applicable Sub-Servicer, or another party in connection with a
purchase obligation ("Purchase Obligation") or an agreement to purchase or act
as remarketing agent with respect to a Convertible Mortgage Loan upon conversion
to a fixed rate. Notwithstanding the foregoing, and as to be described in the
related Prospectus Supplement, certain types of Credit Enhancement, such as a
financial guaranty insurance policy or a letter of credit, may constitute a full
recourse obligation of the issuer of such Credit Enhancement. Except as
described in the related Prospectus Supplement, neither the Securities nor the
underlying Mortgage Loans will be guaranteed or insured by any governmental
agency or instrumentality, or by the Sponsor, the Master Servicer, any
Sub-Servicer or any of their affiliates. Proceeds of the assets included in the
related Trust Estate for each series of Securities (including the Mortgage Loans
and any form of Credit Enhancement) will be the sole source of payments on the
Securities, and there will be no recourse to the Sponsor or any other entity in
the event that such proceeds are insufficient or otherwise unavailable to make
all payments provided for under the Securities.
Limitations, Reduction and Substitution of Credit Enhancement. With
respect to each series of Securities, Credit Enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit Enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: a letter of credit; a Purchase
Obligation; a mortgage pool insurance policy; a special hazard insurance policy;
a bankruptcy bond; a reserve fund; a financial guaranty insurance policy or
other type of Credit Enhancement to provide partial coverage for certain
defaults and losses relating to the Mortgage Loans. Credit Enhancement also may
be provided in the form of the related class of Equity Securities, subordination
of one or more classes of Fixed-Income Securities in a series under which losses
in excess of those absorbed by any related class of Equity Securities are first
allocated to any Subordinate Securities up to a specified limit, cross-support
among Mortgage Assets and/or overcollateralization. See "Subordination" and
"Description of Credit Enhancement" herein. Regardless of the form of Credit
Enhancement provided, the coverage will be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancements may provide only very limited coverage as
to certain types of losses, and may provide no coverage as to certain other
types of losses. Generally, Credit Enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. The Master
Servicer will generally be permitted to reduce, terminate or substitute all or a
portion of the Credit Enhancement for any series of Securities, if the
applicable Rating Agency indicates that the then-current rating thereof will not
be adversely affected. To the extent not set forth herein, the amount and types
of coverage, the identification of any entity providing the coverage, the terms
of any subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Securities. See "Description of Credit
Enhancement" and "Subordination."
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RISKS OF THE MORTGAGE LOANS
Risk of the Losses Associated with Junior Liens. Certain of the
Mortgage Loans will be secured by junior liens subordinate to the rights of the
mortgagee or beneficiary under each related senior mortgage or deed of trust. As
a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the principal balance of a mortgage
loan only to the extent that the claims, if any, of each such senior mortgagee
or beneficiary are satisfied in full, including any related foreclosure costs.
In addition, a mortgagee secured by a junior lien may not foreclose on the
related mortgaged property unless it forecloses subject to the related senior
mortgage or mortgages, in which case it must either pay the entire amount of
each senior mortgage to the applicable mortgagee at or prior to the foreclosure
sale or undertake the obligation to make payments on each senior mortgage in the
event of default thereunder. In servicing junior lien loans in its portfolio, it
has generally been the practice of the Master Servicer to satisfy each such
senior mortgage at or prior to the foreclosure sale but only to the extent that
it determines any amounts so paid will be recoverable from future payments and
collections on such junior lien loans or otherwise. The Trusts will not have any
source of funds to satisfy any such senior mortgage or make payments due to any
senior mortgagee. See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Foreclosure."
Risk of Losses Associated with Declining Real Estate Values. An
investment in securities such as the Securities that generally represent
beneficial ownership interests in the Mortgage Loans or debt secured by such
Mortgage Loans may be affected by, among other things, a decline in real estate
values and changes in the borrowers' financial condition. 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 Mortgage Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of any senior liens, the Mortgage
Loans and any secondary financing on the Mortgaged Properties in a particular
Mortgage Pool become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the nonconforming credit mortgage
lending industry. Such a decline could extinguish the interest of the related
Trust in the Mortgaged Properties before having any effect on the interest of
the related senior mortgagee. In addition, in the case of Mortgage Loans that
are subject to negative amortization, due to the addition to principal balance
of deferred interest ("Deferred Interest"), the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the likelihood
of default. To the extent that such losses are not covered by the applicable
Credit Enhancement, holders of Securities of the series evidencing interests in
the related Mortgage Pool will bear all risk of loss resulting from default by
Mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming Credit and
Non-Traditional Loans. The Sponsor's underwriting standards consider, among
other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the value of the property; however, the
Sponsor's Mortgage Loan program generally provides for the origination of
Mortgage Loans relating to non-conforming credits. For purposes hereof,
"non-conforming credit" means a mortgage loan which, based upon standard
underwriting guidelines, is ineligible for purchase by the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC") due to credit characteristics that do not meet FNMA or FHLMC
guidelines, respectively. Certain of the types of loans that may be included in
the Mortgage Pools may involve additional uncertainties not present in
traditional types of loans. For example, certain of the Mortgage Loans may
provide for escalating or variable payments by the borrower under the Mortgage
Loan (the "Mortgagor"), as to which the Mortgagor is generally qualified on the
basis of the initial payment amount. In some instances the Mortgagors' income
may not be sufficient to enable them to continue to make their loan payments as
such payments increase and thus the likelihood of default will increase. For a
more detailed discussion, see "Mortgage Loan Program."
Risk of Losses Associated with Balloon Loans. Certain of the Mortgage
Loans may constitute "Balloon Loans." Balloon Loans are originated with a stated
maturity of less than the period of time of the corresponding amortization
schedule. Consequently, upon the maturity of a Balloon Loan, the Mortgagor will
be required to make a "balloon" payment that will be significantly larger than
such Mortgagor's previous monthly payments. The ability of such a Mortgagor to
repay a Balloon Loan at maturity frequently will depend on such borrower's
ability to refinance the Mortgage Loan. The ability of a Mortgagor to refinance
such a Mortgage Loan will be affected by a
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number of factors, including the level of available mortgage rates at the time,
the value of the related Mortgaged Property, the Mortgagor's equity in the
related Mortgaged Property, the financial condition of the Mortgagor, the tax
laws and general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing
of a balloon payment, the receipt and reinvestment by Securityholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Sponsor,
the Originators, the Master Servicer, any Sub-Servicer or the Trustee will be
obligated to provide funds to refinance any Mortgage Loan, including Balloon
Loans.
Risk of Losses Associated with ARM Loans. ARM Loans may be underwritten
on the basis of an assessment that Mortgagors will have the ability to make
payments in higher amounts after relatively short periods of time. In some
instances, Mortgagors' income may not be sufficient to enable them to continue
to make their loan payments as such payments increase and thus the likelihood of
default will increase.
Risk of Losses Associated with Bankruptcy of Mortgagors. General
economic conditions have an impact on the ability of borrowers to repay Mortgage
Loans. Loss of earnings, illness and other similar factors also may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of
personal bankruptcy of a Mortgagor, it is possible that a Trust could experience
a loss with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan thereby either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Risk of Losses Associated with Mortgaged Properties. Even assuming that
the Mortgaged Properties provide adequate security for the Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans and corresponding delays in the receipt of related
proceeds by the Securityholders could occur. An action to foreclose on a
Mortgaged Property securing a Mortgage Loan is regulated by state statutes,
rules and judicial decisions 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
Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds
(net of expenses) ("Liquidation Proceeds") sufficient to repay all amounts due
on the related Mortgage Loan. The Master Servicer will be entitled to deduct
from Liquidation Proceeds all expenses reasonably incurred in attempting to
recover amounts due on the related liquidated Mortgage Loan ("Liquidated
Mortgage Loan") and not yet repaid, including payments to prior lienholders,
accrued Servicing Fees, Delinquency Advances, Servicing Advances, legal fees and
costs of legal action, real estate taxes, and maintenance and preservation
expenses. In the event that any Mortgaged Properties fail to provide adequate
security for the related Mortgage Loans and insufficient funds are available
from any applicable Credit Enhancement, Securityholders could experience a loss
on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes 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 larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property that, prior to foreclosure,
has been involved in decisions or actions which may lead to contamination of a
property, may be liable for the costs of cleaning up the purportedly
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Pooling and
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Servicing Agreement, is not required to take an active role in operating the
Mortgaged Properties. See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Environmental Legislation."
Certain of the Mortgaged Properties relating to Mortgage Loans may not
be owner occupied. It is possible that the rate of delinquencies, foreclosures
and losses on Mortgage Loans secured by nonowner occupied properties could be
higher than for loans secured by the primary residence of the borrower.
Litigation. Any material litigation relating to the Sponsor or the
Master Servicer will be specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans underlying certain series of Securities may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Information with respect to geographic
concentration of Mortgaged Properties will be specified in the related
Prospectus Supplement or related Current Report on Form 8-K.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing of
the Originators and the Master Servicer and Sub-Servicers. In addition, most
states have other laws, public policy and general principles of equity relating
to the protection of consumers, unfair and deceptive practices and practices
that may apply to the origination, servicing and collection of the Mortgage
Loans. Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the Master Servicer to collect all or part of the
principal of or interest on the Mortgage Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the Master
Servicer to damages and administrative sanctions. See "Certain Legal Aspects of
Mortgage Loans and Related Matters."
The Mortgage Loans may also be subject to federal laws, including: (i)
the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) 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 general
principles of equity may limit the ability of the Master Servicer to collect all
or part of the principal of or interest on the Mortgage Loans, may entitle the
borrower to rescind the loan or to a refund of amounts previously paid and, in
addition, could subject the Master Servicer to damages and administrative
sanctions. If the Master Servicer is unable to collect all or part of the
principal or interest on the Mortgage Loans because of a violation of the
aforementioned laws, public policies or general principles of equity then the
Trust may be delayed or unable to repay all amounts owed to Investors.
Furthermore, depending upon whether damages and sanctions are assessed against
the Master Servicer or an Originator, such violations may materially impact the
financial ability of the Sponsor to continue to act as Master Servicer or the
ability of an Originator to repurchase or replace Mortgage Loans if such
violation breaches a representation or warranty contained in a Pooling and
Servicing Agreement.
Yield and Prepayment Considerations. The yield to maturity of the
Securities of each series will depend on the rate of payment of principal
(including prepayments, liquidations due to defaults, and repurchases due to
conversion of adjustable-rate mortgage loans ("ARM Loans") to fixed-rate loans
or breaches of representations and warranties) on the Mortgage Loans and the
price paid by Securityholders. Such yield may be adversely affected by a higher
or lower than anticipated rate of prepayments on the related Mortgage Loans. The
yield to maturity on Strip Securities or Securities purchased at premiums or
discounted to par will be extremely sensitive to the rate of prepayments on the
related Mortgage Loans. In addition, the yield to maturity on certain other
types of classes of Securities, including Accrual Securities or certain other
classes in a series including more than one class of Securities, may be
relatively more sensitive to the rate of prepayment on the related Mortgage
Loans than other classes of Securities.
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Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may be imposed in connection therewith. Unless so
specified in the related Prospectus Supplement, such penalties will not be
property of the related Trust. The rate of prepayments of the Mortgage Loans
cannot be predicted and is influenced by a wide variety of economic, social, and
other factors, including prevailing mortgage market interest rates, the
availability of alternative financing, local and regional economic conditions
and homeowner mobility. Therefore, no assurance can be given as to the level of
prepayments that a Trust will experience.
Prepayments may result from mandatory prepayments relating to unused
moneys held in Pre-Funding Accounts, if any, voluntary early payments by
borrowers (including payments in connection with refinancings of the related
senior Mortgage Loan or Loans), sales of Mortgaged Properties subject to
"due-on-sale" provisions and liquidations due to default, as well as the receipt
of proceeds from physical damage, credit life and disability insurance policies.
In addition, repurchases or purchases from a Trust of Mortgage Loans or
substitution adjustments required to be made under the Pooling and Servicing
Agreement will have the same effect on the Securityholders as a prepayment of
such Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, all of the Mortgage Loans contain "due-on-sale" provisions, and the
Master Servicer will be required to enforce such provisions unless (i) the
"due-on-sale" clause, in the reasonable belief of the Master Servicer, is not
enforceable under applicable law or (ii) the Master Servicer reasonably believes
that to permit an assumption of the Mortgage Loan would not materially and
adversely affect the interests of the Securityholders or of the related Credit
Enhancer, if any. See "The Pooling and Servicing Agreement" in the related
Prospectus Supplement.
Collections on the Mortgage Loans may vary due to the level of
incidence of delinquent payments and of prepayments. Collections on the Mortgage
Loans may also vary due to seasonal purchasing and payment habits of borrowers.
Book-Entry Registration. Issuance of the Securities in book-entry form
may reduce the liquidity of such Securities in the secondary trading market
since investors may be unwilling to purchase Securities for which they cannot
obtain definitive physical securities representing such Securityholders'
interests, except in certain circumstances described in the related Prospectus
Supplement.
Since transactions in Securities will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct or Indirect Participants") and certain banks, the ability of a
Securityholder to pledge a Security to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of such
Securities, may be limited due to lack of a physical security representing the
Securities.
Securityholders may experience some delay in their receipt of
distributions of interest on and principal of the Securities since distributions
may be required to be forwarded by the Trustee to DTC and, in such a case, DTC
will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable class of Securityholders either directly or indirectly through
Indirect Participants. See "Description of the Securities--Form of Securities."
The Status of the Mortgage Loans in the Event of Bankruptcy of the
Sponsor or an Originator. In the event of the bankruptcy of the Sponsor or an
Originator at a time when it or any affiliate thereof holds an Equity Security,
a trustee in bankruptcy of the Sponsor, an Originator, or its creditors could
attempt to recharacterize the sale of the Mortgage Loans to the related Trust as
a borrowing by the Sponsor, the Originator or such affiliate with the result, if
such recharacterization is upheld, that the Securityholders would be deemed
creditors of the Sponsor, the Originator or such affiliate, secured by a pledge
of the Mortgage Loans. If such an attempt were successful, it could prevent
timely payments of amounts due to the Trust.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
Master Servicer to collect full
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amounts of interest on certain of the Mortgage Loans. In addition, the Relief
Act imposes limitations that would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the Mortgagor's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
Security Rating. The rating of Securities credit enhanced through
external Credit Enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external Credit Enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
Securities would likely result in a reduction in the rating of the Securities.
See "Ratings" in the Prospectus Supplement.
THE TRUSTS
A Trust for any series of Securities will include the primary mortgage
assets ("Mortgage Assets") consisting of (A) a Mortgage Pool comprised of (i)
Single Family Loans, (ii) Multi-family Loans, (iii) Cooperative Loans, (iv)
Contracts, (v) Home Improvement Loans, or (vi) other loans or (B) certificates
of interest or participation in the items described in clause (A) or in pools of
such items, in each case, as specified in the related Prospectus Supplement,
together with payments in respect of such primary Mortgage Assets and certain
other accounts, obligations or agreements, in each case as specified in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
(i.e., the related Trust Estate) and will not be entitled to payments in respect
of the assets of any other related Trust Estate established by the Sponsor, the
Originators or any of their affiliates. If specified in the related Prospectus
Supplement, certain Securities will evidence the entire fractional undivided
ownership interest in the related Mortgage Loans held by the related Trust or
may represent debt secured by the related Mortgage Loans.
The following is a brief description of the Mortgage Assets expected to
be included in the related Trusts. If specific information respecting the
primary Mortgage Assets is not known at the time the related series of
Securities initially is offered, information of the nature described below will
be provided in the Prospectus Supplement, and specific information will be set
forth in a report on Form 8-K to be filed with the Commission within fifteen
days after the initial issuance of such Securities (the "Detailed Description").
A copy of the Pooling and Servicing Agreement with respect to each Series of
Securities will be attached to the Form 8-K and will be available for inspection
at the corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Mortgage Assets relating to such Series (the
"Mortgage Asset Schedule") will be attached to the Pooling and Servicing
Agreement delivered to the Trustee upon delivery of the Securities.
The Mortgage Loans--General. The real properties and Manufactured
Homes, as the case may be, that secure repayment of the Mortgage Loans and
Contracts (the "Mortgaged Properties") may be located in any one of the fifty
states, the District of Columbia, Puerto Rico or any other Territories of the
United States. Unless otherwise specified in the related Prospectus Supplement,
the Mortgage Loans or Contracts will be "Conventional Loans" (i.e., loans that
are not insured or guaranteed by any governmental agency). If specified in the
related Prospectus Supplement, Mortgage Loans with certain loan-to-value ratios
and/or certain principal balances may be covered wholly or partially by primary
mortgage insurance policies. Unless otherwise specified in the related
Prospectus Supplement, all of the Mortgage Loans will be covered by standard
hazard insurance policies (which may be in the form of a blanket or forced
placed hazard insurance policy). The existence, extent and duration of any such
coverage will be described in the applicable Prospectus Supplement. Unless
otherwise described in the related Prospectus Supplement, the Mortgage Loans
will not be guaranteed or insured by any government agency or other insurer.
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans in a Mortgage Pool will provide for payments to be made
monthly ("monthly pay") or bi-weekly. The payment terms of the Mortgage Loans to
be included in a Trust will be described in the related Prospectus Supplement
and may include any of the following features or combination thereof or other
features described in the related Prospectus Supplement:
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(a) Interest may be payable at a Fixed Rate, or an Adjustable
Rate (i.e., a rate that is adjustable from time to time in relation to
an index, a rate that is fixed for a period of time and under certain
circumstances 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). The specified rate of interest on a
Mortgage Loan is its "Mortgage Rate." Changes to an Adjustable Rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and
added to the principal of a Mortgage Loan for such periods and under
such circumstances as may be specified in the related Prospectus
Supplement. If provided for in the Prospectus Supplement, certain
Mortgage Loans may be subject to temporary buydown plans ("Buydown
Mortgage Loans") pursuant to which the monthly payments made by the
Mortgagor during the early years of the Mortgage Loan (the "Buydown
Period") will be less than the scheduled monthly payments on the
Mortgage Loan, and the amount of any difference may be contributed from
(i) an amount (such amount, exclusive of investment earnings thereon,
being hereinafter referred to as "Buydown Funds") funded by the
originator of the Mortgage Loan or another source (including the Master
Servicer or the related Originator and the builder of the Mortgaged
Property) and placed in a custodial account (the "Buydown Account") and
(ii) if the Buydown Funds are contributed on a present value basis,
investment earnings on such Buydown Funds.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on
the basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate that
is different from the Mortgage Rate, or may not be amortized during all
or a portion of the original term. Payment of all or a substantial
portion of the principal may be due on maturity ("balloon payments").
Principal may include interest that has been deferred and added to the
principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified period
of time ("graduated payments") or may change from period to period.
Mortgage 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. Mortgage Loans having graduated payment
provisions may provide for deferred payment of a portion of the
interest due monthly during a specified period, and recoup the deferred
interest through negative amortization during such period whereby the
difference between the interest paid during such period and interest
accrued during such period is added monthly to the outstanding
principal balance. Other Mortgage Loans sometimes referred to as
"growing equity" mortgage loans may provide for periodic scheduled
payment increases for a specified period with the full amount of such
increases being applied to principal.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Mortgage Loan or may
decline over time, and may be prohibited for the life of the Mortgage
Loan or for certain periods ("lockout periods"). Certain Mortgage Loans
may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection
therewith. Other Mortgage Loans may permit prepayments without payment
of a fee unless the prepayment occurs during specified time periods.
The Mortgage Loans may include due-on-sale clauses which permit the
mortgagee to demand payment of the entire Mortgage Loan in connection
with the sale or certain transfers of the related Mortgaged Property.
Other Mortgage Loans may be assumable by persons meeting the then
applicable underwriting standards of the related Originator.
(e) As more fully described in the related Prospectus
Supplement, the Mortgage Loans may consist, in whole or in part, of
revolving home equity loans or certain balances thereof ("Revolving
Credit Line Loans"). Interest on each Revolving Credit Line Loan,
excluding introductory rates offered from time to time during
promotional periods, may be computed and payable monthly on the average
daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a
Revolving Credit Line Loan, principal amounts on such Revolving Credit
Line Loan may be drawn down (up to a maximum amount as set forth in the
related Prospectus Supplement) or repaid. If specified in the related
Prospectus Supplement, new draws by borrowers under the Revolving
Credit Line Loans will automatically become part of the Trust Estate
described in such Prospectus Supplement. As a result, the aggregate
balance of the Revolving Credit Line Loans will fluctuate from day to
day as new draws by borrowers are added to the Trust Estate and
principal payments are applied to such balances and such
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amounts will usually differ each day, as more specifically described in
the related Prospectus Supplement. Under certain circumstances, under a
Revolving Credit Line Loan, a borrower may, during the related draw
period, choose an interest only payment option, during which the
borrower is obligated to pay only the amount of interest which accrues
on the loan during the billing cycle, and may also elect to pay all or
a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the
borrower must begin paying at least a minimum monthly portion of the
average outstanding principal balance of the loan.
Except as otherwise described in the related Prospectus Supplement or
in the related Current Report on Form 8-K, interest will be calculated on each
Mortgage Loan pursuant to one of three methods:
Date of Payment Loans. Date of Payment Loans provide that
interest is charged to the Mortgagor at the applicable Mortgage Rate on
the outstanding principal balance of such Note and calculated based on
the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payment. Such
interest is deducted from the Mortgagor's payment amount and the
remainder, if any, of the payment is applied as a reduction to the
outstanding principal balance of such Note. Although the Mortgagor is
required to remit equal monthly payments on a specified monthly payment
date that would reduce the outstanding principal balance of such Note
to zero at such Note's maturity date, payments that are made by the
Mortgagor after the due date therefor would cause the outstanding
principal balance of such Note not to be reduced to zero. In such a
case, the Mortgagor would be required to make an additional principal
payment at the maturity date for such Note. On the other hand, if a
Mortgagor makes a payment (other than a prepayment) before the due date
therefor, the reduction in the outstanding principal balance of such
Note would occur over a shorter period of time than it would have
occurred had it been based on the original amortization schedule of
such Note.
Actuarial Loans. Actuarial Loans provide that interest is
charged to the Mortgagor thereunder, and payments are due from such
Mortgagor, as of a scheduled day of each month which is fixed at the
time of origination. Scheduled monthly payments made by the Mortgagors
on the Actuarial Loans either earlier or later than the scheduled due
dates thereof will not affect the amortization schedule or the relative
application of such payments to principal and interest.
Rule of 78's Loans. A Rule of 78's Loan provides for the
payment by the related Mortgagor of a specified total amount of
payments, payable in equal monthly installments on each due date, which
total represents the principal amount financed and add-on interest in
an amount calculated on the basis of the stated Mortgage Rate for the
term of the Loan. The rate at which such amount of add-on interest is
earned and, correspondingly, the amount of each fixed monthly payment
allocated to reduction of the outstanding principal are calculated in
accordance with the "Rule of 78's." Under a Rule of 78's Loan, the
amount of a payment allocable to interest is determined by multiplying
the total amount of add-on interest payable over the term of the loan
by a fraction derived as described below.
The fraction used in the calculation of add-on interest earned each
month under a Rule of 78's Loan has as its denominator a number equal to the sum
of a series of numbers. The series of numbers begins with one and ends with the
number of monthly payments due under the loan. For example, with a loan
providing for 12 payments, the denominator of each month's fraction will be 78,
the sum of the series of numbers from 1 to 12. The numerator of the fraction for
a given month is the number of original payments to stated maturity less the
number of payments made up to but not including the current month. Accordingly,
in the example of a twelve-month loan, the fraction for the first payment is,
for the second payment, for the third party, and so on through the final
payment, for which the fraction is. The applicable fraction is then multiplied
by the total add-on interest payable over the entire term of the loan, and the
resulting amount is the amount of add-on interest "earned" that month. The
difference between the amount of the monthly payment by the obligor and the
amount of earned add-on interest calculated for the month is applied to
principal reduction. Rule of 78's Loans are non-level yield instruments. The
yield in the initial months of a Rule of 78's Loan is somewhat higher than the
stated Mortgage Rate (computed on an actuarial basis) and the yield in the later
months of the loan is somewhat less than such stated Mortgage Rate.
The Prospectus Supplement for each series of Securities or the Current
Report on Form 8-K will contain certain information with respect to the Mortgage
Loans (or a sample thereof) contained in the related Mortgage Pool;
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such information, insofar as it may relate to statistical information relating
to such Mortgage Loans will be presented as of a date certain (the "Statistic
Calculation Date") which may also be the related cut-off date (the "Cut-Off
Date"). Such information will include to the extent applicable to the particular
Mortgage Pool (in all cases as of the Statistic Calculation Date) (i) the
aggregate outstanding principal balance and the average outstanding principal
balance of the Mortgage Loans, (ii) the largest principal balance and the
smallest principal balance of any of the Mortgage Loans, (iii) the types of
Mortgaged Property securing the Mortgage Loans (e.g., one- to four-family
houses, vacation and second homes, Manufactured Homes, multifamily apartments or
other real property), (iv) the original terms to stated maturity of the Mortgage
Loans, (v) the weighted average remaining term to maturity of the Mortgage Loans
and the range of the remaining terms to maturity; (vi) the earliest origination
date and latest maturity date of any of the Mortgage Loans, (vii) the weighted
average CLTV and the range of CLTV's of the Mortgage Loans at origination,
(viii) the weighted average Mortgage Rate or annual percentage rate (as
determined under Regulation Z) (the "APR") and ranges of Mortgage Rates or APRs
borne by the Mortgage Loans, (ix) in the case of Mortgage Loans having
adjustable rates, the weighted average of the adjustable rates and indices, if
any; (x) the aggregate outstanding principal balance, if any, of Buy-Down Loans
and Mortgage Loans having graduated payment provisions; (xi) the amount of any
mortgage pool insurance policy, special hazard insurance policy or bankruptcy
bond to be maintained with respect to such Mortgage Pool; (xii) a description of
any standard hazard insurance required to be maintained with respect to each
Mortgage Loan; (xiii) a description of any Credit Enhancement to be provided
with respect to all or any Mortgage Loans or the Mortgage Pool; and (xiv) the
geographical distribution of the Mortgage Loans on a state-by-state basis. In
addition, preliminary or more general information of the nature described above
may be provided in the Prospectus Supplement, and specific or final information
may be set forth in a Current Report on Form 8-K, together with the related
Pooling and Servicing Agreement, which will be filed with the Securities and
Exchange Commission and will be made available to holders of the related series
of Securities within fifteen days after the initial issuance of such Securities.
The loan-to-value ratio (the "LTV") of a Mortgage Loan is equal to the
ratio (expressed as a percentage) of the original principal balance of such
Mortgage Loan to appraised value of the related Mortgaged Property (unless
otherwise disclosed in the related Prospectus Supplement or in the related
Current Report on Form 8-K, less the amount, if any, of the premium for any
credit life insurance) at the time of origination of the Mortgage Loan or, in
the case where the Mortgage represents a purchase money instrument, the lesser
of (a) the appraised value or (b) the purchase price. The combined loan-to-value
ratio (the "CLTV") of a Mortgage Loan at any given time is the ratio, expressed
as a percentage, determined by dividing (x) the sum of the original principal
balance of such Mortgage Loan (unless otherwise disclosed in the related
Prospectus Supplement or in the related Current Report on Form 8-K, less the
amount, if any, of the premium for any credit life insurance) plus the
then-current principal balance of all mortgage loans (each, a "Senior Lien")
secured by liens on the related Mortgaged Property having priorities senior to
that of the lien which secures such Mortgage Loan, by (y) the value of the
related Mortgaged Property, based upon the appraisal or valuation (which may in
certain instances include estimated increases in value as a result of certain
home improvements to be financed with the proceeds of such Mortgage Loan) made
at the time of origination of the Mortgage Loan. If the related Mortgagor will
use the proceeds of the Mortgage Loan to refinance an existing Mortgage Loan
which is being serviced directly or indirectly by the Master Servicer, the
requirement of an appraisal or other valuation at the time the new Mortgage Loan
is made may be waived. Unless otherwise specified in the related Prospectus
Supplement, for purposes of calculating the CLTV of a Contract relating to a new
Manufactured Home, the value of such Manufactured Home will be no greater than
the sum of a fixed percentage of the list price of the unit actually billed by
the manufacturer to the dealer (exclusive of freight to the dealer site)
including "accessories" identified in the invoice (the "Manufacturer's Invoice
Price"), plus the actual cost of any accessories purchased from the dealer, a
delivery and set-up allowance, depending on the size of the unit, and the cost
of state and local taxes, filing fees and up to three years prepaid hazard
insurance premiums. Unless otherwise specified herein or in the related
Prospectus Supplement, the value of a used Manufactured Home will be either (x)
the appraised value, and National Automobile Dealer's Association book value
plus prepaid taxes and hazard insurance premiums or (y) the sum of (i) the
appraised value of the land to which the Manufactured Home is attached and (ii)
the appraised value of the Manufactured Home. The appraised value of a
Manufactured Home will be based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
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 Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans
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(plus any additional financing by other lenders on the same Mortgaged
Properties) in a particular Pool become equal to or greater than the value of
such Mortgaged Properties, the actual rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the
non-conforming credit mortgage lending industry. An overall decline in the
market value of residential real estate, the general condition of a Mortgaged
Property, or other factors, could adversely affect the values of the Mortgaged
Properties such that the outstanding balances of the Mortgage Loans, together
with any additional liens on the Mortgaged Properties, equal or exceed the value
of the Mortgaged Properties. Under such circumstances, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the non-conforming credit mortgage lending industry.
Certain Mortgage Loans may be secured by junior liens ("Junior Lien
Loans") subordinate to the rights of the mortgagee under any related senior
mortgage(s). The proceeds from any liquidation, insurance or condemnation of
Mortgaged Properties relating to Junior Lien Loans in a Mortgage Pool will be
available to satisfy the principal balance of such Junior Lien Loans only to the
extent that the claims, if any, of all related senior mortgagees, including any
related foreclosure costs, are satisfied in full. In addition, the Master
Servicer may not foreclose on a Mortgaged Property relating to a Junior Lien
Loan unless it forecloses subject to the related senior mortgage or mortgages,
in which case it must either pay the entire amount of each senior mortgage to
the applicable mortgagee at or prior to the foreclosure sale or undertake the
obligation to make payments on each senior mortgage in the event of default
thereunder. Generally, in servicing Junior Lien Loans in its loan portfolios, it
has been the Master Servicer's practice to satisfy each senior mortgage at or
prior to a foreclosure sale but only to the extent that it determines any
amounts so paid will be recoverable from future payments and collections on the
Mortgage Loans or otherwise. The Trusts will not have any source of funds to
satisfy any such senior mortgage or make payments due to any senior mortgagee.
See "Certain Legal Aspects of Mortgage Loans and Related Matters--Foreclosure."
Other factors affecting mortgagors' ability to repay Mortgage Loans
include excessive building resulting in an oversupply of housing stock or a
decrease in employment reducing the demand for units in an area; federal, state
or local regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness of the Mortgaged Properties. To the extent that losses
on the Mortgage Loans are not covered by Credit Enhancements, such losses will
be borne, at least in part, by the Securityholders of the related series.
The Sponsor will cause the Mortgage Loans comprising each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Securities of the related series. The Master
Servicer will service the Mortgage Loans, either directly or through
Sub-Servicers, pursuant to the Pooling and Servicing Agreement and will receive
a fee for such services. See "Mortgage Loan Program" and "The Pooling and
Servicing Agreement." With respect to Mortgage Loans serviced through a
Sub-Servicer, the Master Servicer will remain liable for its servicing
obligations under the related Pooling and Servicing Agreement as if the Master
Servicer alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Sponsor and the Originators with respect to a series of
Securities will be to provide (or, where the Sponsor or an Originator acquired a
Mortgage Loan from another originator, obtain from such originator) certain
representations and warranties concerning the Mortgage Loans and to assign to
the Trustee for such series of Securities the Sponsor's or Originator's rights
with respect to such representations and warranties. See "The Pooling and
Servicing Agreement." The obligations of the Master Servicer with respect to the
Mortgage Loans will consist principally of its contractual servicing obligations
under the related Pooling and Servicing Agreement (including its obligation to
enforce the obligations of the Sub-Servicers or Originators as more fully
described herein under "Mortgage Loan Program--Qualifications of Originators"
and "The Pooling and Servicing Agreement") and its obligation, as described in
the related Prospectus Supplement, to make certain cash advances in the event of
delinquencies in payments on, or prepayments received with respect to, the
Mortgage Loans in the amounts described herein under "Description of the
Securities--Advances." The obligations of a Master Servicer to make advances may
be subject to limitations, to the extent provided herein and in the related
Prospectus Supplement.
Single Family and Cooperative Loans. Unless otherwise specified in the
Prospectus Supplement, single family loans will consist of mortgage loans, deeds
of trust or participation or other beneficial interests therein, secured by
first or junior liens on one- to four-family residential properties ("Single
Family Loans"). The Mortgaged Properties relating to Single Family Loans will
consist of detached or semi-detached one-family dwelling units, two-
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to four-family dwelling units, townhouses, rowhouses, individual condominium
units in condominium developments, individual units in planned unit
developments, and certain mixed use and other dwelling units. Such Mortgaged
Properties may include owner-occupied (which includes vacation and second homes)
and non-owner occupied investment properties.
If so specified, the Single Family Loans may include loans or
participations therein secured by mortgages or deeds of trust on condominium
units in low- or high-rise condominium developments together with such
condominium units' appurtenant interests in the common elements of such
condominium developments. Unless otherwise specified, the Cooperative Loans will
be secured by security interests in or similar liens on stock, shares or
membership certificates issued by cooperatives and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in such cooperatives' buildings.
Multi-family Loans. Multi-family loans will consist of mortgage loans,
deeds of trust or participation or other beneficial interests therein, secured
by first or junior liens on rental apartment buildings or projects containing
five or more residential units ("Multi-family Loans").
Mortgaged Properties that secure Multi-family Loans may include
high-rise, mid-rise and garden apartments. Certain of the Multi-family Loans
may be secured by apartment buildings owned by Cooperatives. In such cases,
the Cooperative owns all the apartment units in the building and all common
areas. The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements that confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a Cooperative must make
a monthly payment to the Cooperative representing such tenant-stockholder's pro
rata share of the Cooperative's payments for its mortgage loan, real property
taxes, maintenance expenses and other capital or ordinary expenses. Those
payments are in addition to any payments of principal and interest the
tenant-stockholder must make on any loans to the tenant-stockholder secured by
its shares in the Cooperative. The Cooperative will be directly responsible for
building management and, in most cases, payment of real estate taxes and hazard
and liability insurance. A Cooperative's ability to meet debt service
obligations on a Multi-family Loan, as well as all other operating expenses,
will be dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the Cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
Home Improvement Loans. Unless otherwise specified in the Prospectus
Supplement, loans to make home improvements may be secured by first or junior
liens on conventional one- to four-family residential properties and
multi-family residential properties ("Home Improvement Loans"). Home Improvement
Loans may be conventional, or may be partially insured by the Federal Housing
Administration ("FHA") or another federal or state agency, as specified in the
related Prospectus Supplement. The loan proceeds from such Home Improvement
Loans are typically disbursed to an escrow agent which, according to guidelines
established by the Originators, releases such proceeds to the contractor upon
completion of the improvements or in draws as the work on the improvements
progresses. Costs incurred by the Mortgagor for loan origination including
origination points and appraisal, legal and title fees, are often included in
the amount financed. In addition, Home Improvement Loans generally provide
additional security to a first or junior mortgage loan because home improvements
typically retain or increase the value of a property.
Contracts. Contracts will consist of manufactured housing conditional
sales contracts and installment sales or loan agreements each secured by a
Manufactured Home ("Contracts"). Contracts may be conventional, insured
partially by the FHA or partially guaranteed by the Veterans Administration, as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, each Contract will be fully amortizing and
will bear interest at its APR.
Unless otherwise specified in the related Prospectus Supplement, the
"Manufactured Homes" securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air
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conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of [this] paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts
contained in the related Trust, among other things, the date of origination of
the Contracts; the Mortgage Rates or the APRs on the Contracts; the Contract
Loan-to-Value Ratios; the minimum and maximum outstanding principal balances as
of the Statistic Calculation Date and the average outstanding principal balance;
the outstanding principal balances of the Contracts included in the related
Trust; and the original maturities of the Contracts and the last maturity date
of any Contract.
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THE MORTGAGE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist primarily of (i) conventional Mortgage Loans, minus
any stripped portion of the interest payments due under the related Mortgage
Note that may have been retained by any Originator or broker ("Originator's
Retained Yield"), or any other interest retained by the Sponsor or any affiliate
of the Sponsor, evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages or deeds of trust or other similar security instruments creating a
lien on single-family (i.e., one- to four-family) residential, multi-family
properties or mixed use properties, or (ii) certificates of interest or
participations in such Mortgage Notes. The Mortgaged Properties will consist
primarily of attached or detached one-family dwelling units, two- to four-family
dwelling units, condominiums, townhouses, row houses, individual units in
planned-unit developments and certain other dwelling units, mixed use properties
and the fee, leasehold or other interests in the underlying real property. The
Mortgaged Properties may be owner-occupied (which includes second and vacation
homes) and non-owner occupied investment properties. If specified in the related
Prospectus Supplement relating to a series of Securities, a Mortgage Pool may
contain cooperative apartment loans ("Cooperative Loans") evidenced by
promissory notes ("Cooperative Notes") secured by security interests in shares
issued by cooperatives and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
related buildings. As used herein, unless the context indicates otherwise,
"Mortgage Loans" include Cooperative Loans, "Mortgaged Properties" include
shares in the related cooperative and the related proprietary leases or
occupancy agreements securing Cooperative Notes, "Mortgage Notes" include
Cooperative Notes and "Mortgages" include security agreements with respect to
Cooperative Notes.
Each Mortgage Loan will be selected by the Sponsor for inclusion in a
Mortgage Pool from among mortgage loans originated by one or more institutions
affiliated with the Sponsor (such affiliated institutions, the "Affiliated
Originators"), or from banks, savings and loan associations, mortgage bankers,
mortgage brokers, investment banking firms, the RTC, the FDIC and other mortgage
loan originators or purchasers not affiliated with the Sponsor (such
unaffiliated institutions, the "Unaffiliated Originators" and, collectively with
the Affiliated Originators, the "Originators"), all as described below under
"Mortgage Loan Program." The characteristics of the Mortgage Loans will be
described in the related Prospectus Supplement. Other mortgage loans available
for acquisition by a Trust may have characteristics that would make them
eligible for inclusion in a Mortgage Pool but may not be selected by the Sponsor
for inclusion in such Mortgage Pool.
Each Security will evidence an interest in only the related Mortgage
Pool and corresponding Trust Estate, and not in any other Mortgage Pool or any
other Trust Estate (except in those limited situations whereby certain
collections on any Mortgage Loans in a related Mortgage Pool in excess of
amounts needed to pay the related securities may be deposited in a common,
master reserve account that provides Credit Enhancement for more than one series
of Securities).
THE MORTGAGE POOLS
Unless otherwise specified below or in the related Prospectus
Supplement, all of the Mortgage Loans in a Mortgage Pool will (i) have payments
that are due monthly or bi-weekly, (ii) be secured by Mortgaged Properties
located in any of the fifty states, the District of Columbia, Puerto Rico or any
other Territories of the United States and (iii) consist of one or more of the
following types of mortgage loans:
(1) Fixed-rate, fully-amortizing mortgage loans (which may
include mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of principal
and interest and terms at origination or modification of generally not
more than 30 years;
(2) ARM Loans having original or modified terms to maturity of
generally not more than 30 years with a related Mortgage Rate that
adjusts periodically, at the intervals described in the related
Prospectus Supplement (which may have adjustments in the amount of
monthly payments at periodic intervals) over the term of the mortgage
loan to equal the sum of a fixed percentage set forth in the related
Mortgage Note (the "Note Margin") and an index (the "Index") to be
specified in the related Prospectus Supplement, such as, by way of
example: (i) U.S. Treasury securities of a specified constant maturity,
(ii)
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weekly auction average investment yield of U.S. Treasury bills of
specified maturities, (iii) the daily Bank Prime Loan rate made
available by the Federal Reserve Board or as quoted by one or more
specified lending institutions, (iv) the cost of funds of member
institutions for the Federal Home Loan Bank of San Francisco, or (v)
the interbank offered rates for U.S. dollar deposits in the London
Markets, each calculated as of a date prior to each scheduled interest
rate adjustment date that will be specified in the related Prospectus
Supplement. The related Prospectus Supplement will set forth the
relevant Index, and the related Prospectus Supplement or the related
Current Report on Form 8-K will indicate the highest, lowest and
weighted-average Note Margin with respect to the ARM Loans in the
related Mortgage Pool. If specified in the related Prospectus
Supplement, an ARM Loan may include a provision that allows the
Mortgagor to convert the adjustable Mortgage Rate to a fixed rate at
some point during the term of such ARM Loan subsequent to the initial
payment date;
(3) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of generally not more than 30
years with monthly payments during the first year calculated on the
basis of an assumed interest rate that will be lower than the Mortgage
Rate applicable to such mortgage loan in subsequent years. Deferred
Interest, if any, will be added to the principal balance of such
mortgage loans;
(4) Balloon mortgage loans ("Balloon Loans"), which are
mortgage loans having original or modified terms to maturity of
generally 5 to 15 years as described in the related Prospectus
Supplement, which may have level monthly payments of principal and
interest based generally on a 10- to 30-year amortization schedule. The
amount of the monthly payment may remain constant until the maturity
date, upon which date the full outstanding principal balance on such
Balloon Loan will be due and payable (such amount, the "Balloon
Amount");
(5) Modified mortgage loans ("Modified Loans"), which are
fixed or adjustable-rate mortgage loans providing for terms at the time
of modification of generally not more than 30 years. Modified Loans may
be mortgage loans which have been consolidated and/or have had various
terms changed, mortgage loans which have been converted from adjustable
rate mortgage loans to fixed rate mortgage loans, or construction loans
which have been converted to permanent mortgage loans;
(6) Another type of mortgage loan described in the related
Prospectus Supplement; or
(7) As more fully described in the related Prospectus
Supplement, the Mortgage Loans may consist, in whole or in part, of
Revolving Credit Line Loans. Interest on each Revolving Credit Line
Loan, excluding introductory rates offered from time to time during
promotional periods, may be computed and payable monthly on the average
daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a
Revolving Credit Line Loan, principal amounts on such Revolving Credit
Line Loan may be drawn down (up to a maximum amount as set forth in the
related Prospectus Supplement) or repaid. If specified in the related
Prospectus Supplement, new draws by borrowers under the Revolving
Credit Line Loans will automatically become part of the Trust Estate
described in such Prospectus Supplement. As a result, the aggregate
balance of the Revolving Credit Line Loans will fluctuate from day to
day as new draws by borrowers are added to the Trust Estate and
principal payments are applied to such balances and such amounts will
usually differ each day, as more specifically described in the related
Prospectus Supplement. Under certain circumstances, under a Revolving
Credit Line Loan, a borrower may, during the related draw period,
choose an interest only payment option, during which the borrower is
obligated to pay only the amount of interest which accrues on the loan
during the billing cycle, and may also elect to pay all or a portion of
the principal. An interest only payment option may terminate at the end
of the related draw period, after which the borrower must begin paying
at least a minimum monthly portion of the average outstanding principal
balance of the loan.
If provided for in the related Prospectus Supplement, a Mortgage Pool
may contain either or both of the following types of mortgage loans (i) ARM
Loans which allow the Mortgagors to convert the adjustable rates on such
Mortgage Loans to a fixed rate at some point during the life of such Mortgage
Loans and (ii) fixed rate mortgage loans which allow the Mortgagors to convert
the fixed rates on such Mortgage Loans to an adjustable rate at some point
during the life of such Mortgage Loans (each such Mortgage Loan described in (i)
and (ii) above, a "Convertible Mortgage Loan").
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If provided for in the related Prospectus Supplement, certain of the
Mortgage Loans may be Buydown Mortgage Loans pursuant to which the monthly
payments made by the Mortgagor during the Buydown Period will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) Buydown Funds funded by the Originator of the Mortgaged
Property or another source (including the Master Servicer or the related
Originator) and placed in the Buydown Account and (ii) if the Buydown Funds are
contributed on a present value basis, investment earnings on such Buydown Funds.
See "Description of the Securities--Payments on Mortgage Loans; Deposits to
Distribution Account." The terms of the Buydown Mortgage Loans, if such loans
are included in a Trust, will be as set forth in the related Prospectus
Supplement.
The Sponsor will cause the Mortgage Loans constituting each Mortgage
Pool to be assigned to the Trustee named in the related Prospectus Supplement,
for the benefit of the holders of all of the Securities of a series. The Master
Servicer named in the related Prospectus Supplement will service the Mortgage
Loans, either directly or through other mortgage servicing institutions
(Sub-Servicers), pursuant to a Pooling and Servicing Agreement and will receive
a fee for such services. See "Mortgage Loan Program" and "Description of the
Securities." With respect to those Mortgage Loans serviced by the Master
Servicer through a Sub-Servicer, the Master Servicer will remain liable for its
servicing obligations under the related Pooling and Servicing Agreement as if
the Master Servicer alone were servicing such Mortgage Loans, unless otherwise
described in the related Prospectus Supplement.
The Sponsor and/or certain Originators may make certain representations
and warranties regarding the Mortgage Loans, but its assignment of the Mortgage
Loans to the Trustee will be without recourse. See "Description of the
Securities--Assignment of Mortgage Loans." The Master Servicer's obligations
with respect to the Mortgage Loans will consist principally of its contractual
servicing obligations under the related Pooling and Servicing Agreement
(including its obligation to enforce certain purchase and other obligations of
Sub-Servicers and of Originators, as more fully described herein under "Mortgage
Loan Program--Representations by Originators," "--Sub-Servicing by Originators"
and "Description of the Securities--Assignment of Mortgage Loans," and its
obligation, if any, to make certain cash advances in the event of delinquencies
in payments on or with respect to the Mortgage Loans and interest shortfalls due
to prepayment of Mortgage Loans, in amounts described herein under "Description
of the Securities--Advances"). The obligation of the Master Servicer to make
delinquency advances will be limited to the extent, in its good faith business
judgment such delinquency advances would be ultimately recoverable from the
proceeds of liquidation of the Mortgage Loans. See "Description of the
Securities--Advances."
MORTGAGE LOAN PROGRAM
As a general matter, the Sponsor's Mortgage Loan program will consist
of the origination and packaging of Mortgage Loans relating to non-conforming
credits. For purposes hereof, "non-conforming credit" means a mortgage loan
which, based upon standard underwriting guidelines, is ineligible for purchase
by FNMA or FHLMC due to credit characteristics that do not meet FNMA or FHLMC
guidelines, respectively. However, certain of the Mortgage Loans will relate to
FNMA or FHLMC conforming credits.
The Mortgagors generally will have taken out the related Mortgage Loans
for one or more of four reasons: (i) to purchase the related Mortgaged Property,
(ii) to refinance an existing mortgage loan on more favorable terms, (iii) to
consolidate debt, or (iv) to obtain cash proceeds by borrowing against the
Mortgagor's equity in the related Mortgaged Property; the Mortgage Loans
described in (i) are commonly referred to as purchase money loans and the
Mortgage Loans described in (ii), (iii) and (iv) on the whole are commonly
referred to as home equity loans.
It is the Sponsor's practice to solicit existing Mortgagors with
respect to the possible refinancing of their existing Mortgages.
UNDERWRITING GUIDELINES
As more fully described below under "Qualifications of Originators" and
as may also be described in greater detail in the related Prospectus Supplement,
there are various types of Originators that may participate in the Sponsor's
Mortgage Loan Program. Under the Sponsor's Mortgage Loan Program, the Sponsor
purchases and originates Mortgage Loans pursuant to three types of underwriting
guidelines: (1) standard underwriting guidelines according to the Sponsor's
Originator Guide, as modified from time to time, used by Affiliated Originators
and Unaffiliated Originators ("Sponsor's Guidelines"), (2) underwriting
guidelines utilized by certain Unaffiliated
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Originators and approved by the Sponsor ("Approved Guidelines"), and (3)
underwriting guidelines ("Bulk Guidelines") used by Unaffiliated Originators of
portfolios of Mortgage Loans subsequently purchased in whole or part by the
Sponsor as bulk acquisitions ("Bulk Acquisitions"). The respective underwriting
guidelines are described below.
Sponsor's Guidelines. The Sponsor's Guidelines are set forth in the
Sponsor's Originator Guide. The Sponsor's Guidelines are revised continuously
based on opportunities and prevailing conditions in the nonconforming credit
residential mortgage market, as well as the expected market for the resulting
Securities.
Mortgage Loans originated by Affiliated Originators generally will, and
Mortgage Loans originated by Unaffiliated Originators may have been, originated
in accordance with the Sponsor's Guidelines as set forth in the Sponsor's
Originator Guide. However, certain of the Mortgage Loans may be employee or
preferred customer loans with respect to which, in accordance with such
Affiliate's mortgage loan programs, no income or asset verifications were
required. In addition, certain Originators may originate Mortgage Loans in
satisfaction of specified requirements of federal or state law applicable to
certain Originators, such as, by way of illustration, the federal Community
Reinvestment Act of 1977, which is applicable to banks; such Mortgage Loans
generally will not have been originated pursuant to the Sponsor's standard
underwriting guidelines applicable to nonconforming loans but may have been
originated pursuant to alternative guidelines applicable to such loans. The
Sponsor will not review any Affiliated Originator mortgage loans for conformity
with the Sponsor's Guidelines set forth in the Sponsor's Originator Guide. The
Sponsor generally will review or cause to be reviewed only a limited portion of
the Mortgage Loans in any delivery of Mortgage Loans from Unaffiliated
Originators for conformity with the Sponsor's Originator Guide.
The following is a brief description of the Sponsor's Guidelines set
forth in the Sponsor's Originator Guide customarily and currently employed by
the Sponsor. The Sponsor believes that these standards are consistent with those
generally used by lenders in the business of making mortgage loans based on
non-conforming credits. The underwriting process is intended to assess both the
prospective borrower's ability to repay and the adequacy of the real property as
collateral for the loan granted. The general appreciation in value of real
estate experienced in the past has been a factor in limiting the Master
Servicer's loss experience on its portfolio of one- to four-family residential
mortgage loans. However, the past pattern of appreciation in value of the real
property securing such loans has not continued, and a depreciation in value has
occurred and may continue to occur in some market areas, and may occur in
others.
The Sponsor's Guidelines permit the origination and purchase of
mortgage loans with multi-tiered credit characteristics tailored to individual
credit profiles. In general, the Sponsor's Guidelines require an analysis of the
equity in the collateral, the payment history of the borrower, the borrower's
ability to repay debt, the property type, and the characteristics of the
underlying first mortgage, if any. A lower maximum CLTV is required for lower
gradations of credit quality and higher property values.
The Sponsor's Guidelines permit the origination or purchase of fixed or
adjustable rate loans that either fully amortize over a period generally not to
exceed 30 years or, in the case of a balloon mortgage, generally amortize based
on a 30-year or less amortization schedule with a due date and a "balloon"
payment due prior to the 30 year period.
The homes used for collateral to secure the loans may be either owner
occupied (which includes second and vacation homes) or non-owner occupied
investor properties which, in either case are single-family residences (which
may be detached, part of a two- to four-family dwelling, a condominium unit or a
unit in a planned unit development). The Sponsor's Guidelines require that the
CLTV of a Mortgage Loan generally not exceed 85%, after taking into account the
amount of any primary mortgage insurance applicable to such Mortgage Loan.
If a senior mortgage exists, the lender may first review the senior
mortgage documentation. If it contains open end advance or negative amortization
provisions, the maximum potential senior mortgage balance may be used, although
for certain of the Sponsor's products the current balance may be used in
calculating the CLTV which determines the maximum loan amount. The Sponsor's
Guidelines do not permit the origination or purchase of loans where the senior
mortgage contains a provision pursuant to which the senior mortgagee may share
in any appreciation of the Mortgaged Property.
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In most cases, the value of each property proposed as security for a
mortgage loan is required to be determined by a full appraisal. A limited
appraisal of a property, conducted on a drive-by basis, may be utilized. Two
full appraisals are generally required for properties valued over $500,000.
Appraisals are required to be completed by qualified professional
appraisers. The Sponsor evaluates the performance of appraisers and maintains a
current disapproved appraiser list.
The Sponsor's Guidelines have provided for the origination of loans
under three general loan programs: (i) a full verification program for salaried
or self-employed borrowers, (ii) a "lite" documentation program for borrowers
who may have income which cannot be verified by traditional methods and (iii) a
non-income verification program for self-employed borrowers only. However, the
Sponsor's Guidelines allow for certain borrowers with existing loans to
refinance such loans with either limited, or no, verification of income. The
Sponsor may also purchase pools of loans which may include some loans originated
under a non-income verification program. For the Sponsor's full verification
process, each mortgage applicant is required to provide, and the Sponsor or its
designee is required to verify, personal financial information. The applicant's
total monthly obligations (including principal and interest on each mortgage,
tax assessments, other loans, charge accounts and all other scheduled
indebtedness) generally (in the absence of countervailing considerations, such
as a lower Combined Loan-to-Value Ratio or a price adjustment) should not exceed
the applicant's ability to pay. Applicants who are salaried employees must
provide current employment information in addition to recent employment history.
The Sponsor or its designee verify this information for salaried borrowers based
on written confirmation from employers or a combination of the most recent pay
stub, the most recent W-2 tax form and telephone confirmation from the employer.
Self-employed applicants are generally required to be self-employed in the same
field for a minimum of two years. The self-employed applicant is generally
required to provide personal and business financial statements and signed copies
of complete federal income tax returns (including schedules) filed for the most
recent two years. For the Sponsor's "lite" documentation program the borrower
must establish proof of cash flow trends to support the borrower's income. Such
proof can include business bank statements or personal bank statements. For the
Sponsor's non-income verifier program, proof of two year's history of
self-employment plus proof of current self-employed status is required. The
applicant's debt-to-income ratio is calculated based on income as certified by
the borrower on the application and must be reasonable.
A credit report by an independent, nationally recognized credit
reporting agency is required reflecting the applicant's complete credit history.
The credit report should reflect all delinquencies of 30 days or more,
repossessions, judgments, foreclosures, garnishments, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records. Verification is required to be obtained of the senior mortgage balance,
if any, the status and whether local taxes, interest, insurance and assessments
are included in the applicant's monthly payment. All taxes and assessments not
included in the payment are required to be verified as current.
In connection with purchase-money loans, the Sponsor's Guidelines
require (x) (i) an acceptable source of downpayment funds, (ii) verification of
the source of the downpayment funds and (iii) adequate cash reserves or (y)
adequate equity in the collateral property.
Certain laws protect loan applicants by offering them a time frame
after loan documents are signed, termed the rescission period, during which the
applicant has the right to cancel the loan. The rescission period must have
expired prior to funding a loan and may not be waived by the applicant except as
permitted by law.
Unless otherwise disclosed in the related Prospectus Supplement, the
Sponsor's Guidelines generally require title insurance coverage issued by an
approved ALTA or CLTA title insurance company on each Mortgage Loan it
purchases. The Sponsor, the related Originator and/or their assignees generally
are named as the insured. Title insurance policies indicate the lien position of
the mortgage loan and protect the insured against loss if the title or lien
position is not as indicated.
The applicant is required to secure property insurance in an amount
sufficient to cover the new loan and any prior mortgage. If the sum of the
outstanding first mortgage, if any, and the related mortgage loan exceeds
replacement value (the cost of rebuilding the subject property, which generally
does not include land value), insurance equal to replacement value may be
accepted. The Sponsor or its designee is required to ensure that its name
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and address is properly added to the "Mortgagee Clause" of the insurance policy.
In the event the Sponsor or the related Originator's name is added to a "Loss
Payee Clause" and the policy does not provide for written notice of policy
changes or cancellation, an endorsement adding such provision is required.
Approved Guidelines. The Sponsor may cause a Trust to acquire Mortgage
Loans underwritten pursuant to underwriting guidelines that may differ from the
Sponsor's Guidelines as set forth in the Sponsor's Originator Guide. Certain of
the Mortgage Loans will be acquired in negotiated transactions, and such
negotiated transactions may be governed by agreements ("Master Commitments")
relating to ongoing acquisitions of Mortgage Loans by the Sponsor, from
Originators who will represent that the Mortgage Loans have been originated in
accordance with underwriting guidelines agreed to by the Sponsor. Certain other
Mortgage Loans will be acquired from Originators that will represent that the
Mortgage Loans were originated pursuant to underwriting guidelines determined by
a mortgage insurance company acceptable to the Sponsor. The Sponsor will accept
a certification from such insurance company as to a Mortgage Loan's insurability
in a mortgage pool as of the date of certification as evidence of a Mortgage
Loan conforming to applicable underwriting standards. Such certifications likely
will have been issued before the purchase of the Mortgage Loan by the Sponsor.
The Sponsor only will perform random quality assurance reviews on Mortgage Loans
delivered with such certifications.
The underwriting standards utilized in negotiated transactions and
Master Commitments and the underwriting standards of insurance companies may
vary substantially from the Sponsor's Guidelines. All of the underwriting
guidelines will provide an underwriter with information to evaluate either the
security for the related Mortgage Loan, which security consists primarily of the
borrower's repayment ability or the adequacy of the Mortgaged Property as
collateral, or a combination of both. Due to the variety of underwriting
guidelines and review procedures that may be applicable to the Mortgage Loans
included in any Mortgage Pool, the related Prospectus Supplement will not
distinguish among the various underwriting guidelines applicable to the Mortgage
Loans nor describe any review for compliance with applicable underwriting
guidelines performed by the Sponsor. Moreover, there can be no assurance that
every Mortgage Loan was originated in conformity with the Approved Guidelines in
all material respects, or that the quality or performance of Mortgage Loans
underwritten pursuant to varying guidelines as described above will be
equivalent under all circumstances.
Bulk Guidelines. Bulk portfolios of Mortgage Loans may be originated by
a variety of Originators under several different underwriting guidelines. For
bulk portfolios which are seasoned for a period of time, the Sponsor's
underwriting review of bulk portfolios of Mortgage Loans focuses primarily on
payment histories and estimated current values based on estimated property
appreciation or depreciation and loan amortization. Mortgage Loans that conform
to the related Bulk Guidelines may not conform to the requirements of either the
Sponsor's Guidelines or the Approved Guidelines. For example, the Sponsor may
purchase Mortgage Loans in bulk portfolios with Combined Loan-to-Value Ratios in
excess of that required under the Sponsor's Guidelines, without title insurance,
or with nonconforming appraisal methods such as tax assessments. Bulk
Acquisition portfolios may be purchased servicing released or retained. If
servicing is retained, the Originator must meet certain minimum requirements, as
modified from time to time, by the Sponsor. The Sponsor generally will cause the
Mortgage Loans acquired in a Bulk Acquisition to be reunderwritten on a sample
basis. Such reunderwriting may be performed by the Sponsor, the Master Servicer
or by a third party acting at the direction of the Sponsor.
Quality Control. The Master Servicer maintains a quality control
department which generally reviews loans originated by Affiliated Originators.
The quality control department randomly selects a portion of the files for
underwriting review. The Sponsor or its Affiliated Originators also cause
appraisal reviews to be performed on a random sample of loan production.
A periodic report is distributed to senior management and the
production offices describing material exceptions to underwriting and appraisal
guidelines, legal and regulatory requirements and variances based on the
reverification process. Appraisers demonstrating chronic errors, omissions or
large valuation errors are removed from the approved appraiser list. Training
programs, additional audits and performance evaluations for underwriting
personnel and management are influenced by the results of the quality control
review.
The Sponsor generally will cause Mortgage Loans acquired from
Unaffiliated Originators to be (i) reunderwritten for the purpose of determining
whether such Mortgage Loans were originated in accordance with the applicable
underwriting guidelines, (ii) reviewed to assess the accuracy of the appraised
values, and (iii) audited to
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determine the accuracy of the loan computer system as compared to the loan
files. Such process may consist of a review of all such Mortgage Loans or may be
performed on a sample basis. Such reunderwriting may be performed by the
Sponsor, the Master Servicer or a third party acting at the direction of the
Sponsor.
QUALIFICATIONS OF ORIGINATORS
Each Originator from which a Mortgage Loan is acquired will have been
accepted by the Sponsor for participation in the Sponsor's mortgage loan
program. Certain Unaffiliated Originators ("Conduit Participants") may be
qualified to enter into agreements to sell mortgage loans to the Sponsor
pursuant to Master Commitments which provide for the periodic purchase and sale
of loans meeting certain specified requirements.
Loans acquired from Unaffiliated Originators other than Conduit
Participants will be acquired on a "spot" basis, or in connection with a Bulk
Acquisition. Unless otherwise described in the related Prospectus Supplement
with respect to certain specified Unaffiliated Originators (in which case any
remedies for breach will lie only against such Unaffiliated Originator), the
Sponsor will make directly, or will guarantee compliance with, any
representations and warranties made by any Unaffiliated Originator, with respect
to the Mortgage Loans originated by it and acquired by a Trust.
All Conduit Participants must have received a satisfactory review by
the Sponsor of its operating procedures. All Unaffiliated Originators will have
delinquency and foreclosure rates monitored and maintained at levels acceptable
to the Sponsor. All Unaffiliated Originators are required to originate mortgage
loans in accordance with the applicable underwriting standards. However, with
respect to any Originator, some of the generally applicable underwriting
standards described herein and in the Sponsor's Originator Guide may be modified
or waived with respect to certain Mortgage Loans originated by such Originators.
The Resolution Trust Corporation (the "RTC") or the Federal Deposit
Insurance Corporation (the "FDIC") (either in their respective corporate
capacities or as receiver or conservator for a depository institution) may also
be an Originator of the Mortgage Loans. The RTC and the FDIC are together
referred to as the "Federal Corporations". The RTC was established pursuant to
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), which was enacted in response to the financial crisis of the thrift
industry and the Federal Savings and Loan Insurance Corporation. The purpose of
FIRREA is to restore the public's confidence in the savings and loan industry in
order to ensure a viable system of affordable housing finance as well as to
improve the supervision of savings associations and promote the independence of
the FDIC. The FDIC is an independent executive agency originally established by
the Banking Act of 1933 to insure the deposits of all banks entitled to federal
deposit insurance under the Federal Reserve Act and Federal Deposit Insurance
Act. The FDIC administers the system of nationwide deposit insurance (mutual
guaranty of deposits) for United States Banks and, together with the United
States Comptroller of the Currency, regulates in areas related to the
maintenance of reserves for certain types of deposits, the maintenance of
certain financial ratios, transactions with affiliates and a broad range of
other banking practices.
The Sponsor monitors the Originators and the Sub-Servicers under the
control of a Federal Corporation, as well as those Originators and Sub-Servicers
that are insolvent or in receivership or conservatorship or otherwise
financially distressed. Such Originators may not be able or permitted to
repurchase Mortgage Loans for which there has been a breach of representation
and warranty. Moreover, any such Originator may make no representations and
warranties with respect to Mortgage Loans sold by it. The Federal Corporations
(either in their respective corporate capacities or as receiver for a depository
institution) may also originate Mortgage Loans, in which event neither the
related Federal Corporation nor the depository institution for which such
Federal Corporation is acting as receiver may make representations and
warranties with respect to the Mortgage Loans that such Federal Corporation
sells, or such Federal Corporation may make only limited representations and
warranties (for example, that the related legal documents are enforceable). A
Federal Corporation may have no obligation to repurchase any Mortgage Loan for a
breach of a representation and warranty. If as a result of a breach of
representation and warranty an Originator is required to repurchase a Mortgage
Loan but is not permitted or otherwise fails to do so or if representations and
warranties are not made by an Originator, to the extent that neither the Sponsor
nor any other entity has assumed the representations and warranties or made
representations and warranties, neither the Sponsor nor that entity will be
required to repurchase such Mortgage Loan and, consequently such Mortgage Loan
will remain in the related Mortgage Pool and any related losses will be borne by
the Securityholders or by the related Credit Enhancement,
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if any. In addition, loans which are purchased either directly or indirectly
from a Federal Corporation may be subject to a contract right of such Federal
Corporation to repurchase such loans under certain limited circumstances.
SUB-SERVICERS
Each Originator of a Mortgage Loan will act as Sub-Servicer for such
Mortgage Loan pursuant to an agreement between the Master Servicer and the
Sub-Servicer (a "Sub-Servicing Agreement") unless the servicing obligations are
released to the Master Servicer or transferred to a servicer approved by the
Master Servicer. An Affiliated Originator of a Mortgage Loan may act as the
Sub-Servicer for such Mortgage Loan unless the other related servicing
obligations are released or transferred. An Unaffiliated Originator acting as a
Sub-Servicer for the Mortgage Loans will be required to meet certain additional
standards with respect to its mortgage loan servicing portfolio, GAAP tangible
net worth and other specified qualifications.
REPRESENTATIONS BY ORIGINATORS
Unless otherwise specified in the related Prospectus Supplement, each
Originator will have made representations and warranties in respect of the
Mortgage Loans sold by such Originator and evidenced by a series of Securities.
Such representations and warranties generally include, among other things, that
at the time of the sale by the Originator to the Sponsor of each Mortgage Loan:
(i) the information with respect to each Mortgage Loan set forth in the
Schedules of Mortgage Loans is true and correct as of the related Cut-Off Date;
(ii) each Mortgage Loan being transferred to the Trust which is a REMIC is a
qualified mortgage under the REMIC provisions of the Code and is a Mortgage;
(iii) each Mortgaged Property is improved by a single (one- to four-) family
residential dwelling or a multi-family structure, which may include condominiums
and townhouses; (iv) each Mortgage Loan had, at the time of origination, either
an attorney's certification of title or a title search or title policy; (v) as
of the related Cut-Off Date each Mortgage Loan is secured by a valid and
subsisting lien of record on the Mortgaged Property having the priority
indicated on the related Schedule of Mortgage Loans subject in all cases to
exceptions to title set forth in the title insurance policy, if any, with
respect to the related Mortgage Loan; (vi) each Originator held good and
indefeasible title to, and was the sole owner of, each Mortgage Loan conveyed by
such Originator; and (vii) each Mortgage Loan was originated in accordance with
law and is the valid, legal and binding obligation of the related Mortgagor.
Unless otherwise described in the related Prospectus Supplement, all of
the representations and warranties of an Originator in respect of a Mortgage
Loan will be made as of the date on which such Originator sells the Mortgage
Loan to the Sponsor; the date as of which such representations and warranties
are made thus may be a date prior to the date of the issuance of the related
series of Securities. A substantial period of time may elapse between the date
as of which the representations and warranties are made and the later date of
issuance of the related series of Securities.
The Sponsor will assign to the Trustee for the benefit of the holders
of the related series of Securities all of its right, title and interest in each
agreement by which it acquires a Mortgage Loan from an Originator insofar as
such agreement relates to the representations and warranties made by an
Originator in respect of such Mortgage Loan and any remedies provided for breach
of such representations and warranties. If an Originator cannot cure a breach of
any representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Securityholders in such
Mortgage Loan within a time period specified in the related Pooling and
Servicing Agreement, such Originator and/or the Sponsor will be obligated to
purchase from the related Trust such Mortgage Loan at a price (the "Loan
Purchase Price") set forth in the related Pooling and Servicing Agreement which
Loan Purchase Price will be equal to the principal balance thereof as of the
date of purchase plus one month's interest at the Mortgage Rate less the amount,
expressed as a percentage per annum, payable in respect of master servicing
compensation or subservicing compensation, as applicable, and the Originator's
Retained Yield, if any, together with, without duplication, the aggregate amount
of all delinquent interest, if any, net of Servicing Advances.
Unless otherwise specified in the related Prospectus Supplement, as to
any such Mortgage Loan required to be purchased by an Originator and/or the
Sponsor, as provided above, rather than repurchase the Mortgage Loan, the Master
Servicer may, at its sole option, remove such Mortgage Loan (a "Deleted Mortgage
Loan") from the related Trust and cause the Sponsor to substitute in its place
another Mortgage Loan of like kind (a "Qualified
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Replacement Mortgage" as such term is defined in the related Pooling and
Servicing Agreement). With respect to a Trust for which a REMIC election is to
be made, except as otherwise provided in the Prospectus Supplement relating to a
series of Securities, such substitution of a defective Mortgage Loan must be
effected within two years of the date of the initial issuance of the Securities,
and may not be made if such substitution would cause the Trust to not qualify as
a REMIC or result in a prohibited transaction tax under the Code. Unless
otherwise specified in the related Prospectus Supplement or Pooling and
Servicing Agreement, an Unaffiliated Originator generally will have no option to
substitute for a Mortgage Loan that it is obligated to repurchase in connection
with a breach of a representation and warranty.
The Master Servicer will be required under the applicable Pooling and
Servicing Agreement to enforce such purchase or substitution obligations for the
benefit of the Trustee and the Securityholders, following the practices it would
employ in its good faith business judgment if it were the owner of such Mortgage
Loan; provided, however, that this purchase or substitution obligation will in
no event become an obligation of the Master Servicer in the event the Originator
fails to honor such obligation. If the Originator fails to repurchase or
substitute a loan and no breach of the Sponsor's representations has occurred,
the Originator's purchase obligation will in no event become an obligation of
the Sponsor. Unless otherwise specified in the related Prospectus Supplement,
the foregoing will constitute the sole remedy available to Securityholders or
the Trustee for a breach of representation by an Originator in its capacity as a
seller of Mortgage Loans to the Sponsor.
Unless otherwise described in the related Prospectus Supplement with
respect to certain Unaffiliated Originators (in which case any remedies for
breach will lie only against such Unaffiliated Originator), the Sponsor will
make directly, or will guarantee compliance with, any representations and
warranties made by any Unaffiliated Originator with respect to the Mortgage
Loans originated or purchased by it and acquired by a Trust.
Notwithstanding the foregoing with respect to any Originator that
requests the Master Servicer's consent to the transfer of sub-servicing rights
relating to any Mortgage Loans to a successor servicer, the Master Servicer may
release such Originator from liability, under its representations and warranties
described above, upon the assumption by such successor servicer of the
Originator's liability for such representations and warranties as of the date
they were made. In that event, the Master Servicer's rights under the instrument
by which such successor servicer assumes the Originator's liability will be
assigned to the Trustee, and such successor servicer shall be deemed to be the
"Originator" for purposes of the foregoing provisions.
SUB-SERVICING BY ORIGINATORS
Each Originator of a Mortgage Loan will act as the Sub-Servicer for
such Mortgage Loan pursuant to a Sub-Servicing Agreement unless servicing is
released to the Master Servicer or has been transferred to a servicer approved
by the Master Servicer. The Master Servicer may, in turn, assign such
sub-servicing to designated sub-servicers that will be qualified Originators and
may include affiliates of the Sponsor. While such a Sub-Servicing Agreement will
be a contract solely between the Master Servicer and the Sub-Servicer, the
Pooling and Servicing Agreement pursuant to which a series of Securities is
issued will provide that, if for any reason the Master Servicer for such series
of Securities is no longer the master servicer of the related Mortgage Loans,
the Trustee or any successor Master Servicer must recognize the Sub-Servicer's
rights and obligations under such Sub-Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, with
the approval of the Master Servicer, a Sub-Servicer may delegate its servicing
obligations to third-party servicers, but such Sub-Servicer will remain
obligated under the related Sub-Servicing Agreement. Each Sub-Servicer will be
required to perform the customary functions of a servicer, including collection
of payments from Mortgagors and remittance of such collections to the Master
Servicer; maintenance of hazard insurance and filing and settlement of claims
thereunder, subject in certain cases to the right of the Master Servicer to
approve in advance any such settlement; maintenance of escrow or impound
accounts of Mortgagors for payment of taxes, insurance and other items required
to be paid by the Mortgagor pursuant to the Mortgage Loan; processing of
assumptions or substitutions; attempting to cure delinquencies; supervising
foreclosures; inspecting and managing Mortgaged Properties under certain
circumstances; and maintaining accounting records relating to the Mortgage
Loans. A Sub-Servicer also may be obligated to make advances to the Master
Servicer in respect of delinquent installments of principal and/or interest (net
of any sub-servicing or other compensation) on Mortgage Loans, as described more
fully under "Description of the Securities--Advances," and in respect of certain
taxes and insurance premiums not paid on a timely basis by Mortgagors. A Sub-
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Servicer may also be obligated to deposit amounts in respect of Compensating
Interest to the related Principal and Interest Account in connection with
prepayments of principal received and applied to reduce the outstanding
principal balance of a Mortgage Loan. No assurance can be given that the
Sub-Servicers will carry out their advance or payment obligations, if any, with
respect to the Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, a Sub-Servicer may transfer its servicing obligations to
another entity that has been approved for participation in the Sponsor's loan
purchase programs, but only with the prior written approval of the Master
Servicer.
As compensation for its servicing duties, the Sub-Servicer may be
entitled to a Base Servicing Fee. The Sub-Servicer may also be entitled to
collect and retain, as part of its servicing compensation, any late charges or
prepayment penalties provided in the Mortgage Note or related instruments. The
Sub-Servicer will be entitled to reimbursement for certain expenditures that it
makes, generally to the same extent that the Master Servicer would be reimbursed
under the applicable Pooling and Servicing Agreement. See "The Pooling and
Servicing Agreement--Servicing and Other Compensation and Payment of Expenses;
Originator's Retained Yield."
Each Sub-Servicer will be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer is required to maintain a fidelity bond and an
errors and omission policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan
pursuant to the terms of the Sub-Servicing Agreement for the entire term of such
Mortgage Loan, unless the Sub-Servicing Agreement is terminated earlier by the
Master Servicer or unless servicing is released to the Master Servicer. The
Master Servicer generally may terminate a Sub-Servicing Agreement immediately
upon the giving of notice upon certain stated events, including the violation of
such Sub-Servicing Agreement by the Sub-Servicer, or following a specified
period after notice to the Sub-Servicer without cause upon payment of an amount
equal to a specified termination fee calculated as a specified percentage of the
aggregate outstanding principal balance of all mortgage loans, including the
Mortgage Loans serviced by such Sub-Servicer pursuant to a Sub-Servicing
Agreement and certain transfer fees.
The Master Servicer may agree with a Sub-Servicer to amend a
Sub-Servicing Agreement. Upon termination of a Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Mortgage Loans or enter into
one or more new Sub-Servicing Agreements. If the Master Servicer acts as
servicer, it will not assume liability for the representations and warranties of
the Sub-Servicer that it replaces. If the Master Servicer enters into a new
Sub-Servicing Agreement, each new Sub-Servicer either must be an Originator,
meet the standards for becoming an Originator or have such servicing experience
that is otherwise satisfactory to the Master Servicer. The Master Servicer may
make reasonable efforts to have the new Sub-Servicer assume liability for the
representations and warranties of the terminated Sub-Servicer, but no assurance
can be given that such an assumption will occur and, in any event, if the new
Sub-Servicer is an affiliate of the Master Servicer, the liability for such
representations and warranties will not be assumed by such new Sub-Servicer. In
the event of such an assumption, the Master Servicer may in the exercise of its
business judgment release the terminated Sub-Servicer from liability in respect
of such representations and warranties. Any amendments to a Sub-Servicing
Agreement or to a new Sub-Servicing Agreement may contain provisions different
from those described above that are in effect in the original Sub-Servicing
Agreements. However, the Pooling and Servicing Agreement for each Trust Estate
will provide that any such amendment or new agreement may not be inconsistent
with such Pooling and Servicing Agreement to the extent that it would materially
and adversely affect the interests of the Securityholders.
DESCRIPTION OF THE SECURITIES
GENERAL
The Securities will be issued in series. Each series of Securities (or,
in certain instances, two or more series of Securities) will be issued pursuant
to a Pooling and Servicing Agreement. The following summaries (together with
additional summaries under "The Pooling and Servicing Agreement" below) describe
all material terms and provisions relating to the Securities common to each
Pooling and Servicing Agreement. The summaries do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, all of the
provisions of the Pooling and Servicing Agreement for the related Trust and the
related Prospectus Supplement.
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The Securities will consist of two basic types: (i) Securities of the
fixed-income type ("Fixed-Income Securities") and (ii) Securities of the equity
participation type ("Equity Securities"). No Class of Equity Securities will be
offered pursuant to this Prospectus or any Prospectus Supplement related hereto.
Fixed-Income Securities generally will be styled as debt instruments, having a
principal balance and a specified interest rate ("Interest Rate"). Fixed-Income
Securities may be either beneficial ownership interests in the related Mortgage
Loans held by the related Trust, or may represent debt secured by such Mortgage
Loans. Each series or class of Fixed-Income Securities may have a different
Interest Rate, which may be a fixed, variable or adjustable Interest Rate. The
related Prospectus Supplement will specify the Interest Rate for each series or
class of Fixed-Income Securities, or the initial Interest Rate and the method
for determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities
("Strip Securities") entitled to (i) principal distributions, with
disproportionate, nominal or no interest distributions, or (ii) interest
distributions, with disproportionate, nominal or no principal distributions. In
addition, a series may include two or more classes of Fixed-Income Securities
that differ as to timing, sequential order, priority of payment, Interest Rate
or amount of distributions of principal or interest or both, or as to which
distributions of principal or interest or both on any class may be made upon the
occurrence of specified events, in accordance with a schedule or formula, or on
the basis of collections from designated portions of the related Mortgage Pool,
which series may include one or more classes of Fixed-Income Securities
("Accrual Securities"), as to which certain accrued interest will not be
distributed but rather will be added to the principal balance (or nominal
principal balance in the case of Accrual Securities which are also Strip
Securities) thereof on each Payment Date, as hereinafter defined and in the
manner described in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series of
Securities may include one or more classes of Fixed-Income Securities
(collectively, the "Senior Securities") that are senior to one or more classes
of Fixed-Income Securities (collectively, the "Subordinate Securities") in
respect of certain distributions of principal and interest and allocations of
losses on Mortgage Loans. In addition, certain classes of Senior (or
Subordinate) Securities may be senior to other classes of Senior (or
Subordinate) Securities in respect of such distributions or losses.
Equity Securities will represent the right to receive the proceeds of
the related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior Securities
and Subordinate Securities), and following any required deposits to any reserve
account that may be established for the benefit of the Fixed-Income Securities.
Equity Securities may constitute what are commonly referred to as the "residual
interest," "seller's interest" or the "general partnership interest," depending
upon the treatment of the related Trust for federal income tax purposes. As
distinguished from the Fixed-Income Securities, the Equity Securities will not
be styled as having principal and interest components. Any losses suffered by
the related Trust first will be absorbed by the related class of Equity
Securities, as described herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered pursuant to this
Prospectus or any Prospectus Supplement related hereto. Equity Securities may be
offered on a private placement basis or pursuant to a separate Registration
Statement to be filed by the Sponsor. In addition, the Sponsor and its
affiliates may initially or permanently hold any Equity Securities issued by any
Trust.
General Payment Terms of Securities. As provided in the related Pooling
and Servicing Agreement and as described in the related Prospectus Supplement,
Securityholders will be entitled to receive payments on their Securities on
specified dates ("Payment Dates"). Payment Dates with respect to Fixed-Income
Securities will occur monthly, quarterly or semi-annually, as described in the
related Prospectus Supplement; Payment Dates with respect to Equity Securities
will occur as described in the related Prospectus Supplement.
The related Prospectus Supplement will describe a date (the "Record
Date") preceding such Payment Date, as of which the Trustee or its paying agent
will fix the identity of the Securityholders for the purpose of receiving
payments on the next succeeding Payment Date. Unless otherwise described in the
related Prospectus Supplement, the Payment Date will be the twenty-fifth day of
each month (or, in the case of quarterly-pay Securities, the twenty-fifth day of
every third month; and, in the case of semi-annually-pay Securities, the
twenty-fifth day of every sixth month) and the Record Date will be the close of
business as of the last day of the calendar month which precedes such Payment
Date.
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The related Prospectus Supplement and the Pooling and Servicing
Agreement will describe a period (a "Remittance Period") antecedent to each
Payment Date (for example, in the case of monthly-pay Securities, the calendar
month preceding the month in which a Payment Date occurs or such other specified
period). Unless otherwise provided in the related Prospectus Supplement,
collections received on or with respect to the related Mortgage Loans during a
Remittance Period will be required to be remitted by the Master Servicer to the
related Trustee prior to the related Payment Date and will be used to distribute
payments to Securityholders on such Payment Date. As may be described in the
related Prospectus Supplement, the related Pooling and Servicing Agreement may
provide that all or a portion of the principal collected on or with respect to
the related Mortgage Loans may be applied by the related Trustee to the
acquisition of additional Mortgage Loans during a specified period (rather than
used to distribute payments of principal to Securityholders during such period)
with the result that the related securities possess an interest-only period,
also commonly referred to as a revolving period, which will be followed by an
amortization period. Any such interest-only or revolving period may, upon the
occurrence of certain events to be described in the related Prospectus
Supplement, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to distribute payments of principal to
Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Unless otherwise specified in the related Prospectus Supplement,
neither the Securities nor the underlying Mortgage Loans will be guaranteed or
insured by any governmental agency or instrumentality or the Sponsor, the Master
Servicer, any Sub-Servicer, any Originator or any of their affiliates.
Unless otherwise specified in the Prospectus Supplement with respect to
a series, Securities of each series covered by a particular Pooling and
Servicing Agreement will evidence specified beneficial ownership interest in a
separate Trust Estate created pursuant to such Pooling and Servicing Agreement.
A Trust Estate will consist of, to the extent provided in the Pooling and
Servicing Agreement: (i) a pool of Mortgage Loans (and the related mortgage
documents) or certificates of interest or participations therein underlying a
particular series of Securities as from time to time are subject to the Pooling
and Servicing Agreement, exclusive of, if specified in the related Prospectus
Supplement, any Originator's Retained Yield or other interest retained by the
related Originator, the Sponsor or any of its affiliates with respect to each
such Mortgage Loan; (ii) certain other assets including, without limitation,
payments and collections in respect of the Mortgage Loans due, accrued or
received, as described in the related Prospectus Supplement, on and after the
related Cut-Off Date, as from time to time are identified as deposited in
respect thereof in the Principal and Interest Account and in the related
Distribution Account; (iii) property acquired by foreclosure of the Mortgage
Loans or deed in lieu of foreclosure; (iv) hazard insurance policies and primary
insurance policies, if any, and certain proceeds thereof; and (v) any
combination, as specified in the related Prospectus Supplement, of a letter of
credit, financial guaranty insurance policy, purchase obligation, mortgage pool
insurance policy, special hazard insurance policy, bankruptcy bond, reserve fund
or other type of Credit Enhancement as described under "Description of Credit
Enhancement." To the extent that any Trust Estate includes certificates of
interest or participations in Mortgage Loans, the related Prospectus Supplement
will describe the material terms and conditions of such certificates or
participations.
FORM OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the
Securities of each series will be issued as physical certificates ("Physical
Certificates") in fully registered form only in the denominations specified in
the related Prospectus Supplement, and will be transferable and exchangeable at
the corporate trust office of the registrar
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of the Securities (the "Security Registrar") named in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities, but the Trustee may require payment of a sum sufficient
to cover any tax or other governmental charge.
If so specified in the related Prospectus Supplement, specified classes
of a series of Securities will be issued in uncertificated book-entry form
("Book-Entry Securities"), and will be registered in the name of Cede, the
nominee of DTC. 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 Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is available
to others such as brokers, dealers, banks and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participant").
Under a book-entry format, Securityholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Securities registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Securityholders will receive all distributions of principal of and interest on
the Securities from the Trustee through DTC and its Participants. Under a
book-entry format, Securityholders will receive payments after the related
Payment Date because, while payments are required to be forwarded to Cede, as
nominee for DTC, on each such date, DTC will forward such payments to its
Participants, which thereafter will be required to forward such payments to
Indirect Participants or Securityholders. Unless and until Physical Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Pooling and Servicing
Agreement. The beneficial holders of such Securities will only be permitted to
exercise the rights of Securityholders under the Pooling and Servicing Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Securityholders
have accounts with respect to their Securities similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Securityholders. Accordingly, although Securityholders will not
possess Securities, the rules provide a mechanism by which Securityholders will
receive distributions and will be able to transfer their interests.
Unless and until Physical Certificates are issued, Securityholders who
are not Participants may transfer ownership of Securities only through
Participants by instructing such Participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
respective Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Securityholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a Physical Certificate for such
Securities.
DTC in general advises that it will take any action permitted to be
taken by a Securityholder under a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account with DTC the related
Securities are credited. Additionally, DTC in general advises that it will take
such actions with respect to specified percentages of the Securityholders only
at the direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Securities that satisfy such specified
percentages. DTC may take conflicting
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actions with respect to other current principal amounts of outstanding
Securities to the extent that such actions are taken on behalf of Participants
whose holdings include such current principal amounts of outstanding Securities.
Any Securities initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to Securityholders or
their nominees ("Physical Certificates"), rather than to DTC or its nominee only
under the events specified in the related Pooling and Servicing Agreement and
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related Pooling and Servicing Agreement and the
Prospectus Supplement, DTC will be required to notify all Participants of the
availability through DTC of Physical Certificates. Upon surrender by DTC of the
securities representing the Securities and instruction for reregistration, the
Trustee will issue the Securities in the form of Physical Certificates, and
thereafter the Trustee will recognize the holders of such Physical Certificates
as Securityholders. Thereafter, payments of principal of and interest on the
Securities will be made by the Trustee directly to Securityholders in accordance
with the procedures set forth herein and in the Pooling and Servicing Agreement.
The final distribution of any Security (whether Physical Certificates or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Payment Date at such
office or agency as is specified in the notice of final payment to
Securityholders.
None of the Company, the Originators, the Master Servicer or the
Trustee will have any liability for any actions taken by DTC or its nominee or
Cedel or Euroclear, including, without limitation, actions for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Securities held by Cede, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of Securities, the Sponsor will
cause the Mortgage Loans being included in the related Trust Estate to be
assigned to the Trustee together with, unless otherwise specified in the related
Prospectus Supplement, all payments and collections in respect of the Mortgage
Loans due, accrued or received, as described in the related Prospectus
Supplement on or after the related Cut-Off Date. If specified in the related
Prospectus Supplement, the Sponsor or any of its affiliates may retain the
Originator's Retained Yield, if any, for itself or transfer the same to others.
The Trustee will, concurrently with such assignment, deliver a series of
Securities to the Sponsor in exchange for the Mortgage Loans. Each Mortgage Loan
will be identified in a schedule appearing as an exhibit to the related Pooling
and Servicing Agreement. Such schedule will include, among other things,
information as to the principal balance of each Mortgage Loan as of the Cut-Off
Date, as well as information regarding the Mortgage Rate, the currently
scheduled monthly payment of principal and interest and the maturity of the
Mortgage Note.
In connection with the establishment of certain Trusts the Sponsor may
first transfer the related Trust Estate to the Transferor and the Transferor
will then transfer such Trust Estate to the related Trust. The use of the
Transferor will not affect the obligations of the Sponsor with respect to the
related Trust or the related Securities. If the Transferor is to be involved in
a particular offering the related Prospectus Supplement will describe its role
in such offering; for purposes of this Prospectus the role of the Transferor is
subsumed in the role of the Sponsor.
The related Prospectus Supplement will describe any applicable
requirements relating to the delivery of documents, such as the related Notes,
and the preparation and/or filing of transfer documentation, such as assignments
of Mortgage, in connection with the establishment of the related Trust. To the
extent that the ratings, if any, then assigned to the unsecured debt of the
Sponsor or of the Sponsor's ultimate corporate parent are satisfactory to the
Rating Agencies, all or any portion of such document delivery requirements
and/or transfer document preparation and filing requirements may be waived, all
as to be described in the related Prospectus Supplement.
A typical provision relating to document delivery requirements would
provide that the Sponsor deliver to the Trustee a file consisting of (i) the
original Notes or certified copies thereof, endorsed by the Originator thereof
in blank or to the order of the holder, (ii) originals of all intervening
assignments, showing a complete chain of title from origination to the
applicable Originators, if any, including warehousing assignments, with evidence
of recording thereon, (iii) originals of all assumption and modification
agreements, if any, and, unless such Mortgage Loan is covered by a counsel's
opinion as described in the next paragraph, (iv) either: (a) the original
Mortgage, with
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evidence of recording thereon, (b) a true and accurate copy of the Mortgage
where the original has been transmitted for recording, until such time as the
original is returned by the public recording office or (c) a copy of the
Mortgage certified by the public recording office in those instances where the
original recorded Mortgage has been lost. To the extent that such a file
containing all or a portion of such items has been delivered to the Trustee, the
Trustee will generally be required, for the benefit of the Securityholders, to
review each such file within a specified period, generally not exceeding 90
days, to ascertain that all required documents (or certified copies of
documents) have been executed and received.
A typical provision relating to the preparation and filing of transfer
documentation would require the Originators to cause to be prepared and
recorded, within a specified period, generally not exceeding 75 business days of
the execution and delivery of the applicable Pooling and Servicing Agreement
(or, if original recording information is unavailable, within such later period
as is permitted by the Pooling and Servicing Agreement) assignments of the
Mortgages from the Originators to the Trustee, in the appropriate jurisdictions
in which such recordation is necessary to perfect the lien thereof as against
creditors of or purchasers from the Originators, to the Trustee; provided,
however, that if the Originators furnish to the Trustee and to the Certificate
Insurer an opinion of counsel to the effect that no such recording is necessary
to perfect the Trustee's interests in the Mortgages with respect to any of the
jurisdictions in which the related Mortgaged Properties are located, then such
recording will not be required with respect to such jurisdictions or at the
election of the Certificate Insurer, any jurisdiction.
Unless otherwise specified in the related Prospectus Supplement, if any
such document is found to be missing or defective in any material respect, the
Trustee (or such custodian) shall promptly so notify the Sponsor, which shall
notify the related Sub-Servicer or Originator, as the case may be. If the
Sub-Servicer or Originator does not cure the omission or defect within a
specified period, generally not exceeding 60 days after notice is given to the
Sponsor, the Sub-Servicer or Originator, as the case may be, will be obligated
to purchase on the next succeeding Remittance Date the related Mortgage Loan
from the Trustee at its Loan Purchase Price (or, if specified in the related
Prospectus Supplement, will be permitted to substitute for such Mortgage Loan
under the conditions specified in the related Prospectus Supplement). The Master
Servicer will be obligated to enforce this obligation of the Sub-Servicer or
Originator, as the case may be, to the extent described above under "Mortgage
Loan Program--Representations by Originators." Unless otherwise specified in the
related Prospectus Supplement, neither the Master Servicer nor the Sponsor will,
however, be obligated to purchase or substitute for such Mortgage Loan if the
Sub-Servicer or Originator, as the case may be, defaults on its obligation to do
so, and there can be no assurance that a Sub-Servicer or Originator, as the case
may be, will carry out any such obligation. Unless otherwise specified in the
related Prospectus Supplement, such purchase obligation constitutes the sole
remedy available to the Securityholders or the Trustee for omission of, or a
material defect in, a constituent document.
The Trustee will be authorized at any time to appoint a custodian
pursuant to a custodial agreement to maintain possession of and, if applicable,
to review the documents relating to the Mortgage Loans as the agent of the
Trustee. The identity of any such custodian to be appointed on the date of
initial issuance of the Securities will be set forth in the related Prospectus
Supplement.
Pursuant to each Pooling and Servicing Agreement, the Master Servicer,
either directly or through Sub-Servicers, will service and administer the
Mortgage Loans assigned to the Trustee as more fully set forth below.
FORWARD COMMITMENTS; PRE-FUNDING
A Trust may enter into an agreement (each, a "Forward Purchase
Agreement") with the Sponsor whereby the Sponsor will agree to transfer
additional Mortgage Loans to such Trust following the date on which such Trust
is established and the related Securities are issued. The Trust may enter into
Forward Purchase Agreements to permit the acquisition of additional Mortgage
Loans (the "Subsequent Mortgage Loans") that could not be delivered by the
Sponsor or have not formally completed the origination process, in each case
prior to the date on which the Securities are delivered to the Securityholders
(the "Closing Date"). Any Forward Purchase Agreement will require that any
Mortgage Loans so transferred to a Trust conform to the requirements specified
in such Forward Purchase Agreement. In addition, the Forward Purchase Agreement
states that the Depositor shall only transfer the Subsequent Mortgage Loans upon
the satisfaction of certain conditions including that the Depositor shall have
delivered to the Certificate Insurer, the Rating Agencies and the Trustee
opinions of counsel (including bankruptcy, corporate and tax opinions) with
respect to the transfer of the Subsequent Mortgage Loans.
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If a Forward Purchase Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the related Trustee will be
required to deposit in a segregated account (each, a "Pre-Funding Account") up
to 100% of the net proceeds received by the Trustee in connection with the sale
of one or more classes of Securities of the related series; the additional
Mortgage Loans will be transferred to the related Trust in exchange for money
released to the Sponsor from the related Pre-Funding Account. Each Forward
Purchase Agreement will set a specified period (the "Funding Period") during
which any such transfers must occur; for a Trust which elects federal income
treatment as a REMIC or as a grantor trust, the related Funding Period will be
limited to three months from the date such Trust is established; for a Trust
which is treated as a mere security device for federal income tax purposes, the
related Funding Period will be limited to nine months from the date such Trust
is established. The Forward Purchase Agreement or the related Pooling and
Servicing Agreement will require that, if all moneys originally deposited to
such Pre-Funding Account are not so used by the end of the related Funding
Period, then any remaining moneys will be applied as a mandatory prepayment of
the related class or classes of Securities as specified in the related
Prospectus Supplement.
During the Funding Period, the moneys deposited to the Pre-Funding
Account will either (i) be held uninvested or (ii) will be invested in
cash-equivalent investments that are rated in one of the four highest rating
categories by at least one nationally recognized statistical rating organization
and that will either mature prior to the end of the Funding Period, or will be
drawable on demand and in any event, will not constitute the type of investment
that would require registration of the related Trust as an "investment company"
under the Investment Company Act of 1940, as amended. On payment dates that
occur during the Funding Period, the Trustee will transfer any earnings on the
moneys in the Pre-Funding Account to the Certificate Account for distribution to
the Certificateholders.
The Pre-Funding Account will be maintained by the Trustee, which must
be a bank having combined capital and surplus, generally, of at least
$100,000,000, long-term, unsecured debt rated at least investment grade and a
long-term deposit rating of at least investment grade.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO DISTRIBUTION ACCOUNT
Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing
Agreement will establish and maintain an account (the "Sub-Servicing Account")
which generally meets the requirements set forth in the Sponsor's Originator
Guide from time to time, and is otherwise acceptable to the Master Servicer. A
Sub-Servicing Account must be established with a Federal Home Loan Bank or with
a depository institution (including the Sub-Servicer itself) whose accounts are
insured by the National Credit Union Share Insurance Fund or the FDIC, provided
that any such depository institution must meet certain minimum rating criteria
set forth in the Sponsor's Originator Guide. Except as otherwise permitted by
the applicable Rating Agencies, a Sub-Servicing Account must be segregated and
may not be established as a general ledger account.
A Sub-Servicer is required to deposit into its Sub-Servicing Account on
a daily basis all amounts described above under "Mortgage Loan
Program--Sub-Servicing by Originators" that are received by it in respect of the
Mortgage Loans, less its servicing or other compensation. On or before the date
specified in the Sub-Servicing Agreement (which date may be no later than the
business day prior to the Determination Date referred to below or, if such day
is not a business day, the preceding business day), the Sub-Servicer must remit
or cause to be remitted to the Master Servicer all funds held in the
Sub-Servicing Account with respect to Mortgage Loans that are required to be so
remitted. A Sub-Servicer may also be required to make such Servicing Advances
and Delinquency Advances and to pay Compensating Interest as set forth in the
related Sub-Servicing Agreement.
The Master Servicer will deposit or will cause to be deposited into the
Principal and Interest Account on a daily basis certain payments and collections
due, accrued or received, as described in the related Prospectus Supplement on
or after to the Cut-Off Date, as specifically set forth in the related Pooling
and Servicing Agreement, such as the following except as otherwise provided
therein:
(i) all payments on account of principal, including principal
payments received in advance of the date on which the related monthly
payment is due (the "Due Date") ("Principal Prepayments"), on the
Mortgage Loans comprising a Trust Estate;
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(ii) all payments on account of interest on the Mortgage Loans
comprising such Trust Estate, net of the portion of each payment
thereof retained by the Sub-Servicer, if any, as its servicing or other
compensation;
(iii) all amounts received and retained, if any, in connection
with the liquidation of any defaulted Mortgage Loan, by foreclosure,
deed in lieu of foreclosure or otherwise ("Liquidation Proceeds"),
including all proceeds of any special hazard insurance policy,
bankruptcy bond, mortgage pool insurance policy, financial guaranty
insurance policy and any title, hazard or other insurance policy
covering any Mortgage Loan in such Mortgage Pool (together with any
payments under any letter of credit, "Insurance Proceeds") or proceeds
from any alternative arrangements established in lieu of any such
insurance and described in the applicable Prospectus Supplement, other
than proceeds to be applied to the restoration of the related property
or released to the Mortgagor in accordance with the Master Servicer's
normal servicing procedures (such amounts, net of related unreimbursed
liquidation expenses and insured expenses incurred and unreimbursed
advances of the Master Servicer or by the related Sub-Servicer, "Net
Liquidation Proceeds");
(iv) any Buydown Funds (and, if applicable, investment
earnings thereon) required to be paid to Securityholders, as described
below;
(v) all proceeds of any Mortgage Loan in such Trust Estate
purchased (or, in the case of a substitution, certain amounts
representing a principal adjustment) by the Master Servicer, the
Sponsor, any Sub-Servicer or Originator or any other person pursuant to
the terms of the Pooling and Servicing Agreement. See "Mortgage Loan
Program--Representations by Originators," "--Assignment of Mortgage
Loans" above;
(vi) any amounts required to be deposited by the Master Servicer
in connection with losses realized on investments of funds held in the
Principal and Interest Account, as described below;
(vii) any amounts required to be deposited in connection with
the liquidation of the related Trust; and
(viii) any amounts required to be transferred from the
Distribution Account to the Principal and Interest Account.
In addition to the Principal and Interest Account, the Sponsor shall
cause to be established and the Trustee will maintain, at the corporate trust
office of the Trustee, in the name of the Trust for the benefit of the holders
of each series of Securities, an account for the disbursement of payments on the
Mortgage Loans evidenced by each series of Securities (the "Distribution
Account"). The Principal and Interest Account and the Distribution Account each
must be maintained with a Designated Depository Institution. A "Designated
Depository Institution" is an institution whose deposits are insured by the Bank
Insurance Fund or the Savings Association Insurance Fund of the FDIC, the
long-term deposits of which have a rating satisfactory to the Rating Agencies
and the related Credit Enhancer, if any, and which is any of the following: (i)
a federal savings and loan association duly organized, validly existing and in
good standing under the federal banking laws, (ii) an institution duly
organized, validly existing and in good standing under the applicable banking
laws of any state, (iii) a national banking association duly organized, validly
existing and in good standing under the federal banking laws, (iv) a principal
subsidiary of a bank holding company, or (v) approved in writing by the related
Credit Enhancer, if any, each Rating Agency and, in each case acting or
designated by the Master Servicer as the depository institution for the
Principal and Interest Account; provided, however, that any such institution or
association will generally be required to have combined capital, surplus and
undivided profits of at least $50,000,000. Notwithstanding the foregoing, the
Principal and Interest Account may be held by an institution otherwise meeting
the preceding requirements except that the only applicable rating requirement
shall be that the unsecured and uncollateralized debt obligations thereof shall
be rated at a level satisfactory to one or more Rating Agencies if such
institution has trust powers and the Principal and Interest Account is held by
such institution in its trust capacity and not in its commercial capacity. The
Distribution Account, the Principal and Interest Account and other accounts
described in the related Prospectus Supplement are collectively referred to as
"Accounts." All funds in the Distribution Account shall be invested and
reinvested by the Trustee for the benefit of the Securityholders and the related
Credit Enhancer, if any, as directed by the Master Servicer, in
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certain defined obligations set forth in the related Pooling and Servicing
Agreement ("Eligible Investments"). The Principal and Interest Account may
contain funds relating to more than one series of Securities as well as payments
received on other mortgage loans serviced or master serviced by it that have
been deposited into the Principal and Interest Account. All funds in the
Principal and Interest Account will be required to be held (i) uninvested, up to
limits insured by the FDIC or (ii) invested in Eligible Investments. The Master
Servicer will be entitled to any interest or other income or gain realized with
respect to the funds on deposit in the Principal and Interest Account.
To the extent that the ratings, if any, then assigned to the unsecured
debt of the Master Servicer or of the Master Servicer's corporate parent and
satisfactory to the Rating Agencies, the Master Servicer may be permitted to
co-mingle Mortgage Loan payments and collections with the Master Servicer's
general funds rather than required to deposit such amounts into a segregated
Principal and Interest Account.
Unless otherwise specified in the related Prospectus Supplement, on the
day seven days preceding each Payment Date (the "Remittance Date"), the Master
Servicer will withdraw from the Principal and Interest Account and remit to the
Trustee for deposit in the applicable Distribution Account, in immediately
available funds, the amount to be distributed therefrom to Securityholders on
such Payment Date. The Master Servicer will remit to the Trustee for deposit
into the Distribution Account the amount of any advances made by the Master
Servicer as described herein under "--Advances," any amounts required to be
transferred to the Distribution Account from a Reserve Fund, as described under
"Credit Enhancement" below, any amounts required to be paid by the Master
Servicer out of its own funds due to the operation of a deductible clause in any
blanket policy maintained by the Master Servicer to cover hazard losses on the
Mortgage Loans as described under "Hazard Insurance; Claims Thereunder--Hazard
Insurance Policies" below and any other amounts as specifically set forth in the
related Pooling and Servicing Agreement. The Trustee will cause all payments
received by it from any Credit Enhancer to be deposited in the Distribution
Account not later than the related Payment Date.
Unless otherwise specified in the related Prospectus Supplement, the
portion of any payment received by the Master Servicer in respect of a Mortgage
Loan that is allocable to the Originator's Retained Yield generally will not be
deposited into the Principal and Interest Account, but will not be paid over to
the parties entitled thereto as provided in the related Pooling and Servicing
Agreement.
Funds on deposit in the Principal and Interest Account attributable to
Mortgage Loans underlying a series of Securities may be invested in Eligible
Investments maturing in general not later than the business day preceding the
next Payment Date. Unless otherwise specified in the related Prospectus
Supplement, all income and gain realized from any such investment will be for
the account of the Master Servicer. Funds on deposit in the related Distribution
Account may be invested in Eligible Investments maturing, in general, no later
than the business day preceding the next Payment Date.
With respect to each Buydown Mortgage Loan, the Sub-Servicer will
deposit the related Buydown Funds provided to it in a Buydown Account that will
comply with the requirements set forth herein with respect to a Sub-Servicing
Account. Unless otherwise specified in the related Prospectus Supplement, the
terms of all Buydown Mortgage Loans provide for the contribution of Buydown
Funds in an amount equal to or exceeding either (i) the total payments to be
made from such funds pursuant to the related buydown plan or (ii) if such
Buydown Funds are to be deposited on a discounted basis, that amount of Buydown
Funds which, together with investment earnings thereon at a rate as set forth in
the Sponsor's Originator Guide from time to time, will support the scheduled
level of payments due under the Buydown Mortgage Loan. Neither the Master
Servicer nor the Sponsor will be obligated to add to any such discounted Buydown
Funds any of its own funds should investment earnings prove insufficient to
maintain the scheduled level of payments. To the extent that any such
insufficiency is not recoverable from the Mortgagor or, in an appropriate case,
from the related Originator or the related Sub-Servicer, distributions to
Securityholders may be affected. With respect to each Buydown Mortgage Loan, the
Sub-Servicer will withdraw from the Buydown Account and remit to the Master
Servicer on or before the date specified in the Sub-Servicing Agreement
described above the amount, if any, of the Buydown Funds (and, if applicable,
investment earnings thereon) for each Buydown Mortgage Loan that, when added to
the amount due from the Mortgagor on such Buydown Mortgage Loan, equals the full
monthly payment which would be due on the Buydown Mortgage Loan if it were not
subject to the buydown plan.
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If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan
in its entirety during the Buydown Period, the Sub-Servicer will withdraw from
the Buydown Account and remit to the Mortgagor or such other designated party in
accordance with the related buydown plan any Buydown Funds remaining in the
Buydown Account. If a prepayment by a Mortgagor during the Buydown Period
together with Buydown Funds will result in full prepayment of a Buydown Mortgage
Loan, the Sub-Servicer will generally be required to withdraw from the Buydown
Account and remit to the Master Servicer the Buydown Funds and investment
earnings thereon, if any, which together with such prepayment will result in a
prepayment in full; provided that Buydown Funds may not be available to cover a
prepayment under certain Mortgage Loan programs. Any Buydown Funds so remitted
to the Master Servicer in connection with a prepayment described in the
preceding sentence will be deemed to reduce the amount that would be required to
be paid by the Mortgagor to repay fully the related Mortgage Loan if the
Mortgage Loan were not subject to the buydown plan. Any investment earnings
remaining in the Buydown Account after prepayment or after termination of the
Buydown Period will be remitted to the related Mortgagor or such other
designated party pursuant to the agreement relating to each Buydown Mortgage
Loan (the "Buydown Agreement"). If the Mortgagor defaults during the Buydown
Period with respect to a Buydown Mortgage Loan and the property securing such
Buydown Mortgage Loan is sold in liquidation (either by the Master Servicer, the
Primary Insurer, the insurer under the mortgage pool insurance policy (the "Pool
Insurer") or any other insurer), the Sub-Servicer will be required to withdraw
from the Buydown Account the Buydown Funds and all investment earnings thereon,
if any, and remit the same to the Master Servicer or, if instructed by the
Master Servicer, pay the same to the primary insurer or the Pool Insurer, as the
case may be, if the Mortgaged Property is transferred to such insurer and such
insurer pays all of the loss incurred in respect of such default.
WITHDRAWALS FROM THE PRINCIPAL AND INTEREST ACCOUNT
The Master Servicer may, from time to time, make withdrawals from the
Principal and Interest Account for certain purposes, as specifically set forth
in the related Pooling and Servicing Agreement, which generally will include the
following except as otherwise provided therein:
(i) to effect the timely remittance to the Trustee for deposit
to the Distribution Account in the amounts and in the manner provided
in the Pooling and Servicing Agreement and described in "--Payments on
Mortgage Loans; Deposits to Distribution Account" above;
(ii) to reimburse itself or any Sub-Servicer for any accrued and
unpaid Servicing Fees and for Delinquency Advances and Servicing
Advances as to any Mortgaged Property, out of late payments or
collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds and such other amounts as may be collected
by the Master Servicer from the related Mortgagor or otherwise relating
to the Mortgage Loan with respect to which such Delinquency Advances or
Servicing Advances were made;
(iii) to reimburse itself for any Delinquency Advances or
Servicing Advances determined in good faith to have become
Non-Recoverable Advances, such reimbursement to be made from any funds
in the Principal and Interest Account;
(iv) to withdraw investment earnings on amounts on deposit in
the Principal and Interest Account;
(v) to pay the Sponsor or its assignee all amounts allocable to
the Originator's Retained Yield out of collections or payments which
represent interest on each Mortgage Loan (including any Mortgage Loan
as to which title to the underlying Mortgaged Property was acquired);
(vi) to withdraw amounts that have been deposited in the
Principal and Interest Account in error;
(vii) to clear and terminate the Principal and Interest Account in
connection with the termination of the Trust Estate pursuant to the
Pooling and Servicing Agreement, as described in "The Pooling and
Servicing Agreement--Termination, Retirement of Securities"; and
(viii) to invest in Eligible Investments.
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DISTRIBUTIONS
Beginning on the Payment Date in the month following the month (or, in
the case of quarterly-pay Securities, the third month following such month and
each third month thereafter or, in the case of semi-annually-pay Securities, the
sixth month following such month and each sixth month thereafter) in which the
Cut-Off Date occurs (or such other date as may be set forth in the related
Prospectus Supplement) for a series of Securities, distributions of principal
and interest (or, where applicable, of principal only or interest only) on each
class of Securities entitled thereto will be made either by the Trustee or a
paying agent appointed by the Trustee (the "Paying Agent"), to the persons who
are registered as Securityholders at the close of business on the Record Date in
proportion to their respective Percentage Interests. Unless otherwise specified
in the related Prospectus Supplement, interest that accrues and is not payable
on a class of Securities will be added to the principal balance of each Security
of such class in proportion to its Percentage Interest. The undivided percentage
interest (the "Percentage Interest") represented by a Security of a particular
class will be equal to the percentage obtained by dividing the initial principal
balance or notional amount of such Security by the aggregate initial amount or
notional balance of all the Securities of such class. Distributions will be made
in immediately available funds (by wire transfer or otherwise) to the account of
a Securityholder at a bank or other entity having appropriate facilities
therefor, if such Securityholder has so notified the Trustee or the Paying
Agent, as the case may be, and the applicable Pooling and Servicing Agreement
provides for such form of payment, or by check mailed to the address of the
person entitled thereto as it appears on the Security Register; provided,
however, that the final distribution in retirement of the Securities (other than
any Book-Entry Securities) will be made only upon presentation and surrender of
the Securities at the office or agency of the Trustee specified in the notice to
Securityholders of such final distribution.
PRINCIPAL AND INTEREST ON THE SECURITIES
The method of determining, and the amount of, distributions of
principal and interest (or, where applicable, of principal only or interest
only) on a particular series of Securities will be described in the related
Prospectus Supplement. Each class of Securities (other than certain classes of
Strip Securities) may bear interest at a different interest rate (the
"Pass-Through Rate"), which may be a fixed or adjustable Pass-Through Rate. The
related Prospectus Supplement will specify the Pass-Through Rate for each class,
or in the case of an adjustable Pass-Through Rate, the initial Pass-Through Rate
and the method for determining the Pass-Through Rate. Unless otherwise specified
in the related Prospectus Supplement, interest on the Securities will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
On each Payment Date for a series of Securities, the Trustee will
distribute or cause the Paying Agent to distribute, as the case may be, to each
holder of record on the Record Date of a class of Securities, an amount equal to
the Percentage Interest represented by the Security held by such holder
multiplied by such class' Distribution Amount. The Distribution Amount for a
class of Securities for any Payment Date will be the portion, if any, of the
principal distribution amount (as defined in the related Prospectus Supplement)
allocable to such class for such Payment Date, as described in the related
Prospectus Supplement, plus, if such class is entitled to payments of interest
on such Payment Date, the interest accrued at the applicable Pass-Through Rate
on the principal balance or notional amount of such class, as specified in the
applicable Prospectus Supplement, less (unless otherwise specified in the
Prospectus Supplement) the amount of any Deferred Interest added to the
principal balance of the Mortgage Loans and/or the outstanding balance of one or
more classes of Securities on the related Due Date and any other interest
shortfalls allocable to Securityholders which are not covered by advances or the
applicable Credit Enhancement, in each case in such amount that is allocated to
such class on the basis set forth in the Prospectus Supplement.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
will possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
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In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to fund payments of principal to Securityholders.
In the case of a series of Securities that includes two or more classes
of Securities, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Securities or Subordinate Securities) of each
such class shall be as provided in the related Prospectus Supplement.
Distributions in respect of principal of any class of Securities will be made on
a pro rata basis among all of the Securities of such class.
Except as otherwise provided in the related Pooling and Servicing
Agreement, on or prior to the third business day next preceding the Payment Date
(or such earlier day as shall be agreed by the related Credit Enhancer, if any,
and the Trustee) of the month of distribution (the "Determination Date"), the
Trustee will determine the amounts of principal and interest which will be
passed through to Securityholders on the immediately succeeding Payment Date. If
the amount in the Distribution Account is insufficient to cover the amount to be
passed through to Securityholders, the Trustee will be required to notify the
related Credit Enhancer, if any, pursuant to the related Pooling and Servicing
Agreement for the purpose of funding such deficiency.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, each
Servicer will be required, not later than each Remittance Date, to deposit into
the Principal and Interest Account an amount equal to the sum of the interest
portions (net of the Servicing Fees and the Originators' Retained Yield) due,
but not collected, with respect to delinquent Mortgage Loans directly serviced
by such Servicer during the prior Remittance Period, but only if, in its good
faith business judgment, such Servicer believes that such amount will ultimately
be recovered from the related Mortgage Loan. As may be described in the related
Prospectus Supplement, such Servicer may also be required so to advance
delinquent payments of principal. Any such amounts so advanced are "Delinquency
Advances". The Master Servicer will be permitted to fund its payment of
Delinquency Advances on any Remittance Date from collections on any Mortgage
Loan deposited to the Principal and Interest Account subsequent to the related
Remittance Period, and will be required to deposit into the Principal and
Interest Account with respect thereto (i) collections from the Mortgagor whose
delinquency gave rise to the shortfall which resulted in such Delinquency
Advance and (ii) Net Liquidation Proceeds recovered on account of the related
Mortgage Loan to the extent of the amount of aggregate Delinquency Advances
related thereto. A Sub-Servicer will be permitted to fund its payment of
Delinquency Advances as set forth in the related Sub-Servicing Agreement.
A Mortgage Loan is "delinquent" if any payment due thereon is not made
by the close of business on the day such payment is scheduled to be due.
Unless otherwise specified in the related Prospectus Supplement, on or
prior to each Remittance Date, each Servicer will be required to deposit in the
Principal and Interest Account with respect to any full prepayment received on a
Mortgage Loan directly serviced by such Servicer during the related Remittance
Period out of its own funds without any right of reimbursement therefor, an
amount equal to the difference between (x) 30 days' interest at the Mortgage
Loan's Mortgage Rate (less the related Base Servicing Fees and the Originators'
Retained Yield, if any) on the principal balance of such Mortgage Loan as of the
first day of the related Remittance Period and (y) to the extent not previously
advanced, the interest (less the Servicing Fee and the Originators' Retained
Yield, if any) paid by the Mortgagor with respect to the Mortgage Loan during
such Remittance Period (any such amount paid by such Servicer, "Compensating
Interest"). No Servicer shall be required to pay Compensating Interest with
respect to any Remittance Period in an amount in excess of the aggregate related
Base Servicing Fees received by such Servicer with respect to all Mortgage Loans
directly serviced by such Servicer for such Remittance Period.
Each Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, but only to
the extent that such Servicer reasonably believes that such amounts will
increase Net Liquidation Proceeds on the related Mortgage Loan. Each such amount
so paid will constitute a "Servicing Advance". Such Servicer may recover
Servicing Advances to the extent permitted by the Mortgage Loans
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or, if not theretofore recovered from the Mortgagor on whose behalf such
Servicing Advance was made, from Liquidation Proceeds realized upon the
liquidation of the related Mortgage Loan or, in certain cases, from excess cash
flow otherwise payable to the holders of the related Equity Securities or prior
to any distributions being made to the related Securityholders.
Notwithstanding the foregoing, if the Master Servicer exercises its
option, if any, to purchase the assets of a Trust Estate as described under "The
Pooling and Servicing Agreement--Termination; Retirement of Securities" below,
the Master Servicer will net from the purchase price of such amounts for all
related advances previously made by it and not theretofore reimbursed to it. The
Master Servicer's obligation to make advances may be supported by Credit
Enhancement as described in the related Pooling and Servicing Agreement. In the
event that the provider of such support is downgraded by a Rating Agency rating
the related Securities or if the collateral supporting such obligation is not
performing or is removed pursuant to the terms of any agreement described in the
related Prospectus Supplement, the Securities may also be downgraded.
REPORTS TO SECURITYHOLDERS
With each distribution to Securityholders of a particular class the
Trustee will forward or cause to be forwarded to each holder of record of such
class of Securities a statement or statements with respect to the related Trust
setting forth the information specifically described in the related Pooling and
Servicing Agreement, which generally will include the following as applicable
except as otherwise provided therein:
(i) the amount of the distribution with respect to each class
of Securities;
(ii) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any prepayments or other
recoveries of principal included therein;
(iii) the amount of such distribution allocable to interest;
(iv) the aggregate unpaid Principal Balance of the Mortgage
Loans after giving effect to the distribution of principal on such
Payment Date;
(v) with respect to a series consisting of two or more
classes, the outstanding principal balance or notional amount of each
class after giving effect to the distribution of principal on such
Payment Date;
(vi) the amount of coverage under any letter of credit,
mortgage pool insurance policy or other form of Credit Enhancement
covering default risk as of the close of business on the applicable
Determination Date and a description of any Credit Enhancement
substituted therefor;
(vii) information furnished by the Sponsor pursuant to section
6049(d)(7)(C) of the Code and the regulations promulgated thereunder to
assist Securityholders in computing their market discount;
(viii) the total of any Substitution Amounts and any Loan
Purchase Price amounts included in such distribution; and
(ix) a number with respect to each class (the "Pool Factor")
computed by dividing the principal balance of all Securities in such
class (after giving effect to any distribution of principal to be made
on such Payment Date) by the original principal balance of the
Securities of such class on the Closing Date.
Items (i) through (iii) above shall, with respect to each class of
Securities, be presented on the basis of a certificate having a $1,000
denomination. In addition, by January 31 of each calendar year during which
Securities are outstanding, the Trustee shall furnish a report to each
Securityholder at any time during each calendar year as to the aggregate amounts
reported pursuant to (i), (ii) and (iii) with respect to the Securities for such
calendar year. If a class of Securities are in book-entry form, DTC will supply
such reports to the Securityholders in accordance with its procedures.
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In addition, on each Payment Date the Trustee will forward or cause to
be forwarded additional information, as of the close of business on the last day
of the prior calendar month, as more specifically described in the related
Pooling and Servicing Agreement, which generally will include the following as
applicable except as otherwise provided therein:
(i) the total number of Mortgage Loans and the aggregate
principal balances thereof, together with the number, percentage (based
on the then-outstanding principal balances) and aggregate principal
balances of Mortgage Loans (a) 30-59 days delinquent, (b) 60-89 days
delinquent and (c) 90 or more days delinquent;
(ii) the number, percentage (based on the then-outstanding
principal balances), aggregate Mortgage Loan balances and status of all
Mortgage Loans in foreclosure proceedings (and whether any such
Mortgage Loans are also included in any of the statistics described in
the foregoing clause (i));
(iii) the number, percentage (based on the then-outstanding
principal balances) and aggregate Mortgage Loan balances of all
Mortgage Loans relating to Mortgagors in bankruptcy proceedings (and
whether any such Mortgage Loans are also included in any of the
statistics described in the foregoing clause (i));
(iv) the number, percentage (based on the then-outstanding
principal balances) and aggregate Mortgage Loan balances of all
Mortgage Loans relating to the status of any Mortgaged Properties as to
which title has been taken in the name of, or on behalf of the Trustee
(and whether any such Mortgage Loans are also included in any of the
statistics described in the foregoing clause (i)); and
(v) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure.
COLLECTION AND OTHER SERVICING PROCEDURES
Acting directly or through one or more Sub-Servicers as provided in the
related Pooling and Servicing Agreement, the Master Servicer, is required to
service and administer the Mortgage Loans in accordance with the Pooling and
Servicing Agreement and with reasonable care, and using that degree of skill and
attention that the Master Servicer exercises with respect to comparable mortgage
loans that it services for itself or others.
The duties of the Master Servicer include collecting and posting of all
payments, responding to inquiries of Mortgagors or by federal, state or local
government authorities with respect to the Mortgage Loans, investigating
delinquencies, reporting tax information to Mortgagors in accordance with its
customary practices and accounting for collections and furnishing monthly and
annual statements to the Trustee with respect to distributions and making
Delinquency Advances and Servicing Advances to the extent described in the
related Pooling and Servicing Agreement. The Master Servicer is required to
follow its customary standards, policies and procedures in performing its duties
as Master Servicer.
The Master Servicer (i) is authorized and empowered to execute and
deliver, on behalf of itself, the Securityholders and the Trustee or any of
them, any and all instruments of satisfaction or cancellation, or of partial or
full release or discharge and all other comparable instruments, with respect to
the Mortgage Loans and with respect to the related Mortgaged Properties; (ii)
may consent to any modification of the terms of any Note not expressly
prohibited by the Pooling and Servicing Agreement if the effect of any such
modification (x) will not materially and adversely affect the security afforded
by the related Mortgaged Property or the timing of receipt of any payments
required thereunder (in each case other than as permitted by the related Pooling
and Servicing Agreement); and (y) will not cause a Trust which is a REMIC to
fail to qualify as a REMIC.
The related Pooling and Servicing Agreement will require the Master
Servicer to follow such collection procedures as it follows from time to time
with respect to mortgage loans in its servicing portfolio that are comparable to
the Mortgage Loans; provided that the Master Servicer is required always at
least to follow collection procedures that are consistent with or better than
standard industry practices. The Master Servicer may in its discretion (i) waive
any assumption fees, late payment charges, charges for checks returned for
insufficient funds,
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prepayment fees, if any, or the fees which may be collected in the ordinary
course of servicing the Mortgage Loans, (ii) if a Mortgagor is in default or
about to be in default because of a Mortgagor's financial condition, arrange
with the Mortgagor a schedule for the payment of delinquent payments due on the
related Mortgage Loan; provided, however, the Master Servicer shall generally
not be permitted to reschedule the payment of delinquent payments more than one
time in any twelve consecutive months with respect to any Mortgagor or (iii)
modify payments of monthly principal and interest on any Mortgage Loan becoming
subject to the terms of the Relief Act in accordance with the Master Servicer's
general policies of the comparable mortgage loans subject to such Relief Act.
When a Mortgaged Property (other than Mortgaged Property subject to an
ARM Loan) has been or is about to be conveyed by the Mortgagor, the Master
Servicer will be required, to the extent it has knowledge of such conveyance or
prospective conveyance, to exercise its rights to accelerate the maturity of the
related Mortgage Loan under any "due-on-sale" clause contained in the related
Mortgage or Note; provided, however, that the Master Servicer will not be
required to exercise any such right if (i) the "due-on-sale" clause, in the
reasonable belief of the Master Servicer, is not enforceable under applicable
law or (ii) the Master Servicer reasonably believes that to permit an assumption
of the Mortgage Loan would not materially and adversely affect the interests of
Securityholders or the related Credit Enhancer or jeopardize coverage under any
primary insurance policy or applicable Credit Enhancement arrangements. In such
event, the Master Servicer will be required to enter into an assumption and
modification agreement with the person to whom such Mortgaged Property has been
or is about to be conveyed, pursuant to which such person becomes liable under
the Mortgage Note and, unless prohibited by applicable law or the related
documents, the Mortgagor remains liable thereon. If the foregoing is not
permitted under applicable law, the Master Servicer will be authorized to enter
into a substitution of liability agreement with such person, pursuant to which
the original Mortgagor is released from liability and such person is substituted
as Mortgagor and becomes liable under the Mortgage Note. The assumed loan must
conform in all respects to the requirements, representations and warranties of
the Pooling and Servicing Agreement.
An ARM Loan may be assumed if such ARM Loan is by its terms assumable
and if, in the reasonable judgment of the Master Servicer or the Sub-Servicer,
the proposed transferee of the related Mortgaged Property establishes its
ability to repay the loan and the security for such ARM Loan would not be
impaired by the assumption. If a Mortgagor transfers the Mortgaged Property
subject to an ARM Loan without consent, such ARM Loan may be declared due and
payable. Any fee collected by the Master Servicer or Sub-Servicer for entering
into an assumption or substitution of liability agreement will be retained by
the Master Servicer or Sub-Servicer as additional servicing compensation unless
otherwise set forth in the related Prospectus Supplement. See "Certain Legal
Aspects of Mortgage Loans and Related Matters--Enforceability of Certain
Provisions" herein.
The Master Servicer will have the right under the Pooling and Servicing
Agreement to approve applications of Mortgagors seeking consent for (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Mortgaged Properties. No application for consent may be approved by
the Master Servicer unless: (i) the provisions of the related Mortgage Note and
Mortgage have been complied with; (ii) the credit profile of the related
Mortgage Loan after any release is consistent with the Sponsor's Originator
Guide then applicable to such Mortgage Loan; and (iii) the lien priority of the
related Mortgage is not reduced.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer shall foreclose upon or otherwise comparably effect
the ownership of Mortgaged Properties relating to defaulted Mortgage Loans as to
which no satisfactory arrangements can be made for collection of delinquent
payments and which the Master Servicer has not purchased pursuant to the related
Pooling and Servicing Agreement (such Mortgage Loans, "REO Property"). In
connection with such foreclosure or other conversion, the Master Servicer shall
exercise such of the rights and powers vested in it, and use the same degree of
care and skill in their exercise or use, as prudent mortgage lenders would
exercise or use under the circumstances in the conduct of their own affairs,
including, but not limited to, making Servicing Advances for the payment of
taxes, amounts due with respect to Senior Liens, and insurance premiums. Unless
otherwise provided in the related Prospectus Supplement, the Master Servicer
shall sell any REO Property within 23 months of its acquisition by the Trust.
The Pooling and Servicing Agreements generally will permit the Master Servicer
to cease further collection and foreclosure activity if the Master Servicer
reasonably determines that such further activity would not increase collections
or recoveries to be received by the related Trust with respect to the related
Mortgage Loan. In addition, any required advancing may be permitted to cease at
this point.
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Notwithstanding the generality of the foregoing provisions, the Master
Servicer will be required to manage, conserve, protect and operate each REO
Property for the Securityholders solely for the purpose of its prompt
disposition and sale as "foreclosure property" within the meaning of Section
860G(a)(8) of the Code or to prevent the receipt by the Trust of any "income
from non-permitted assets" within the meaning of Section 860F(a)(2)(B) of the
Code or any "net income from foreclosure property" which is subject to taxation
under the REMIC Provisions. Pursuant to its efforts to sell such REO Property,
the Master Servicer shall either itself or through an agent selected by the
Master Servicer protect and conserve such REO Property in the same manner and to
such extent as is customary in the locality where such REO Property is located
and may, incident to its conservation and protection of the interests of the
Securityholders, rent the same, or any part thereof, as the Master Servicer
deems to be in the best interest of the Securityholders for the period prior to
the sale of such REO Property. The Master Servicer shall take into account the
existence of any hazardous substances, hazardous wastes or solid wastes, as such
terms are defined in the Comprehensive Environmental Response Compensation and
Liability Act, the Resource Conservation and Recovery Act of 1976, or other
federal, state or local environmental legislation, on a Mortgaged Property in
determining whether to foreclose upon or otherwise comparably convert the
ownership of such Mortgaged Property.
The Master Servicer shall determine, with respect to each defaulted
Mortgage Loan, when it has recovered, whether through trustee's sale,
foreclosure sale or otherwise, all amounts it expects to recover from or on
account of such defaulted Mortgage Loan, whereupon such Mortgage Loan shall
become a Liquidated Mortgage Loan. A Mortgage Loan which is "charged-off", i.e.,
as to which the Master Servicer ceases further collection and/or foreclosure
activity as a result of a determination that such further actions will not
increase collections or recoveries to be received by the related Trust is also a
"Liquidated Mortgage Loan."
If a loss is realized on a defaulted Mortgage Loan or REO Property upon
the final liquidation thereof that is not covered by any applicable form of
Credit Enhancement or other insurance, the Securityholders will bear such loss.
However, if a gain results from the final liquidation of an REO Property that is
not required by law to be remitted to the related Mortgagor, the Master Servicer
will be entitled to retain such gain as additional servicing compensation unless
the related Prospectus Supplement provides otherwise. For a description of the
Master Servicer's obligations to maintain and make claims under applicable forms
of Credit Enhancement and insurance relating to the Mortgage Loans, see
"Description of Credit Enhancement" and "Hazard Insurance; Claims Thereunder;
Hazard Insurance Policies."68
SUBORDINATION
A Senior/Subordinate Series of Securities will consist of one or more
classes of Senior Securities and one or more classes of Subordinate Securities,
as specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, only the Senior Securities will be offered
hereby. Subordination of the Subordinate Securities of any Senior/Subordinate
Series of Securities will be effected by the following method, unless an
alternative method is specified in the related Prospectus Supplement. In
addition, certain classes of Senior (or Subordinate) Securities may be senior to
other classes of Senior (or Subordinate) Securities, as specified in the related
Prospectus Supplement, in which case the following discussion is qualified in
its entirety by reference to the related Prospectus Supplement with respect to
the various priorities and other rights as among the various classes of Senior
Securities or Subordinate Securities, as the case may be.
With respect to any Senior/Subordinate Series of Securities, the total
amount available for distribution on each Payment Date, as well as the method
for allocating such amount among the various classes of Securities included in
such series, will be as set forth in the related Prospectus Supplement.
Generally, the amount available for contribution will be allocated first to
interest on the Senior Securities of such series, and then to principal of the
Senior Securities up to the amounts determined as specified in the related
Prospectus Supplement, prior to allocation to the Subordinate Securities of such
series.
In the event of any Realized Losses (as defined below) on Mortgage
Loans not in excess of the limitations described below, other than Extraordinary
Losses, the rights of the Subordinate Securityholders to receive distributions
with respect to the Mortgage Loans will be subordinate to the rights of the
Senior Securityholders. With respect to any defaulted Mortgage Loan that becomes
a Liquidated Mortgage Loan, through foreclosure sale, disposition of the related
Mortgaged Property if acquired by deed in lieu of foreclosure, "charged-off" or
otherwise, the amount of loss realized, if any (as more fully described in the
related Pooling and Servicing Agreement, a
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"Realized Loss"), will equal the portion of the stated principal balance
remaining, after application of all amounts recovered (net of amounts
reimbursable to the Master Servicer for related advances and expenses) towards
interest and principal owing on the Mortgage Loan. With respect to a Mortgage
Loan the principal balance of which has been reduced in connection with
bankruptcy proceedings, the amount of such reduction will be treated as a
Realized Loss.
Except as noted below, all Realized Losses will be allocated to the
Subordinate Securities of the related series, until the Principal Balance (as
defined in the related Prospectus Supplement) of such Subordinate Securities
thereof has been reduced to zero. Any additional Realized Losses will be
allocated to the Senior Securities (or, if such series includes more than one
class of Senior Securities, either on a pro-rata basis among all of the Senior
Securities in proportion to their respective outstanding Principal Balances or
as otherwise provided in the related Prospectus Supplement).
With respect to certain Realized Losses resulting from physical damage
to Mortgaged Properties that are generally of the same type as are covered under
a special hazard insurance policy, the amount thereof that may be allocated to
the Subordinate Securities of the related series may be limited to an amount
(the "Special Hazard Amount") specified in the related Prospectus Supplement.
See "Description of Credit Enhancement--Special Hazard Insurance Policies." If
so, any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of Securities of the related series,
either on a pro-rata basis in proportion to their outstanding Security Principal
Balances, regardless of whether any Subordinate Securities remain outstanding,
or as otherwise provided in the related Prospectus Supplement. The respective
amounts of other specified types of losses (including Fraud Losses and
Bankruptcy Losses) that may be borne solely by the Subordinate Securities may be
similarly limited to an amount (with respect to Fraud Losses, the "Fraud Loss
Amount" and with respect to Bankruptcy Losses, the "Bankruptcy Loss Amount"),
and the Subordinate Securities may provide no coverage with respect to certain
other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro-rata basis
among all outstanding classes of Securities.
Any allocation of a Realized Loss (including a Special Hazard Loss) to
a Security in a Senior/Subordinate Series will be made by reducing the Security
Principal Balance thereof as of the Payment Date following the calendar month in
which such Realized Loss was incurred.
In lieu of the foregoing provisions, subordination may be effected in
the following manner, or in any other manner described in the related Prospectus
Supplement. The rights of the holders of Subordinate Securities to receive any
or a specified portion of distributions with respect to the Mortgage Loans may
be subordinated to the extent of the amount set forth in the related Prospectus
Supplement (the "Subordinate Amount"). As specified in the related Prospectus
Supplement, the Subordinate Amount may be subject to reduction based upon the
amount of losses borne by the holders of the Subordinate Securities as a result
of such subordination, a specified schedule or such other method of reduction as
such Prospectus Supplement may specify. If so specified in the related
Prospectus Supplement, additional credit support for this form of subordination
may be provided by the establishment of a reserve fund for the benefit of the
holders of the Senior Securities (which may, if such Prospectus Supplement so
provides, initially be funded by a cash deposit by the Originator) into which
certain distributions otherwise allocable to the holders of the Subordinate
Securities may be placed; such funds would thereafter be available to cure
shortfalls in distributions to holders of the Senior Securities.
DESCRIPTION OF CREDIT ENHANCEMENT
Unless otherwise expressly provided and described in the applicable
Prospectus Supplement, each series of Securities shall have credit support
(referred to herein as "Credit Enhancement") comprised of one or more of the
following components. Each component will have a monetary limit and will provide
coverage with respect to Realized Losses that are (i) attributable to the
Mortgagor's failure to make any payment of principal or interest as required
under the Mortgage Note, but not including Special Hazard Losses, Extraordinary
Losses or other losses resulting from damage to a Mortgaged Property, Bankruptcy
Losses or Fraud Losses (any such loss, a "Defaulted Mortgage Loss"); (ii) of a
type generally covered by a special hazard insurance policy (as defined below)
(any such loss, a "Special Hazard Loss"); (iii) attributable to certain actions
which may be taken by a bankruptcy court in connection with a Mortgage Loan,
including a reduction by a bankruptcy court of the principal balance of or the
Mortgage Rate on a Mortgage Loan or an extension of its maturity (any such loss,
a "Bankruptcy Loss"); and (iv) incurred on defaulted Mortgage Loans as to which
there was fraud in the origination of such Mortgage Loans (any
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such loss, a "Fraud Loss"). Losses occasioned by war, civil insurrection,
certain governmental actions, nuclear reaction and certain other risks
("Extraordinary Losses") will not be covered unless otherwise specified. To the
extent that the Credit Enhancement for any series of Securities is exhausted,
the Securityholders will bear all further risks of loss not otherwise insured
against.
As set forth below and in the applicable Prospectus Supplement, Credit
Enhancement may be provided with respect to one or more classes of a series of
Securities or with respect to the Mortgage Assets in the related Trust. Credit
Enhancement may be in the form of (i) the subordination of one or more classes
of Subordinate Securities to provide credit support to one or more classes of
Senior Securities as described under "Subordination," (ii) the use of a mortgage
pool insurance policy, special hazard insurance policy, bankruptcy bond, reserve
fund, letter of credit, financial guaranty insurance policy, other third party
guarantees, another method of Credit Enhancement described in the related
Prospectus Supplement, or the use of a cross-support feature or
overcollateralization, or (iii) any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any 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 that exceed the amount covered by Credit Enhancement or
are not covered by the Credit Enhancement, holders of one or more classes of
Securities will bear their allocable share of deficiencies. If a form of Credit
Enhancement applies to several classes of Securities, and if principal payments
equal to the aggregate principal balances of certain classes will be distributed
prior to such distributions to the classes, the classes that receive such
distributions at a later time are more likely to bear any losses that exceed the
amount covered by Credit Enhancement.
The amounts and type of Credit Enhancement arrangement as well as the
provider thereof, if applicable, with respect to each series of Securities will
be set forth in the related Prospectus Supplement. To the extent provided in the
applicable Prospectus Supplement and the Pooling and Servicing Agreement, the
Credit Enhancement arrangements may be periodically modified, reduced and
substituted for based on the aggregate outstanding principal balance of the
Mortgage Loans covered thereby. See "Description of Credit
Enhancement--Reduction or Substitution of Credit Enhancement." If specified in
the applicable Prospectus Supplement, Credit Enhancement for a series of
Securities may cover one or more other series of Securities.
The descriptions of any insurance policies or bonds described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of such policies, copies of which are available upon request.
Letter of Credit. If any component of Credit Enhancement as to any
series of Securities is to be provided by a letter of credit (the "Letter of
Credit"), a bank (the "Letter of Credit Bank") will deliver to the Trustee an
irrevocable Letter of Credit. The Letter of Credit may provide direct coverage
with respect to the related Securities or, if specified in the related
Prospectus Supplement, support the Sponsor's or any other person's obligation
pursuant to a Purchase Obligation to make certain payments to the Trustee with
respect to one or more components of Credit Enhancement. The Letter of Credit
Bank, as well as the amount available under the Letter of Credit with respect to
each component of Credit Enhancement, will be specified in the applicable
Prospectus Supplement. The Letter of Credit will expire on the expiration date
set forth in the related Prospectus Supplement, unless earlier terminated or
extended in accordance with its terms. On or before each Payment Date, either
the Letter of Credit Bank or the Trustee (or other obligor under a Purchase
Obligation) will be required to make the payments specified in the related
Prospectus Supplement after notification from the Trustee, to be deposited in
the related Distribution Account, if and to the extent covered, under the
applicable Letter of Credit.
Mortgage Pool Insurance Policies. Any mortgage pool insurance policy
("Mortgage Pool Insurance Policy") obtained by the Sponsor for each related
Trust Estate will be issued by the Pool Insurer named in the related Prospectus
Supplement. Each Mortgage Pool Insurance Policy will, subject to limitations
specified in the related Prospectus Supplement described below, cover Defaulted
Mortgage Losses in an amount equal to a percentage specified in the related
Prospectus Supplement (or in a Current Report on Form 8-K) of the aggregate
principal balance of the Mortgage Loans on the Cut-Off Date. As set forth under
"Maintenance of Credit Enhancement," the Master Servicer will use reasonable
efforts to maintain the Mortgage Pool Insurance Policy and to present claims
thereunder to the Pool Insurer on behalf of itself, the Trustee and the
Securityholders. The Mortgage Pool Insurance Policies, however, are not blanket
policies against loss (typically, such policies do not cover Special Hazard
Losses, Fraud Losses and Bankruptcy Losses), since claims thereunder may only be
made respecting particular defaulted
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Mortgage Loans and only upon satisfaction of certain conditions precedent
described below due to a failure to pay irrespective of the reason therefor.
Special Hazard Insurance Policies. Any insurance policy covering
Special Hazard Losses (a "Special Hazard Insurance Policy") obtained by the
Sponsor for a Trust Estate will be issued by the insurer named in the related
Prospectus Supplement. Each Special Hazard Insurance Policy will, subject to
limitations described in the related Prospectus Supplement, protect holders of
the related series of Securities from (i) losses due to direct physical damage
to a Mortgaged Property other than any loss of a type covered by a hazard
insurance policy or a flood insurance policy, if applicable, and (ii) losses
from partial damage caused by reason of the application of the co-insurance
clauses contained in hazard insurance policies. See "Hazard Insurance; Claims
Thereunder." A Special Hazard Insurance Policy will not cover Extraordinary
Losses. Aggregate claims under a Special Hazard Insurance Policy will be limited
to a maximum amount of coverage, as set forth in the related Prospectus
Supplement or in a Current Report on Form 8-K. A Special Hazard Insurance Policy
will provide that no claim may be paid unless hazard and, if applicable, flood
insurance on the Mortgaged Property securing the Mortgage Loan has been kept in
force and other protection and preservation expenses have been paid by the
Master Servicer.
Subject to the foregoing limitations, in general a Special Hazard
Insurance Policy will provide that, where there has been damage to property
securing a foreclosed Mortgage Loan (title to which has been acquired by the
insured) and to the extent such damage is not covered by the hazard insurance
policy or flood insurance policy, if any, maintained by the Mortgagor or the
Master Servicer or the Sub-Servicer, the insurer will pay the lesser of (i) the
cost of repair or replacement of such property or (ii) up on transfer of the
property to the insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest at the Mortgage Rate to the date of claim
settlement and certain expenses incurred by the Master Servicer or the
Sub-Servicer with respect to such property. If the property is transferred to a
third party in a sale approved by the issuer of the Special Hazard Insurance
Policy (the "Special Hazard Insurer"), the amount that the Special Hazard
Insurer will pay will be the amount under (ii) above reduced by the net proceeds
of the sale of the property.
As indicated under "Description of the Securities--Assignment of
Mortgage Loans" above and to the extent set forth in the related Prospectus
Supplement, coverage in respect of Special Hazard Losses for a series of
Securities may be provided, in whole or in part by a type of special hazard
instrument other than a Special Hazard Insurance Policy or by means of the
special hazard representation of the Sponsor.
Bankruptcy Bonds. In the event of a personal bankruptcy of a Mortgagor,
it is possible that the bankruptcy court may establish the value of the
Mortgaged Property of such Mortgagor at an amount less than the
then-outstanding, principal balance of the Mortgage Loan secured by such
Mortgaged Property (a "Deficient Valuation"). The amount of the secured debt
then could be reduced to such value, and, thus, the holder of such Mortgage Loan
would become an unsecured creditor to the extent the outstanding principal
balance of such Mortgage Loan exceeds the value assigned to the Mortgaged
Property by the bankruptcy court. In addition, certain other modifications of
the terms of a Mortgage Loan can result from a bankruptcy proceeding, including
a reduction in the amount of the monthly payment on the related Mortgage Loan or
a reduction in the mortgage interest rate (a "Debt Service Reduction"; Debt
Service Reductions and Deficient Valuations, collectively referred to herein as
"Bankruptcy Losses"). See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Anti-Deficiency Legislation and Other Limitations on Lenders." Any
bankruptcy bond ("Bankruptcy Bond") to provide coverage for Bankruptcy Losses
for proceedings under the federal Bankruptcy Code obtained by the Sponsor for a
Trust Estate will be issued by an insurer named in the related Prospectus
Supplement. The level of coverage under each Bankruptcy Bond will be set forth
in the applicable Prospectus Supplement or in a Current Report on Form 8-K.
Reserve Funds. If so provided in the related Prospectus Supplement, the
Sponsor will deposit or cause to be deposited in an account (a "Reserve Fund")
any combination of cash, one or more irrevocable letters of credit or one or
more Eligible Investments in specified amounts, amounts otherwise distributable
to Subordinate Securityholders or the owners of any Originator's Retained Yield,
or any other instrument satisfactory to the Rating Agency or Agencies, which
will be applied and maintained in the manner and under the conditions specified
in such Prospectus Supplement. In the alternate or in addition to such deposit
to the extent described in the related Prospectus Supplement, a Reserve Fund may
be funded through application of all or a portion of amounts otherwise payable
on any related Subordinate Securities from the Originator's Retained Yield or
otherwise. In addition, with respect to any series of Securities as to which
Credit Enhancement includes a Letter of Credit, if so specified in the related
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Prospectus Supplement, under certain circumstances the remaining amount of the
Letter of Credit may be drawn by the Trustee and deposited in a Reserve Fund.
Amounts in a Reserve Fund may be distributed to Securityholders, or applied to
reimburse the Master Servicer for outstanding advances or may be used for other
purposes, in the manner and to the extent specified in the related Prospectus
Supplement. A Trust Estate may contain more than one Reserve Fund, each of which
may apply only to a specified class of Securities or to specified Mortgage
Assets.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or series of Securities. The issuer of any Financial Guaranty Insurance
Policy (a "Financial Guaranty Insurer") will be described in the related
Prospectus Supplement. A copy of any such Financial Guaranty Insurance Policy
will be attached as an exhibit to the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Securityholders that an amount equal to each full and complete
insured payment will be received by an agent of the Trustee (an "Insurance
Paying Agent") on behalf of Securityholders, for distribution by the Trustee to
each Securityholder. The "insured payment" will be defined in the related
Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Securityholders are entitled
under the related Pooling and Servicing Agreement plus any other amounts
specified therein or in the related Prospectus Supplement (the "Insured
Payment").
Financial Guaranty Insurance Policies may apply only to certain
specified classes, or may apply at the Mortgage Asset level and only to
specified Mortgage Assets.
The specific terms of any Financial Guaranty Insurance Policy will be
as set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Originators to
repurchase or substitute for any Mortgage Loans, Financial Guaranty Insurance
Policies will not guarantee any specified rate of prepayments and/or to provide
funds to redeem Securities on any specified date.
Subject to the terms of the related Pooling and Servicing Agreement,
the Financial Guaranty Insurer may be subrogated to the rights of each
Securityholder to receive payments under the Securities to the extent of any
payment by such Financial Guaranty Insurer under the related Financial Guaranty
Insurance Policy.
Other Insurance, Guarantees and Similar Instruments or Agreements. If
specified in the related Prospectus Supplement, a Trust may include in lieu of
some or all of the foregoing or in addition thereto third party guarantees, and
other arrangements for maintaining timely payments or providing additional
protection against losses on all or any specified portion of the assets included
in such Trust, paying administrative expenses, or accomplishing such other
purpose as may be described in the Prospectus Supplement. The Trust may include
a guaranteed investment contract or reinvestment agreement pursuant to which
funds held in one or more accounts will be invested at a specified rate. If any
class of Securities has a floating interest rate, or if any of the Mortgage
Assets has a floating interest rate, the Trust may include an interest rate swap
contract, an interest rate cap agreement or similar contract providing limited
protection against interest rate risks.
Cross Support. If specified in the Prospectus Supplement, the
beneficial ownership of separate groups of assets included in a Trust may be
evidenced by separate classes of the related series of Securities. In such case,
credit support may be provided by a cross-support feature which requires that
distributions be made with respect to one class of Securities may be made from
excess amounts available from other asset groups within the same Trust which
support other classes of Securities. The Prospectus Supplement for a series that
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of credit support may apply concurrently to two or more separate
Trusts. If applicable, the Prospectus Supplement will identify the Trusts to
which such credit support relates and the manner of determining the amount of
the coverage provided thereby and of the application of such coverage to the
identified Trusts.
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Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Securities relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Securities. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof, over
collateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or a group thereof, over the principal
balance of the related class of Securities. Such acceleration may continue for
the life of the related Security, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related Prospectus Supplement,
such limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
Maintenance of Credit Enhancement. To the extent that the applicable
Prospectus Supplement does not expressly provide for Credit Enhancement
arrangements in lieu of some or all of the arrangements mentioned below, the
following paragraphs shall apply.
If a form of Credit Enhancement has been obtained for a series of
Securities, the Sponsor will be obligated to exercise its best reasonable
efforts to keep or cause to be kept such form of credit support in full force
and effect throughout the term of the applicable Pooling and Servicing
Agreement, unless coverage thereunder has been exhausted through payment of
claims or otherwise, or substitution therefor is made as described below under
"Reduction or Substitution of Credit Enhancement."
In lieu of the Sponsor's obligation to maintain a particular form of
Credit Enhancement, the Sponsor may obtain a substitute or alternate form of
Credit Enhancement. If the Master Servicer obtains such a substitute form of
Credit Enhancement, it will maintain and keep such form of Credit Enhancement in
full force and effect as provided herein. Prior to its obtaining any substitute
or alternate form of Credit Enhancement, the Sponsor will obtain written
confirmation from the Rating Agency or Agencies that rated the related series of
Securities that the substitution or alternate form of Credit Enhancement for the
existing Credit Enhancement will not adversely affect the then-current ratings
assigned to such Securities by such Rating Agency or Agencies.
The Master Servicer, on behalf of itself, the Trustee and
Securityholders, will provide the Trustee information required for the Trustee
to draw under a Letter of Credit or Financial Guaranty Insurance Policy, will
present claims to each Pool Insurer, to the issuer of each Special Hazard
Insurance Policy or other special hazard instrument, to the issuer of each
Bankruptcy Bond and will take such reasonable steps as are necessary to permit
recovery under such Letter of Credit, Financial Guaranty Insurance Policy,
Purchase Obligation, insurance policies or comparable coverage respecting
defaulted Mortgage Loans or Mortgage Loans which are the subject of a bankruptcy
proceeding. Additionally, the Master Servicer will present such claims and take
such steps as are reasonably necessary to provide for the performance by another
party of its Purchase Obligation. As set forth above, all collections by the
Master Servicer under any Purchase Obligation, any Mortgage Pool Insurance
Policy, or any Bankruptcy Bond and, where the related property has not been
restored, any Special Hazard Insurance Policy, are to be deposited initially in
the Principal and Interest Account and ultimately in the Distribution Account,
subject to withdrawal as described above. All draws under any Letter of Credit
or Financial Guaranty Insurance Policy will be deposited directly in the
Distribution Account.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any applicable form of Credit
Enhancement, the Master Servicer is not required to expend its own funds to
restore the damaged property unless it determines (i) that such restoration will
increase the proceeds to one or more classes of Securityholders on liquidation
of the Mortgage Loan after reimbursement of the Master Servicer for its expenses
and (ii) that such expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds. If recovery under any applicable form of Credit
Enhancement is not available because the Master Servicer has been unable to make
the above determinations, has made such determinations incorrectly or recovery
is not available for any other reason, the Master Servicer is nevertheless
obligated to follow such normal practices and procedures (subject to the
preceding sentence) as it deems necessary or advisable to realize upon the
defaulted Mortgage Loan and in the event such determination has been incorrectly
made, is entitled to reimbursement of its expenses in connection with such
restoration.
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Reduction or Substitution of Credit Enhancement. Unless otherwise
specified in the related Prospectus Supplement, the amount of credit support
provided pursuant to any of the Credit Enhancements (including, without
limitation, a Mortgage Pool Insurance Policy, Financial Guaranty Insurance
Policy, Special Hazard Insurance Policy, Bankruptcy Bond, Letter of Credit, or
any alternative form of Credit Enhancement) may be reduced under certain
specified circumstances. In addition, if so described in the related Prospectus
Supplement, any formula used in calculating the amount or degree of Credit
Enhancement may be changed without the consent of the Securityholders upon
written confirmation from each Rating Agency then rating the Securities that
such change will not adversely affect the then-current rating or ratings
assigned to the Securities. In most cases, the amount available pursuant to any
Credit Enhancement will be subject to periodic reduction in accordance with a
schedule or formula on a nondiscretionary basis pursuant to the terms of the
related Pooling and Servicing Agreement as the aggregate outstanding principal
balance of the Mortgage Loans declines. Additionally, in certain cases, such
credit support (and any replacements therefor) may be replaced, reduced or
terminated upon the written assurance from each applicable Rating Agency that
the then-current rating of the related series of Securities will not be
adversely affected. Furthermore, in the event that the credit rating of any
obligor under any applicable Credit Enhancement is downgraded, the credit rating
of the related Securities may be downgraded to a corresponding level, and,
unless otherwise specified in the related Prospectus Supplement, the Sponsor
thereafter will not be obligated to obtain replacement credit support in order
to restore the rating of the Securities, and also will be permitted to replace
such credit support with other Credit Enhancement instruments issued by obligors
whose credit ratings are equivalent to such downgraded level and in lower
amounts which would satisfy such downgraded level, provided that the
then-current, albeit downgraded, rating of the related series of Securities is
maintained. Where the credit support is in the form of a Reserve Fund, a
permitted reduction in the amount of Credit Enhancement will result in a release
of all or a portion of the assets in the Reserve Fund to the Sponsor, the Master
Servicer, one or more Originators or such other person that is entitled thereto.
Any assets so released will not be available to fund distribution obligations in
future periods.
HAZARD INSURANCE; CLAIMS THEREUNDER
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below). The following is only a brief description of
certain insurance policies and does not purport to summarize or describe all of
the provisions of these policies. Such insurance is subject to underwriting and
approval of individual Mortgage Loans by the respective insurers. The
descriptions of any insurance policies described in this Prospectus or any
Prospectus Supplement and the coverage thereunder do not purport to be complete
and are qualified in their entirety by reference to such forms of policies,
sample copies of which are available from the Trustee upon request.
HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a
hazard insurance policy for the Mortgage Loan. Additionally, the Pooling and
Servicing Agreement will require the Master Servicer to cause to be maintained
with respect to each Mortgage Loan a hazard insurance policy with a generally
acceptable carrier that provides for fire and extended coverage relating to such
Mortgage Loan in an amount not less than the least of (i) the outstanding
principal balance of the Mortgage Loan, (ii) the minimum amount required to
compensate for damage or loss on a replacement cost basis or (iii) the full
insurable value of the premises.
If a Mortgage Loan at the time of origination relates to a Mortgaged
Property in an area identified in the Federal Register by the Federal Emergency
Management Agency as having special flood hazards, the Master Servicer will be
required to maintain with respect thereto a flood insurance policy in a form
meeting the requirements of the then-current guidelines of the Federal Insurance
Administration with a generally acceptable carrier in an amount representing
coverage, and which provides for recovery by the Master Servicer on behalf of
the Trust of insurance proceeds relating to such Mortgage Loan of not less than
the least of (i) the outstanding principal balance of the Mortgage Loan, (ii)
the minimum amount required to compensate for damage or loss on a replacement
cost basis, (iii) the maximum amount of insurance that is available under the
Flood Disaster Protection Act of 1973. Pursuant to the related Pooling and
Servicing Agreement, the Master Servicer will be required to indemnify the Trust
out of the Master Servicer's own funds for any loss to the Trust resulting from
the Master Servicer's failure to maintain such flood insurance.
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In the event that the Master Servicer obtains and maintains a blanket
policy insuring against fire with extended coverage and against flood hazards on
all of the Mortgage Loans, then, to the extent such policy names the Master
Servicer as loss payee and provides coverage in an amount equal to the aggregate
unpaid principal balance on the Mortgage Loans without co-insurance, and
otherwise complies with the requirements of the Pooling and Servicing Agreement,
the Master Servicer shall be deemed conclusively to have satisfied its
obligations with respect to fire and hazard insurance coverage under the Pooling
and Servicing Agreement. Such blanket policy may contain a deductible clause, in
which case the Master Servicer will be required, in the event that there shall
not have been maintained on the related Mortgaged Property a policy complying
with the Pooling and Servicing Agreement, and there shall have been a loss that
would have been covered by such policy, to deposit in the Principal and Interest
Account from the Master Servicer's own funds the difference, if any, between the
amount that would have been payable under a policy complying with the Pooling
and Servicing Agreement and the amount paid under such blanket policy.
THE SPONSOR AND THE TRANSFEROR
The Sponsor, ADVANTA Mortgage Conduit Services, Inc., was incorporated
in the State of Delaware in April, 1993. It is a direct subsidiary of the Master
Servicer, Advanta Mortgage Corp. USA, in addition to ADVANTA Mortgage Corp.
Midatlantic, ADVANTA Mortgage Corp., Midatlantic II, ADVANTA Mortgage Corp.
Midwest, ADVANTA Mortgage Corp. of New Jersey and ADVANTA Mortgage Corp.
Northeast. The Sponsor was organized for the purpose of the purchase and
securitization of first and junior mortgage loans.
The Sponsor maintains its principal office at 16875 West Bernardo
Drive, San Diego, California 92127. Its telephone number is (619) 674-1800.
The Transferor, ADVANTA Mortgage Receivables Inc., was incorporated in
the State of Delaware in February, 1994. It is a direct subsidiary of the
Sponsor, and was formed as a special purpose finance subsidiary to facilitate
certain issuances of Securities. The use of the Transferor will not affect the
obligations of the Sponsor with respect to the related Trust or the related
Securities. If the Transferor is to be involved in a particular offering the
related Prospectus Supplement will describe its role in such offering; for
purposes of this Prospectus the role of the Transferor is subsumed in the role
of the Sponsor.
The Transferor maintains its principal office at Brandywine Corporate
Center, 650 Naamans Road, Claymont, Delaware 19703. Its telephone number is
(302) 791-4400.
THE MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement,
ADVANTA Mortgage Corp. USA will act as the Master Servicer for a series of
Securities.
ADVANTA Mortgage Corp. USA was acquired by ADVANTA Corp., a Delaware
corporation ("ADVANTA Parent") in September, 1986 and is an indirect subsidiary
of ADVANTA Parent. The Master Servicer is an affiliate of Colonial National Bank
USA ("Colonial"), a national banking association domiciled in Delaware, and the
parent of ADVANTA Mortgage Corp. Midatlantic, ADVANTA Mortgage Corp. Midatlantic
II, ADVANTA Mortgage Corp. Midwest, ADVANTA Mortgage Corp. of New Jersey and
ADVANTA Mortgage Corp. Northeast. ADVANTA Mortgage Corp. USA is a Delaware
corporation incorporated in 1983. It is a nationwide servicer of first and
junior mortgage loans. ADVANTA Mortgage Corp. USA has centralized servicing
functions located in San Diego, California. This provides for economies of scale
and a depth of appraisal, attorney and realtor contacts throughout the country.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Securities--General," each
series of Securities will be issued pursuant to a Pooling and Servicing
Agreement as described in that section. The following summaries describe certain
additional provisions common to each Pooling and Servicing Agreement.
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SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; ORIGINATOR'S RETAINED
YIELD
Each servicer, whether the Master Servicer or any Sub-Servicer (either
the Master Servicer or any Sub- Servicer being a "Servicer"), will retain a fee
in connection with its servicing activities for each series of Securities equal
to the percentage per annum specified in the related Prospectus Supplement or
Current Report on Form 8-K (the "Base Servicing Fee"), generally payable monthly
with respect to each Mortgage Loan directly serviced by such Servicer at
one-twelfth the annual rate, of the then-outstanding principal amount of each
such Mortgage Loan as of the first day of each calendar month. The Master
Servicer acting as master servicer with respect to Mortgage Loans being serviced
directly by a Sub-Servicer will retain a fee equal to the percentage per annum
specified in the related Prospectus Supplement or Current Report on Form 8-K
("Master Servicing Fee"), generally payable monthly on one-twelfth the annual
rate, of the then-outstanding principal amount of each such Mortgage Loan as of
the first day of each calendar month. The Base Servicing Fees and the Master
Servicing Fee are collectively referred to as the "Servicing Fee."
In addition to the Base Servicing Fee, each Servicer will generally be
entitled under the Pooling and Servicing Agreement to retain additional
servicing compensation in the form of prepayment charges, release fees, bad
check charges, assumption fees, late payment charges, or any other
servicing-related fees, Net Liquidation Proceeds not required to be deposited in
the Principal and Interest Account pursuant to the Pooling and Servicing
Agreement, and similar items.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will pay or cause to be paid certain ongoing expenses associated
with each Trust Estate and incurred by it in connection with its
responsibilities under the Pooling and Servicing Agreement, including, without
limitation, payment of any fee or other amount payable in respect of any
alternative Credit Enhancement arrangements, payment of the fees and
disbursements of the Trustee or accountant, any custodian appointed by the
Trustee, the Security Registrar and any Paying Agent, and payment of expenses
incurred in enforcing the obligations of Sub-Servicers and Originators. The
Master Servicer may be entitled to reimbursement of expenses incurred in
enforcing the obligations of Sub-Servicers and Originators under certain limited
circumstances. In addition, as indicated in the preceding section, the Master
Servicer will be entitled to reimbursements for certain expenses incurred by it
in connection with Liquidated Mortgage Loans and in connection with the
restoration of Mortgaged Properties, such right of reimbursement being prior to
the rights of Securityholders to receive any related Liquidation Proceeds
(including Insurance Proceeds).
The Prospectus Supplement for a series of Securities will specify if
there will be any Originator's Retained Yield retained. Any such Originator's
Retained Yield will be a specified portion of the interest payable on each
Mortgage Loan in a Mortgage Pool. Any such Originator's Retained Yield will be
established on a loan-by-loan basis and the amount thereof with respect to each
Mortgage Loan in a Mortgage Pool will be specified on an exhibit to the related
Pooling and Servicing Agreement. Any Originator's Retained Yield in respect of a
Mortgage Loan will represent a specified portion of the interest payable thereon
and will not be part of the related Trust Estate. Any partial recovery of
interest in respect of a Mortgage Loan will be allocated between the owners of
any Originator's Retained Yield and the holders of classes of Securities
entitled to payments of interest as provided in the Prospectus Supplement and
the applicable Pooling and Servicing Agreement.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement will require the Master Servicer
to deliver annually to the Trustee and any Credit Enhancer, an officers'
certificate stating, as to each signer thereof, that (i) a review of the
activities of the Master Servicer during such preceding year and of performance
under the related Pooling and Servicing Agreement has been made under such
officers' supervision, and (ii) to the best of such officers' knowledge, based
on such review, the Master Servicer has fulfilled all its obligations under the
related Pooling and Servicing Agreement for such year, or, if there has been a
default in the fulfillment of any such obligations, specifying each such default
known to such officers and the nature and status thereof including the steps
being taken by the Master Servicer to remedy such defaults.
Each Pooling and Servicing Agreement will require the Master Servicer
to cause to be delivered to the Trustee and any Credit Enhancer a letter or
letters of a firm of independent, nationally recognized certified public
accountants reasonably acceptable to the Credit Enhancer, if applicable, stating
that such firm has, with respect to
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the Master Servicer's overall servicing operations (i) performed applicable
tests in accordance with the compliance testing procedures as set forth in
Appendix 3 of the Audit Guide for Audits of HUD Approved Nonsupervised
Mortgagees or (ii) examined such operations in accordance with the requirements
of the Uniform Single Attestation Program for Mortgage Bankers, and in either
case stating such firm's conclusions relating thereto.
Copies of the annual accountants' statement and the annual statement of
officers of the Master Servicer may be obtained by Securityholders without
charge upon written request to the Master Servicer.
REMOVAL AND RESIGNATION OF THE MASTER SERVICER
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that the Master Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it. No such resignation will become effective until the Trustee has
assumed the Master Servicer's obligations and duties under the Pooling and
Servicing Agreement. The Trustee, the Securityholders or a Credit Enhancer, if
applicable, will have the right, pursuant to the related Pooling and Servicing
Agreement, to remove the Master Servicer upon the occurrence of any of (a)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Master Servicer and certain
actions by the Master Servicer indicating its insolvency or inability to pay its
obligations; (b) the failure of the Master Servicer to perform any one or more
of its material obligations under the Pooling and Servicing Agreement as to
which the Master Servicer shall continue in default with respect thereto for a
specified period, generally of sixty (60) days, after notice by the Trustee or
any Credit Enhancer (if required by the Pooling and Servicing Agreement) of said
failure; or (c) the failure of the Master Servicer to cure any breach of any of
its representations and warranties set forth in the Pooling and Servicing
Agreement which materially and adversely affects the interests of the
Securityholders or any Credit Enhancer, for a specified period, generally of
thirty (30) days after the Master Servicer's discovery or receipt of notice
thereof.
The Pooling and Servicing Agreement may also provide that the related
Credit Enhancer may remove the Master Servicer upon the occurrence of any of
certain events including:
(i) with respect to any Payment Date, if the total available
funds with respect to the Mortgage Loans Group will be less than the
related distribution amount on the class of credit-enhanced securities
in respect of such Payment Date; provided, however, that the Credit
Enhancer generally will have no right to remove the Master Servicer
pursuant to the provision described in this clause (i) if the Master
Servicer can demonstrate to the reasonable satisfaction of the Credit
Enhancer that such event was due to circumstances beyond the control of
the Master Servicer;
(ii) the failure by the Master Servicer to make any required
Servicing Advance;
(iii) the failure of the Master Servicer to perform one or
more of its material obligations under the Pooling and Servicing
Agreement; or
(iv) the failure by the Master Servicer to make any required
Delinquency Advance or to pay any Compensating Interest;
provided, however, that prior to any removal of the Master Servicer by the
related Credit Enhancer pursuant to clauses (i), (ii) or (iii) above the Master
Servicer shall first have been given by the related Credit Enhancer notice of
the occurrence of one or more of the events set forth in clauses (i) or (ii)
above and the Master Servicer shall not have remedied, or shall not have taken
action satisfactory to such Credit Enhancer to remedy, such event or events
within a specified period, generally 30 days (60 days with respect to clause
(iii)) after the Master Servicer's receipt of such notice; and provided, further
that in the event of the refusal or inability of the Master Servicer to make any
required Delinquency Advance or to pay any Compensating Interest as described in
clause (iv) above, such removal shall be effective (without the requirement of
any action on the part of such Credit Enhancer or of the Trustee) not later than
a shorter specified period, generally not in excess of five business days,
following the day on which the Trustee notifies an authorized officer of the
Master Servicer that a required Delinquency Advance or to pay any Compensating
Interest has not been received by the Trustee.
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AMENDMENTS
The Trustee, the Sponsor and the Master Servicer may at any time and
from time to time, with the prior approval of the related Credit Enhancer, if
required, but without the giving of notice to or the receipt of the consent of
the Securityholders, amend a Pooling and Servicing Agreement, and the Trustee
will be required to consent to such amendment, for the purposes of (x) (i)
curing any ambiguity, or correcting or supplementing any provision of such
Pooling and Servicing Agreement which may be inconsistent with any other
provision of the Pooling and Servicing Agreement, (ii) in connection with a
Trust making REMIC elections, if accompanied by an approving opinion of counsel
experienced in federal income tax matters, removing the restriction against the
transfer of a REMIC residual security to a Disqualified Organization (as such
term is defined in the Code) or (iii) complying with the requirements of the
Code and the regulations proposed or promulgated thereunder; provided, however,
that such action shall not, as evidenced by an opinion of counsel delivered to
the Trustee, materially and adversely affect the interests of any Securityholder
(without its written consent) or (y) such other purposes set forth in the
related Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement may also be amended by the Trustee, the Sponsor
and the Master Servicer at any time and from time to time, with the prior
written approval of the related Credit Enhancer, if required, and not less than
a majority of the Percentage Interest represented by each related class of
Securities then outstanding, for the purpose of adding any provisions or
changing in any manner or eliminating any of the provisions of such Pooling and
Servicing Agreement or of modifying in any manner the rights of the
Securityholders thereunder; provided, however, that no such amendment shall (a)
change in any manner the amount of, or delay the timing of, payments which are
required to be distributed to any Securityholders without the consent of the
holder of such Security or (b) change the aforesaid percentages of Percentage
Interest which are required to consent to any such amendments, without the
consent of the holders of all Securities of the class or classes affected then
outstanding.
TERMINATION; RETIREMENT OF SECURITIES
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide that a Trust will terminate upon
the earlier of (i) the payment to the Securityholders of all Securities issued
by the Trust from amounts other than those available under, if applicable, the
related Credit Enhancement of all amounts required to be paid to such
Securityholders upon the later to occur of (a) the final payment or other
liquidation (or any advance made with respect thereto) of the last Mortgage Loan
in the Trust Estate or (b) the disposition of all property acquired in respect
of any Mortgage Loan remaining in the Trust Estate, (ii) any time when a
Qualified Liquidation (as defined in the Code) of the Trust Estate (if the
related Trust is a REMIC) is effected. In no event, however, will the trust
created by the Pooling and Servicing Agreement continue beyond the expiration of
21 years from the death of the survivor of certain persons named in such Pooling
and Servicing Agreement. Written notice of termination of the Pooling and
Servicing Agreement will be given to each Securityholder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency appointed by the Trustee that will be specified in the
notice of termination. If the Securityholders are permitted to terminate the
trust under the applicable Pooling and Servicing Agreement, a penalty may be
imposed upon the Securityholders based upon the fee that would be foregone by
the Master Servicer because of such termination.
Any purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Securities shall be made at the option
of the Master Servicer, the Sponsor or, if applicable, the holder of the REMIC
Residual Securities at the price specified in the related Prospectus Supplement.
The exercise of such right will effect earlier than expected retirement of the
Securities of that series, but the right of the Master Servicer, the Sponsor or,
if applicable, such holder to so purchase is, unless otherwise specified in the
applicable Prospectus Supplement, subject to the aggregate principal balance of
the Mortgage Loans for that series as of any Remittance Date being less than the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans at the Cut-Off Date for that series. The
Prospectus Supplement for each series of Securities will set forth the amounts
that the holders of such Securities will be entitled to receive upon such
earlier than expected retirement. If a REMIC election has been made, the
termination of the related Trust Estate will be effected in a manner consistent
with applicable federal income tax regulations and its status as a REMIC.
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THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement will be named in
the related Prospectus Supplement. Each Pooling and Servicing Agreement will
provide that the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by the Pooling and Servicing Agreement at the
request or direction of any of the Securityholders, unless such Securityholders
shall have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by it in compliance with
such request or direction.
The Trustee may execute any of the trusts or powers granted by each
Pooling and Servicing Agreement or perform any duties thereunder either directly
or by or through agents or attorneys, and the Trustee will not be responsible
for any misconduct or negligence on the part of any agent or attorney appointed
and supervised with due care by it thereunder.
Pursuant to each Pooling and Servicing Agreement, the Trustee will not
be liable for any action it takes or omits to take in good faith which it
reasonably believes to be authorized by an authorized officer of any person or
within its rights or powers under the Pooling and Servicing Agreement.
Unless otherwise described in the related Prospectus Supplement, each
Pooling and Servicing Agreement will permit the removal of the Trustee upon the
occurrence and continuance of one of the following events:
(1) the Trustee shall fail to distribute to the
Securityholders entitled thereto on any Payment Date amounts available
for distribution in accordance with the terms of the Pooling and
Servicing Agreement; or
(2) the Trustee shall default in the performance of, or
breach, any covenant or agreement of the Trustee in the Pooling and
Servicing Agreement, or if any representation or warranty of the
Trustee made in the Pooling and Servicing Agreement or in any
certificate or other writing delivered pursuant thereto or in
connection therewith shall prove to be incorrect in any material
respect as of the time when the same shall have been made, and such
default or breach shall continue or not be cured for the period then
specified in the related Pooling and Servicing Agreement after the
Trustee shall have received notice specifying such default or breach
and requiring it to be remedied; or
(3) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, or for
the winding-up or liquidation of its affairs, shall have been entered
against the Trustee, and such decree or order shall have remained in
force undischarged or unstayed for the period then specified in the
related Pooling and Servicing Agreement; or
(4) a conservator or receiver or liquidator or sequestrator or
custodian of the property of the Trustee is appointed in any
insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings of or relating to the Trustee or relating to all
or substantially all of its property; or
(5) the Trustee shall become insolvent (however insolvency is
evidenced), generally fail to pay its debts as they come due, file or
consent to the filing of a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the
benefit of its creditors, voluntarily suspend payment of its
obligations, or take corporate action for the purpose of any of the
foregoing.
If an event described above occurs and is continuing, then, and in
every such case (i) the Sponsor, (ii) the Securityholders (on the terms set
forth in the related Pooling and Servicing Agreement), or (iii) if there is a
Credit Enhancer, such Credit Enhancer may, whether or not the Trustee has
resigned, immediately, concurrently with the giving of notice to the Trustee,
and without delay, appoint a successor Trustee pursuant to the terms of the
Pooling and Servicing Agreement.
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No Securityholder will have any right to institute any proceeding,
judicial or otherwise, with respect to a Pooling and Servicing Agreement or any
Credit Enhancement, if applicable, or for the appointment of a receiver or
trustee, or for any other remedy under the Pooling and Servicing Agreement,
unless:
(1) such Securityholder has previously given written notice to
the Sponsor and the Trustee of such Securityholder's intention to
institute such proceeding;
(2) the Securityholders of not less than 25% of the Percentage
Interests represented by certain specified classes of Securities then
outstanding shall have made written request to the Trustee to institute
such proceeding;
(3) such Securityholder or Securityholders have offered to the
Trustee reasonable indemnity, against the costs, expenses and
liabilities to be incurred in compliance with such request;
(4) the Trustee for the period specified in the related
Pooling and Servicing Agreement, generally not in excess of 60 days
after receipt of such notice, request and offer of indemnity, has
failed to institute such proceeding;
(5) as long as such action affects any credit-enhanced class
of Securities outstanding, the related Credit Enhancer has consented in
writing thereto; and
(6) no direction inconsistent with such written request has
been given to the Trustee during such specified period by the
Securityholders of a majority of the Percentage Interests represented
by certain specified classes of Securities.
No one or more Securityholders will have any right in any manner
whatever by virtue of, or by availing themselves of, any provision of the
Pooling and Servicing Agreement to affect, disturb or prejudice the rights of
any other Securityholder of the same class or to obtain or to seek to obtain
priority or preference over any other Securityholder of the same class or to
enforce any right under the Pooling and Servicing Agreement, except in the
manner provided in the Pooling and Servicing Agreement and for the equal and
ratable benefit of all of the Securityholders of the same class.
In the event the Trustee receives conflicting or inconsistent requests
and indemnity from two or more groups of Securityholders, each representing less
than a majority of the applicable class of Securities, the Trustee in its sole
discretion may determine what action, if any, shall be taken, notwithstanding
any other provision of the Pooling and Servicing Agreement.
Notwithstanding any other provision in the Pooling and Servicing
Agreement, the Securityholder of any Security has the right, which is absolute
and unconditional, to receive distributions to the extent provided in the
Pooling and Servicing Agreement with respect to such Security or to institute
suit for the enforcement of any such distribution, and such right shall not be
impaired without the consent of such Security.
Either (i) the Securityholders of a majority of the Percentage
Interests represented by certain specified classes of Securities then
outstanding or (ii) if there is a Credit Enhancer, such Credit Enhancer may
direct the time, method and place of conducting any proceeding for any remedy
available to the Sponsor with respect to the Certificates or exercising any
trust or power conferred on the Trustee with respect to such Certificates;
provided that:
(1) such direction shall not be in conflict with any rule of
law or with a Pooling and Servicing Agreement;
(2) the Sponsor or the Trustee, as the case may be, shall have
been provided with indemnity satisfactory to them; and
(3) the Sponsor or the Trustee, as the case may be, may take
any other action deemed proper by the Trustee which is not inconsistent
with such direction; provided, however, that the Sponsor or the
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Trustee, as the case may be, need not take any action which they
determine might involve them in liability or may be unjustly
prejudicial to the Securityholders not so directing.
The Trustee will be liable under the Pooling and Servicing Agreement
only to the extent of the obligations specifically imposed upon and undertaken
by the Trustee therein. Neither the Trustee nor any of the directors, officers,
employees or agents of the Trustee will be under any liability on any Security
or otherwise to any Account, the Sponsor, the Master Servicer or any
Securityholder for any action taken or for refraining from the taking of any
action in good faith under a Pooling and Servicing Agreement, or for errors in
judgment; provided, however, that such provision shall not protect the Trustee
or any such person against any liability which would otherwise be imposed by
reason of negligent action, negligent failure to act or willful misconduct in
the performance of duties or by reason of reckless disregard of obligations and
duties thereunder.
YIELD CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by
the holder for such Security, the Pass- Through Rate on any such Security
entitled to payments of interest (which Pass-Through Rate may vary if so
specified in the related Prospectus Supplement) and the rate of payment of
principal on such Security (or the rate at which the notional amount thereof is
reduced if such Security is not entitled to payments of principal) and other
factors.
Each month the interest payable on an actuarial type of Mortgage Loan
will be calculated as one-twelfth of the applicable Mortgage Rate multiplied by
the principal balance of such Mortgage Loan outstanding as of a specified day,
usually the first day of the month prior to the month in which the Payment Date
for the related series of Securities occurs, after giving effect to the payment
of principal due on such day, subject to any Deferred Interest. With respect to
date of payment Mortgage Loans, interest is charged to the Mortgagor at the
Mortgage Rate on the outstanding principal balance of such Note and calculated
based on the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payments. The amount of
such payments with respect to each Mortgage Loan distributed (or accrued in the
case of Deferred Interest or Accrual Securities) either monthly, quarterly or
semi-annually to holders of a class of Securities entitled to payments of
interest will be similarly calculated on the basis of such class' specified
percentage of each such payment of interest (or accrual in the case of Accrual
Securities) and will be expressed as a fixed, adjustable or variable
Pass-Through Rate payable on the outstanding principal balance or notional
amount of such Security, calculated as described herein and in the related
Prospectus Supplement. Holders of Strip Securities or a class of Securities
having a fixed Pass-Through Rate that varies based on the weighted average
Mortgage Rate of the underlying Mortgage Loans will be affected by
disproportionate prepayments and repurchases of Mortgage Loans having higher Net
Mortgage Rates or rates applicable to the Strip Securities, as applicable.
The effective yield to maturity to each holder of fixed-rate Securities
entitled to payments of interest will be below that otherwise produced by the
applicable Pass-Through Rate and purchase price of such Security because, while
interest will accrue on each Mortgage Loan from the first day of each month, the
distribution of such interest will be made on the 25th day (or, if such day is
not a business day, the next succeeding business day) of the month (or, in the
case of quarterly-pay Securities, the twenty-fifth day of every third month, or,
in the case of semi-annual-pay Securities, the twenty-fifth day of every sixth
month) following the month of accrual.
A class of Securities may be entitled to payments of interest at a
fixed Pass-Through Rate specified in the related Prospectus Supplement, a
variable Pass-Through Rate or adjustable Pass-Through Rate calculated based on
the weighted average of the Mortgage Rates (net of Servicing Fees and any
Originator's Retained Yield (each, a "Net Mortgage Rate")) of the related
Mortgage Loans for the designated periods preceding the Payment Date if so
specified in the related Prospectus Supplement, or at such other variable rate
as may be specified in the related Prospectus Supplement.
As will be described in the related Prospectus Supplement, the
aggregate payments of interest on a class of Securities, and the yield to
maturity thereon, will be effected by the rate of payment of principal on the
Securities (or the rate of reduction in the notional balance of Securities
entitled only to payments of interest) and, in the case of Securities evidencing
interests in ARM Loans, by changes in the Net Mortgage Rates on the ARM Loans.
See "Maturity and Prepayment Considerations" below. The yield on the Securities
also will be effected by liquidations
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of Mortgage Loans following Mortgagor defaults and by purchases of Mortgage
Loans required by the Pooling and Servicing Agreement in the event of breaches
of representations made in respect of such Mortgage Loans by the Sponsor, the
Originators, the Master Servicer and others, or repurchases due to conversions
of ARM Loans to a fixed interest rate. See "Mortgage Loan
Program--Representations by Originators" and "Descriptions of the Securities--
Assignment of Mortgage Loans" above. In general, if a class of Securities is
purchased at initial issuance at a premium and payments of principal on the
related Mortgage Loans occur at a rate faster than anticipated at the time of
purchase, the purchaser's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if a class of Securities is
purchased at initial issuance at a discount and payments of principal on the
related Mortgage Loans occur at a rate slower than that assumed at the time of
purchase, the purchaser's actual yield to maturity will be lower than that
originally anticipated. The effect of principal prepayments, liquidations and
purchases on yield will be particularly significant in the case of a series of
Securities having a class entitled to payments of interest only or to payments
of interest that are disproportionately high relative to the principal payments
to which such class is entitled. Such a class likely will be sold at a
substantial premium to its principal balance, if any, and any faster than
anticipated rate of prepayments will adversely affect the yield to holders
thereof. In certain circumstances, rapid prepayments may result in the failure
of such holders to recoup their original investment. In addition, the yield to
maturity on certain other types of classes of Securities, including Accrual
Securities or certain other classes in a series including more than one class of
Securities, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Loans than other classes of Securities.
The timing of changes in the rate of principal payments on or
repurchases of the Mortgage Loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. In general, the earlier
a prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of Securities
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
The Mortgage Rates on certain ARM Loans subject to negative
amortization adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the Indices applicable at origination and the related Note Margins) the amount
of interest accruing on the principal balance of such Mortgage Loans may exceed
the amount of the minimum scheduled monthly payment thereon. As a result, a
portion of the accrued interest on negatively amortizing Mortgage Loans may
become Deferred Interest that will be added to the principal balance thereof and
will bear interest at the applicable Mortgage Rate. The addition of any such
Deferred Interest to the principal balance will lengthen the weighted average
life of the Securities evidencing interests in such Mortgage Loans and may
adversely affect yield to holders thereof depending upon the price at which such
Securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce such principal balance, the weighted average life of such Securities
will be reduced and may adversely affect yield to holders thereof depending upon
the price at which such Securities were purchased.
For each Mortgage Pool, if all necessary advances are made and if there
is no unrecoverable loss on any Mortgage Loan and if the related Credit Enhancer
is not in default under its obligations or other Credit Enhancement has not been
exhausted, the net effect of each distribution respecting interest will be to
pass-through to each holder of a class of Securities entitled to payments of
interest an amount which is equal to one month's interest (or, in the case of
quarterly-pay Securities, three month's interest or, in the case of
semi-annually-pay Securities, six months' interest) at the applicable
Pass-Through Rate on such class' principal balance or notional balance, as
adjusted downward to reflect any decrease in interest caused by any principal
prepayments and the addition of any Deferred Interest to the principal balance
of any Mortgage Loan. "Description of the Securities--Principal and Interest on
the Securities."
With respect to certain of the ARM Loans, the Mortgage Rate at
origination may be below the rate that would result if the index and margin
relating thereto were applied at origination. Under the Sponsor's underwriting
standards, the Mortgagor under each Mortgage Loan will be qualified on the basis
of the Mortgage Rate in effect
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at origination. The repayment of any such Mortgage Loan may thus be dependent on
the ability of the Mortgagor to make larger level monthly payments following the
adjustment of the Mortgage Rate.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Securities will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans may be prepaid without penalty in full or in part at any time.
The prepayment experience with respect to the Mortgage Loans in a Mortgage Pool
will affect the maturity, average life and yield of the related series of
Securities.
With respect to Balloon Loans, payment of the Balloon Amount (which,
based on the amortization schedule of such Mortgage Loans, may be a substantial
amount) will generally depend on the Mortgagor's ability to obtain refinancing
of such Mortgage Loan or to sell the Mortgaged Property prior to the maturity of
the Balloon Loan. The ability to obtain refinancing will depend on a number of
factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the Mortgagor's financial situation,
prevailing mortgage loan interest rates, the Mortgagor's equity in the related
Mortgaged Property, tax laws and prevailing general economic conditions. Unless
otherwise specified in the related Prospectus Supplement, neither the Sponsor,
the Master Servicer, nor any of their affiliates will be obligated to refinance
or repurchase any Mortgage Loan or to sell the Mortgaged Property.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds, affect prepayment experience. Unless otherwise
specified in the related Prospectus Supplement, the Mortgage Loans will
generally contain due-on-sale provisions permitting the mortgagee to accelerate
the maturity of the Mortgage Loan upon sale or certain transfers by the
Mortgagor of the underlying Mortgaged Property. Unless the related Prospectus
Supplement indicates otherwise, the Master Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any action in relation to the enforcement of any due-on-sale provision which
would adversely affect or jeopardize coverage under any applicable insurance
policy. Certain ARM Loans may be assumable under certain conditions if the
proposed transferee of the related Mortgaged Property establishes its ability to
repay the Mortgage Loan and, in the reasonable judgment of the Master Servicer
or the related Sub-Servicer, the security for the ARM Loan would not be impaired
or might be improved by the assumption. The extent to which ARM Loans are
assumed by purchasers of the Mortgaged Properties rather than prepaid by the
related Mortgagors in connection with the sales of the Mortgaged Properties will
affect the weighted average life of the related series of Securities. See
"Description of the Securities--Collection and Other Servicing Procedures" and
"Certain Legal Aspects of the Mortgage Loans and Related Matters--Enforceability
of Certain Provisions" for a description of certain provisions of the Pooling
and Servicing Agreement and certain legal developments that may affect the
prepayment experience on the Mortgage Loans.
There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Sponsor is not aware of any reliable, publicly available statistics
relating to the principal prepayment experience of diverse portfolios of
mortgage loans such as the Mortgage Loans over an extended period of time. All
statistics known to the Sponsor that have been compiled with respect to
prepayment experience on mortgage loans indicates that while some mortgage loans
may remain outstanding until their stated maturities, a substantial number will
be paid prior to their respective stated maturities.
Although the Mortgage Rates on ARM Loans will be subject to periodic
adjustments, such adjustments will, unless otherwise specified in the related
Prospectus Supplement, (i) not increase or decrease such Mortgage Rates by more
than a fixed percentage amount on each adjustment date, (ii) not increase such
Mortgage Rates over a fixed percentage amount during the life of any ARM Loan
and (iii) be based on an index (which may not rise and fall consistently with
mortgage interest rates) plus the related Note Margin (which may be different
from margins being used at the time for newly originated adjustable rate
mortgage loans). As a result, the Mortgage Rates on the ARM Loans in a Mortgage
Pool at any time may not equal the prevailing rates for similar, newly
originated adjustable rate
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mortgage loans. In certain rate environments, the prevailing rates on fixed-rate
mortgage loans may be sufficiently low in relation to the then-current Mortgage
Rates on ARM Loans that the rate of prepayment may increase as a result of
refinancings. There can be no certainty as to the rate of prepayments on the
Mortgage Loans during any period or over the life of any series of Securities.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Mortgage Loans may be
applied by the related Trustee to the acquisition of additional Mortgage Loans
during a specified period (rather than used to fund payments of principal to
Securityholders during such period) with the result that the related securities
possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any such interest-only
or revolving period may, upon the occurrence of certain events to be described
in the related Prospectus Supplement, terminate prior to the end of the
specified period and result in the earlier than expected amortization of the
related Securities.
In addition, and as may be described in the related Prospectus
Supplement, the related Pooling and Servicing Agreement may provide that all or
a portion of such collected principal may be retained by the Trustee (and held
in certain temporary investments, including Mortgage Loans) for a specified
period prior to being used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related Prospectus Supplement, resulting in the current funding
of principal payments to the related Securityholders and an acceleration of the
amortization of such Securities.
Under certain circumstances, the Master Servicer, the Sponsor or, if
specified in the related Prospectus Supplement, the holders of the REMIC
Residual Securities or the Credit Enhancer may have the option to purchase the
Mortgage Loans in a Trust Estate. See "The Pooling and Servicing
Agreement--Termination; Retirement of Securities."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state law (which laws may differ substantially),
the summaries do not purport to be complete nor to reflect the laws of any
particular state nor to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
GENERAL
The Mortgage Loans will be secured by either deeds of trust or
mortgages, depending upon the prevailing practice in the state in which the
Mortgaged Property subject to a Mortgage Loan is located. In some states, a
mortgage creates a lien upon the real property encumbered by the mortgage. In
other states, the mortgage conveys legal title to the property to the mortgagee
subject to a condition subsequent (i.e., the payment of the indebtedness secured
thereby). The mortgage is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers. Priority
between mortgages depends on their terms in some cases or on the terms of
separate subordination or intercreditor agreements, and generally on the order
of recordation of the mortgage in the appropriate recording office. There are
two parties to a mortgage, the mortgagor, who is the borrower and homeowner, and
the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower is the beneficiary;
at origination of a mortgage loan, the borrower executes a separate undertaking
to make payments on the mortgage note. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties; the borrower-homeowner 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,
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in trust, generally with a power of sale, to the trustee to secure payment of
the obligation. The trustee's authority under a deed of trust and the
mortgagee's authority under a mortgage are governed by law, the express
provisions of the deed of trust or mortgage, and, in some cases, the directions
of the beneficiary.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Securities, the Mortgage Loans also may consist of Cooperative Loans evidenced
by Cooperative Notes secured by security interests in shares issued by
cooperatives, which are private corporations that are entitled to be treated as
housing cooperatives under federal tax law, and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units therein. The cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental impositions
and hazard and liability insurance. If there is a blanket mortgage or mortgages
on the cooperative apartment building or underlying land, as is generally the
case, or an underlying lease of the land, as is the case in some instances, the
cooperative, as property mortgagor, or lessee, as the case may be, also is
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or the
obtaining of capital by the cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that cooperative is the
landlord generally is subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease. If the cooperative
is unable to meet the payment obligations (i) arising under a blanket mortgage,
the mortgagee holding a blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements or (ii)
arising under its land lease, the holder of the landlord's interest under the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity. The
inability of the cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee.
Similarly, a land lease has an expiration date and the inability of the
cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of the Mortgage Loans,
the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary leases or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "Foreclosure on Shares of
Cooperatives" below.
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FORECLOSURE
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale (private sale) under a specific provision in the
deed of trust and state laws which authorize the trustee to sell the property
upon any default by the borrower under the terms of the note or deed of trust.
Beside the nonjudicial remedy, a deed of trust may be judicially foreclosed. In
addition to any notice requirements contained in a deed of trust, in some
states, the trustee must record a notice of default and within a certain period
of time send a copy to the borrower trustor and to any person who has recorded a
request for a copy of notice of default and notice of sale. In addition, the
trustee must provide notice in some states to any other individual having an
interest of record in the real property, including any junior lienholders. If
the deed of trust is not reinstated within a specified 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 local newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest of record in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale unless there is a great deal of economic incentive for the new
purchaser to purchase the subject property at the sale. Rather, it is common for
the lender to purchase the property from the trustee or referee for a credit bid
less than or equal to the unpaid principal amount of the mortgage or deed of
trust, accrued and unpaid interest and the expense of foreclosure. Generally,
state law controls the amount of foreclosure costs and expenses, including
attorneys' fees, which may be recovered by a lender. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property and, in some states, the lender may be entitled to a
deficiency judgment. Any loss may be reduced by the receipt of any mortgage
insurance proceeds.
FORECLOSURE ON SHARES OF COOPERATIVES
The cooperative shares and proprietary lease or occupancy agreement
owned by the tenant-stockholder and pledged to the lender are, in almost all
cases, subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled by the cooperative for failure by the tenant
stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
that are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate such
lease or agreement in the event the borrower defaults in the performance of
covenants thereunder. Typically, the lender and the cooperative enter into a
recognition agreement that, together with any lender protection provisions
contained in the proprietary lease, establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the
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proprietary lease or occupancy agreement usually will constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the cooperative will
recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement or sums that have become liens on the
shares relating to the proprietary lease or occupancy agreement. The total
amount owed to the cooperative by the tenant-stockholder, which the lender
generally cannot restrict and does not monitor, could reduce the amount realized
upon a sale of the collateral below the outstanding principal balance of the
Cooperative Loan and accrued and unpaid interest thereon.
Recognition agreements generally also provide that in the event of a
foreclosure on a Cooperative Loan, the lender must obtain the approval or
consent of the cooperative as required by the proprietary lease before
transferring the cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholder.
In New York, foreclosure on the cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
sale and the sale price. Generally, a sale conducted according to the usual
practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
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 or other parties are
given a statutory period in which to redeem the property from the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. 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 rights
of redemption would defeat the title of any purchaser subsequent to foreclosure
or sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired. In some states,
there is no right to redeem property after a trustee's sale under a deed of
trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, including California, statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the amount due to
the lender and the net amount realized upon the public sale of the real
property. In the case of a Mortgage Loan secured by a property owned by a trust
where the Mortgage Note is executed on behalf of the trust, a deficiency
judgment against the trust following foreclosure or sale under a deed of trust,
even if obtainable under applicable
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law, may be of little value to the mortgagee or beneficiary if there are no
trust assets against which such deficiency judgment may be executed. Other
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the borrower. In certain
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting such security; however, in
some of these states the lender, following judgment on such personal action, may
be deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in certain other states, statutory
provisions limit any deficiency judgment against the former borrower following a
foreclosure to the excess of the outstanding debt over the fair value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
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 collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
Certain states have imposed general equitable principles upon judicial
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of the borrower's default under the related 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 for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, lenders
have been required to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disabilities.
In other cases, such courts have limited the right of the lender to foreclose if
the default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include, by example, the federal Truth-in-Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act and related statutes and the California Fair Debt
Collection Practices Act. These laws and regulations impose specific statutory
liabilities upon lenders who originate mortgage loans and fail to comply with
the provisions of the law. In some cases, this liability may affect assignees of
the mortgage loans.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien generally will have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In some states, however, such a lien will not
have
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priority over prior recorded liens of a deed of trust. In addition, under
federal environmental legislation and under state law in a number of states, a
secured party which takes a deed in lieu of foreclosure or acquires a mortgaged
property at a foreclosure sale or assumes active control over the operation or
management of a property so as to be deemed an "owner" or "operator" of the
property may be liable for the costs of cleaning up a contaminated site.
Although such costs could be substantial, it is unclear whether they would be
imposed on a lender (such as a Trust Estate) secured by residential real
property. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust Estate was acquired by the Trust and cleanup costs were incurred
in respect of the Mortgaged Property, the holders of the related series of
Securities might realize a loss if such costs were required to be paid by the
Trust.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, generally all of
the Mortgage Loans contain due-on-sale clauses. These clauses permit the lender
to accelerate the maturity of the loan if the borrower sells, transfers or
conveys the property. The enforceability of these clauses has been the subject
of legislation or litigation in many states including California, and in some
cases the enforceability of these clauses was limited or denied. However, the
Garn-St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain
Act") preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. 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.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St. Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, that may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles generally are designed to relieve the borrower from
the legal effect of his 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 for 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 borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust 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 deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. 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, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
CERTAIN PROVISIONS OF CALIFORNIA DEEDS OF TRUST
Most institutional lenders in California use a form of deed of trust
that confers on the beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the deed of trust, in such order as the beneficiary may
determine, provided, however, that California law prohibits the beneficiary from
applying insurance and condemnation proceeds to the indebtedness secured by the
deed of trust unless the beneficiary's security has been impaired by the
casualty or condemnation, and, if such security has been impaired, permits such
proceeds to be so applied only to the extent of such impairment. Thus, in the
event improvements on
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the property are damaged or destroyed by fire or other casualty, or in the event
the property is taken by condemnation, and, as a result thereof, the
beneficiary's security is impaired, the beneficiary under the underlying first
deed of trust 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
first deed of trust. Proceeds in excess of the amount of indebtedness secured by
a first deed of trust will, in most cases, be applied to the indebtedness of a
junior deed of trust.
Another provision typically found in the forms of deed of trust used by
most institutional lenders in California obligates the trustor 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 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 beneficiary under the deed of trust. Upon a failure of the
trustor to perform any of these obligations, the beneficiary is given the right
under the deed of trust to perform the obligation itself, at its election, with
the trustor agreeing to reimburse the beneficiary for any sums expended by the
beneficiary on behalf of the trustor. All sums so expended by the beneficiary
become part of the indebtedness secured by the deed of trust.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits or to limit
discount points or other charges.
As indicated above under "Mortgage Loan Program--Representations by
Originators," each Originator of a Mortgage Loan will have represented that such
Mortgage Loan was originated in compliance with then applicable state laws,
including usury laws, in all material respects. However, the Mortgage Rates on
the Mortgage Loans will be subject to applicable usury laws as in effect from
time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including ARM Loans and early
ownership mortgage loans, originated by non-federally chartered lenders have
historically been subjected to a variety of restrictions. Such restrictions
differed from state to state, resulting in difficulties in determining whether a
particular alternative mortgage instrument originated by a state-chartered
lender was in compliance with applicable law. These difficulties were alleviated
substantially as a result of the enactment of Title VIII of the Garn-St. Germain
Act ("Title VIII"). Title VIII provides that: notwithstanding any state law to
the contrary, state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the Comptroller of the
Currency with respect to origination of alternative mortgage instruments by
national banks; state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions; and all other non-federally chartered
housing creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
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SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
Mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on certain of
the Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Mortgage Loans, would result in a reduction
of the amounts distributable to the holders of the related Securities, and would
not be covered by advances, any Letter of Credit or any other form of Credit
Enhancement provided in connection with the related series of Securities. In
addition, the Relief Act imposes limitations that would impair the ability of
the Master Servicer to foreclose on an affected Mortgage Loan during the
Mortgagor's period of active duty status, and, under certain circumstances,
during an additional three month period thereafter. Thus, in the event that the
Relief Act or similar legislation or regulations apply to any Mortgage Loan
which goes into default, there may be delays in payment and losses on the
related Securities in connection therewith. Any other interest shortfalls,
deferrals or forgiveness of payments on the Mortgage Loans resulting from
similar legislation or regulations may result in delays in payments or losses to
Securityholders of the related series.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material anticipated
federal income tax consequences to investors of the purchase, ownership and
disposition of the Securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Securities. For purposes of this
discussion, references to a "Securityholder" or a "Holder" are to the beneficial
owner of a Security.
The following discussion addresses securities of three general types:
(i) securities ("Grantor Trust Securities") representing interests in a Trust
Estate (a "Grantor Trust Estate") which the Sponsor will covenant not to elect
to have treated as a real estate mortgage investment conduit (REMIC); (ii)
securities ("REMIC Securities") representing interests in a Trust Estate, or a
portion thereof, which the Sponsor will covenant to elect to have treated as a
REMIC under sections 860A through 860G of the Internal Revenue Code of 1986, as
amended (the "Code"); and (iii) securities ("Debt Securities") that are intended
to be treated for federal income tax purposes as indebtedness secured by the
underlying Mortgage Loans. This Prospectus does not address the tax treatment of
partnership interests or interests in a FASIT. Such a discussion will be set
forth in the related Prospectus Supplement for any Trust issuing Securities
characterized as partnership interests or interests in a FASIT. The Prospectus
Supplement for each series of Securities will indicate whether a REMIC or FASIT
election (or elections) will be made for the related Trust Estate and, if a
REMIC or FASIT election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC or all "regular interests," "high-yield
interests" or "ownership interest" in the FASIT. Pursuant to the Small Business
Job Protection Act of 1996, enacted on August 20, 1996 (the "1996 Act"), a FASIT
election can be made on or after September 1, 1997.
GRANTOR TRUST SECURITIES
With respect to each series of Grantor Trust Securities, Dewey
Ballantine, special tax counsel to the Sponsor, will deliver its opinion to the
Sponsor that (unless otherwise limited in the related Prospectus Supplement) the
related Grantor Trust Estate will be classified as a grantor trust and not as a
partnership or an association taxable as a
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corporation. Accordingly, each Holder of a Grantor Trust Security will generally
be treated as the owner of an interest in the Mortgage Loans included in the
Grant or Trust Estate.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Estate, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Security." A Grantor Trust Security representing ownership
of all or a portion of the difference between interest paid on the Mortgage
Loans constituting the related Grantor Trust Estate and interest paid to the
Holders of Grantor Trust Fractional Interest Securities issued with respect to
such Grantor Trust Estate will be referred to as a "Grantor Trust Strip
Security."
Special Tax Attributes
Unless otherwise disclosed in a related Prospectus Supplement, Dewey B
llantine, special tax counsel to the Sponsor, will deliver its opinion to the
Sponsor that (a) Grantor Trust Fractional Interest Securities will represent
interests in (i) "loans . . . secured by an interest in real property" within
the meaning of section 7701(a)(19)(C)(v) of the Code; and (ii) "obligations
(including any participation or certificate of beneficial ownership therein)
which . . . are principally secured by an interest in real property" within the
meaning of section 860G(a)(3)(A) of the Code; and (b) interest on Grantor Trust
Fractional Interest Securities will be considered "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. In addition, the Grantor Trust
Strip Securities will be "obligations (including any participation or
certificate of beneficial ownership therein) . . . principally secured by an
interest in real property" within the meaning of section 860G(a)(3)(A) of the
Code.
The 1996 Act repeals the bad debt reserve method of accounting for
mutual savings banks and domestic building and loan associations for tax years
beginning after December 31, 1995. As a result, section 593(d) of the Code is no
longer applicable to treat the Certificates as "qualifying real property loans."
Taxation of Holders of Grantor Trust Securities
Holders of Grantor Trust Fractional Interest Securities generally will
be required to report on their federal i come tax returns their respective
shares of the income from the Mortgage Loans (including amounts used to pay
reasonable servicing fees and other expenses but excluding amounts payable to
Holders of any corresponding Grantor Trust Strip Securities) and, subject to the
limitations described below, will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. If a Holder acquires a Grantor
Trust Fractional Interest Security for an amount that differs from its
outstanding principal amount, the amount includible in income on a Grantor Trust
Fractional Interest Security may differ from the amount of interest
distributable thereon. See "Discount and Premium," below. Individuals holding a
Grantor Trust Fractional Interest Security directly or through certain
pass-through entities will be allowed a deduction for such reasonable servicing
fees and expenses only to the extent that the aggregate of such Holder's
miscellaneous itemized deductions exceeds 2% of such Holder's adjusted gross
income. Further, Holders (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining
alternative minimum taxable income.
Holders of Grantor Trust Strip Securities generally will be required to
treat such Securities as "stripped coupons" under section 1286 of the Code.
Accordingly, such a Holder will be required to treat the excess of the total
amount of payments on such a Security over the amount paid for such Security as
original issue discount and to include such discount in income as it accrues
over the life of such Security. See "--Discount and Premium," below.
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the Holder's income as
it accrues (regardless of the Holder's method of accounting), as described below
under "--Discount and Premium." The coupon stripping rules will not apply,
however, if (i) the pass-through rate is no more than 100 basis points lower
than the gross rate of interest payable on the underlying Mortgage Loans and
(ii) the difference between
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the outstanding principal balance on the Security and the amount paid for such
Security is less than 0.25% of such principal balance times the weighted average
remaining maturity of the Security.
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust Security
(equal to the difference between the amount realized on the sale and the
adjusted basis of such Grantor Trust Security) will be capital gain or loss,
except to the extent of accrued and unrecognized market discount, which will be
treated as ordinary income, and in the case of banks and other financial
institutions except as provided under section 582(c) of the Code. The adjusted
basis of a Grantor Trust Security will generally equal its cost, increased by
any income reported by the seller (including original issue discount and market
discount income) and reduced (but not below zero) by any previously reported
losses, any amortized premium and by any distributions of principal.
Grantor Trust Reporting
The Trustee will furnish to each Holder of a Grantor Trust Fractional
Interest Security with each distribution a statement setting forth the amount of
such distribution allocable to principal on the underlying Mortgage Loans and to
interest thereon at the related Pass-Through Rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Master Servicer, the Trustee will furnish to each Holder during
such year such customary factual information as the Master Servicer deems
necessary or desirable to enable Holders of Grantor Trust Securities to prepare
their tax returns and will furnish comparable information to the Internal
Revenue Service (the "IRS") as and when required to do so by law.
REMIC SECURITIES
If provided in a related Prospectus Supplement, an election will be
made to treat a Trust Estate as a REMIC under the Code. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each series
of Securities for which such an election is made, Dewey Ballantine, special tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the related Prospectus Supplement), assuming compliance
with the Pooling and Servicing Agreement, the Trust Estate will be treated as a
REMIC for federal income tax purposes. A Trust Estate for which a REMIC election
is made will be referred to herein as a "REMIC Trust." The Securities of each
class will be designated as "regular interests" in the REMIC Trust except that a
separate class will be designated as the "residual interest" in the REMIC Trust.
The Prospectus Supplement for each series of Securities will state whether
Securities of each class will constitute a regular interest (a REMIC Regular
Security) or a residual interest (a REMIC Residual Security).
A REMIC Trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in certain other instances
described below. See "--Taxes on a REMIC Trust." Generally, the total income
from the Mortgage Loans in a REMIC Trust will be taxable to the Holders of the
Securities of that series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (the
"REMIC Regulations") provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
Securities. While certain material provisions of the REMIC Regulations are
discussed below, investors should consult their own tax advisors regarding the
possible application of the REMIC Regulations in their specific circumstances.
SPECIAL TAX ATTRIBUTES
REMIC Regular Securities and REMIC Residual Securities will be "regular
or residual interests in a REMIC" within the meaning of section
7701(a)(19)(C)(xi) of the Code and "real estate assets" within the meaning of
section 856(c)(5)(A) of the Code. If at any time during a calendar year less
than 95% of the assets of a REMIC Trust consist of "qualified mortgages" (within
the meaning of section 860G(a)(3) of the Code) then the portion of the REMIC
Regular Securities and REMIC Residual Securities that are qualifying assets
under those sections during such calendar year may be limited to the portion of
the assets of such REMIC Trust that are qualified mortgages. Similarly, income
on the REMIC Regular Securities and REMIC Residual Securities will be treated as
"interest on
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obligations secured by mortgages on real property" within the meaning of section
856(c)(3)(B) of the Code, subject to the same limitation as set forth in the
preceding sentence. For purposes of applying this limitation, a REMIC Trust
should be treated as owning the assets represented by the qualified mortgages.
The assets of the Trust Estate will include, in addition to the Mortgage Loans,
payments on the Mortgage Loans held pending distribution on the REMIC Regular
Securities and REMIC Residual Securities and any reinvestment income thereon.
REMIC Regular Securities and REMIC Residual Securities held by a financial
institution to which section 585, 586 or 593 of the Code applies will be treated
as evidences of indebtedness for purposes of section 582(c)(1) of the Code.
REMIC Regular Securities will also be qualified mortgages with respect to other
REMICs.
The 1996 Act repeals the bad debt reserve method of accounting for
mutual savings banks and domestic building and loan associations for tax years
beginning after December 31, 1995. As a result, section 593(d) of the Code is no
longer applicable to treat the Certificates as "qualifying real property loans."
Taxation of Holders of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the
REMIC Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the "Settlement Date") and not as ownership interests in the
REMIC Trust or its assets. Holders of REMIC Regular Securities that otherwise
report income under a cash method of accounting will be required to report
income with respect to such Securities under an accrual method. For additional
tax consequences relating to REMIC Regular Securities purchased at a discount or
with premium, see "--Discount and Premium," below.
Taxation of Holders of REMIC Residual Securities
Daily Portions. Except as indicated below, a Holder of a REMIC Residual
Security for a REMIC Trust generally will be required to report its daily
portion of the taxable income or net loss of the REMIC Trust for each day during
a calendar quarter that the Holder owned such REMIC Residual Security. For this
purpose, the daily portion shall be determined by allocating to each day in the
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC Trust for such quarter and by allocating the amount so allocated among the
Residual Holders (on such day) in accordance with their percentage interests on
such day. Any amount included in the gross income or allowed as a loss of any
Residual Holder by virtue of this paragraph will be treated as ordinary income
or loss.
The requirement that each Holder of a REMIC Residual Security report
its daily portion of the taxable income or net loss of the REMIC Trust will
continue until there are no Securities of any class outstanding, even though the
Holder of the REMIC Residual Security may have received full payment of the
stated interest and principal on its REMIC Residual Security.
The Trustee will provide to Holders of REMIC Residual Securities of
each series of Securities (i) such information as is necessary to enable them to
prepare their federal income tax returns and (ii) any reports regarding the
Securities of such series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net
loss of a REMIC Trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with certain modifications. The
first modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d) of the Code) on the REMIC Regular
Securities (but not the REMIC Residual Securities), even though REMIC Regular
Securities are for non-tax purposes evidences of beneficial ownership rather
than indebtedness of a REMIC Trust. Second, market discount or premium equal to
the difference between the total stated principal balances of the qualified
mortgages and the basis to the REMIC Trust therein generally will be included in
income (in the case of discount) or deductible (in the case of premium) by the
REMIC Trust as it accrues under a constant yield method, taking into account the
"Prepayment Assumption" (as defined in the Related Prospectus Supplement, see
"--Discount and Premium--Original Issue Discount," below). The basis to a REMIC
Trust in the qualified mortgages is the aggregate
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of the issue prices of all the REMIC Regular Securities and REMIC Residual
Securities in the REMIC Trust on the Settlement Date. If, however, a substantial
amount of a class of REMIC Regular Securities or REMIC Residual Securities has
not been sold to the public, then the fair market value of all the REMIC Regular
Securities or REMIC Residual Securities in that class as of the date of the
Prospectus Supplement should be substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see "--Taxes on a REMIC Trust--Prohibited Transactions"
below) will be taken into account. Fourth, a REMIC Trust generally may not
deduct any item that would not be allowed in calculating the taxable income of a
partnership by virtue of section 703(a)(2) of the Code. Finally, the limitation
on miscellaneous itemized deductions imposed on individuals by section 67 of the
Code will not be applied at the REMIC Trust level to any servicing and guaranty
fees. (See, however, "--Pass-Through of Servicing and Guaranty Fees to
Individuals" below.) In addition, under the REMIC Regulations, any expenses that
are incurred in connection with the formation of a REMIC Trust and the issuance
of the REMIC Regular Securities and REMIC Residual Securities are not treated as
expenses of the REMIC Trust for which a deduction is allowed. If the deductions
allowed to a REMIC Trust exceed its gross income for a calendar quarter, such
excess will be a net loss for the REMIC Trust for that calendar quarter. The
REMIC Regulations also provide that any gain or loss to a REMIC Trust from the
disposition of any asset, including a qualified mortgage or "permitted
investment" (as defined in section 860G(a)(5) of the Code) will be treated as
ordinary gain or loss.
A Holder of a REMIC Residual Security may be required to recognize
taxable income without being entitled to receive a corresponding amount of cash.
This could occur, for example, if the qualified mortgages are considered to be
purchased by the REMIC Trust at a discount, some or all of the REMIC Regular
Securities are issued at a discount, and the discount included as a result of a
prepayment on a Mortgage Loan that is used to pay principal on the REMIC Regular
Securities exceeds the REMIC Trust's deduction for unaccrued original issue
discount relating to such REMIC Regular Securities. Taxable income may also be
greater in earlier years because interest expense deductions, expressed as a
percentage of the outstanding principal amount of the REMIC Regular Securities,
may increase over time as the earlier classes of REMIC Regular Securities are
paid, whereas interest income with respect to any given Mortgage Loan expressed
as a percentage of the outstanding principal amount of that Mortgage Loan, will
remain constant over time.
Basis Rules and Distributions. A Holder of a REMIC Residual Security
has an initial basis in its Security equal to the amount paid for such REMIC
Residual Security. Such basis is increased by amounts included in the income of
the Holder and decreased by distributions and by any net loss taken into account
with respect to such REMIC Residual Security. A distribution on a REMIC Residual
Security to a Holder is not included in gross income to the extent it does not
exceed such Holder's basis in the REMIC Residual Security (adjusted as described
above) and, to the extent it exceeds the adjusted basis of the REMIC Residual
Security, shall be treated as gain from the sale of the REMIC Residual Security.
A Holder of a REMIC Residual Security is not allowed to take into
account any net loss for any calendar quarter to the extent such net loss
exceeds such Holder's adjusted basis in its REMIC Residual Security as of the
close of such calendar quarter (determined without regard to such net loss). Any
loss disallowed by reason of this limitation may be carried forward indefinitely
to future calendar quarters and, subject to the same limitation, may be used
only to offset income from the REMIC Residual Security.
Excess Inclusions. Any excess inclusions with respect to a REMIC
Residual Security are subject to certain special tax rules. With respect to a
Holder of a REMIC Residual Security, the excess inclusion for any calendar
quarter is defined as the excess (if any) of the daily portions of taxable
income over the sum of the "daily accruals" for each day during such quarter
that such REMIC Residual Security was held by such Holder. The daily accruals
are determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC Residual
Security at the beginning of the calendar quarter and 120% of the "federal
long-term rate" in effect on the Settlement Date, based on quarterly
compounding, and properly adjusted for the length of such quarter. For this
purpose, the adjusted issue price of a REMIC Residual Security as of the
beginning of any calendar quarter is equal to the issue price of the REMIC
Residual Security, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made with respect to such REMIC
Residual Security before the beginning of such quarter. The issue price of a
REMIC Residual Security is the initial offering price to the public (excluding
bond houses and brokers) at which a substantial number of the REMIC Residual
Securities was
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sold. The federal long-term rate is a blend of current yields on Treasury
securities having a maturity of more than nine years, computed and published
monthly by the IRS.
In general, Holders of REMIC Residual Securities with excess inclusion
income cannot offset such income by losses from other activities. For Holders
that are subject to tax only on unrelated business taxable income (as defined in
section 511 of the Code), an excess inclusion of such Holder is treated as
unrelated business taxable income. With respect to variable contracts (within
the meaning of section 817 of the Code), a life insurance company cannot adjust
its reserve to the extent of any excess inclusion, except as provided in
regulations. The REMIC Regulations indicate that if a Holder of a REMIC Residual
Security is a member of an affiliated group filing a consolidated income tax
return, the taxable income of the affiliated group cannot be less than the sum
of the excess inclusions attributable to all residual interests in REMICS held
by members of the affiliated group. For a discussion of the effect of excess
inclusions on certain foreign investors that own REMIC Residual Securities, see
"--Foreign Investors" below.
The Treasury Department also has the authority to issue regulations
that would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
how significant value would be determined for these purposes. If no such rule is
applicable, excess inclusions should be calculated as discussed above.
In the case of any REMIC Residual Securities that are held by a real
estate investment trust, the aggregate excess inclusions with respect to such
REMIC Residual Securities reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of section 857(b)(2) of the
Code, excluding any net capital gain) will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Security as if held directly by such
shareholder. Similar rules will apply in the case of regulated investment
companies, common trust funds and certain cooperatives that hold a REMIC
Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of
a REMIC Residual Security who is an individual will be required to include in
income a share of any servicing and guaranty fees. A deduction for such fees
will be allowed to such Holder only to the extent that such fees, along with
certain of such Holder's other miscellaneous itemized deductions exceed 2% of
such Holder's adjusted gross income. In addition, a Holder of a REMIC Residual
Security may not be able to deduct any portion of such fees in computing such
Holder's alternative minimum tax liability. A Holder's share of such fees will
generally be determined by (i) allocating the amount of such expenses for each
calendar quarter on a pro rata basis to each day in the calendar quarter, and
(ii) allocating the daily amount among the Holders in proportion to their
respective holdings on such day.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC equal to
100% of the net income derived from "prohibited transactions." In general, a
prohibited transaction means the disposition of a qualified mortgage other than
pursuant to certain specified exceptions, the receipt of investment income from
a source other than a Mortgage Loan or certain other permitted investments, the
receipt of compensation for services, or the disposition of an asset purchased
with the payments on the qualified mortgages for temporary investment pending
distribution on the regular and residual interests.
Contributions to a REMIC after the Startup Day. The Code imposes a tax
on a REMIC equal to 100% of the value of any property contributed to the REMIC
after the "startup day" (generally the same as the Settlement Date). Exceptions
are provided for cash contributions to a REMIC (i) during the three month period
beginning on the startup day, (ii) made to a qualified reserve fund by a Holder
of a residual interest, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted by Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules
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applicable to real estate investment trusts. Generally, foreclosure property
would be treated as such for a period of two years, with possible extensions.
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.
Sales of REMIC Securities
General. Except as provided below, if a Regular or REMIC Residual
Security is sold, the seller will recognize gain or loss equal to the difference
between the amount realized in the sale and its adjusted basis in the Security.
The adjusted basis of a REMIC Regular Security generally will equal the cost of
such Security to the seller, increased by any original issue discount or market
discount included i the seller's gross income with respect to such Security and
reduced by distributions on such Security previously received by the seller of
amounts included in the stated redemption price at maturity and by any premium
that has reduced the seller's interest income with respect to such Security. See
"--Discount and Premium." The adjusted basis of a REMIC Residual Security is
determined as described above under "--Taxation of Holders of REMIC Residual
Securities--Basis Rules and Distributions." Except as provided in the following
paragraph or under section 582(c) of the Code, any such gain or loss will be
capital gain or loss, provided such Security is held as a "capital asset"
(generally, property held for investment) within the meaning of section 1221 of
the Code.
Gain from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the Holder of a REMIC Regular Security had income
accrued at a rate equal to 110% of the "applicable federal rate" (generally, an
average of current yields on Treasury securities) as of the date of purchase
over (ii) the amount actually includible in such Holder's income. In addition,
gain recognized on such a sale by a Holder of a REMIC Regular Security who
purchased such a Security at a market discount would also be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period such Security was held by such Holder, reduced by any market
discount includible in income under the rules described below under "--Discount
and Premium."
If a Holder of a REMIC Residual Security sells its REMIC Residual
Security at a loss, the loss will not be recognized if, within six months before
or after the sale of the REMIC Residual Security, such Holder purchases another
residual interest in any REMIC or any interest in a taxable mortgage pool (as
defined in section 7701(i) of the Code) comparable to a residual interest in a
REMIC. Such disallowed loss would be allowed upon the sale of the other residual
interest (or comparable interest) if the rule referred to in the preceding
sentence does not apply to that sale. While this rule may be modified by
Treasury regulations, no such regulations have yet been published.
Transfers of REMIC Residual Securities. Section 860E(e) of the Code
imposes a substantial tax, payable by the transferor (or, if a transfer is
through a broker, nominee, or other middleman as the transferee's agent, payable
by that agent) upon any transfer of a REMIC Residual Security to a disqualified
organization and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, certain cooperatives, and nominees) that owns a REMIC Residual
Security if such pass-through entity has a disqualified organization as a
record-holder. For purposes of the preceding sentence, a transfer includes any
transfer of record or beneficial ownership, whether pursuant to a purchase, a
default under a secured lending agreement or otherwise.
The term "disqualified organization" includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(other than certain taxable instrumentalities), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas, or any organization (other than a farmers' cooperative) that is exempt
from federal income tax, unless such organization is subject to the tax on
unrelated business income. Moreover, an entity will not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that (i) residual
interests in such entity are not held by disqualified organizations and (ii)
information necessary for the application of the tax described herein will be
made available. Restrictions on the transfer of a REMIC Residual Security and
certain other provisions that are intended to meet this requirement are
described in the Pooling and Servicing Agreement, and will be discussed more
fully in the related Prospectus Supplement relating to the offering of any REMIC
Residual Security. In addition, a pass-through entity (including a nominee) that
holds a REMIC Residual Security may be subject to
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additional taxes if a disqualified organization is a record-holder therein. A
transferor of a REMIC Residual Security (or an agent of a transferee of a REMIC
Residual Security, as the case may be) will be relieved of such tax liability if
(i) the transferee furnishes to the transferor (or the transferee's agent) an
affidavit that the transferee is not a disqualified organization, and (ii) the
transferor (or the transferee's agent) does not have actual knowledge that the
affidavit is false at the time of the transfer. Similarly, no such tax will be
imposed on a pass-through entity for a period with respect to an interest
therein owned by a disqualified organization if (i) the record-holder of such
interest furnishes to the pass-through entity an affidavit that it is not a
disqualified organization, and (ii) during such period, the pass-through entity
has no actual knowledge that the affidavit is false.
Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person (as defined below in "--Foreign Investors--Grantor
Trust Securities and REMIC Regular Securities") will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. A REMIC Residual Security would be treated
as constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
REMIC Residual Security is no less than the product of the present value of the
"anticipated excess inclusions" with respect to such Security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC Trust in an amount sufficient to satisfy the liability
for income tax on any "excess inclusions" at or after the time when such
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a REMIC Residual Security, determined as of the date
such Security is transferred and based on events that have occurred as of that
date and on the Prepayment Assumption. See "--Discount and Premium" and
"--Taxation of Holders of REMIC Residual Securities--Excess Inclusions."
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has "improper knowledge" (i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC Trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (ii) the
transferee makes certain representations to the transferor in the affidavit
relating to disqualified organizations discussed above. Transferors of a REMIC
Residual Security should consult with their own tax advisors for further
information regarding such transfers.
Reporting and Other Administrative Matters. For purposes of the
administrative provisions of the Code, each REMIC Trust will be treated as a
partnership and the Holders of REMIC Residual Securities will be treated as
partners. The Trustee will prepare, sign and file federal income tax returns for
each REMIC Trust, which returns are subject to audit by the IRS. Moreover,
within a reasonable time after the end of each calendar year, the Trustee will
furnish to each Holder that received a distribution during such year a statement
setting forth the portions of any such distributions that constitute interest
distributions, original issue discount, and such other information as is
required by Treasury regulations and, with respect to Holders of REMIC Residual
Securities in a REMIC Trust, information necessary to compute the daily portions
of the taxable income (or net loss) of such REMIC Trust for each day during such
year. The Trustee will also act as the tax matters partner for each REMIC Trust,
either in its capacity as a Holder of a REMIC Residual Security or in a
fiduciary capacity. Each Holder of a REMIC Residual Security, by the acceptance
of its REMIC Residual Security, agrees that the Trustee will act as its
fiduciary in the performance of any duties required of it in the event that it
is the tax matters partner.
Each Holder of a REMIC Residual Security is required to treat items on
its return consistently with the treatment on the return of the REMIC Trust,
unless the Holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC Trust. The IRS may assert a deficiency resulting from a failure
to comply with the consistency requirement without instituting an administrative
proceeding at the REMIC Trust level. Unless otherwise specified in the related
Prospectus Supplement, the Trustee does not intend to register any REMIC Trust
as a tax shelter pursuant to section 6111 of the Code.
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Termination
In general, no special tax consequences will apply to a Holder of a
REMIC Regular Security upon the termination of a REMIC Trust by virtue of the
final payment or liquidation of the last Mortgage Loan remaining in the Trust
Estate. If a Holder of a REMIC Residual Security's adjusted basis in its REMIC
Residual Security at the time such termination occurs exceeds the amount of cash
distributed to such Holder in liquidation of its interest, although the matter
is not entirely free from doubt, it would appear that the Holder of the REMIC
Residual Security is entitled to a loss equal to the amount of such excess.
DEBT SECURITIES
General
With respect to each series of Debt Securities, Dewey Ballantine,
special tax counsel to the Sponsor, will deliver its opinion to the Sponsor that
(unless otherwise limited in the related Prospectus Supplement) the Securities
will be classified as debt of the Sponsor secured by the related Mortgage Loans.
Consequently, the Debt Securities will not be treated as ownership interests in
the Mortgage Loans or the Trust. Holders will be required to report income
received with respect to the Debt Securities in accordance with their normal
method of accounting. For additional tax consequences relating to Debt
Securities purchased at a discount or with premium, see "--Discount and
Premium," below.
Special Tax Attributes
As described above, Grantor Trust Securities will possess certain
special tax attributes by virtue of their being ownership interests in the
underlying Mortgage Loans. Similarly, REMIC Securities will possess similar
attributes by virtue of the REMIC provisions of the Code. In general, Debt
Securities will not possess such special tax attributes. Investors to whom such
attributes are important should consult their own tax advisors regarding
investment in Debt Securities.
Sale or Exchange
If a Holder of a Debt Security sells or exchanges such Security, the
Holder will recognize gain or loss equal to the difference, if any, between the
amount received and the Holder's adjusted basis in the Security. The adjusted
basis in the Security generally will equal its initial cost, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Security and reduced by the payments previously
received on the Security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described in "--Discount and Premium--Market
Discount," below), except for certain financial institutions subject to section
582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security
recognized by an investor who holds the Security as a capital asset (within the
meaning of section 1221 of the Code), will be capital gain or loss and will be
long-term or short-term depending on whether the Security has been held for more
than one year.
DISCOUNT AND PREMIUM
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286 of the
Code. In very general terms, (i) original issue discount is treated as a form of
interest and must be included in a Holder's income as it accrues (regardless of
the Holder's regular method of accounting) using a constant yield method; (ii)
market discount is treated as ordinary income and must be included in a Holder's
income as principal payments are made on the Security (or upon a sale of a
Security); and (iii) if a Holder so elects, premium may be amortized over the
life of the Security and offset against inclusions of interest income. These tax
consequences are discussed in greater detail below.
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Original Issue Discount
In general, a Security will be considered to be issued with original
issue discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial number of the Securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
Remittance Period and the Settlement Date. The stated redemption price at
maturity of a Security that has a notional principal amount or receives
principal only or that is or may be an Accrual Security is equal to the sum of
all distributions to be made under such Security. The stated redemption price at
maturity of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first Payment Date
over the interest that accrues for the period from the Settlement Date to the
first Payment Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25% of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a Security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the amounts
determined by multiplying (i) the number of complete years (rounding down for
partial years) from the Settlement Date until the date on which each such
distribution is expected to be made under the assumption that the Mortgage Loans
prepay at the rate specified in the related Prospectus Supplement (the
"Prepayment Assumption") by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the Security's
stated redemption price at maturity. If original issue discount is treated as
zero under this rule, the actual amount of original issue discount must be
allocated to the principal distributions on the Security and, when each such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities and applicable
by analogy to Grantor Trust Securities. Investors in Grantor Trust Securities
should be aware that there can be no assurance that the rules described below
will be applied to such Securities. Under these rules (described in greater
detail below), (i) the amount and rate of accrual of original issue discount on
each series of Securities will be based on (x) the Prepayment Assumption, and
(y) in the case of a Security calling for a variable rate of interest, an
assumption that the value of the index upon which such variable rate is based
remains equal to the value of that rate on the Settlement Date, and (ii)
adjustments will be made in the amount of discount accruing in each taxable year
in which the actual prepayment rate differs from the Prepayment Assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Sponsor anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The Sponsor
makes no representation, however, that the Mortgage Loans for a given series
will prepay at the rate reflected in the Prepayment Assumption for that series
or at any other rate. Each investor must make its own decision as to the
appropriate prepayment assumption to be used in deciding whether or not to
purchase any of the Securities.
Each Securityholder must include in gross income the sum of the "daily
portions" of original issue discount on its Security for each day during its
taxable year on which it held such Security. For this purpose, in the case of an
original Holder, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each "accrual period." The Trustee
will supply, at the time and in the manner required by the IRS, to
Securityholders, brokers and middlemen information with respect to the original
issue discount accruing on the Securities. Unless otherwise disclosed in the
related Prospectus Supplement, the Trustee will report original issue discount
based on accrual periods of one month, each beginning on a payment date (or, in
the case of the first such period, the Settlement Date) and ending on the day
before the next payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security
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during the accrual period of amounts included in the stated redemption price at
maturity, over (ii) the adjusted issue price of such Security at the beginning
of the accrual period. The present value of the remaining distributions referred
to in the preceding sentence will be calculated based on (i) the yield to
maturity of the Security, calculated as of the Settlement Date, giving effect to
the Prepayment Assumption, (ii) events (including actual prepayments) that have
occurred prior to the end of the accrual period, (iii) the Prepayment
Assumption, and (iv) in the case of a Security calling for a variable rate of
interest, an assumption that the value of the index upon which such variable
rate is based remains the same as its value on the Settlement Date over the
entire life of such Security. The adjusted issue price of a Security at any time
will equal the issue price of such Security, increased by the aggregate amount
of previously accrued original issue discount with respect to such Security, and
reduced by the amount of any distributions made on such Security as of that time
of amounts included in the stated redemption price at maturity. The original
issue discount accruing during any accrual period will then be allocated ratably
to each day during the period to determine the daily portion of original issue
discount.
In the case of Grantor Trust Strip Securities and certain REMIC
Securities, the calculation described in the preceding paragraph may produce a
negative amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of such negative
amounts. The legislative history to section 1272(a)(6) indicates that such
negative amounts may be used to offset subsequent positive accruals but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive accruals. Holders of such
Securities should consult their own tax advisors concerning the treatment of
such negative accruals.
A subsequent purchaser of a Security that purchases such Security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
Market Discount
A Holder that purchases a Security at a market discount, that is, at a
purchase price less than the remaining stated redemption price at maturity of
such Security (or, in the case of a Security with original issue discount, its
adjusted issue price), will be required to allocate each principal distribution
first to accrued market discount on the Security, and recognize ordinary income
to the extent such distribution does not exceed the aggregate amount of accrued
market discount on such Security not previously included in income. With respect
to Securities that have unaccrued original issue discount, such market discount
must be included in income in addition to any original issue discount. A Holder
that incurs or continues indebtedness to acquire a Security at a market discount
may also be required to defer the deduction of all or a portion of the interest
on such indebtedness until the corresponding amount of market discount is
included in income. In general terms, market discount on a Security may be
treated as accruing either (i) under a constant yield method or (ii) in
proportion to remaining accruals of original issue discount, if any, or if none,
in proportion to remaining distributions of interest on the Security, in any
case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to Holders of Securities information
necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such Security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost
greater than its remaining stated redemption price at maturity will be
considered to have purchased such Security (a "Premium Security") at a premium.
Such a
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purchaser need not include in income any remaining original issue discount and
may elect, under section 171(c)(2) of the Code, to treat such premium as
"amortizable bond premium." If a Holder makes such an election, the amount of
any interest payment that must be included in such Holder's income for each
period ending on a Payment Date will be reduced by the portion of the premium
allocable to such period based on the Premium Security's yield to maturity. The
legislative history of the Tax Reform Act of 1986 states that such premium
amortization should be made under principles analogous to those governing the
accrual of market discount (as discussed above under "-- Market Discount"). If
such election is made by the Holder, the election will also apply to all bonds
the interest on which is not excludible from gross income ("fully taxable
bonds") held by the Holder at the beginning of the first taxable year to which
the election applies and to all such fully taxable bonds thereafter acquired by
it, and is irrevocable without the consent of the IRS. If such an election is
not made, (i) such a Holder must include the full amount of each interest
payment in income as it accrues, and (ii) the premium must be allocated to the
principal distributions on the Premium Security and, when each such distribution
is received, a loss equal to the premium allocated to such distribution will be
recognized. Any tax benefit from the premium not previously recognized will be
taken into account in computing gain or loss upon the sale or disposition of the
Premium Security.
Some Securities may provide for only nominal distributions of principal
in comparison to the distributions of interest thereon. It is possible that the
IRS or the Treasury Department may issue guidance excluding such Securities from
the rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total payments to be received
thereon over its issue price. In such event, section 1272(a)(6) of the Code
would govern the accrual of such original issue discount, but a Holder would
recognize substantially the same income in any given period as would be
recognized if an election were made under section 171(c)(2) of the Code. Unless
and until the Treasury Department or the IRS publishes specific guidance
relating to the tax treatment of such Securities, the Trustee intends to furnish
tax information to Holders of such Securities in accordance with the rules
described in the preceding paragraph.
Special Election
For any Security acquired on or after April 4, 1994, a Holder may elect
to include in gross income all "interest" that accrues on the Security by using
a constant yield method. For purposes of the election, the term "interest"
includes stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimis market discount and
unstated interest as adjusted by any amortizable bond premium or acquisition
premium. A Holder should consult its own tax advisor regarding the time and
manner of making and the scope of the election and the implementation of the
constant yield method.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under section 3406 of the Code at a rate of 31% if recipients of such
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
FOREIGN INVESTORS
Grantor Trust Securities and REMIC Regular Securities
Distributions made on a Grantor Trust Security or a REMIC Regular
Security to, or on behalf of a Holder that is not a U.S. Person generally will
be exempt from U.S. federal income and withholding taxes. The term "U.S. Person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, an estate that is subject to U.S. federal
income tax regardless of the source of its income, or a trust if a court within
the United States can exercise primary supervision over its administration and
at least one United States fiduciary has the authority to control all
substantial decisions of the trust. This exemption is applicable provided (a)
the Holder is not subject to
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U.S. tax as a result of a connection to the United States other than ownership
of the Security, (b) the Holder signs a statement under penalties of perjury
that certifies that such Holder is not a U.S. Person, and provides the name and
address of such Holder, and (c) the last U.S. Person in the chain of payment to
the Holder receives such statement from such Holder or a financial institution
holding on its behalf and does not have actual knowledge that such statement is
false. Holders should be aware that the IRS might take the position that this
exemption does not apply to a Holder that also owns 10% or more of the REMIC
Residual Securities of any REMIC trust, or to a Holder that is a "controlled
foreign corporation" described in section 881(c)(3)(C) of the Code.
REMIC Residual Securities
Amounts distributed to a Holder of a REMIC Residual Security that is a
not a U.S. Person generally will be treated as interest for purposes of applying
the 30% (or lower treaty rate) withholding tax on income that is not effectively
connected with a U.S. trade or business. Temporary Treasury Regulations clarify
that amounts not constituting excess inclusions that are distributed on a REMIC
Residual Security to a Holder that is not a U.S. Person generally will be exempt
from U.S. federal income and withholding tax, subject to the same conditions
applicable to distributions on Grantor Trust Securities and REMIC Regular
Securities, as described above, but only to the extent that the obligations
directly underlying the REMIC Trust that issued the REMIC Residual Security
(e.g., Mortgage Loans or regular interests in another REMIC) were issued after
July 18, 1984. In no case will any portion of REMIC income that constitutes an
excess inclusion be entitled to any exemption from the withholding tax or a
reduced treaty rate for withholding. See "--REMIC Securities--Taxation of
Holders of REMIC Residual Securities--Excess Inclusions."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain fiduciary and prohibited transaction restrictions on
employee pension and welfare benefit plans subject to ERISA ("ERISA Plans").
Section 4975 of the Code imposes essentially the same prohibited transaction
restrictions on tax-qualified retirement plans described in section 401(a) of
the Code ("Qualified Retirement Plans") and on Individual Retirement Accounts
("IRAs") described in section 408 of the Code (collectively, "Tax-Favored
Plans").
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Securities without
regard to the ERISA considerations described below, subject to the provisions of
applicable federal and state law. Any such plan that is a Qualified Retirement
Plan and exempt from taxation under sections 401(a) and 501(a) of the Code,
however, is subject to the prohibited transaction rules set forth in section 503
of the Code.
Section 404 of ERISA imposes general fiduciary requirements, including
those of investment prudence and diversification and the requirement that a
Plan's investment be made in accordance with the documents governing the Plan.
In addition, Section 406 of ERISA and section 4975 of the Code prohibit a broad
range of transactions involving assets of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest (or Disqualified Persons) that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or section 4975 of the Code, unless a
statutory or administrative exemption is available.
PLAN ASSET REGULATIONS
A Plan's investment in Securities may cause the Mortgage Loans included
in a Mortgage Pool to be deemed Plan assets. The U.S. Department of Labor (the
"DOL") has promulgated regulations (the "DOL Regulations") concerning whether or
not a Plan's assets would be deemed to include an interest in the underlying
assets of an entity (such as a Trust Estate), for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an "equity
interest" (such as a Security) in such entity. Because of the factual nature of
certain of the rules set forth in the DOL Regulations, an investing Plan's
assets either may be deemed to include an interest in the assets of a Trust
Estate or may be deemed merely to include its interest in the Securities.
Therefore, Plans should not acquire or hold Securities in reliance upon the
availability of any exception under the DOL Regulations.
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The prohibited transaction provisions of Section 406 of ERISA and
section 4975 of the Code may apply to a Trust Estate and cause the Sponsor, the
Master Servicer, any Sub-Servicer, the Trustee, the obligor under any Credit
Enhancement mechanism or certain affiliates thereof, to be considered or become
Parties in Interest or Disqualified Persons with respect to an investing Plan.
If so, the acquisition or holding of Securities by or on behalf of the investing
Plan could also give rise to a prohibited transaction under ERISA and the Code,
unless some statutory or administrative exemption is available. Securities
acquired by a Plan would be assets of that Plan. Under the DOL Regulations, the
Trust Estate, including the Mortgage Loans and the other assets held in the
Trust Estate, may also be deemed to be assets of each Plan that acquires
Securities. Special caution should be exercised before the assets of a Plan are
used to acquire a Security in such circumstances, especially if, with respect to
such assets, the Sponsor, the Master Servicer, any Sub-Servicer, the Trustee,
the obligor under any Credit Enhancement mechanism or an affiliate thereof
either (i) has investment discretion with respect to the investment of Plan
assets; or (ii) has authority or responsibility to give (or regularly gives)
investment advice with respect to Plan assets for a fee pursuant to an agreement
or understanding that such advice will serve as a primary basis for investment
decisions with respect to such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee (in the manner described above), is
a fiduciary of the investing Plan. If the Mortgage Loans were to constitute Plan
assets, then any party exercising management or discretionary control regarding
those assets may be deemed to be a Plan "fiduciary," and thus subject to the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and section 4975 of the Code with respect to the investing Plan. In
addition, if the Mortgage Loans were to constitute Plan assets, then the
acquisition or holding of Securities by a Plan, as well as the operation of the
Trust Estate, may constitute or involve a prohibited transaction under ERISA and
the Code.
PROHIBITED TRANSACTION CLASS EXEMPTION
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which generally exempts from the prohibited
transaction provisions of section 406(a) of ERISA, and from the excise taxes
imposed by sections 4975(a) and (b) of the Code by reason of section
4975(c)(1)(A) through (D) of the Code, certain transactions involving
residential mortgage pool investment trusts relating to the purchase, sale and
holding of securities in the initial issuance of Securities and the servicing
and operation of "mortgage pools" (as defined below). PTCE 83-1 permits, subject
to certain general and specific conditions, transactions which might otherwise
be prohibited between Plans and Parties in Interest (or Disqualified Persons)
with respect to those Plans, related to the origination, maintenance and
termination of mortgage pools and the acquisition and holding of certain
mortgage pool pass-through Securities representing interests in such mortgage
pools by Plans, whether or not the Plan's assets would be deemed to include an
ownership interest in the mortgage loans in the mortgage pool. PTCE 83-1 is not
available for mortgage pools that include Cooperative Loans and does not provide
an exemption for Subordinate Securities.
PTCE 83-1 defines the term "mortgage pool" as "an investment pool the
corpus of which (1) is held in trust; and (2) consists solely of (a) interest
bearing obligations secured by either first or second mortgages or deeds of
trust on one- to four-family residential property; (b) property which had
secured obligations and which has been acquired by foreclosure; and (c)
undistributed cash." The Sponsor expects that each pool of Mortgage Loans (other
than pools including Junior Lien Loans which are not in the second lien
position, Cooperative Loans or Multi-Family Loans) will be a "mortgage pool"
within the meaning of PTCE 83-1.
PTCE 83-1 defines the term "mortgage pool pass-through certificate" as
a "certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." The Sponsor has been advised that, for purposes
of applying PTCE 83-1, the term "mortgage pool pass-through certificate" would
include (i) Securities representing interests in a Trust Estate consisting of
Mortgage Loans issued in a series consisting of only a single class of
Securities; and (ii) Senior Securities representing interests in a Trust Estate
consisting of Mortgage Loans issued in a series in which there is only one class
of Senior Securities; provided that the Securities described in clauses (i) and
(ii) evidence the beneficial ownership of a specified portion of both future
interest payments and future principal payments with respect to the Mortgage
Loans.
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<PAGE> 198
It is not clear whether all types of Securities that may be offered
hereunder would be "mortgage pass-through certificates" for purposes of applying
PTCE 83-1, including, but not limited to, (a) a class of Securities that
evidences the beneficial ownership of interest payments only or principal
payments only, disproportionate interest and principal payments, or nominal
principal or interest payments, such as the Strip Securities; or (b) Securities
in a series including classes of Securities which differ as to timing,
sequential order, rate or amount of distributions of principal or interest or
both, or as to which distributions of principal or interest or both on any class
may be made upon the occurrence of specified events, in accordance with a
schedule or formula, or on the basis of collections from designated portions of
the Mortgage Pool; or (c) Securities evidencing an interest in a Trust Estate as
to which two or more REMIC elections have been made; or (d) a series including
other types of multiple classes. Accordingly, until further clarification by the
DOL, Plans should not acquire or hold Securities representing interests
described in this paragraph in reliance upon the availability of PTCE 83-1
without first consulting with their counsel regarding the application of PTCE
83-1 to the proposed acquisition and holding of such Securities.
PTCE 83-1 sets forth three general conditions that must be satisfied
for any transaction involving the purchase, sale and holding of "mortgage pool
pass-through certificates" and the servicing and operation of the "mortgage
pool" to be eligible for exemption: (1) the pool trustee must not be an
affiliate of the pool sponsor; (2) a system of insurance or other protection for
the pooled mortgage loans and property securing such loans, and for indemnifying
securityholders against reductions in pass-through payments due to property
damage or defaults in loan payments in an amount not less than the greater of 1%
of the aggregate principal balance of all covered pooled mortgages, or the
principal balance of the largest covered mortgage, must be maintained; and (3)
the amount of the payment retained by the pool sponsor together with other funds
inuring to its benefit must be limited to not more than adequate consideration
for forming the mortgage pools plus reasonable compensation for services
provided by the pool sponsor to the mortgage pool. PTCE 83-1 also imposes
additional specific conditions for certain types of transactions involving an
investing Plan and for situations in which the Parties in Interest or
Disqualified Persons are fiduciaries.
The Prospectus Supplement for a series will set forth whether the
Trustee in respect of that series is affiliated with the Sponsor. If the Credit
Enhancement mechanism for a series of Securities constitutes a system of
insurance or other protection within the meaning of PTCE 83-1 and is maintained
in an amount not less than the greater of 1% of the aggregate principal balance
of the Mortgage Loans or the principal balance of the largest Mortgage Loan,
then the Sponsor has been advised that the second general condition referred to
above will be satisfied. The Sponsor will not receive total compensation for
forming and providing services to the Mortgage Pools which will be more than
adequate consideration. Each Plan fiduciary responsible for making the
investment decision whether to acquire or hold Securities must make its own
determination as to whether (i) the Securities constitute "mortgage pool pass
through certificates" for purposes of applying PTCE 83-1, (ii) the second and
third general conditions will be satisfied, and (iii) the specific conditions,
not discussed herein, of PTCE 83-1 have been satisfied.
It should be noted that in promulgating PTCE 83-1 and its predecessor,
the DOL did not have under its consideration interests in pools of the exact
nature described herein. There are other class and individual prohibited
transaction exemptions issued by the DOL that could apply to a Plan's
acquisition or holding of Securities. There can be no assurance that any of
those exemptions will apply with respect to any particular Plan that acquires or
holds Securities or, even if all of the conditions specified therein were
satisfied, that the exemption would apply to all transactions involving the
Trust Estate. The related Prospectus Supplement under "ERISA Considerations" may
contain additional information regarding the application of PTCE 83-1, or other
prohibited transaction exemptions that may be available, with respect to the
series offered thereby.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section
501 of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is unrelated business taxable
income within the meaning of Section 512 of the Code. All "excess inclusions" of
a REMIC allocated to a REMIC Residual Security held by a Tax Exempt Investor
will be considered unrelated business taxable income and thus will be subject to
federal income tax. See "Certain Federal Income Tax Consequences--REMIC
Securities-- Taxation of Holders of REMIC Residual Securities--Excess
Inclusions."
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CONSULTATION WITH COUNSEL
Any Plan fiduciary that proposes to cause a Plan to acquire or hold
Securities should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and the Code to the proposed
investment and the availability of PTCE 83-1 or any other prohibited transaction
exemption.
LEGAL INVESTMENT MATTERS
Certain classes of Securities offered hereby and by the related
Prospectus Supplement will constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as
they are rated in at least the second highest rating category by any Rating
Agency, and as such may 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
whose authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, if a State enacted
legislation on or prior to October 3, 1991 specifically limiting the legal
investment authority of any such entities with respect to "mortgage related
securities," such securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Certain States
have enacted legislation which overrides the preemption provisions of SMMEA.
SMMEA provides, however, that in no event will the enactment of any such
legislation affect the validity of any contractual commitment to purchase, hold
or invest in "mortgage related securities," or require the sale or other
disposition of such securities, so long as such contractual commitment was made
or such securities acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has adopted a
supervisory policy statement (the "Policy Statement"), applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the Office of Thrift Supervision with
an effective date of February 10, 1992. The Policy Statement generally indicates
that a mortgage derivative product will be deemed to be high risk if it exhibits
greater price volatility than a standard fixed rate thirty-year mortgage
security. According to the Policy Statement, prior to purchase, a depository
institution will be required to determine whether a mortgage derivative product
that it is considering acquiring is high-risk, and if so, that the proposed
acquisition would reduce the institution's overall interest rate risk. Reliance
on analysis and documentation obtained from a securities dealer or other outside
party without internal analysis by the institution would be unacceptable. There
can be no assurance as to which classes of Securities will be treated as
high-risk under the Policy Statement. In addition, the National Credit Union
Administration has issued regulations governing federal credit union investments
which prohibit investment in certain specified types of securities, which may
include certain classes of Securities. Similar policy statements have been
issued by regulators having jurisdiction over other types of depository
institutions.
There may be other restrictions on the ability of certain investors
either to purchase certain classes of Securities or to purchase any class of
Securities representing more than a specified percentage of the investors'
assets. The Sponsor will make no representations as to the proper
characterization of any class of Securities for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Securities under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Securities. Accordingly, all
investors whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their own legal advisors in determining whether and to what
extent the Securities of any class constitute legal investments under SMMEA or
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are subject to investment, capital or other restrictions, and whether SMMEA has
been overridden in any jurisdiction applicable to such investor.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of Securities
will be applied by the Sponsor to finance the purchase of, or to repay
short-term loans incurred to finance the purchase of, the Mortgage Loans
underlying the Securities or will be used by the Sponsor for general corporate
purposes. The Sponsor expects that it will make additional sales of securities
similar to the Securities from time to time, but the timing and amount of any
such additional offerings will be dependent upon a number of factors, including
the volume of mortgage loans purchased by the Sponsor, prevailing interest
rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the public offering or
purchase price of such series and the net proceeds to the Sponsor from such
sale.
The Sponsor intends that Securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of Securities may be made through a combination of two or more of these
methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. By placements by the Sponsor with institutional investors through
dealers; and
3. By direct placements by the Sponsor with institutional investors.
In addition, if specified in the related Prospectus Supplement, a
series of Securities may be offered in whole or in part in exchange for the
Mortgage Loans (and other assets, if applicable) that would comprise the
Mortgage Pool in respect of such Securities.
If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. Such underwriters may be
broker-dealers affiliated with the Sponsor whose identities and relationships to
the Sponsor will be as set forth in the related Prospectus Supplement. The
managing underwriter or underwriters with respect to the offer and sale of a
particular series of Securities will be set forth on the cover of the Prospectus
Supplement relating to such series and the members of the underwriting
syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Sponsor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Sponsor and any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended. The Prospectus Supplement will describe any such compensation
paid by the Sponsor.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Securities will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Securities if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Sponsor will indemnify the
several underwriters and the
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underwriters will indemnify the Sponsor against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Sponsor and
purchasers of Securities of such series.
The Sponsor anticipates that the Securities offered hereby will be sold
primarily to institutional investors. Purchasers of Securities, including
dealers, may, depending on the facts and circumstances of such purchases, be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended, in connection with reoffers and sales by them of Securities. Holders of
Securities should consult with their legal advisors in this regard prior to any
such reoffer or sale.
LEGAL MATTERS
Certain legal matters will be passed upon for the Sponsor by Dewey
Ballantine, New York, New York and by the office of the general counsel of the
Sponsor.
FINANCIAL INFORMATION
The Sponsor has determined that its financial statements are not
material to the offering made hereby. However, any prospective purchaser who
desires to review financial information concerning the Sponsor will be provided
by the Sponsor upon request with a copy of the most recent financial statements
of the Sponsor.
A Prospectus Supplement may contain the financial statements of the
related Credit Enhancer, if any.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each
series of Securities, contains a summary of the material terms of the applicable
exhibits to the Registration Statement and the documents referred to herein and
therein. Copies of such exhibits are on file at the offices of the Securities
and Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and may be
inspected, without charge, at the Commission's offices.
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INDEX OF PRINCIPAL DEFINITIONS
Page
Accounts................................................................ 41
Accrual Securities...................................................... 6
Actuarial Loans......................................................... 20
ADVANTA Parent.......................................................... 56
Affiliated Originators.................................................. 4
Approved Guidelines..................................................... 9
APR..................................................................... 21
ARM Loans............................................................... 16
Balloon Amount.......................................................... 26
Balloon Loans........................................................... 14
Balloon payments........................................................ 19
Bankruptcy Bond......................................................... 52
Bankruptcy Loss......................................................... 50
Bankruptcy Loss Amount.................................................. 50
Base Servicing Fee...................................................... 57
Book-Entry Securities................................................... 37
Bulk Acquisition........................................................ 9
Bulk Guidelines......................................................... 28
Buydown Account......................................................... 19
Buydown Agreement....................................................... 43
Buydown Funds........................................................... 19
Buydown Mortgage Loans.................................................. 19
Buydown Period.......................................................... 19
Cede.................................................................... 12
Certificates............................................................ 5
Closing Date............................................................ 39
CLTV.................................................................... 21
Code.................................................................... 72
Colonial................................................................ 56
Compensating Interest................................................... 45
Conduit Participants.................................................... 31
Contracts............................................................... 23
Conventional Loans...................................................... 18
Convertible Mortgage Loan............................................... 26
Cooperative Loans....................................................... 25
Cooperative Notes....................................................... 25
Credit Enhancement...................................................... 42
Credit Enhancer......................................................... 18
Cut-Off Date............................................................ 21
Date of Payment Loans................................................... 20
Debt Securities......................................................... 12
Debt Service Reduction.................................................. 52
Defaulted Mortgage Loss................................................. 50
Deferred Interest....................................................... 14
Deficient Valuation..................................................... 52
Deleted Mortgage Loan................................................... 32
Delinquency Advances.................................................... 45
Designated Depository Institution....................................... 41
Detailed Description.................................................... 18
Determination Date...................................................... 45
Direct or Indirect Participants......................................... 17
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Disqualified Persons.................................................... 84
Distribution Account.................................................... 41
DOL..................................................................... 84
DOL Regulations......................................................... 84
DTC..................................................................... 12
Due Date................................................................ 40
Eligible Investments.................................................... 42
Equity Securities....................................................... .6
ERISA................................................................... 11
ERISA Plans............................................................. 84
Exchange Act............................................................ 12
Extraordinary Losses.................................................... 51
FDIC.................................................................... 31
Federal Corporations.................................................... 31
FHA..................................................................... 23
FHLMC................................................................... 14
Financial Guaranty Insurance Policy..................................... 53
Financial Guaranty Insurer.............................................. 53
FIRREA.................................................................. 31
Fixed-Income Securities................................................. 6
FNMA.................................................................... 14
Forward Purchase Agreement.............................................. 9
Fraud Loss.............................................................. 51
Fraud Loss Amount....................................................... 50
Funding Period.......................................................... 40
Garn-St. Germain Act.................................................... 70
Graduated payments...................................................... 19
Grantor Trust Estate.................................................... 72
Grantor Trust Fractional Interest Security.............................. 73
Grantor Trust Securities................................................ 11
Grantor Trust Strip Security............................................ 73
Holder.................................................................. 72
Home Improvement Loans.................................................. 23
Indenture............................................................... 5
Indenture Trustee....................................................... 5
Index................................................................... 25
Indirect Participant.................................................... 37
Insurance Paying Agent.................................................. 53
Insurance Proceeds...................................................... 41
Insured Payment......................................................... 53
Interest Rate........................................................... 6
Investment Company Act.................................................. 8
IRAs.................................................................... 84
IRS..................................................................... 74
Junior Lien Loans....................................................... 22
Letter of Credit........................................................ 51
Letter of Credit Bank................................................... 51
Liquidated Mortgage Loan................................................ 15
Liquidation Proceeds.................................................... 15
Loan Purchase Price..................................................... 32
Lockout periods......................................................... 19
LTV..................................................................... 21
Manufactured Homes...................................................... 23
Manufacturer's Invoice Price............................................ 21
Master Commitments...................................................... 30
Master Servicer......................................................... 2
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Master Servicing Fee.................................................... 57
Modified Loans.......................................................... 26
Monthly pay............................................................. 18
Mortgage Asset Schedule................................................. 18
Mortgage Assets......................................................... 18
Mortgage Loans.......................................................... 1
Mortgage Notes.......................................................... 25
Mortgage Pool........................................................... 1
Mortgage Pool Insurance Policy.......................................... 51
Mortgage pool pass-through certificate.................................. 85
Mortgage Rate........................................................... 19
Mortgaged Properties.................................................... 18
Mortgages............................................................... 9
Mortgagor............................................................... 14
Multi-family Loans...................................................... 23
Net Liquidation Proceeds................................................ 41
Net Mortgage Rate....................................................... 62
Note Margin............................................................. 25
Notes................................................................... 5
Originator's Retained Yield............................................. 25
Originators............................................................. 1
Participants............................................................ 37
Parties in Interest..................................................... 84
Partnership Interests................................................... 12
Pass-Through Rate....................................................... 44
Paying Agent............................................................ 44
Payment Date............................................................ .7
Percentage Interest..................................................... 44
Physical Certificates................................................... 36
Plan.................................................................... 11
Plans................................................................... 84
Policy Statement........................................................ 87
Pool Factor............................................................. 46
Pool Insurer............................................................ 43
Pooling and Servicing Agreement......................................... 5
Pre-Funding Account..................................................... 9
Premium Security........................................................ 82
Prepayment Assumption................................................... 75
Principal Prepayments................................................... 40
PTCE 83-1............................................................... 85
Purchase Obligation..................................................... 13
Qualified Replacement Mortgage.......................................... 32
Qualified Retirement Plans.............................................. 84
Rating Agencies......................................................... 12
Realized Loss........................................................... 50
Record Date............................................................. 7
Relief Act.............................................................. 17
REMIC................................................................... 2
REMIC Regular Securities................................................ 11
REMIC Regulations....................................................... 74
REMIC Residual Securities............................................... 11
REMIC Securities........................................................ 72
REMIC Trust............................................................. 74
Remittance Date......................................................... 42
Remittance Period....................................................... 7
REO Property............................................................ 48
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Reserve Fund............................................................ 52
Revolving Credit Line Loans............................................. 19
RTC..................................................................... 31
Rule of 78's............................................................ 20
Rule of 78's Loan....................................................... 20
Securities.............................................................. 1
Security Registrar...................................................... 37
Securityholders......................................................... 1
Senior Lien............................................................. 21
Senior Securities....................................................... 6
Servicer................................................................ 57
Servicing Advance....................................................... 45
Servicing Agreement..................................................... 5
Servicing Fee........................................................... 57
Settlement Date......................................................... 75
Single Family Loans..................................................... 22
SMMEA................................................................... 11
Special Hazard Amount................................................... 50
Special Hazard Insurance Policy......................................... 52
Special Hazard Insurer.................................................. 52
Special Hazard Loss..................................................... 50
Sponsor................................................................. 1
Sponsor's Guidelines.................................................... 9
Sponsor's Originator Guide.............................................. 9
Statistic Calculation Date.............................................. 21
Strip Securities........................................................ 6
Sub-Servicing Account................................................... 40
Sub-Servicing Agreement................................................. 32
Subordinate Amount...................................................... 50
Subordinate Securities.................................................. 6
Subsequent Mortgage Loans............................................... 9
Subservicer(s).......................................................... 2
Tax Exempt Investor..................................................... 86
Tax-Favored Plans....................................................... 84
Title V................................................................. 71
Title VIII.............................................................. 71
Trust................................................................... 1
Trust Agreement......................................................... 5
Trust Estate............................................................ 1
Trustee................................................................. 4
U.S. Person............................................................. 83
UCC..................................................................... 37
Unaffiliated Originators................................................ 4
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
Securities (the "Global Securities") will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through any
of DTC, CEDEL or Euroclear. The Global Securities will be tradeable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
Relevant Depository which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
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Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depository, 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 coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depository to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL 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 CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depository for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL 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 Depository, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depository, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL 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). In the event that the CEDEL Participant or Euroclear Participant has
a line of credit with its respective clearing system and elects 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 CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
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<PAGE> 208
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until
the purchase side of the trade is reflected in their CEDEL 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 CEDEL 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 CEDEL Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners
of Global Securities that are Non-U.S. Persons (as defined below) can
obtain a complete exemption from the withholding tax by filing a signed
Form W-8 (Certificate of Foreign Status). If the information shown on
Form W-8 changes, a new Form W-8 must be filed within 30 days of such
change.
Exemption for Non-U.S. Persons with effectively connected
income (Form 4224). A Non-U.S. Person (as defined below), including a
non-U.S. corporation or bank with a U.S. branch, for which the interest
income is effectively connected with its conduct of a trade or business
in the United States, can obtain an exemption from the withholding tax
by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the
United States).
Exemption or reduced rate for non-U.S. Persons resident in
treaty countries (Form 1001). Non-U.S. Persons residing in a country
that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Certificate). If the treaty
provides only for a reduced rate, withholding tax will be imposed at
that rate unless the filer alternatively files Form W-8. Form 1001 may
be filed by Certificate Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain
a complete exemption from the withholding tax by filing Form W-9
(Payer's Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer,
his agent, 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-8 and
Form 1001 are effective for three calendar years and Form 4224 is
effective for one calendar year.
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<PAGE> 209
On April 22, 1996, the IRS proposed regulations relating to
withholding, backup withholding and information reporting that, if adopted in
their current form would, among other things, unify current certification
procedures and forms and clarify certain reliance standards. The regulations are
proposed to be effective for payments made after December 31, 1997 but provide
that certificates issued on or before the date that is 60 days after the
proposed regulations are made final will continue to be valid until they expire.
Proposed regulations, however, are subject to change prior to their adoption in
final form.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof, (iii) an
estate that is subject to U.S. federal income tax regardless of the source of
its income or (iv) a trust if a court within the United States can exercise
primary supervision over its administration and at least one United States
fiduciary has the authority to control all substantial decisions of the trust.
The term "Non-U.S. Person" means any person who is not a U.S. Person. This
summary does not deal with all aspects of U.S. Federal income tax withholding
that may be relevant to foreign holders of the Global Securities. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
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<PAGE> 210
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SPONSOR
OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO TO ANYONE TO WHOM IT
IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR THEREIN IS
CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUPPLEMENT
Available Information...................... S-2
Reports to the Certificateholders.......... S-3
Incorporation of Certain Documents by
Reference................................ S-3
Summary.................................... S-4
Risk Factors............................... S-35
The Portfolio of Mortgage Loans............ S-38
The Mortgage Loan Pool..................... S-42
Prepayment and Yield Considerations........ S-62
Use of Proceeds............................ S-75
The Sponsor and the Master Servicer........ S-76
Description of the Certificates............ S-77
Credit Enhancement......................... S-86
The Pooling and Servicing Agreement........ S-92
The Class A-6 Insurer...................... S-95
The Class A-6 Insurance Policy............. S-97
Certain Federal Income Tax Consequences.... S-99
ERISA Considerations....................... S-100
Ratings.................................... S-103
Legal Investment Considerations............ S-105
Underwriting............................... S-105
Experts.................................... S-107
Certain Legal Matters...................... S-107
Index of Principal Defined Terms........... S-108
PROSPECTUS
Summary of Prospectus...................... 4
Risk Factors............................... 13
The Trusts................................. 18
The Mortgage Pools......................... 25
Mortgage Loan Program...................... 27
Description of the Securities.............. 34
Subordination.............................. 49
Description of Credit Enhancement.......... 50
Hazard Insurance; Claims Thereunder........ 55
The Sponsor and the Transferor............. 56
The Master Servicer........................ 56
The Pooling and Servicing Agreement........ 56
Yield Considerations....................... 62
Maturity and Prepayment Considerations..... 64
Certain Legal Aspects of Mortgage Loans and
Related Matters.......................... 65
Certain Federal Income Tax Consequences.... 72
ERISA Considerations....................... 84
Legal Investment Matters................... 87
Use of Proceeds............................ 88
Methods of Distribution.................... 88
Legal Matters.............................. 89
Financial Information...................... 89
Additional Information..................... 89
Index of Principal Definitions............. 90
Global Clearance, Settlement and Tax
Documentation Procedures............... Annex I
</TABLE>
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ADVANTA MORTGAGE LOAN
TRUST 1997-2
$165,800,000 6.80%
Class A-1 Fixed Rate Certificates
$109,900,000 7.05%
Class A-2 Fixed Rate Certificates
$10,500,000 7.30%
Class A-3 Fixed Rate Certificates
$44,445,000 7.60%
Class A-4 Fixed Rate Certificates
$36,855,000 7.25%
Class A-5 Fixed Rate Certificates
$280,000,000 Class A-6 Adjustable Rate Certificates
5.00% Class A-7IO Certificates
$13,650,000 7.55%
Class M-1 Fixed Rate Certificates
$24,150,000 7.70%
Class M-2 Fixed Rate Certificates
$14,700,000 8.05%
Class B-1 Fixed Rate Certificates
Mortgage Loan
Asset-Backed Certificates
Series 1997-2
-----------------------------------------------
PROSPECTUS SUPPLEMENT
-----------------------------------------------
MORGAN STANLEY & CO.
Incorporated
J.P. MORGAN & CO.
LEHMAN BROTHERS
SALOMON BROTHERS INC
May 22, 1997
=======================================================
