<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 31, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
NATIONSBANC ASSET SECURITIES, INC.
(Exact name of Registrant as specified in its charter)
---------------------
<TABLE>
<S> <C>
DELAWARE 75-2533468
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
</TABLE>
NATIONSBANK CORPORATE CENTER
CHARLOTTE, N.C. 28255
(704) 386-2400
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
ROBERT J. PERRET
SENIOR VICE PRESIDENT
NATIONSBANC ASSET SECURITIES, INC.
NATIONSBANK CORPORATE CENTER
CHARLOTTE, N.C. 28255
(704) 388-5934
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------
COPIES TO:
<TABLE>
<S> <C> <C>
JORDAN M. SCHWARTZ, ESQ. ROBERT W. LONG, JR. ESQ. MICHAEL NEDZBALA, ESQ.
CADWALADER, WICKERSHAM & TAFT NATIONSBANC MORTGAGE HUNTON & WILLIAMS
100 MAIDEN LANE CAPITAL CORPORATION 101 SOUTH TRYON STREET
NEW YORK, NEW YORK 10038 100 NORTH TRYON STREET CHARLOTTE, N.C. 28280
NC1-007-11-07
CHARLOTTE, N.C. 28255
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
---------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
Asset Backed Certificates (the
"Certificates") and Asset Backed Notes (the
"Notes" and, together with the
Certificates, the "Securities"), issued in
Series(2).................................. $2,000,000,000 100% $2,000,000,000 $590,000
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</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee on the
basis of the proposed maximum aggregate offering price.
(2) This Registration Statement also registers an indeterminate amount of
Securities to be sold by NationsBanc Montgomery Securities LLC in market
making transactions, to the extent required.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
PURSUANT TO RULE 429 OF THE SECURITIES AND EXCHANGE COMMISSION'S RULES AND
REGULATIONS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, THE PROSPECTUS AND
PROSPECTUS SUPPLEMENT CONTAINED IN THIS REGISTRATION STATEMENT ALSO RELATE TO
THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-3 (REGISTRATION NO.
333-32857).
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS SUPPLEMENTSUBJECT TO COMPLETION AUGUST 31, 1998
- ----------------------------------
(TO PROSPECTUS DATED , 199 )
$
NATIONSBANC ASSET SECURITIES, INC.
DEPOSITOR
ASSET BACKED CERTIFICATES, SERIES 199 -
ASSET SELLER AND SERVICER
The Series 199 - Asset Backed Certificates (the "Certificates") will
include the following four senior classes: Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates and Class A-4 Certificates (each, a "Class"
and collectively, the "Class A Certificates"). In addition to the Class A
Certificates, the Series 199 - Asset Backed Certificates will include
the Class R Certificates (the "Residual Certificates"). Only the Class A
Certificates are offered hereby.
The Company has caused (the "Certificate Insurer") to issue a
certificate guaranty insurance policy (the "Certificate Insurance Policy") for
the benefit of the Class A Certificateholders pursuant to which it will
guarantee certain payments to the Class A Certificateholders as described
herein.
There is currently no secondary market for the Class A Certificates.
[NationsBanc Montgomery Securities LLC] [Other Underwriter] (the "Underwriter")
intends to make a secondary market in the Class A Certificates, but is not
obligated to do so. There can be no assurance that a secondary market for the
Class A Certificates will develop or, if it does develop, that it will continue.
The Class A Certificates will not be listed on any securities exchange.
Accordingly, the liquidity of the Class A Certificates may be limited.
(Cover continued on next page)
---------------------
Capitalized terms used in this Prospectus Supplement and not otherwise
defined herein have the meanings assigned in the Prospectus. See the "Index of
Principal Definitions" beginning on page S- herein and the "Index of Principal
Definitions" in the Prospectus.
PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE CERTIFICATE
INSURANCE POLICY ARE THE SOLE SOURCE OF PAYMENTS ON THE CLASS A CERTIFICATES.
THE CLASS A CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE CERTIFICATE INSURER, THE SERVICER, THE TRUSTEE OR ANY OF THEIR
AFFILIATES. NEITHER THE CLASS A CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS
ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY
THE DEPOSITOR, THE SERVICER OR ANY OF THEIR AFFILIATES.
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.
<TABLE>
<CAPTION>
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CLASS DESIGNATION OF THE ASSET BACKED CERTIFICATES SECURITY BALANCE(1) PASS-THROUGH RATE
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<S> <C> <C>
Class A-1........................................ $ %
Class A-2........................................ $ %
Class A-3........................................ $ %
Class A-4........................................ $ %
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</TABLE>
(1) Approximate. The initial Security Balances are subject to adjustment as
described herein.
PROSPECTIVE INVESTORS IN THE CLASS A CERTIFICATES SHOULD CONSIDER THE
MATERIAL RISKS DISCUSSED UNDER "RISK FACTORS" IN THIS PROSPECTUS SUPPLEMENT
BEGINNING ON PAGE S-9 AND IN THE PROSPECTUS BEGINNING ON PAGE 11.
The Class A Certificates will be purchased from the Depositor by the
Underwriter and will be offered by the Underwriter from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the Depositor from the sale of
the Class A Certificates, before deducting expenses payable by the Depositor,
will be equal to approximately % of the aggregate initial principal balance
of the Class A Certificates, plus accrued interest on the Class A Certificates
from , 199 to (but not including) , 199 .
The Class A Certificates are offered by the Underwriter subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to certain other conditions. The Underwriter reserves the right to withdraw,
cancel or modify such offer and to reject any order in whole or in part. It is
expected that delivery of the Class A Certificates will be made only in book-
entry form through the facilities of The Depository Trust Company, on or about
, 199 against payment therefor in immediately available funds.
---------------------
[NATIONSBANC MONTGOMERY SECURITIES LLC] [OTHER UNDERWRITER]
, 199
<PAGE> 3
(Cover continued from previous page)
The Certificates will each evidence a beneficial ownership interest in a
trust fund (the "Trust Fund") consisting primarily of (i) certain conventional,
fixed-rate, one- to four-family, first lien and second lien mortgage loans, with
terms to maturity of approximately 30 years (the "Initial Mortgage Loans"), to
be deposited by NationsBanc Asset Securities, Inc. (the "Depositor") into the
Trust Fund for the benefit of the Certificateholders, (ii) amounts on deposit in
the Pre-Funding Account and the Capitalized Interest Account and (iii) the
Certificate Insurance Policy described herein. Certain characteristics of the
Mortgage Loans are described herein under "Description of the Mortgage Loans."
It is a condition of the issuance of the Class A Certificates that they be
rated " " by and " " by .
The Class A Certificates initially will be represented by certificates
registered in the name of Cede & Co., as nominee of The Depository Trust Company
("DTC"), as further described herein, which will be the "holders" or
"Certificateholders" of such Certificates, as such terms are used herein. The
interests of beneficial owners of the Class A Certificates will be represented
by book entries on the records of DTC and the participating members of DTC.
Definitive certificates will be available for the Class A Certificates only
under limited circumstances. See "Description of the Certificates -- General"
herein and "Description of the Securities -- Book-Entry Registration and
Definitive Securities" in the Prospectus.
As described herein, a "real estate mortgage investment conduit" ("REMIC")
election will be made in connection with the Trust Fund for federal income tax
purposes. Each Class of Class A Certificates will represent ownership of
"regular interests" in the REMIC and the Class R Certificates will constitute
the sole class of "residual interests" in the REMIC. See "Federal Income Tax
Consequences" herein and in the Prospectus.
Distributions on the Class A Certificates will be made on the [25th] day of
each month or, if such day is not a business day, then on the next business day,
commencing in , 199 (each, a "Distribution Date"). As described
herein, interest payable with respect to each Distribution Date on each Class of
Class A Certificates will accrue on the basis of a 360-day year consisting of
twelve 30-day months and will be based on the Security Balance thereof and the
then-applicable Pass-Through Rate thereof. Distributions in respect of principal
of the Class A Certificates will be made as described herein under "Description
of the Certificates -- Class A Principal Distribution Amount."
THE YIELD TO MATURITY ON THE CLASS A CERTIFICATES WILL BE SENSITIVE IN
VARYING DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) ON THE MORTGAGE LOANS. INVESTORS IN THE CLASS A CERTIFICATES SHOULD
CONSIDER THE ASSOCIATED RISKS, INCLUDING, IN THE CASE OF CLASS A CERTIFICATES
PURCHASED AT A DISCOUNT, THE RISK THAT A SLOWER THAN ANTICIPATED RATE OF
PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS
COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN ANTICIPATED. A FASTER THAN
ANTICIPATED RATE OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS) ON
THE MORTGAGE LOANS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN
ANTICIPATED FOR INVESTORS PURCHASING CLASS A CERTIFICATES AT A PREMIUM.
INVESTORS PURCHASING CLASS A CERTIFICATES AT A PREMIUM SHOULD ALSO CONSIDER THE
RISK THAT A RAPID RATE OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING
PREPAYMENTS) ON THE MORTGAGE LOANS COULD RESULT IN THE FAILURE OF SUCH INVESTORS
TO FULLY RECOVER THEIR INITIAL INVESTMENTS.
The Mortgage Loans generally may be prepaid in full or in part at any time;
however, a prepayment may subject the related Mortgagor to a prepayment charge
with respect to the majority of the Mortgage Loans. See "Summary -- Special
Prepayment Considerations" and "-- Special Yield Considerations" herein,
"Certain Yield and Prepayment Considerations" herein and "Yield Considerations"
in the Prospectus.
On or about , 19 (the "Closing Date"), approximately $ (the
"Pre-Funded Amount") will be deposited in the name of (the
"Trustee") in an account (the "Pre-Funding
(ii)
<PAGE> 4
(Cover continued from previous page)
Account"). The Pooling and Servicing Agreement provides that additional mortgage
loans (the "Subsequent Mortgage Loans," and together with the Initial Mortgage
Loans, the "Mortgage Loans") may be deposited in the Trust Fund by the Depositor
from time to time between the Closing Date and , 199 (the
"Pre-Funding Period") upon being acquired with funds on deposit in the
Pre-Funding Account in the manner and to the extent described herein.
On the Closing Date an amount will be deposited in the name of the Trustee
in the Capitalized Interest Account. The Capitalized Interest Account will be
applied by the Trustee to cover shortfalls in interest accrued on the Class A
Certificates during the Pre-Funding Period attributable to the pre-funding
feature.
---------------------
THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE
PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING
OFFERED PURSUANT TO THE PROSPECTUS DATED , 199 , OF WHICH THIS
PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO
READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE CLASS A
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A CERTIFICATES,
INCLUDING OVER-ALLOTMENT AND SHORT-COVERING TRANSACTIONS IN SUCH CERTIFICATES,
AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERING. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "METHOD OF DISTRIBUTION."
[This Prospectus Supplement and Prospectus may be used by NationsBanc
Montgomery Securities LLC, to the extent required, in connection with market
making transactions in the Class A Certificates. NationsBanc Montgomery
Securities LLC may act as principal or agent in such transactions.]
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. 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.
(iii)
<PAGE> 5
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY..................................................... S-1
RISK FACTORS................................................ S-9
Risks Associated with the Underwriting Standards.......... S-9
Risk of Delinquencies and Potential Delinquencies......... S-9
Risk of Loss on Second Liens.............................. S-9
Risks Associated with Subsequent Mortgage Loans........... S-10
Consumer Protection Laws.................................. S-10
Risks Associated with Book-Entry Certificates............. S-11
DESCRIPTION OF THE MORTGAGE LOANS........................... S-12
General................................................... S-12
Mortgage Rates............................................ S-12
Mortgage Loan Characteristics............................. S-13
Subsequent Mortgage Loans................................. S-18
The Asset Seller.......................................... S-18
Underwriting.............................................. S-18
Additional Information.................................... S-19
DESCRIPTION OF THE CERTIFICATES............................. S-19
General................................................... S-19
Pre-Funding Account....................................... S-20
Capitalized Interest Account.............................. S-20
Overcollateralization Provisions and Support Features..... S-21
Priority of Payment....................................... S-23
Class A Interest Distribution Amount...................... S-23
Class A Principal Distribution Amount..................... S-24
Advances.................................................. S-25
Certificate Insurance Policy.............................. S-25
CERTIFICATE INSURER......................................... S-27
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS................. S-28
THE SERVICER................................................ S-34
General................................................... S-34
Delinquency and Loss Experience of the Servicer........... S-35
POOLING AND SERVICING AGREEMENT............................. S-36
General................................................... S-36
Servicing and Other Compensation and Payment of
Expenses............................................... S-37
The Trustee............................................... S-37
Termination............................................... S-37
FEDERAL INCOME TAX CONSEQUENCES............................. S-38
LEGAL INVESTMENT............................................ S-39
ERISA CONSIDERATIONS........................................ S-39
METHOD OF DISTRIBUTION...................................... S-40
SECONDARY MARKET............................................ S-41
LEGAL OPINIONS.............................................. S-41
RATINGS..................................................... S-41
EXPERTS..................................................... S-42
INDEX OF PRINCIPAL DEFINITIONS.............................. S-43
</TABLE>
(iv)
<PAGE> 6
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus. Reference is made to the "Index of Principal
Definitions" beginning on page herein and the "Index of Principal Definitions"
in the Prospectus.
Title of Certificates...... Asset Backed Certificates, Series 199 -- (the
"Certificates").
Depositor.................. NationsBanc Asset Securities, Inc. (the
"Depositor"). See "The Depositor" in the
Prospectus.
Servicer................... (the "Servicer"). [The Servicer is an
affiliate of the Depositor.] Among other things,
the Servicer is obligated under certain
circumstances to advance delinquent payments of
principal and interest with respect to the
Mortgage Loans. The Servicer will be entitled to
(i) a monthly servicing fee (the "Servicing Fee")
with respect to each Mortgage Loan it services
payable on each Distribution Date that is
expressed as one-twelfth of [a fixed percentage
per annum] multiplied by the scheduled principal
balance of such Mortgage Loan on the first day of
the related Due Period and (ii) other additional
servicing compensation described herein. See "The
Servicer" herein.
Asset Seller............... (the "Asset Seller"). [The Asset Seller
is an affiliate of the Depositor.] See
"Description of the Mortgage Loans -- The Asset
Seller" herein.
Trustee.................... , a [national banking association] (the
"Trustee").
Cut-off Date............... , 199 .
Closing Date............... On or about .
Forms of Class A
Certificates;
Denominations............ Each Class of Class A Certificates will be issued
in book-entry form. Each Class of Class A
Certificates will be issued in a minimum
denomination of $ and integral multiples
of $ in excess thereof.
The Class A Certificates will be issued in
book-entry form through the facilities of The
Depository Trust Company ("DTC") and are referred
to collectively herein as the "Book-Entry
Certificates." Each Class of Book-Entry
Certificates will be represented by one or more
certificates registered in the name of Cede &
Co., as nominee of DTC. No person acquiring an
interest in the Book-Entry Certificates (a
"Beneficial Owner") will be entitled to receive a
Class A Certificate in fully registered,
certificated form (a "Definitive Certificate"),
except under the limited circumstances described
under "Description of the
Certificates -- Book-Entry Registration and
Definitive Securities" in the Prospectus. The
interests of Beneficial Owners of the Book-Entry
Certificates will be represented by book entries
on the records of DTC and its participating
organizations. All references herein to holders
and Certificateholders reflect the rights of
Beneficial Owners only as such rights may be
exercised through DTC and its participating
organizations, for so long as such Certificates
remain Book-Entry Certificates. See "Risk
Factors -- Risks Associated with Book-Entry
Certificates" and "Description of the
Certificates -- General" herein and "Descrip-
S-1
<PAGE> 7
tion of the Securities -- Book Entry Registration
and Definitive Securities" in the Prospectus.
The Trust Property......... The Certificates represent interests in a trust
fund (the "Trust Fund, initially consisting
primarily of (i) a pool of conventional,
fixed-rate mortgage loans originated by or
purchased by the Asset Seller as described herein
(each, an "Initial Mortgage Loan") and evidenced
by promissory notes or other evidence of
indebtedness (each, a "Mortgage Note") secured by
mortgages, deeds of trust or other instruments
(each, a "Mortgage") creating a first or second
lien on one- to four-family dwellings (each a
"Mortgaged Property), with an aggregate principal
balance of approximately $ as of the
Cut-off Date, after giving effect to payments
received prior to the Cutoff Date, (ii) all
monies received with respect to the Mortgage
Loans on and after the Cut-off Date (other than
amounts received on and after the Cut-off Date in
respect of interest accrued on the Mortgage Loans
prior to the Cut-off Date), (iii) an irrevocable
certificate guaranty insurance policy (the
"Certificate Insurance Policy") to be issued on
or before the Closing Date by (the
"Certificate Insurer") in favor of the Trustee
for the benefit of the Class A Certificateholders
and (iv) amounts on deposit in the Pre-Funding
Account and the Capitalized Interest Account and
certain other property. The Initial Mortgage
Loans will be deposited into the Trust Fund on
the Closing Date. The actual Mortgage Loans may
vary from the description below due to a number
of factors, including prepayments, substitutions
or the purchase of Subsequent Mortgage Loans. In
the event that any of the characteristics as of
the Cut-off Date of the Initial Mortgage Loans
that constitute the Trust Fund on the date of
initial issuance of the Certificates vary
materially from those described herein, revised
information regarding the Initial Mortgage Loans
will be made available to purchasers of the Class
A Certificates, on or before such issuance date,
and a Current Report on Form 8-K containing such
information will be filed with the Securities and
Exchange Commission within 15 days following such
date. In addition, a Current Report on Form 8-K
will be filed following each purchase of
Subsequent Mortgage Loans. On the Closing Date,
the Pre-Funded Amount will be deposited in the
name of the Trustee into the Pre-Funding Account.
It is intended that additional mortgage loans
originated by or purchased by the Asset Seller
(the "Subsequent Mortgage Loans," and together
with the Initial Mortgage Loans, the "Mortgage
Loans") will be transferred into the Trust Fund
by the Depositor from time to time during the
Pre-Funding Period upon being acquired with funds
on deposit in the Pre-Funding Account. On the
Closing Date, the sum of the aggregate principal
balance of the Initial Mortgage Loans as of the
Cut-off Date and the Pre-Funding Amount will
equal the original aggregate Security Balance of
the Class A Certificates.
The Mortgage Loans......... The Initial Mortgage Loans had approximate
individual principal balances at origination of
at least $ but not more than $
with an average principal balance at origination
of approximately $ . All of the Initial
Mortgage Loans have terms to maturity from the
date of origination or modification of 30 years.
The Initial Mortgage Loans have a weighted
average remaining term to stated maturity of
approximately months as of the Cut-off Date.
S-2
<PAGE> 8
Approximately % of the Initial Mortgage Loans
(by aggregate principal balance as of the Cut-off
Date) are refinanced mortgage loans. None of the
Mortgage Loans were thirty or more days
delinquent in their Monthly Payments (such
Mortgage Loans, "Delinquent Mortgage Loans") as
of the Cut-off Date. Prospective investors in the
Class A Certificates should be aware, however,
that only approximately % of the Initial
Mortgage Loans (by aggregate principal balance as
of the Cut-off Date) had a first payment due on
or before , and therefore, the
remaining Initial Mortgage Loans could not have
been Delinquent Mortgage Loans as of the Cut-off
Date. Approximately % of the Initial
Mortgage Loans (by aggregate principal balance as
of the Cut-off Date) will be secured by second
liens on the related Mortgaged Property.
The mortgage interest rate specified in the related
Mortgage Note (the "Mortgage Rate") on each
Initial Mortgage Loan is fixed. As of the Cut-off
Date, the Initial Mortgage Loans will bear
interest at Mortgage Rates of at least % per
annum but no more than % per annum, with a
weighted average Mortgage Rate of approximately
% per annum as of the Cut-off Date.
The Initial Mortgage Loans were underwritten, and
the Subsequent Mortgage Loans will be
underwritten, in accordance with the underwriting
standards described in "Description of the
Mortgage Loans -- Underwriting Standards" in this
Prospectus Supplement. See also "Risk
Factors -- Risks Associated with the Underwriting
Standards" in this Prospectus Supplement. For a
further description of the Mortgage Loans, see
"Description of the Mortgage Loans" herein.
Pre-Funding Account........ On the Closing Date, approximately $ (the
"Pre-Funded Amount") will be deposited into an
account maintained with the Trustee (the
"Pre-Funding Account"). During the period (the
"Pre-Funding Period") from and including the
Closing Date until the earliest of (i) the date
on which the amount on deposit in the Pre-Funding
Account is less than $ or (ii) the close of
business on , 199 , the Pre-Funded
Amount will be maintained in the Pre-Funding
Account. The Pre-Funded Amount will be reduced by
the amount thereof used to purchase Subsequent
Mortgage Loans in accordance with the Pooling and
Servicing Agreement. The Depositor expects that
the Pre-Funded Amount will be reduced to less
than $ by , 199 . Any Pre-
Funded Amount remaining at the end of the
Pre-Funding Period will be payable to the Class A
Certificateholders in accordance with the
priorities set forth herein under "Description of
the Certificates -- Class A Principal
Distribution Amount".
Capitalized Interest
Account.................... On the Closing Date an amount will be deposited
into an account maintained with the Trustee (the
"Capitalized Interest Account"). The Capitalized
Interest Account will be applied by the Trustee
to cover shortfalls in interest accrued during
the Pre-Funding Period on the Class A
Certificates attributable to the pre-funding
feature. Any amounts remaining in the Capitalized
Interest Account and not used for such purpose
following the Pre-Funding Period are required to
be paid directly to the Class R
Certificateholders.
S-3
<PAGE> 9
The Class A Certificates... The Class A Certificates will each evidence a
beneficial ownership interest in the Trust Fund
and will be issued pursuant to a Pooling and
Servicing Agreement, to be dated as of the
Cut-off Date, among the Depositor, the Servicer
and the Trustee (the "Pooling and Servicing
Agreement"). Each Class of Class A Certificates
will have the approximate Security Balance as of
the Closing Date set forth on the cover of this
Prospectus Supplement. Any difference between the
aggregate Security Balances of the Class A
Certificates as of the Closing Date and the
approximate initial aggregate Security Balance of
such Classes as of the date of this Prospectus
Supplement will not exceed 5% of the initial
aggregate Security Balance of the Class A
Certificates as stated on the cover of this
Prospectus Supplement. Any difference allocated
to the Class A Certificates will be allocated to
one or more of the Classes of Class A
Certificates.
Interest Distributions..... On each Distribution Date, the holders of the Class
A Certificates will be entitled to receive, to
the extent of amounts available for distribution
as described herein, interest distributions in an
amount equal to the sum of (i) interest accrued
during the calendar month immediately preceding
the month in which such Distribution Date occurs
(the "Interest Accrual Period") on the Security
Balance thereof immediately prior to such
Distribution Date at the applicable Pass-Through
Rate (based on a 360-day year consisting of
twelve 30-day months) and (ii) the Class A
Carry-Forward Amount, if any. The aggregate
amount of interest allocable to the Class A
Certificates (the "Class A Interest Distribution
Amount") will be allocable to the related Class A
Certificates on a pro rata basis. See
"Description of the Certificates -- Priority of
Payment" and "-- Class A Interest Distribution
Amount" herein.
The "Pass-Through Rate" for each Class of Class A
Certificates is set forth on the cover of this
Prospectus Supplement.
Principal Distribution..... Holders of the Class A Certificates will be
entitled to receive on each Distribution Date, to
the extent of amounts available for distribution
as described herein remaining after interest on
the Class A Certificates is distributed, an
amount (the "Class A Principal Distribution
Amount") equal to the sum of (i) the portion of
the Class A Carry-Forward Amount, as applicable,
which relates to a shortfall in a distribution of
a related Subordination Deficit, (ii) all
scheduled installments of principal in respect of
the Mortgage Loans received or advanced during
the related Due Period, together with all
unscheduled recoveries of principal on such
Mortgage Loans received by the Servicer during
the prior calendar month, (iii) the Principal
Balance of each Mortgage Loan that was
repurchased by the Asset Seller, (iv) any amounts
received in connection with a substitution of a
Mortgage Loan, (v) the net Liquidation Proceeds
collected by the Servicer on all Mortgage Loans
during the prior calendar month (to the extent
such net Liquidation Proceeds are related to
principal), (vi) the amount of any related
Subordination Deficit for such Distribution Date,
(vii) the proceeds received by the Trustee of any
termination of the Trust Fund (to the extent such
proceeds are related to principal), (viii) the
amount of any related Subordination Increase
Amount for such Distribution Date and (ix) with
respect to the Distribution Date
S-4
<PAGE> 10
occurring in , 199 , any amounts in
the Pre-Funding Account after giving effect to
any purchase of Subsequent Mortgage Loans; minus
(x) the amount of any related Subordination
Reduction Amount for such Distribution Date.
In no event will any Class A Principal Distribution
Amount with respect to any Distribution Date be
less than zero or greater than the Security
Balances of the Class A Certificates.
See "Description of the Certificates -- Priority of
Payment" and "-- Class A Principal Distribution
Amount" herein.
Credit Enhancement......... The credit enhancement provided for the benefit of
the Class A Certificateholders consists solely of
(a) the overcollateralization mechanics that use
the internal cash flows of the Mortgage Loans and
(b) the Certificate Insurance Policy.
Overcollateralization. The subordination
provisions of the Trust Fund result in a limited
acceleration of the Class A Certificates relative
to the amortization of the Mortgage Loans,
generally in the early months of the transaction.
The accelerated amortization is achieved by the
application of certain excess interest to the
payment of the Security Balances of the Class A
Certificates. This acceleration feature creates
overcollateralization which equals the excess of
the aggregate principal balances of the Mortgage
Loans and the Pre-Funded Amount over the
aggregate Security Balance of the Class A
Certificates. Once the required level of
overcollateralization is reached, and subject to
the provisions described in the next paragraph,
the acceleration feature will cease, unless
necessary to maintain the required level of
overcollateralization.
The Pooling and Servicing Agreement provides that,
subject to certain trigger tests, the required
level of overcollateralization with respect to
the Mortgage Loans may increase or decrease over
time. An increase would result in a temporary
period of accelerated amortization of the Class A
Certificates to increase the actual level of
overcollateralization to its required level; a
decrease would result in a temporary period of
decelerated amortization to reduce the actual
level of overcollateralization to its required
level. See "Description of the Certificates --
Overcollateralization Provisions and Support
Features" herein.
The Certificate Insurance Policy. The Class A
Certificateholders will have the benefit of the
Certificate Insurance Policy, as discussed more
fully below. See "Description of the
Certificates -- Certificate Insurance Policy"
herein.
Certificate Insurer........ (the "Certificate Insurer"). See
" " herein.
Certificate Insurance
Policy..................... The Certificate Insurer will issue the Certificate
Insurance Policy as a means of providing
additional credit enhancement to the Class A
Certificates.
Under the Certificate Insurance Policy, the
Certificate Insurer will pay the Trustee, for the
benefit of the holders of the Class A
Certificates, as further described herein, an
amount that will insure the payment of (i) on
each Distribution Date, an amount equal to (a)
the Class A Interest Distribution Amount and (b)
the Subordination Deficit and
S-5
<PAGE> 11
(ii) any unpaid Preference Amount. A payment by
the Certificate Insurer under the Certificate
Insurance Policy is referred to herein as an
"Insured Payment." See "Description of the
Certificates -- The Certificate Insurance Policy"
herein.
Advances................... The Servicer is required to make advances
("Advances") in respect of delinquent payments of
principal and interest on the Mortgage Loans,
subject to the limitations described herein. See
"Description of the Certificates -- Advances"
herein and "Description of the Securities --
Advances in Respect of Delinquencies" in the
Prospectus.
Optional Termination....... The Servicer, at its option, on any Distribution
Date when the aggregate Principal Balance of the
Mortgage Loans is less than % of the sum of
the aggregate principal balance of the Initial
Mortgage Loans as of the Cut-off Date and the
aggregate principal balance of the Subsequent
Mortgage Loans as of the first day of the month
such Subsequent Mortgage Loans are added to the
Trust Fund (the "Subsequent Cut-off Date"), may
purchase from the Trust Fund all remaining
Mortgage Loans and other assets thereof at the
price described herein, and thereby effect early
retirement of the related Certificates. No such
termination is permitted without the prior
written consent of the Certificate Insurer if it
would result in a draw on the Certificate
Insurance Policy. See "Pooling and Servicing
Agreement -- Termination" herein and "Description
of the Securities -- Termination" in the
Prospectus.
Special Prepayment
Considerations........... The rate and timing of principal payments on the
Class A Certificates will depend, among other
things on the rate and timing of principal
payments (including prepayments, defaults,
liquidations and purchases of the Mortgage Loans
due to a breach of a representation or warranty)
on the Mortgage Loans. As is the case with
mortgage-backed certificates generally, the Class
A Certificates are subject to substantial
inherent cash-flow uncertainties because the
Mortgage Loans may be prepaid at any time.
Generally, when prevailing interest rates
increase, prepayment rates on mortgage loans tend
to decrease, resulting in a slower return of
principal to investors at a time when
reinvestment at such higher prevailing rates
would be desirable. Conversely, when prevailing
interest rates decline, prepayment rates on
mortgage loans tend to increase, resulting in a
faster return of principal to investors at a time
when reinvestment at comparable yields may not be
possible.
The Class A Certificates are subject to various
priorities for payment of principal as described
herein. Distributions of principal on such
Classes having an earlier priority of payment
will be affected by the rates of prepayments of
the Mortgage Loans earlier than such Classes
having a later priority of payment. The timing of
commencement of principal distributions and the
weighted average lives of the Class A
Certificates with a later priority of payment
will be affected by the rates of prepayments
experienced both before and after the
commencement of principal distributions on such
Classes.
S-6
<PAGE> 12
See "Description of the Certificates -- Class A
Principal Distribution Amount" and "Certain Yield
and Prepayment Considerations" herein, and "Yield
Considerations" in the Prospectus.
Special Yield
Considerations............. The yield to maturity of the Class A Certificates
will depend on, among other things, the rate and
timing of principal payments (including
prepayments, defaults, liquidations and purchases
of the Mortgage Loans due to a breach of a
representation or warranty) on the Mortgage Loans
and the allocation thereof to reduce the Security
Balances thereof. The yield to maturity on the
Class A Certificates will also depend on the
Pass-Through Rate and the purchase price for such
Certificates. If the Class A Certificates are
purchased at a premium and principal
distributions thereon occur at a rate faster than
anticipated at the time of purchase, the
investor's actual yield to maturity will be lower
than that assumed at the time of purchase.
Conversely, if the Class A Certificates are
purchased at a discount and principal
distributions thereon occur at a rate slower than
that assumed at the time of purchase, the
investor's actual yield to maturity will be lower
than that assumed at the time of purchase.
See "Certain Yield and Prepayment Considerations"
herein and "Yield Considerations" in the
Prospectus.
Federal Income Tax
Consequences............. A real estate mortgage investment conduit ("REMIC")
election will be made with respect to the Trust
Fund for federal income tax purposes. Assuming
compliance with all provisions of the Pooling and
Servicing Agreement, for federal income tax
purposes, the Trust Fund will qualify as a REMIC
under Sections 860A through 86OG of the Internal
Revenue Code of 1986, as amended (the "Code").
For federal income tax purposes, the Class R
Certificates will be the sole class of "residual
interests" in the REMIC and each Class of Class A
Certificates will represent "regular interests"
in the REMIC and will generally be treated as
representing ownership of debt instruments of the
REMIC.
For federal income tax reporting purposes, the
Class A Certificates will [not] be treated as
having been issued with original issue discount.
The prepayment assumption that will be used in
determining the rate of accrual of original issue
discount, market discount and premium, if any,
with respect to the Class A Certificates for
federal income tax purposes will be a rate equal
to % SPA. No representation is made that the
Mortgage Loans will prepay at these rates or at
any other rates. See "Certain Yield and
Prepayment Considerations" herein.
For further information regarding the federal
income tax consequences of investing in the Class
A Certificates, see "Federal Income Tax
Consequences" herein and in the Prospectus.
ERISA Considerations....... The United States Department of Labor has issued an
individual exemption, Prohibited Transaction
Exemption 93-31 (the "Exemption") to NationsBank
Corporation that generally exempts from certain
of the prohibited transaction provisions of the
Employee Retirement Income Security Act of 1974,
as amended ("ERISA"),
S-7
<PAGE> 13
and the excise taxes imposed on such prohibited
transactions by Section 4975 of the Code,
transactions relating to the purchase, sale and
holding by Plans (as defined herein) of
pass-through certificates underwritten by
[NationsBanc Montgomery Securities LLC], such as
the Class A Certificates, provided that certain
conditions are satisfied. A fiduciary of a Plan
should make its own determination as to whether
the Exemption or any other prohibited transaction
exemption will be applicable to an investment in
the Class A Certificates. See "ERISA
Considerations" herein and in the Prospectus.
Legal Investment........... [The Class A Certificates will constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 (the
"Enhancement Act") so long as they are rated in
one of the two highest rating categories by at
least one nationally recognized statistical
rating organization. As such, the Class A
Certificates are legal investments for certain
entities to the extent provided in such act.
However, there are regulatory requirements and
considerations applicable to regulated financial
institutions and restrictions on the ability of
such institutions to invest in certain types of
mortgage rated securities.]
[The Class A Certificates will not constitute
"mortgage related securities" for purposes of the
Enhancement Act.] Institutions whose investment
activities are subject to legal investment laws
and regulations, regulatory capital requirements
or review by regulatory authorities may be
subject to restrictions on investment in the
Class A Certificates and should consult with
their legal advisors. See "Legal Investment"
herein.
Ratings.................... It is a condition to the issuance of the Class A
Certificates that they be rated " " by
and " " by . A
rating is not a recommendation to buy, sell or
hold the Class A Certificates and may be subject
to revision or withdrawal at any time by the
assigning rating organization. A rating does not
address the possibility that, as a result of
principal prepayments, holders of such
Certificates may receive a lower than anticipate
yield. See "Certain Yield and Prepayment
Considerations" and "Ratings" herein and "Yield
Considerations" and "Rating" in the Prospectus.
S-8
<PAGE> 14
RISK FACTORS
Prospective Class A Certificateholders should consider, among other things,
the items discussed under "Risk Factors" in the Prospectus and the following
factors in connection with the purchase of the Class A Certificates.
RISKS ASSOCIATED WITH THE UNDERWRITING STANDARDS
The Initial Mortgage Loans were underwritten, and the Subsequent Mortgage
Loans will be underwritten, by the Asset Seller in accordance with its
underwriting standards described in "Description of the Mortgage
Loans -- Underwriting" below which are primarily intended to provide single
family mortgage loans for non-conforming credits. A "non-conforming credit"
means a mortgage loan which is ineligible for purchase by Fannie Mae or Freddie
Mac due to credit characteristics that do not meet the Fannie Mae or Freddie Mac
underwriting guidelines, including mortgagors whose creditworthiness and
repayment ability do not satisfy such Fannie Mae or Freddie Mac underwriting
guidelines and mortgagors who may have a record of credit write-offs,
outstanding judgments, prior bankruptcies and other credit items that do not
satisfy such Fannie Mae or Freddie Mac underwriting guidelines. ACCORDINGLY,
MORTGAGE LOANS UNDERWRITTEN UNDER THE ASSET SELLER'S NON-CONFORMING CREDIT
UNDERWRITING STANDARDS ARE LIKELY TO EXPERIENCE RATES OF DELINQUENCY,
FORECLOSURE AND LOSS THAT ARE HIGHER, AND MAY BE SUBSTANTIALLY HIGHER, THAN
MORTGAGE LOANS ORIGINATED IN ACCORDANCE WITH THE FANNIE MAE OR FREDDIE MAC
UNDERWRITING GUIDELINES.
Under the Asset Seller's non-conforming credit underwriting standards, the
critical factors in underwriting a Mortgage Loan are the income and employment
history of the prospective mortgagor, the creditworthiness of the prospective
mortgagor, an assessment of the value of the related Mortgaged Property and the
adequacy of such property as collateral in relation to the amount of such
Mortgage Loan. Therefore, changes in values of the Mortgaged Properties may have
a greater effect on the delinquency, foreclosure and loss experience of the
related Mortgage Loans than on mortgage loans originated in accordance with the
Fannie Mae or Freddie Mac credit underwriting guidelines. No assurance can be
given that the values of the Mortgaged Properties have remained or will remain
at the levels in effect on the dates of origination of the Mortgage Loans. If
the values of the Mortgaged Properties decline after the dates of origination of
the Mortgage Loans, then the rates of delinquencies, foreclosures and losses on
the Mortgage Loans may increase and such increase may be substantial.
RISK OF DELINQUENCIES AND POTENTIAL DELINQUENCIES
None of the Initial Mortgage Loans were thirty or more days delinquent in
their scheduled payments (such Mortgage Loans, "Delinquent Mortgage Loans") as
of the Cut-off Date. Prospective investors in the Class A Certificates should be
aware, however, that only approximately % of the Mortgage Loans (by
aggregate principal balance as of the Cut-off Date), had a first scheduled
payment due on or before 199 , and therefore, the remaining Initial
Mortgage Loans could not have been Delinquent Mortgage Loans as of the Cut-off
Date.
RISK OF LOSS ON SECOND LIENS
Approximately % of the Initial Mortgage Loans (by aggregate
outstanding principal balance as of the Cut-off Date) are secured by second
liens on the related Mortgaged Properties. Mortgage Loans secured by second
mortgages will be entitled to proceeds that remain from the sale of the related
Mortgaged Property after any related senior mortgage loans and prior statutory
liens have been satisfied and, if such were satisfied by the Servicer, after the
Servicer has been reimbursed. In the event that such proceeds are insufficient
to satisfy such loans and prior liens in the aggregate and the Certificate
Insurer is unable to perform its obligations under the Certificate Insurance
Policy, the Class A Certificates may bear (i) the risk of delay in distributions
while a deficiency judgment against the borrower is obtained and (ii) the risk
of loss if the deficiency judgment is not realized upon. See "Risk
Factors -- Increased Risk of Losses on Foreclosure of
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<PAGE> 15
Junior Mortgage Loans" in the Prospectus. In addition, the rate of default of
second mortgage loans may be greater than that of mortgage loans secured by
first liens on comparable properties.
RISKS ASSOCIATED WITH SUBSEQUENT MORTGAGE LOANS
Subsequent Mortgage Loans may have characteristics different from those of
the related Initial Mortgage Loans. However, each Subsequent Mortgage Loan must
satisfy the eligibility criteria referred to herein under "Description of the
Mortgage Loans -- Subsequent Mortgage Loans" at the time of its conveyance to
the Trust Fund and be underwritten in accordance with the criteria set forth
herein under "Description of the Mortgage Loans -- Underwriting." However,
Subsequent Mortgage Loans may be of a different credit quality and seasoning
than the Initial Mortgage Loans. Following the transfer of Subsequent Mortgage
Loans to the Trust Fund, the aggregate characteristics of the Mortgage Loans
then held in the Trust Fund may vary from those of the Initial Mortgage Loans.
To the extent that any Pre-Funded Amount on deposit in the Pre-Funding
Account has not been fully applied to the acquisition of Subsequent Mortgage
Loans by the end of the Pre-Funding Period, the holders of the Class A
Certificates will receive a prepayment of principal in an amount equal to the
Pre-Funded Amount (net of reinvestment income payable to the Class R
Certificateholders) remaining on deposit in the Pre-Funding Account.
The addition of Subsequent Mortgage Loans to the Trust Fund on any date
(each, a "Subsequent Transfer Date") is subject to the receipt of confirmation
from the Rating Agencies that the addition of such Subsequent Mortgage Loans
will not result in a reduction or withdrawal of the initial rating of any of the
Class A Certificates and the approval of the Certificate Insurer. If, as a
result of the failure to receive such confirmation or approval, the Depositor is
unable to transfer Subsequent Mortgage Loans to the Trust Fund, principal
prepayments to holders of the Class A Certificates will occur following the
Pre-Funding Period.
CONSUMER PROTECTION LAWS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosure, and require licensing of the [Asset Seller] [Other
Originators]. In addition, other state laws, public policy and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Mortgage Loans. The [Asset Seller] will be
required to repurchase any Mortgage Loans which, at the time of origination,
fail to comply with applicable federal and state laws and regulations, which
failure results in a material adverse effect on the Trust Fund, the Certificate
Insurer or the parties to the Pooling and Servicing Agreement. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans, may entitle the Mortgagor to a refund of amounts
previously paid and, in addition, could subject the Depositor, the Servicer, the
Asset Seller or the Other Originators to damages and administrative enforcement.
See "Certain Legal Aspects of Mortgage Loans" in the Prospectus.
The Mortgage Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the Mortgagors 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 Mortgagor's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans and in addition could subject the Asset Seller, the
S-10
<PAGE> 16
Other Originators, the Depositor or the Servicer to damages and administrative
enforcement. The [Asset Seller] will be required to repurchase any Mortgage
Loans which, at the time of origination, did not comply with such federal laws
or regulations. See "Certain Legal Aspects of Mortgage Loans" in the Prospectus.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of 1994.
The Riegle Act adds certain additional provisions to Regulation Z, the
implementing regulation of the Truth-In-Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to
non-purchase money mortgage loans with high interest rates or high upfront fees
and charges. In general, mortgage loans within the purview of the Riegle Act
have annual percentage rates over 10% greater than the yield on Treasury
Securities of comparable maturity and/or fees and points which exceed the
greater of 8% of the total loan amount or $400. The provisions of the Riegle Act
apply on a mandatory basis to all mortgage loans originated on or after October
1, 1995. These provisions can impose specific statutory liabilities upon
creditors who fail to comply with their provisions and may affect the
enforceability of the related loans. In addition, any assignee of the creditor
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including, without limitation, the right to rescind
the mortgage loan.
RISKS ASSOCIATED WITH BOOK-ENTRY CERTIFICATES
Issuance of the Class A Certificates in book-entry form may reduce the
liquidity of such Certificate in the secondary trading market since investors
may be unwilling to purchase Class A Certificates for which they cannot obtain
physical certificates.
Since transactions in the Book-Entry Certificates will be effected only
through DTC, the ability of a Beneficial Owner to pledge Book-Entry Certificates
to persons or entities that do not participate in the DTC system, or otherwise
to take actions in respect of such Certificates, may be limited due to lack of a
physical certificate representing such Certificates.
Beneficial Owners may experience some delay in their receipt of
distributions of interest and principal on the Book-Entry Certificates since
such distributions will be forwarded by the Trustee to DTC, and DTC will credit
such distributions to the accounts of its Participants which will thereafter
credit them to the accounts of Beneficial Owners either directly or indirectly
through Indirect Participants. See "Description of the Securities -- Book Entry
Registration and Definitive Securities" in the Prospectus.
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<PAGE> 17
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information presented in this Prospectus Supplement
describes the mortgage loans included in the Trust Fund as of the Closing Date
(the "Initial Mortgage Loans").
The Initial Mortgage Loans underlying the Certificates had an aggregate
Principal Balance as of the Cut-off Date of $ . The Initial Mortgage
Loans will generally consist of conventional, fixed-rate, monthly payment, first
lien mortgage loans (except that approximately % of the Initial Mortgage
Loans (by aggregate Principal Balance as of the Cut-Off Date) are second lien
mortgages). All of the Initial Mortgage Loans have terms to maturity from the
date of origination or modification of 30 years. The Initial Mortgage Loans will
be originated by (the "Asset Seller") or acquired by the
Asset Seller from various other entities (the "Other Originators"). The Initial
Mortgage Loans were underwritten substantially in accordance with the
underwriting criteria described herein under "-- Underwriting" below. The
Depositor will acquire the Initial Mortgage Loans from the Asset Seller [an
affiliate of the Depositor]. The Asset Seller will make certain representations
and warranties with respect to the Mortgage Loans and, as more particularly
described in the Prospectus, will have certain repurchase or substitution
obligations in connection with a breach of any such representation or warranty,
as well as in connection with an omission or defect in respect of certain
constituent documents required to be delivered with respect to the Mortgage
Loans, in any event if such breach, omission or defect cannot be cured and it
materially and adversely affects the interests of Certificateholders. See
"Description of the Agreements -- Material Terms of the Pooling and Servicing
Agreements, Trust Agreements and Underlying Servicing Agreements -- Assignment
of Assets; Repurchases" and "-- Representations and Warranties; Repurchases" in
the Prospectus.
Pursuant to the terms of the Pooling and Servicing Agreement, the Depositor
will assign the representations and warranties made by the Asset Seller to the
Trustee for the benefit of the Certificateholders.
Each Mortgage Loan will contain a customary "due-on-sale" clause. See
"Certain Legal Aspects of Mortgage Loans-Due-on-Sale Clauses" in the Prospectus.
Approximately % of the Initial Mortgage Loans (by aggregate Principal
Balance as of the Cut-Off Date) provide for payment of a prepayment charge.
Generally, each such Mortgage Loan provides for payment of a prepayment charge
for certain partial prepayments and all prepayments in full made within
approximately three or five years of the origination of such Initial Mortgage
Loan, in an amount equal to six months' advance interest on the amount of the
prepayment that, when added to all other amounts prepaid during the twelve-month
period immediately preceding the date of the prepayment, exceeds twenty percent
of the original principal amount of the Initial Mortgage Loan. The Servicer will
be entitled to all prepayment charges received on the Mortgage Loans and such
amounts will not be available for distribution on the Certificates.
[None of the Mortgage Loans originated under a program which does not meet
the credit underwriting standards of the Federal Home Loan Mortgage Corporation
("Freddie Mac") or Fannie Mae (a "Standard Non-Conforming Program") are insured
by a primary mortgage insurance policy.] [Approximately % of the Initial
Mortgage Loans (by aggregate Principal Balance as of the Cut-off Date) had
Loan-to-Value Ratios at the date of origination in excess of % but will not
be covered by a primary mortgage insurance policy.]
MORTGAGE RATES
The Mortgage Rate on each Initial Mortgage Loan is fixed. The day of each
month in which Mortgage Loan payments are due (the "Due Date") is generally the
first day of the month for all of the Initial Mortgage Loans. Initial
Mortgage Loans, comprising approximately % of the Initial Mortgage Loans
(by aggregate Principal Balance as of the Cut-off Date) have a first Due Date
that is not the first day of the month. There is no Retained Interest (as
defined in the Prospectus) with respect to any of the Mortgage Loans.
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<PAGE> 18
MORTGAGE LOAN CHARACTERISTICS
The Initial Mortgage Loans will consist of Mortgage Loans with an aggregate
Principal Balance as of the Cut-off Date, after deducting payments of principal
due on or prior to such date, of $ . All percentages of the Initial
Mortgage Loans described herein are approximate percentages (except as otherwise
indicated) by aggregate Principal Balance as of the Cut-off Date.
Approximately % of the Initial Mortgage Loans were originated by
and , respectively. Approximately % of the Initial Mortgage
Loans have original terms to stated maturity of approximately 30 years.
Approximately % and % of the Initial Mortgage Loans are secured by
first liens and second liens, respectively.
As of the Cut-off Date, each Initial Mortgage Loan will have a Principal
Balance of not less than $ or more than $ and the average
Principal Balance of the Initial Mortgage Loans will be approximately
$ . The latest stated maturity date of any of the Initial Mortgage
Loans will be ; however, the actual date on which any Mortgage Loan is
paid in full may be earlier than the stated maturity date due to unscheduled
payments of principal. Based on information supplied by the mortgagors in
connection with their loan applications at origination, approximately % of
the Initial Mortgage Loans will be secured by Mortgaged Properties which are
owner occupied primary residences, approximately % of the Initial Mortgage
Loans will be secured by Mortgaged Properties which are second homes and
approximately % of the Initial Mortgage Loans will be secured by Mortgaged
Properties which are non-owner occupied properties. No Initial Mortgage Loan
provides for negative amortization or deferred interest.
Set forth below is a description of certain additional characteristics of
the Initial Mortgage Loans as of the Cut-off Date (except as otherwise
indicated). Dollar amounts and percentages may not add up to totals due to
rounding.
MORTGAGE RATES
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-
NUMBER OF INITIAL AGGREGATE UNPAID OFF DATE AGGREGATE
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
---------- ---------- ----------
========== ========== ==========
</TABLE>
The weighted average Mortgage Rate of the Initial Mortgage Loans will be
approximately % per annum.
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<PAGE> 19
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
REMAINING MONTHS TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
---------- ---------- ----------
========== ========== ==========
</TABLE>
The weighted average remaining term to stated maturity of the Initial
Mortgage Loans will be approximately months.
YEARS OF ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
YEARS OF ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
---------- ---------- ----------
========== ========== ==========
</TABLE>
The earliest month and year of origination of any Initial Mortgage Loan is
, 199 and the latest month and year of origination is ,
199 .
S-14
<PAGE> 20
ORIGINAL LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
ORIGINAL LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
------- ------- ---
======= ======= ===
</TABLE>
- ---------------
(1) The Loan-to-Value Ratio of Initial Mortgage Loans secured by second liens
includes the outstanding principal balance of the related Senior Liens. See
"Description of the Trust Funds -- The Mortgage Loans" in the Prospectus.
The minimum and maximum Loan-to-Value Ratios at origination of the Initial
Mortgage Loans were approximately % and %, respectively, and the
weighted average Loan-to-Value Ratio at origination of the Initial Mortgage
Loans was approximately %.
MORTGAGE LOAN PROGRAM
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
NUMBER OF INITIAL AGGREGATE UNPAID DATE AGGREGATE
LOAN PROGRAM MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ ----------------- ----------------- ---------------------
<S> <C> <C> <C>
Full Documentation........................
Stated Income.............................
Alternate Documentation...................
Quick Documentation.......................
No Income Qualification...................
Lite Documentation........................
------- ------- ---
Total...........................
======= ======= ===
</TABLE>
S-15
<PAGE> 21
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-
NUMBER OF INITIAL AGGREGATE UNPAID OFF DATE AGGREGATE
ORIGINAL INITIAL MORTGAGE LOAN PRINCIPAL BALANCE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------ ----------------- ----------------- ------------------
<S> <C> <C> <C>
---------- ---------- ----------
========== ========== ==========
</TABLE>
The average original principal balance of the Initial Mortgage Loans will
be approximately $ .
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-
NUMBER OF INITIAL AGGREGATE UNPAID OFF DATE AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
Single-Family...................................
2-4 Family......................................
Condominium.....................................
PUD.............................................
--------- --------- ---------
Total.................................
========= ========= =========
</TABLE>
RISK CATEGORIES
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-
NUMBER OF INITIAL AGGREGATE UNPAID OFF DATE AGGREGATE
RISK CLASSIFICATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
A...............................................
A-..............................................
B...............................................
C...............................................
D...............................................
--------- ---------- ----------
Total.................................
========= ========== ==========
</TABLE>
S-16
<PAGE> 22
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-
NUMBER OF INITIAL AGGREGATE UNPAID OFF DATE AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- ----------------- ----------------- ------------------
<S> <C> <C> <C>
--------- ---------- ----------
========= ========== ==========
</TABLE>
No more than approximately % of the Initial Mortgage Loans will be
secured by Mortgaged Properties located in any one zip code.
PURPOSES OF MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-
NUMBER OF INITIAL AGGREGATE UNPAID OFF DATE AGGREGATE
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ ----------------- ----------------- ------------------
<S> <C> <C> <C>
Purchase........................................
Refinance (Rate/Term)...........................
Refinance (Equity Take-Out).....................
--------- ---------- ----------
Total.................................
========= ========== ==========
</TABLE>
In general, in the case of a Mortgage Loan made for "rate/term" refinance
purposes (not for "equity take-out"), substantially all of the proceeds are used
to pay in full the principal balance of a previous mortgage loan of the
mortgagor with respect to a Mortgaged Property and to pay origination and
closing costs associated with such refinancing. Mortgage Loans made for "equity
take out" refinance purposes involve the use of the proceeds to pay in full the
principal balance of such previous mortgage loan and related costs except that a
portion of the proceeds are generally retained by the mortgagor for uses
unrelated to the Mortgaged Property. The amount of such proceeds retained by the
mortgagor may be substantial.
OCCUPANCY STATUS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-
NUMBER OF INITIAL AGGREGATE UNPAID OFF DATE AGGREGATE
OCCUPANCY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
Investment
Primary.........................................
Second Homes....................................
-------- -------- --------
Total.................................
======== ======== ========
</TABLE>
DELINQUENCY STATUS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-
NUMBER OF INITIAL AGGREGATE UNPAID OFF DATE AGGREGATE
STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------ ----------------- ----------------- ------------------
<S> <C> <C> <C>
30-59 days..................................... $ %
60-89 days.....................................
90 days or more................................
--- ---------- ----------
Total................................ $ %
=== ========== ==========
</TABLE>
The indicated periods of delinquency are based on the number of days past
due, based on a 30-day month. No Mortgage Loan is considered delinquent for
these purposes until one month has passed since its contractual due date.
S-17
<PAGE> 23
SUBSEQUENT MORTGAGE LOANS
The obligation of the Trust Fund to purchase Subsequent Mortgage Loans on a
Subsequent Transfer Date will be subject to the aggregate Subsequent Mortgage
Loans, including the Subsequent Mortgage Loans to be conveyed to the Trust Fund
on such Subsequent Transfer Date, meeting the following criteria: (i) the
weighted average Mortgage Rate of the Subsequent Mortgage Loans will not be less
than %; (ii) no Subsequent Mortgage Loan will have a Mortgage Rate of less
than %; (iii) the weighted average remaining term of the Subsequent
Mortgage Loans will not be greater than months; and (iv) no Subsequent
Mortgage Loan will have a final scheduled payment due later than ,
20 . Such criteria will be based on the characteristics of the Subsequent
Mortgage Loans on the related Subsequent Transfer Date. In addition, no
Subsequent Mortgage Loan, as of the Subsequent Cut-off Date, will be more than
30 days past due or have a mortgagor that has been noted in the related records
of the Servicer as being the subject of a bankruptcy proceeding.
Except for the criteria described in the preceding paragraph, there will be
no required characteristics of the Subsequent Mortgage Loans. Therefore, the
aggregate characteristics of Subsequent Mortgage Loans, including the
composition of the Subsequent Mortgage Loans, the distribution by Mortgage Rate
and the geographic distribution may vary significantly from time to time, and
will bear no particular relationship to the characteristics of the Initial
Mortgage Loans at any time. It is expected that a substantial portion of the
Subsequent Mortgage Loans will be originated in the State of .
The addition of Subsequent Mortgage Loans to the Trust Fund on any
Subsequent Transfer Date is subject to the receipt of confirmation from the
Rating Agencies that the addition of such Subsequent Mortgage Loans will not
result in a reduction or withdrawal of the initial rating of any of the Class A
Certificates and the approval of the Certificate Insurer. If, as a result of the
failure to receive such confirmation or approval, the Depositor is unable to
transfer Subsequent Mortgage Loans to the Trust Fund, principal prepayments to
holders of the Class A Certificates will occur following the Pre-Funding Period.
THE ASSET SELLER
(in its capacity as seller of the Mortgage Loans to the
Depositor, the "Asset Seller") is a corporation. [The Asset Seller is
an affiliate of the Depositor.] The Asset Seller's residential lending division
underwrites first and second lien mortgage loans secured by one- to four-family
residences. The Asset Seller acquires mortgage loans through a network of branch
offices and approved mortgage brokers. The Asset Seller also acquires mortgage
loans from other financial institutions in accordance with the underwriting
standards described below under "Description of the Mortgage
Loans -- Underwriting." The Asset Seller began originating and acquiring
mortgage loans as of . The Asset Seller, which has its principal place
of business in , had assets as of , 199 in excess of
$ .
UNDERWRITING
[All of the Initial Mortgage Loans were underwritten, and all of the
Subsequent Mortgage Loans will be underwritten, by the Asset Seller in
accordance with the "Standard Non-Conforming Program" which does not meet the
credit underwriting standards of Fannie Mae or Freddie Mac. The Asset Seller's
current single family mortgage loan volume is generally originated based on loan
packages submitted through a mortgage broker network. Such loan packages, which
generally contain relevant credit, property and underwriting information on the
loan request, are compiled by the applicable mortgage broker and submitted to
the Asset Seller for approval and funding. The mortgage broker receives as
compensation all or a portion of the loan origination fee charged to the
mortgagor at the time the loan is made. As part of its quality control
procedures, the Asset Seller accepts loan packages submitted by pre-approved
mortgage brokers. In connection with the approval process, it requires that the
mortgage broker be licensed by the appropriate state agencies, as required, and
review a package of documents consisting of, among other things, an application,
resumes of key personnel, narrative of the company, organizational documentation
and financial statements. At least annually, the Asset Seller reviews the
performance of each of its mortgage brokers for poor processing,
misrepresentation, fraud or delinquency, and substandard mortgage brokers are
terminated.
S-18
<PAGE> 24
Each prospective mortgagor completes a mortgage loan application that
includes information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. At least two credit
reports on each applicant from national credit reporting companies are required.
The report typically contains information relating to such matters as credit
history with local and national merchants and lenders, installment debt payments
and any record of defaults, bankruptcies, repossessions, or judgments.
Mortgaged properties are appraised by licensed appraisers. The Asset Seller
does not approve all appraisers but instead relies on the mortgage brokers to
evaluate the appraiser's experience and ability; however, in the event that a
mortgage broker uses an appraiser who has not been approved by the Asset Seller,
the related appraisal will be reviewed by an approved appraiser of the Asset
Seller for conformance with its guidelines. The Asset Seller requires the
appraiser to address neighborhood conditions, site and zoning status and
condition and valuation of improvements. Following each appraisal, the appraiser
prepares a report which includes a reproduction cost analysis (when appropriate)
based on the current cost of constructing a similar home and a market value
analysis based on recent sales of comparable homes in the area. All appraisals
are required to conform to the Uniform Standards of Professional Appraisal
Practice and must be on forms acceptable to Fannie Mae and Freddie Mac. Every
appraisal is reviewed by a non-affiliated appraisal review firm, or by another
review appraiser acceptable to the Asset Seller before the mortgage loan is
made.]
[Describe any other material elements of underwriting criteria for Mortgage
Loans applied by Asset Seller or Other Originator.]
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Mortgage Loans
and the Mortgaged Properties is based upon the Initial Mortgage Loans as
constituted at the close of business on the Cut-off Date, as adjusted for the
scheduled principal payments due on or before such date. Prior to the issuance
of the Certificates, Mortgage Loans may be excluded from the Trust Fund as a
result of incomplete documentation or otherwise, if the Depositor deems such
removal necessary or appropriate. A limited number of other mortgage loans may
be added prior to the issuance of the Certificates. The Depositor believes that
the information set forth herein will be substantially representative of the
characteristics of the Initial Mortgage Loans at the time the Class A
Certificates are issued although the range of Mortgage Rates and maturities and
certain other characteristics of the Mortgage Loans may vary. In addition, the
Mortgage Loans ultimately included in the Trust Fund will include the Subsequent
Mortgage Loans and therefore the characteristics of the Mortgage Loans
ultimately included in the Trust Fund will differ from those set forth above for
the Initial Mortgage Loans.
In the event that any of the characteristics as of the Cut-off Date of the
Initial Mortgage Loans that constitute the Trust Fund on the date of initial
issuance of the Certificates vary materially from those described herein,
revised information regarding the Initial Mortgage Loans will be made available
to purchasers of the Class A Certificates, on or before such issuance date, and
a Current Report on Form 8-K containing such information will be filed with the
Securities and Exchange Commission within 15 days following such date. In
addition, a Current Report on Form 8-K will be filed following each purchase of
Subsequent Mortgage Loans.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 199 - Asset Backed Certificates (the "Certificates") will
include the following four senior classes (the "Class A Certificates"): Class
A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates and Class A4
Certificates (each, a "Class" and collectively, the "Class A Certificates"). In
addition to the Class A Certificates, the Series 199 - Asset Backed
Certificates will include the Class R Certificates (the "Residual
Certificates"). Only the Class A Certificates are offered hereby.
S-19
<PAGE> 25
The Certificates will evidence the entire beneficial ownership interest in
the Trust Fund. The Trust Fund will consist of: (i) the Mortgage Loans; (ii)
such assets as from time to time are identified as deposited in respect of the
Mortgage Loans in the Certificate Account; (iii) property acquired by
foreclosure of such Mortgage Loans or deed in lieu of foreclosure; (iv) the
Trustee's rights with respect to the Mortgage Loans under all insurance policies
(including the Certificate Insurance Policy) required to be maintained pursuant
to the Pooling and Servicing Agreement and any proceeds thereof; (v) liquidation
proceeds; and (vi) amounts on deposit in the Pre-Funding Account and the
Capitalized Interest Account.
Distributions on the Class A Certificates will be made on the [25th] day of
each month or, if such day is not a business day, then on the next succeeding
business day (each, a "Distribution Date"), commencing in
, to Certificateholders of record on the immediately preceding Record Date.
The record date (the "Record Date") for each Distribution Date will be the close
of business on the last day of the month immediately preceding the related
Distribution Date.
Each Class of Class A Certificates will be issued in a minimum denomination
of $ and integral multiples of $ in excess thereof.
The Class A Certificates will be represented by one or more certificates
registered in the name of Cede & Co. ("Cede"), the nominee of DTC (Class A
Certificates so registered, "Book-Entry Certificates"). No person acquiring an
interest in the Class A Certificates (a "Beneficial Owner") will be entitled to
receive a physical certificate representing such person's interest (a
"Definitive Certificate"), except as set under "Description of the
Securities -- Book-Entry Registration and Definitive Securities" in the
Prospectus. Unless and until Definitive Certificates are issued for the Class A
Certificates under the limited circumstances described therein, all references
to actions by Certificateholders with respect to the Class A Certificates shall
refer to actions taken by DTC upon instructions from its Participants, and all
references herein to distributions, notices, reports and statements to
Certificateholders with respect to the Class A Certificates shall refer to
distributions, notices, reports and statements to DTC or Cede, as the registered
holder of the Class A Certificates, for distribution to Beneficial Owners by DTC
in accordance with DTC procedures. See "Description of the
Securities -- Book-Entry Registration and Definitive Securities" in the
Prospectus.
PRE-FUNDING ACCOUNT
On the Closing Date approximately $ (the "Pre-Funded Amount") will be
deposited in the Pre-Funding Account, which account shall be part of the Trust
Fund. The maximum aggregate principal amount of the Subsequent Mortgage Loans
which may be deposited in the Trust Fund is equal to the sum of the Pre-Funded
Amount and the principal payments received on the Initial Mortgage Loans between
the Cut-off Date and the Closing Date. During the period (the "Pre-Funding
Period") from and including the Closing Date until the earlier of (i) the date
on which the Pre-Funded Amount on deposit in the Pre-Funding Account is less
than or equal to $ , or (ii) , 199 , the Pre-Funded Amount will
be maintained in the Pre-Funding Account. The Pre-Funding Account will be
reduced during the Pre-Funding Period by the amount of Subsequent Mortgage Loans
deposited in the Trust Fund in accordance with the Pooling and Servicing
Agreement. Immediately following the Pre-Funding Period, the Pre-Funded Amount
(net of reinvestment income payable to the Class R Certificateholders),
remaining at the end of such Pre-Funding Period will be distributed to the
holders of the Class A Certificates in reduction of the Security Balances of
their Certificates in accordance with the priorities set forth herein under
"-- Class A Principal Distribution Amount", resulting in a partial principal
prepayment of such Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in
investments permitted by the Pooling and Servicing Agreement and all interest
and any other investment earnings on amounts on deposit in the Pre-Funding
Account will be distributed to the Class R Certificateholders following the
Pre-Funding Period.
CAPITALIZED INTEREST ACCOUNT
The Depositor will establish for the benefit of the Class A
Certificateholders a trust account (the "Capitalized Interest Account"). On the
Closing Date, the Depositor will deposit in such account a cash amount as
required by the Pooling and Servicing Agreement. On each Distribution Date
during the Pre-
S-20
<PAGE> 26
Funding Period and on the Distribution Date immediately following, funds on
deposit in the Capitalized Interest Account will be applied by the Trustee to
cover shortfalls in the Class A Interest Distribution Amount attributable to the
pre-funding feature during the related Pre-Funding Period. Such shortfall
initially will exist during the Pre-Funding Period because while the Class A
Certificateholders are entitled to receive interest accruing on the Security
Balance of the Class A Certificates, the Security Balance of the Class A
Certificates during the Pre-Funding Period will be greater than the aggregate
principal balance of the related Mortgage Loans on the Closing Date. Following
the termination of the Pre-Funding Period, funds on deposit in the Capitalized
Interest Account will be distributed by the Trustee to the Class R
Certificateholders.
OVERCOLLATERALIZATION PROVISIONS AND SUPPORT FEATURES
Overcollateralization Resulting From Cash Flow Structure. The Pooling and
Servicing Agreement requires that, on each Distribution Date, the Net Monthly
Excess Cashflow with respect to the Mortgage Loans, if any, be applied on such
Distribution Date as an accelerated payment of principal on the related Class A
Certificates, but only to the limited extent hereafter described. The "Net
Monthly Excess Cashflow" for any Distribution Date is equal to (x) the amount on
deposit in the Collection Account on such Distribution Date with respect to the
Mortgage Loans, other than Future Distribution Amounts, the related Insured
Payments and the Trustee's Fee and Premium Amount payable on such Distribution
Date (such amount, the related "Available Funds" for such Distribution Date)
minus (y) the sum of (i) the sum of the related Class A Interest Distribution
Amount and the related Class A Principal Distribution Amount (calculated for
this purpose without regard to any Subordination Increase Amount, Subordination
Reduction Amount or portion thereof included therein) and (ii) any Reimbursement
Amount owed to the Certificate Insurer. This application has the effect of
accelerating the amortization of the related Class A Certificates relative to
the amortization of the Mortgage Loans.
With respect to any Distribution Date, the excess, if any, of (x) the sum
of (i) the aggregate Principal Balances of the Mortgage Loans as of the close of
business on the last day of the related Due Period and (ii) any amounts on
deposit in the Pre-Funding Account (other than reinvestment income) over (y) the
Security Balances of the Class A Certificates as of such Distribution Date (and
following the making of all distributions on such Distribution Date) is the
"Subordinated Amount" as of such Distribution Date. The Pooling and Servicing
Agreement requires that the Net Monthly Excess Cashflows will be applied as an
accelerated payment of principal on the related Class A Certificates until the
related Subordinated Amount has increased to the level equal to the related
Required Subordinated Amount for such Distribution Date. Any amount of Net
Monthly Excess Cashflow actually applied as an accelerated payment of principal
is a "Subordination Increase Amount." The required level of the Subordinated
Amount with respect to a Distribution Date is the "Required Subordinated Amount"
with respect to such Distribution Date. Initially, the Required Subordinated
Amount will be set at an amount equal to a percentage, specified in the Pooling
and Servicing Agreement, of the aggregate Principal Balances of the Mortgage
Loans as of the Cut-off Date and the original Pre-Funded Amount. The Pooling and
Servicing Agreement generally provides that the Required Subordinated Amounts
may, over time, decrease, or increase, subject to certain floors, caps and
triggers, including triggers that allow the Required Subordinated Amount to
decrease or "step down" based on the performance of the Mortgage Loans with
respect to certain tests specified in the Pooling and Servicing Agreement based
on delinquency rates and cumulative losses. If certain delinquency and/or loss
levels set forth in the Pooling and Servicing Agreement are exceeded, the
Required Subordinated Amount may become unlimited. Net Monthly Excess Cashflow
will then be applied in reduction of principal of the Class A Certificates
during the period that the Mortgage Loans are unable to meet certain tests
specified in the Pooling and Servicing Agreement based on delinquency rates and
cumulative losses.
In the event that the Required Subordinated Amount is permitted to decrease
or "step down" on a Distribution Date in the future, the Pooling and Servicing
Agreement provides that some or all of the principal that would otherwise be
distributed to the holders of the Class A Certificates on such Distribution Date
will be available to satisfy other cash flow priorities of the Trust Fund
including distributions to the holders of the Class R Certificates on such
Distribution Date. This has the effect of decelerating the amortization of the
Class A Certificates relative to the amortization of the Mortgage Loans, and of
reducing the related
S-21
<PAGE> 27
Subordinated Amount. With respect to any Distribution Date, the difference, if
any, between (a) the related Subordinated Amount that would apply on such
Distribution Date after taking into account all distributions to be made on such
Distribution Date (exclusive of any reductions thereto attributable to
Subordination Reduction Amounts (as described below) on such Distribution Date)
and (b) the Required Subordinated Amount for such Distribution Date is the
"Excess Subordinated Amount" with respect to such Distribution Date. If, on any
Distribution Date, the Excess Subordinated Amount is, or, after taking into
account all other distributions to be made on such Distribution Date would be,
greater than zero (i.e., the related Subordinated Amount is or would be greater
than the Required Subordinated Amount), then any amounts relating to principal
which would otherwise be distributed to the holders of the Class A Certificates
on such Distribution Date shall instead be distributed to the holders of the
Class R Certificates (to the extent available therefor) in an amount equal to
the lesser of (x) the related Excess Subordinated Amount and (y) the amount
available for distribution on account of principal with respect to the related
Class A Certificates on such Payment Date; such amount being a "Subordination
Reduction Amount." In addition, due to the cash flow structure of the
Certificates as described below, Subordination Reduction Amounts may result even
prior to the occurrence of any decrease or "step down" in the related Required
Subordinated Amount. This is because the holders of the related Class A
Certificates will generally be entitled to receive 100% of collected principal,
even though the Security Balances of the Class A Certificates will, following
the accelerated amortization resulting from the application of the Net Monthly
Excess Cashflow, represent less than 100% of the related Mortgage Loan's
principal balance. In the absence of the provisions relating to Subordination
Reduction Amounts, the foregoing may otherwise increase the Subordinated Amounts
above the Required Subordinated Amount requirements even without the application
of any Net Monthly Excess Cashflow.
The Pooling and Servicing Agreement provides that, on any Distribution
Date, all unscheduled collections on account of principal (other than any such
amount applied to the payment of a Subordination Reduction Amount) with respect
to each Mortgage Loan during the period beginning on the day following the Due
Date in the month preceding the month in which such Distribution Date occurs,
and ending on the Due Date of the month in which such Distribution Date occurs
(each such period, a "Due Period") will be distributed to the holders of the
Class A Certificates on such Distribution Date. If any Mortgage Loan became a
Liquidated Mortgage Loan during its Due Period, the net Liquidation Proceeds (as
defined in the Prospectus) related thereto and allocated to principal may be
less than the Principal Balance of the related Mortgage Loan; the amount of any
such insufficiency is a "Liquidated Loan Loss." A "Liquidated Mortgage Loan" is,
in general, a defaulted Mortgage Loan as to which the 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). In addition,
the Pooling and Servicing Agreement provides that the principal balance of any
Mortgage Loan after it becomes a Liquidated Mortgage Loan shall equal zero. The
Pooling and Servicing Agreement does not contain any rule that requires that the
amount of any Liquidated Loan Loss be distributed to the holders of the Class A
Certificates on the Distribution Date that immediately follows the event of
loss; i.e., the Pooling and Servicing Agreement does not require the current
recovery of losses. However, the occurrence of a Liquidated Loan Loss will
reduce the Subordinated Amount (and may result in a Subordination Deficit as
described below under "-- Overcollateralization and the Certificate Insurance
Policy"), which, to the extent that such reduction causes the Subordinated
Amount to be less than the related Required Subordinated Amount applicable to
the related Distribution Date, will require the payment of a Subordination
Increase Amount on such Distribution Date (or, if insufficient funds are
available on such Distribution Date, on subsequent Distribution Dates, until the
Subordinated Amount equals the Required Subordinated Amount).
Overcollateralization and The Certificate Insurance Policy. The Pooling
and Servicing Agreement defined a "Subordination Deficit" with respect to a
Distribution Date as the amount, if any, by which (x) the Security Balances with
respect to a Distribution Date, after taking into account all distributions to
be made on such Distribution Date (except for any Subordination Deficit and
Subordination Increase amount), exceeds (y) the sum of (a) the aggregate
Principal Balances of the related Mortgage Loans as of the close of business on
the last day of the related Due Period and (b) the amount, if any, on deposit in
the Pre-Funding Account on such Distribution Date, exclusive of reinvestment
income. The Pooling and Servicing Agreement requires the Trustee to make a claim
for an Insured Payment under the related Certificate Insurance Policy not later
S-22
<PAGE> 28
than the second Business Day prior to any Distribution Date as to which the
Trustee has determined that a Subordination Deficit will occur for the purpose
of applying the proceeds of such Insured Payment as a payment of principal to
the holders of the Class A Certificates on such Distribution Date. No payments
in respect of principal will be made under such Certificate Insurance Policy
unless a Subordination Deficit occurs. Investors in the Class A Certificates
should realize that, under extreme loss or delinquency scenarios applicable to
the Mortgage Loans that occur when no Subordination Deficit exists, they may
temporarily receive no distributions of principal when they would otherwise be
entitled thereto under the principal allocation provisions described herein. The
exposure to risk of loss of principal to the holders of the Class A Certificates
depends in part on the ability of the Certificate Insurer to satisfy its
obligations under the Certificate Insurance Policy.
PRIORITY OF PAYMENT
On each Distribution Date, the Trustee shall make the following
distributions, from funds on deposit in the Collection Account (other than
Future Distribution Amounts) and the amount of Insured Payments to be made on
such Distribution Date:
(a) to the Certificate Insurer, the Premium Amount;
(b) to the Trustee, an amount equal to the Trustee's Fees then due to
it;
(c) to the Certificate Insurer the lesser of (x) an amount equal to (i)
the amount then on deposit in the Collection Account remaining after the
foregoing distributions minus (ii) the Insured Distribution Amount for such
Distribution Date and (y) the amount of all Insured Payments and other payments
made by the Certificate Insurer pursuant to the Certificate Insurance Policy
(together with interest thereon at the Pass-Through Rate for the Class A
Certificates) which have not been previously repaid (the "Reimbursement Amount")
as of such Distribution Date;
(d) from amounts then on deposit in the Collection Account (including
any Insured Payments), to the Class A Certificateholders an amount equal to the
Class A Interest Distribution Amount, distributed on a pro rata basis to the
Class A Certificateholders as described below under "-- Class A Interest
Distribution Amount";
(e) from amounts then on deposit in the Collection Account (including
any related Insured Payments), to the Class A Certificateholders an amount equal
to the Class A Principal Distribution Amount, distributed as described below
under "-- Class A Principal Distribution Amount";
(f) from amounts then on deposit in the Collection Account, to the
holders of the Class R Certificates, the amount remaining on such Distribution
Date, if any.
With respect to any Distribution Date, "Future Distribution Amounts"
include (i) all scheduled payments of principal and interest collected but due
on a date subsequent to the related Due Period, (ii) all unscheduled recoveries
of principal, together with related payments of interest thereon, on the
Mortgage Loans received during the month in which such Distribution Date occurs,
(iii) all amounts received with respect to a Mortgage Loan that was repurchased
by the Asset Seller during the month in which such Distribution Date occurs and
(iv) all net Liquidation Proceeds collected by the Servicer during the month in
which such Distribution Date occurs.
CLASS A INTEREST DISTRIBUTION AMOUNT
On each Distribution Date, holders of each Class of Class A Certificates
will be entitled to receive interest distributions in an amount equal to the sum
of (a) interest accrued for the related Interest Accrual Period on the related
Security Balance thereof immediately prior to such Distribution Date at the
applicable Pass-Through Rate (to the extent of the amounts remaining for
distributions after payments under clauses (a) through (c) under "-- Priority of
Payment" above) and (b) the Class A Carry-Forward Amount, as applicable,
allocable to interest. The aggregate amount of interest allocable to the Class A
Certificates as determined separately (the "Class A Interest Distribution
Amount") will be allocable to the Class A
S-23
<PAGE> 29
Certificates on a pro rata basis in proportion to the amount of interest payable
thereon. The Class A Interest Distribution Amount with respect to the Class A
Certificates is calculated on the basis of a 360-day year consisting of twelve
30-day months.
With respect to any Distribution Date and the Class A Certificates, the sum
of the related Class A Interest Distribution Amount and the amount of the
related Subordination Deficit, if any, with respect to such Distribution Date is
the related "Insured Distribution Amount" for such Distribution Date.
For each Distribution Date, the "Interest Accrual Period" is the previous
calendar month.
The "Class A Carry-Forward Amount" as of any Distribution Date equals the
sum of (a) the amount, if any, by which (i) the related Insured Distribution
Amount for the immediately preceding Distribution Date exceeded (ii) the amount
actually distributed to the holders of the Class A Certificates on such
Distribution Date in respect thereof (including, without limitation, amounts
paid under the Certificate Insurance Policy) and (b) 30 days' interest on such
amount at the Pass-Through Rate applicable to the Class A Certificates for such
Distribution Date.
As described herein, the Class A Interest Distribution Amount allocable to
each Class of Class A Certificates is based on the Security Balance of such
Class immediately prior to the related Distribution Date. The Security Balance
of any Class of Class A Certificates as of any date of determination is equal to
the initial Security Balance thereof, reduced as described herein with respect
to such Class.
On any Distribution Date, the amount of the premium (the "Premium Amount")
payable to the Certificate Insurer is equal to one-twelfth of the product of a
percentage specified in the Pooling and Servicing Agreement and the aggregate
Security Balance of the Class A Certificates.
CLASS A PRINCIPAL DISTRIBUTION AMOUNT
Holders of the Class A Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the amounts remaining for
distribution after payments under clauses (a) through (d) under "-- Priority of
Payment" above, an amount ("Class A Principal Distribution Amount"), in
reduction of the Security Balances thereof as described below, which equals the
sum of (i) the portion of any Class A Carry-Forward Amount which relates to a
shortfall in a distribution of a related Subordination Deficit, (ii) all
scheduled installments of principal in respect of the Mortgage Loans received or
advanced during the Due Period, together with all unscheduled recoveries of
principal on such Mortgage Loans received by the Servicer during the prior
calendar month, (iii) the Principal Balance of each Mortgage Loan that was
repurchased by the Asset Seller during the prior calendar month, (iv) any
amounts received in connection with a substitution of a Mortgage Loan, (v) the
net Liquidation Proceeds collected by the Servicer during the prior calendar
month (to the extent such net Liquidation Proceeds are related to principal),
(vi) the amount of any Subordination Deficit for such Distribution Date, (vii)
the proceeds received by the Trustee of any termination of the Trust Fund (to
the extent such proceeds are related to principal), (viii) the amount of any
related Subordination Increase Amount for such Distribution Date, and (ix) with
respect to the Distribution Date occurring in , any amounts in the
Pre-Funding Account after giving effect to any purchase of Subsequent Mortgage
Loans; minus (x) the amount of any Subordination Reduction Amount for such
Distribution Date.
In no event will the Class A Principal Distribution Amount with respect to
any Distribution Date be (x) less than zero or (y) greater than the then
outstanding aggregate Security Balance of the Class A Certificates.
Distributions of the Class A Principal Distribution Amount will be
allocated [insert distribution priorities].
The "Servicer Remittance Date" with respect to any Distribution Date is the
18th day of the month in which such Distribution Date occurs, or if such 18th
day is not a business day, the business day immediately preceding such 18th day.
S-24
<PAGE> 30
The "Principal Balance" of any Mortgage Loan as of any date of
determination is the principal balance of such Mortgage Loan as of the Due Date
preceding such date of determination, as such principal balance is specified for
such Due Date in the amortization schedule, (before any adjustment to such
amortization schedule by reason of any bankruptcy (other than Deficient
Valuations (as defined in the Prospectus)) or similar proceeding or any
moratorium or similar waiver or grace period) after giving effect to prepayments
received prior to such Due Date, Deficient Valuations incurred prior to such Due
Date, and to the payment of principal due on such Due Date and irrespective of
any delinquency in payment by the related Mortgagor. The Principal Balance of a
Mortgage Loan that becomes a Liquidated Mortgage Loan (as defined herein) on or
prior to such Due Date shall be zero.
As of any Distribution Date, the "Security Balance" of a Class of Class A
Certificates will equal the initial principal amount of such Class on the
Closing Date less all amounts distributed to the holders of such Class on
account of principal.
See "Summary -- Special Prepayment Considerations" and "-- Special Yield
Considerations" and "Certain Yield and Prepayment Considerations" herein.
ADVANCES
Prior to each Distribution Date, the Servicer is required to make Advances
with respect to any payments of principal and interest (net of the related
Servicing Fees) which were due on the Mortgage Loans on the immediately
preceding Due Date and have not been received as of the business day immediately
preceding the related Servicer Remittance Date.
Such Advances are required to be made by the Servicer only to the extent
they are deemed by the Servicer to be recoverable from related late collections,
insurance proceeds or liquidation proceeds. The purpose of making such Advances
is to maintain a regular cash flow to the Certificateholders, to maintain a
specified level of overcollateralization and to pay the premium due the
Certificate Insurer and to pay the Trustee, rather than to guarantee or insure
against losses. Any failure by the Servicer to make an Advance as required under
the Pooling and Servicing Agreement will constitute an Event of Default
thereunder, in which case the Trustee, as successor servicer, will be obligated
to make any such Advance, in accordance with the terms of the Pooling and
Servicing Agreement.
All Advances will be reimbursable to the Servicer making the Advance,
subject to certain conditions and restrictions, from late collections, insurance
proceeds and liquidation proceeds from the Mortgage Loan as to which such
unreimbursed Advance was made.
CERTIFICATE INSURANCE POLICY
The following information regarding the Certificate Insurance Policy has
been supplied by the Certificate Insurer for inclusion in this Prospectus
Supplement.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Insurance Policy, thereby
unconditionally and irrevocably guarantees to any Owner that an amount equal to
each full and complete Insured Payment will be received by the Trustee, or its
successor as Trustee for the Owners, on behalf of the Owners from the
Certificate Insurer, for distribution by the Trustee to each Owner of each
Owner's proportionate share of the Insured Payment. The Certificate Insurer's
obligations under the Certificate Insurance Policy with respect to a particular
Insured Payment shall be discharged to the extent funds equal to the applicable
Insured Payment are received by the Trustee, whether or not such funds are
properly applied by the Trustee. Insured Payments shall be made only at the time
set forth in the Certificate Insurance Policy, and no accelerated Insured
Payments shall be made regardless of any acceleration of the Class A
Certificates, unless such acceleration is at the sole option of the Certificate
Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policies
do not cover shortfalls, if any, attributable to the liability of the Trust
Fund, the REMIC or the Trustee for withholding taxes, if any (including interest
and penalties in respect of any such liability).
S-25
<PAGE> 31
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the
Certificate Insurer's Fiscal Agent of (i) a certified copy of the order
requiring the return of a preference payment, (ii) an opinion of counsel
satisfactory to the Certificate Insurer that such order is final and not subject
to appeal, (iii) an assignment in such form as is reasonably required by the
Certificate Insurer, irrevocably assigning to the Certificate Insurer all rights
and claims of the Owner relating to or arising under the Class A Certificates
against the debtor which made such preference payment or otherwise with respect
to such preference payment and (iv) appropriate instruments to effect the
appointment of the Certificate Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Certificate 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. Such payments shall be
disbursed to the receiver or trustee in bankruptcy named in the final order of
the court exercising jurisdiction on behalf of the Owner and not to any Owner
directly unless such Owner has returned principal or interest paid on the Class
A Certificates to such receiver or trustee in bankruptcy, in which case such
payment shall be disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 noon, City of New York time, on
the later of the Distribution Date on which the related Insured Payment is due
or the Business Day following receipt in New York, New York on a Business Day by
, as the Certificate Insurer's Fiscal Agent or any successor fiscal
agent appointed by the Certificate Insurer (the "Certificate Insurer's Fiscal
Agent") of a Notice (as described below); provided that if such Notice is
received after 12:00 noon, City of New York time, on such Business Day, it will
be deemed to be received on the following Business Day. If any such Notice
received by the Certificate Insurer's Fiscal Agent is not in proper form or is
otherwise insufficient for the purpose of making a claim under the Certificate
Insurance Policy it shall be deemed not to have been received by the Certificate
Insurer's Fiscal Agent for purposes of this paragraph, and the Certificate
Insurer or the Certificate Insurer's Fiscal Agent, as the case may be, shall
promptly so advise the Trustee and the Trustee may submit an amended Notice.
Insured Payments due under the Certificate Insurance Policy, unless
otherwise stated therein, will be disbursed by the Certificate Insurer's Fiscal
Agent to the Trustee on behalf of the Owners by wire transfer of immediately
available funds in the amount of the Insured Payment less, in respect of Insured
Payments related to Preference Amounts, any amount held by the Trustee for the
payment of such Insured Payment and legally available therefor.
The Certificate Insurer's Fiscal Agent is the agent of the Certificate
Insurer only and the Certificate Insurer's Fiscal Agent shall in no event be
liable to Owners for any acts of the Certificate Insurer's Fiscal Agent or any
failure of the Certificate Insurer to deposit, or cause to be deposited,
sufficient funds to make payments due under the Certificate Insurance Policy.
As used in the Certificate Insurance Policy, the following terms shall have
the following meanings:
"Business Day" means any day other than a Saturday, a 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 under the Pooling and Servicing
Agreement is located are authorized or obligated by law or executive order
to close.
"Insured Payment" means (i) as of any Distribution Date, an amount
equal to the sum of (a) the Class A Interest Distribution Amount minus the
related Available Funds and (b) the Subordination Deficit and (ii) the
related unpaid Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit A
attached to each Certificate Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the Trustee
specifying the Insured Payment which shall be due and owing on the
applicable Distribution Date.
"Owner" means each related Class A Certificateholder (as defined in
the Pooling and Servicing Agreement) who, on the applicable Distribution
Date, is entitled under the terms of the applicable Class A Certificate, to
payment under the related Certificate Insurance Policy.
S-26
<PAGE> 32
"Preference Amount" means any amount previously distributed to an
Owner on the related Class A Certificates that is recoverable and sought to
be recovered as a voidable preference by a trustee in bankruptcy pursuant
to the United States Bankruptcy Code (11 U.S.C.), as amended from time to
time in accordance with a final nonappealable order of a court having
competent jurisdiction.
Capitalized terms used in the Certificate Insurance Policy and not
otherwise defined in the Certificate Insurance Policy shall have the respective
meanings set forth in the Pooling and Servicing Agreement as of the date of
execution of the Certificate Insurance Policies, without giving effect to any
subsequent amendment or modification to the Pooling and Servicing Agreement
unless such amendment or modification has been approved in writing by the
Certificate Insurer.
Any notice under the Certificate Insurance Policy or service of process on
the Certificate Insurer's Fiscal Agent may be made at the address listed below
for the Certificate Insurer's Fiscal Agent or such other address as the
Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Certificate Insurer's Fiscal Agent is ,
Attention: Municipal Registrar and Paying Agency, or such other address as the
Certificate Insurer's Fiscal Agent shall specify to the Trustee in writing.
The Certificate Insurance Policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policies is not covered
by the Property/Casualty Insurance Certificate Fund specified in Article 76 of
the New York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premium on each of the Certificate Insurance Policies is not refundable for any
reason including payment, or provision being made for payment, prior to maturity
of the Class A Certificates.
CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer for
inclusion in this Prospectus Supplement.
The Certificate Insurer is a company, incorporated
under the laws of the State of and licensed to do business in all 50
states, the District of Columbia and Puerto Rico.
, and have each assigned a
claims-paying ability rating to the Certificate Insurer.
All information regarding the Certificate Insurer, a wholly owned
subsidiary of , including the financial statements of the Certificate
Insurer for the year ended December 31, 199 , prepared in accordance with
generally accepted accounting principles, included in the Annual Report on Form
10-K of for the year ended December 31, 199 , is hereby incorporated
by reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be modified or superseded for purposes of this Prospectus Supplement to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Certificate Insurer included in documents
filed 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 Class
A Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
S-27
<PAGE> 33
The tables below present selected financial information of the Certificate
Insurer determined in accordance with generally accepted accounting principles:
<TABLE>
<CAPTION>
SAP
------------------------
---------- -----------
(AUDITED) (UNAUDITED)
<S> <C> <C>
Admitted Assets.............................................
Liabilities.................................................
Capital and Surplus.........................................
</TABLE>
<TABLE>
<CAPTION>
, 199
------------------------
---------- -----------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets.............................................
Liabilities.................................................
Capital and Surplus.........................................
</TABLE>
For additional financial information concerning the Certificate Insurer,
see the audited financial statements of the Certificate Insurer incorporated by
reference herein. Copies of the financial statements of the Certificate Insurer
incorporated herein by reference and copies of the Certificate Insurer's annual
statement for the year ended December 31, 199 prepared in accordance with
statutory accounting standards are available, without charge, from the
Certificate Insurer. The address of the Certificate Insurer's administrative
offices and its telephone number is and .
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity and the aggregate amount of distributions on the
Class A Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans. Such yield may be adversely affected by a higher
or lower than anticipated rate of principal payments on the Mortgage Loans. The
rate of principal payments on such Mortgage Loans will in turn be affected by
the amortization schedules of the Mortgage Loans, the rate and timing of
principal prepayments thereon by the Mortgagors, liquidations of defaulted
Mortgage Loans and purchases of Mortgage Loans due to certain breaches of
representations or warranties. The timing of changes in the rate of prepayments,
liquidations and purchases of the Mortgage Loans may, and the timing of losses
on the Mortgage Loans will, significantly affect the yield on the Class A
Certificates to an investor, even if the average rate of principal payments
experienced over time is consistent with an investor's expectation. Since the
rate and timing of principal payments on the Mortgage Loans will depend on
future events and on a variety of factors (as described herein and in the
Prospectus under "Yield Considerations"), no assurance can be given as to such
rate or the timing of principal payments on the Class A Certificates.
The Mortgage Loans may be prepaid by the mortgagors at any time; however,
certain of the Mortgage Loans are subject to a prepayment charge for
prepayments. See "Description of the Mortgage Loans" herein. In addition, the
Mortgage Loans contain a provision that may result in the acceleration of the
payment of the Mortgage Loan in the event of the transfer or sale of the
Mortgaged Property. Prepayments, liquidations and purchases of the Mortgage
Loans will result in distributions to holders of the Class A Certificates of
principal amounts that would otherwise be distributed over the remaining terms
of the Mortgage Loans. Factors affecting prepayment (including defaults and
liquidations) of mortgage loans include changes in mortgagors' housing needs,
job transfers, unemployment, mortgagors' net equity in the mortgaged properties,
changes in the value of the mortgaged properties, mortgage market interest
rates, solicitations and servicing decisions. In addition, if prevailing
mortgage rates fell significantly below the Mortgage Rates on the Mortgage
Loans, the rate of prepayments (including refinancings) would be expected to
increase. Conversely, if prevailing mortgage rates rose significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayments on the Mortgage
Loans would be expected to decrease.
S-28
<PAGE> 34
The yield to maturity on the Class A Certificates will depend on, among
other things, the price paid by the holders of the Class A Certificates and the
Pass-Through Rate. The extent to which the yield to maturity of a Class A
Certificate is sensitive to prepayments will depend, in part, upon the degree to
which it is purchased at a discount or premium. In general, if a Class of Class
A Certificates is purchased at a premium and principal distributions thereon
occur at a rate faster than anticipated at the time of purchase, the investor's
actual yield to maturity will be lower than that assumed at the time of
purchase. Conversely, if a Class of Class A Certificates is purchased at a
discount and principal distributions thereon occur at a rate slower than that
assumed at the time of purchase, the investor's actual yield to maturity will be
lower than that assumed at the time of purchase. For additional considerations
relating to the yield on the Class A Certificates, see "Yield Considerations" in
the Prospectus.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on Mortgage Loans which are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Furthermore, the
rate and timing of prepayments, defaults and liquidations on the Mortgage Loans
will be affected by the general economic condition of the region of the country
in which the related Mortgaged Properties are located. The risk of delinquencies
and loss is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
In addition, with respect to the Class A Certificates, because principal
distributions are paid to certain of such classes before other classes, holders
of classes having a later priority of payment bear a greater risk of losses than
holders of classes having earlier priorities for distribution of principal.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a Certificate until each dollar of principal
of such Certificate is scheduled to be repaid to an investor (assuming no
losses). The weighted average life of the Class A Certificates will be
influenced by the rate at which principal of the Mortgage Loans is paid, which
may be in the form of scheduled amortization or prepayments (for this purpose,
the term "prepayment" includes liquidations due to default).
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Standard Prepayment Assumption ("SPA"), represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of new
mortgage loans. A prepayment assumption of 100% SPA assumes constant prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of the mortgage loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month and in each month thereafter during the life of
the mortgage loans, 100% SPA assumes a constant prepayment rate of 6% per annum
each month. As used in the table below, "0% SPA" assumes prepayment rates equal
to 0% of SPA, i.e. no prepayments. Correspondingly, " % SPA" assumes
prepayment rates equal to % of SPA, and so forth. SPA 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
Mortgage Loans.
S-29
<PAGE> 35
The following table has been prepared assuming that the Mortgage Loans have
the following characteristics (dollar amounts are approximate):
<TABLE>
<CAPTION>
REMAINING ORIGINAL
TERM TERM
PRINCIPAL TO MATURITY TO MATURITY
BALANCE MORTGAGE RATE (IN MONTHS) (IN MONTHS)
--------- ------------- ------------- -------------
<S> <C> <C> <C>
</TABLE>
In addition, the following tables have been prepared assuming that the
Mortgage Loans have the following characteristics: (i) all calculations for the
Mortgage Loans are done on the basis of a 360-day year consisting of twelve
30-day months; (ii) with respect to the Class A Certificates, all weighted
average lives are calculated on the basis of a 360-day year and a 30-day month;
(iii) Due Dates on each Mortgage Loan are the first day of the month; (iv) all
scheduled monthly payments on the Mortgage Loans are made in a timely fashion on
the first day of each month, commencing in , and prepayments are assumed to be
received on the last day of each month, commencing in (except for
the hypothetical mortgage loans with an or first Due Date, for
which scheduled monthly payments commence in or , respectively, and prepayments
commence in or , respectively); (v) distributions on the Class A
Certificates are made on the 25th day of each month, commencing in ; (vi)
the Closing Date is ; (vii) the Required Subordinated Amount will be set
as provided in the Pooling and Servicing Agreement; (viii) the Mortgage Loans
will prepay at the indicated assumed percentages of SPA; and (ix) with regard to
the weighted average lives, the Servicer does not exercise its option to
terminate the Trust Fund when the aggregate principal balance of the Mortgage
Loans is reduced to less than % of the aggregate Principal Balance of the
Initial Mortgage Loans as of the Cut-off Date and the aggregate Principal
Balance of the Subsequent Mortgage Loans as of the related Subsequent Cut-off
Date.
Based upon the foregoing assumptions, certain of which may not reflect
actual experience, the following tables indicate the projected weighted average
life of each Class of Class A Certificates and the percentages of the initial
Security Balance of each such Class that would be outstanding after each of the
dates shown at various percentages of SPA.
S-30
<PAGE> 36
PERCENTAGE OF INITIAL SECURITY BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF SPA
CLASS A-1 CERTIFICATES
<TABLE>
<CAPTION>
DISTRIBUTION DATE % % % % % % % %
- ----------------- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average Lives in
Years(1)..........................
</TABLE>
- ---------------
(1) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the Security
Balance by the number of years from the date of issuance of such Certificate
to the related Distribution Date, (ii) adding the results and (iii) dividing
the sum by the initial Security Balance of the Certificate.
S-31
<PAGE> 37
PERCENTAGE OF INITIAL SECURITY BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF SPA
CLASS A-2 CERTIFICATES
<TABLE>
<CAPTION>
DISTRIBUTION DATE % % % % % % % %
- ----------------- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average Lives in
Years(1)..........................
</TABLE>
- ---------------
(1) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the Security
Balance by the number of years from the date of issuance of such Certificate
to the related Distribution Date, (ii) adding the results and (iii) dividing
the sum by the initial Security Balance of the Certificate.
S-32
<PAGE> 38
PERCENTAGE OF INITIAL SECURITY BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF SPA
CLASS A-3 CERTIFICATES
<TABLE>
<CAPTION>
DISTRIBUTION DATE % % % % % % % %
- ----------------- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average Lives in
Years(1)..........................
</TABLE>
- ---------------
(1) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the Security
Balance by the number of years from the date of issuance of such Certificate
to the related Distribution Date, (ii) adding the results and (iii) dividing
the sum by the initial Security Balance of the Certificate.
S-33
<PAGE> 39
PERCENTAGE OF INITIAL SECURITY BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF SPA
CLASS A-4 CERTIFICATES
<TABLE>
<CAPTION>
DISTRIBUTION DATE % % % % % % % %
- ----------------- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average Lives in
Years(1)..........................
</TABLE>
- ---------------
(1) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the Security
Balance by the number of years from the date of issuance of such Certificate
to the related Distribution Date, (ii) adding the results and (iii) dividing
the sum by the initial Security Balance of the Certificate.
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth above,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at the
given percentages of SPA until maturity or that all of the Mortgage Loans will
prepay at the same percentage of SPA. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the table at the various percentages of SPA
specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between such assumptions and the
actual characteristics and performance of the Mortgage Loans, or actual
prepayment or loss experience, will affect the percentages of initial Security
Balance outstanding over time and the weighted average lives of the Classes of
Class A Certificates.
THE SERVICER
GENERAL
(in its capacity as servicer, the "Servicer") will act as
servicer for the Mortgage Loans pursuant to the Pooling and Servicing Agreement.
The Servicer is an indirect subsidiary of , a corporation [and an
affiliate of the Depositor].
As of , the Servicer and its subsidiaries were servicing approximately
mortgage loans in its Owned and Managed Servicing Portfolio representing an
aggregate outstanding principal balance of approxi-
S-34
<PAGE> 40
mately $ , and approximately mortgage loans in its Third-Party
Servicing Portfolio representing an aggregate outstanding principal balance of
approximately $ .
The Certificates will not represent an interest in or obligation of, nor
are the Mortgage Loans guaranteed by, the Servicer or any of its affiliates.
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER
Owned and Managed Servicing Portfolio. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience of
the Servicer for its Owned and Managed Servicing Portfolio for 199 , and for
each of the prior years. The Servicer's "Owned and Managed Servicing
Portfolio" consists of the Servicer's servicing portfolio of fixed and variable
rate mortgage loans excluding certain loans serviced by the Servicer that were
not originated or purchased and reunderwritten by the Servicer or any affiliate
thereof. In addition to the Owned and Managed Servicing Portfolio, the Servicer
serviced as of , 199 , approximately mortgage loans with an
aggregate principal balance as of such date of approximately $ ; such
loans were not originated by the Servicer or any affiliate thereof 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 SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-------------------------------------------
MONTHS ENDING 19 19
---------------------- ---------------------- ------------------
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR
OF MORTGAGE AMOUNT OF MORTGAGE AMOUNT OF AMOUNT
LOANS (000) LOANS (000) LOANS (000)
----------- -------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Portfolio.........................
Delinquency.......................
Percentage(1)
30-59 days......................
60-89 days......................
90 days or more.................
Total...................
Foreclosure Rate(2)...............
REO Properties(3).................
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
---------------------------------------------------
19 19
------------------------ ------------------------
NUMBER DOLLAR NUMBER DOLLAR
OF MORTGAGE AMOUNT OF MORTGAGE AMOUNT
LOANS (000) LOANS (000)
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Portfolio.......................................
Delinquency.....................................
Percentage(1)
30-59 days....................................
60-89 days....................................
90 days or more...............................
Total.................................
Foreclosure Rate(2).............................
REO Properties(3)...............................
</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.
S-35
<PAGE> 41
(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 mortgage foreclosed or for which deeds in lieu of foreclosure have been
accepted, and held by the Servicer pending disposition) percentages are
calculated using the number of loans, not the dollar amount.
LOAN LOSS EXPERIENCE OF THE SERVICER'S OWNED AND
MANAGED SERVICING PORTFOLIO OF MORTGAGE LOANS
<TABLE>
<CAPTION>
MONTHS ENDING YEARS ENDING DECEMBER 31,
---------------- -----------------------------------------
19 19 19 19
---------------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average amount outstanding(1).........
Gross losses(2).......................
Recoveries(3).........................
Net losses(4).........................
Net losses as a percentage of average
amount outstanding..................
</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".
[The Servicer experienced an increase in the net loss rate on its Owned and
Managed Servicing Portfolio during the period through . 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 chargeoffs on loans in . In addition, the level of
net losses during such period was negatively impacted by the performance on its
Non-Income Verification ("NIV") loan program. The net loss rates as a percentage
of the average amount outstanding on its Owned and Managed Servicing Portfolio,
excluding NIV loans, are %, %, % and % for the periods
ending , , and , respectively.]
There can be no assurance that the delinquency experience of the Mortgage
Loans will correspond to the delinquency experience of the Servicer's servicing
portfolio set forth in the foregoing tables. The statistics shown above
represent the delinquency experience for the Servicer's servicing portfolio only
for the periods presented, whereas the aggregate delinquency experience on the
Mortgage Loans will depend on the results obtained over the life of the Mortgage
Loans. The Servicer's servicing portfolio includes mortgage loans with a variety
of payment and other characteristics (including geographic location) which are
not necessarily representative of the payment and other characteristics of the
Mortgage Loans. The Servicer's servicing portfolio includes mortgage loans
underwritten pursuant to guidelines not necessarily representative of those
applicable to the Mortgage Loans. It should be noted that if the residential
real estate market should experience an overall decline in property values, the
actual rates of delinquencies and foreclosures could be higher than those
previously experienced by the Servicer. In addition, adverse economic conditions
may affect the actual rates of delinquencies and foreclosures with respect to
the Mortgage Loans.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement"), dated as of ,
199 among the Depositor, the Servicer and
S-36
<PAGE> 42
, as Trustee. Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Class A Certificates. See "Description
of the Agreements -- Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements" in the Prospectus.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The servicing fee for each Mortgage Loan (the "Servicing Fee") is payable
out of the interest payments on such Mortgage Loan. The Servicing Fee on each
Mortgage Loan is payable monthly and is equal to one-twelfth of [a fixed
percentage per annum] (the "Servicing Fee Rate") multiplied by the Principal
Balance of such Mortgage Loan on the first day of the related Due Period. In
addition to the Servicing Fee, the Servicer shall be entitled to receive, as
additional servicing compensation, to the extent permitted by applicable law and
the related Mortgage Notes, any late payment charges, assumption fees or similar
items. The Servicer shall pay all expenses incurred by it in connection with its
servicing activities under the Pooling and Servicing Agreement and shall not be
entitled to reimbursement therefor except as specifically provided in the
Pooling and Servicing Agreement.
THE TRUSTEE
(the "Trustee"), [a national banking
association,] will act as trustee for the Certificates pursuant to the Pooling
and Servicing Agreement. The Trustee will be entitled to a fee, payable monthly,
equal to one-twelfth of % per annum multiplied by the Principal Balance of
each Mortgage Loan on the first day of the related Due Period (the "Trustee's
Fee"). See "Description of the Agreements -- Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements -- The Trustee" in the
Prospectus.
TERMINATION
The Pooling and Servicing Agreement will terminate upon notice to the
Trustee of either: (a) the later of the distribution to Certificateholders of
the final payment or collection with respect to the last Mortgage Loan (or
Advances of same by the Servicer), or the disposition of all funds with respect
to the last Mortgage Loan and the remittance of all funds due under the Pooling
and Servicing Agreement and the payment of all amounts due and payable to the
Certificate Insurer and the Trustee or (b) mutual consent of the Servicer, the
Certificate Insurer and all Certificateholders in writing; provided, however,
that in no event will the Trust Fund established by the Pooling and Servicing
Agreement terminate later than twenty-one years after the death of the last
surviving lineal descendant of the person named in the Pooling and Servicing
Agreement.
Subject to provisions in the Pooling and Servicing Agreement, the Servicer
may, at its option and at its sole cost and expense, on any Distribution Date
when the aggregate Principal Balance of the Mortgage Loans is less than %
of the sum of the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date and the aggregate principal balance of the Subsequent Mortgage
Loans as of the related Subsequent Cut-off Date, purchase from the Trust Fund
all of the outstanding Mortgage Loans at a price equal to the sum of (a) 100% of
the Principal Balance of each outstanding Mortgage Loan, (b) the aggregate
amount of accrued and unpaid interest on the Mortgage Loans through the related
Due Period and 30 days' accrued interest thereon at a rate equal to the Mortgage
Rate (net of the Servicing Fee Rate in the case of such a purchase by the
Servicer), (c) any unreimbursed amounts due to the Certificate Insurer under the
Pooling and Servicing Agreement), (d) any excess of the actual stated principal
balance of each such Mortgage Loan over the Principal Balance thereof, the
aggregate amount of accrued and unpaid interest on such excess through the
related due period and 30 days' interest on such excess at a rate equal to the
related Mortgage Rate with respect to each related Mortgage Loan, and (e) the
amount of any unreimbursed Servicing Advances made by the Servicer with respect
to the related Mortgage Loans. Any such purchase shall be accomplished by
deposit into the related Collection Account of the purchase price specified
above. No such termination is permitted without the prior written consent of the
Certificate Insurer if it would result in a draw on the related Certificate
Insurance Policy. See "Description of the Securities -- Termination" in the
Prospectus.
S-37
<PAGE> 43
FEDERAL INCOME TAX CONSEQUENCES
The following discussion represents the opinion of [Cadwalader, Wickersham
& Taft] [Hunton & Williams], special tax counsel to the Depositor. Assuming
compliance with all provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a REMIC under the
Code.
For federal income tax purposes, each Class of Class A Certificates will
represent ownership of "regular interests" in the REMIC and will generally be
treated as representing ownership of debt instruments issued by the REMIC and
the Class R Certificates will constitute the sole class of "residual interests"
in the REMIC. See "Federal Income Tax Consequences -- REMICs" in the Prospectus.
For federal income tax reporting purposes, the Class A Certificates will
[not] be treated as having been issued with original issue discount. The
prepayment assumption that will be used with respect to the Class A Certificates
in determining the rate of accrual of original issue discount, market discount
and premium, if any, for federal income tax purposes will be based on the
assumption that, subsequent to the date of any determination the Mortgage Loans
will prepay at a rate equal to a % SPA. No representation is made that the
Mortgage Loans will prepay at this rate or at any other rate. See "Federal
Income Tax Consequences -- REMICs -- Taxation of Owners of Regular
Securities -- Original Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers of
the Class A Certificates should be aware that the OID Regulations do not
adequately address certain issues relevant to, or are not applicable to,
securities such as the Class A Certificates. In addition, there is considerable
uncertainty concerning the application of the OID Regulations to REMIC Regular
Certificates that provide for payments based on an adjustable rate. Because of
the uncertainty concerning the application of Section 1272(a)(6) of the Code to
such Certificates and because the rules of the OID Regulations relating to debt
instruments having an adjustable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the Class A Certificates are issued with original issue discount or should be
governed by the rules applicable to debt instruments having contingent payments
or by some other method not yet set forth in regulations. Prospective purchasers
of the Class A Certificates are advised to consult their tax advisors concerning
the tax treatment of such Certificates.
In certain circumstances the OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
Certificate may be able to select a method for recognizing original issue
discount that differs from that used in preparing reports to the
Certificateholders and the IRS.
The Class A Certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of a Class A Certificate
will be treated as holding a certificate with amortizable bond premium will
depend on such Certificateholders' purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of the Class A Certificates should consult their tax
advisors regarding the possibility of making an election to amortize such
premium. See "Certain Federal Income Tax Consequences -- REMICs -- Taxation of
Owners of Regular Securities" and "-- Premium" in the Prospectus.
The Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Class A Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code generally to the extent that such Class A
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. Moreover, the Class A Certificates will be "qualified mortgages"
within the meaning of Section 860G(a)(3) of the Code. See "The Pooling and
Servicing Agreement -- Termination" herein and "Certain Federal Income Tax
Consequences -- REMICs -- Characterization of Investments in REMIC Securities"
in the Prospectus.
S-38
<PAGE> 44
For further information regarding federal income tax consequences of
investing in the Class A Certificates, see "Federal Income Tax
Consequences -- REMICs" in the Prospectus.
LEGAL INVESTMENT
[The Class A Certificates constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 (the
"Enhancement Act") so long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization. As such, the Class A Certificates are legal investments for
certain entities to the extent provided in the Enhancement Act. However,
institutions subject to the jurisdiction of the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, the National
Credit Union Administration or state banking or insurance authorities should
review applicable rules, supervisory policies and guidelines of these agencies
before purchasing any of the Class A Certificates, as certain Classes of Class A
Certificates may be deemed to be unsuitable investments under one or more of
these rules, policies and guidelines and whether certain restrictions may apply
to investments in other Classes of Class A Certificates. It should also be noted
that certain states recently have enacted, or have proposed enacting,
legislation limiting to varying extents the ability of certain entities (in
particular insurance companies) to invest in mortgage related securities.] [The
Class A Certificates will not constitute "mortgage related securities" for
purposes of the Enhancement Act.] Investors should consult with their own legal
advisors in determining whether and to what extent the Class A Certificates
constitute legal investments for such investors. See "Legal Investment" in the
Prospectus.
ERISA CONSIDERATIONS
As described in the Prospectus under "ERISA Considerations", Title I of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
Section 4975 of the Code impose certain duties and restrictions on employee
benefit plans and certain other retirement plans and arrangements subject
thereto (collectively, "Plans") and on persons who have certain specified
relationships to Plans, including fiduciaries and service providers. Comparable
duties and restrictions may exist with respect to any "governmental plan" (as
defined in Section 3(32) of ERISA) subject to a federal, state or local law
("Similar Law") which is, to a material extent, similar to the foregoing
provisions of ERISA or the Code. There are certain exemptions issued by the
United States Department of Labor (the "DOL") that may be applicable to an
investment by a Plan in the Class A Certificates, including the individual
administrative exemption described below and Prohibited Transaction Class
Exemption 83-1 ("PTE 83-1"). For a further discussion of the individual
administrative exemption and PTE 83-1, including the necessary conditions to
their applicability, and other important factors to be considered by a Plan
contemplating investing in the Class A Certificates, see "ERISA Considerations"
in the Prospectus.
[On May 14, 1993, the DOL issued to the NationsBank Corporation an
individual administrative exemption, Prohibited Transaction Exemption 93-31, 59
Fed. Reg. 26820] [On , 199 , the DOL issued to an
individual administrative exemption, prohibited Transaction Exemption -
, Fed. Reg. ] (the "Exemption"), from certain of the prohibited
transaction rules of ERISA with respect to the initial purchase, the holding and
the subsequent resale by a Plan of certificates in pass-through trusts that meet
the conditions and requirements of the Exemption. The Exemption might apply to
the acquisition, holding and resale of the Class A Certificates by a Plan,
provided that specified conditions are met.
Among the conditions which would have to be satisfied for the Exemption to
apply to the acquisition by a Plan of the Class A Certificates is the condition
that the Plan investing in the Class A Certificates be an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act").
Before purchasing a Class A Certificate, a fiduciary of a Plan should make
its own determination as to the availability of the exemptive relief provided in
the Exemption or the availability of any other prohibited
S-39
<PAGE> 45
transaction exemptions (including PTE 83-1), and whether the conditions of any
such exemption will be applicable to the Class A Certificates, and fiduciary of
a governmental plan should make its own determination as to the need for an
availability of any exemptive relief under Similar Law. Any fiduciary of a Plan
or governmental plan considering whether to purchase a Class A Certificate
should also carefully review with its own legal advisors the applicability of
the fiduciary duty and prohibited transaction provisions of ERISA, the Code or
Similar Law to such investment. See "ERISA Considerations" in the Prospectus.
INVESTMENTS BY PLANS ARE SUBJECT TO ERISA'S GENERAL FIDUCIARY REQUIREMENTS.
ACCORDINGLY, BEFORE INVESTING IN A CLASS A CERTIFICATE, A PLAN FIDUCIARY SHOULD
DETERMINE WHETHER SUCH AN INVESTMENT IS PERMITTED IN ACCORDANCE WITH THE
DOCUMENTS GOVERNING THE PLAN AND IS PRUDENT FOR THE PLAN IN VIEW OF ITS OVERALL
INVESTMENT POLICY AND THE COMPOSITION AND DIVERSIFICATION OF ITS PORTFOLIO.
The sale of Class A Certificates to a Plan is in no respect a
representation by the Depositor or Underwriter that this investment meets all
relevant legal requirements with respect to investments by Plans generally or
any particular Plan, or that this investment is appropriate for Plans generally
or any particular Plan.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated , 199 (the "Underwriting Agreement"), among (the
"Underwriter") and the Depositor, the Underwriter has agreed to purchase and the
Depositor has agreed to sell to the Underwriter the Class A Certificates.
The distribution of the Class A Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the
Depositor from the sale of the Class A Certificates, before deducting expenses
payable by the Depositor, will be approximately % of the aggregate initial
Security Balance of the Class A Certificates plus accrued interest on the Class
A Certificates from to (but not including ) . [The Underwriter is
an affiliate of the Depositor.] The Underwriter may effect such transactions by
selling the Class A Certificates to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter. In connection with the sale of the Class A
Certificates, the Underwriter may be deemed to have received compensation from
the Depositor in the form of underwriting compensation. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the Class A
Certificates may be deemed to be underwriters and any profit on the resale of
the Class A Certificates positioned by them may be deemed to be underwriting
discounts and commissions under the Securities Act.
In connection with the offering, the Underwriter may purchase and sell the
Class A Certificates in the open market. These transactions may include
over-allotment and purchases to cover short positions created by the Underwriter
in connection with the offering. Short positions created by the Underwriter
involve the sale by the Underwriter of a greater number of Class A Certificates
than they are required to purchase from the Depositor in the offering. The
Underwriter may also impose a penalty bid, whereby selling concessions allowed
to broker-deals in respect of the securities sold in the offering may be
reclaimed by the Underwriter if such Class A Certificates are repurchased by the
Underwriter in covering transactions. These activities may maintain or otherwise
affect the market price of the Class A Certificates, which may be higher than
the price that might otherwise prevail in the open market; and these activities,
if commenced, may be discontinued at any time. These transactions may be
affected in the over-the-counter markets or otherwise.
[This Prospectus Supplement and Prospectus may be used by NationsBanc
Montgomery Securities LLC, to the extent required, in connection with market
making transactions in the Class A Certificates. NationsBanc Montgomery
Securities LLC may act as principal or agent in such transaction.]
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter, and that under limited circumstances the Underwriter will indemnify
the Depositor, against certain civil liabilities under the Securities Act, or
contribute to payments required to be made in respect thereof.
S-40
<PAGE> 46
SECONDARY MARKET
There will not be any market for the Class A Certificates prior to the
issuance thereof. The Underwriter intends to act as a market maker in the Class
A Certificates, subject to applicable provisions of federal and state securities
laws and other regulatory requirements, but is under no obligation to do so.
There can be no assurance that a secondary market for the Class A Certificates
will develop or, if it does develop, that it will continue. Further, no
application will be made to list the Class A Certificates on any securities
exchange. Accordingly, the liquidity of the Class A Certificates may be limited.
The primary source of information available to investors concerning the Class A
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Securities -- Reports to Securityholders," which will
include information as to the outstanding Security Balances of the Class A
Certificates. There can be no assurance that any additional information
regarding the Class A Certificates will be available through any other source.
In addition, the Depositor is not aware of any source through which price
information about the Class A Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Class A
Certificates may adversely affect the liquidity of the Class A Certificates,
even if a secondary market for the Class A Certificates becomes available.
LEGAL OPINIONS
The validity of the Class A Certificates and certain tax matters with
respect thereto will be passed upon for the Depositor by [Cadwalader, Wickersham
& Taft] [Hunton & Williams]. Certain legal matters will be passed upon for the
Underwriter by [Cadwalader, Wickersham & Taft] [Hunton & Williams].
RATINGS
It is a condition of the issuance of the Class A Certificates that
they be rated " " by and " " by .
The ratings assigned by to mortgage loan asset backed pass-through
certificates address the likelihood of the receipt by Certificateholders of
payments required under the Pooling and Servicing Agreement. 's
ratings take into consideration the credit quality of the mortgage pool,
structural and legal aspects associated with the Certificates, and the extent to
which the payment stream in the mortgage pool is adequate to make payments
required under the Certificates. 's rating on the Certificates does
not, however, constitute a statement regarding frequency of prepayments on the
mortgages. See "Certain Yield and Prepayment Considerations" herein.
The ratings assigned by to mortgage loan asset backed
pass-through certificates also address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. The rating process addresses the structural and legal aspects
associated with the Certificates, including the nature of the underlying
mortgage loans. The ratings assigned to mortgage loan asset backed pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments. The ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield.
The Depositor has not requested a rating on the Class A Certificates by any
rating agency other than and . However, there can be no assurance as
to whether any other rating agency will rate the Class A Certificates, or, if it
does, what rating would be assigned by any such other rating agency. A rating on
the Certificates by another rating agency, if assigned at all, may be lower than
the ratings assigned to the Class A Certificates by and .
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Class A Certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional support or credit enhancement with
respect to the Class A Certificates.
S-41
<PAGE> 47
EXPERTS
The balance sheets of the Certificate Insurer, as of and
and the related statements of income, changes in shareholder's equity
and cash flow for the years ended and , incorporated by reference
in this Prospectus Supplement have been audited by , independent auditors,
as set forth in their report thereon in reliance upon the authority of such firm
as experts in accounting and auditing.
S-42
<PAGE> 48
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<S> <C>
Advances..................................S-6
Asset Seller..............................S-1
Available Funds......................... S-21
Beneficial Owner..........................S-1
Book-Entry Certificates................. S-1
Business Day............................ S-26
Capitalized Interest Account..............S-3
Cede.................................... S-20
Certificate Insurance Policy............Cover
Certificate Insurer.....................Cover
Certificate Insurer's Fiscal Agent...... S-26
Certificateholders...................... ii
Certificates............................Cover
Class...................................Cover
Class A Carry-Forward Amount............ S-24
Class A Certificates....................Cover
Class A Interest Distribution Amount......S-4
Class A Principal Distribution
Amount..................................S-4
Closing Date............................ ii
Code.................................... S-7
Definitive Certificate....................S-1
Delinquent Mortgage Loans.................S-3
Depositor..................................ii
Distribution Date..........................ii
DOL..................................... S-39
DTC........................................ii
Due Date.................................S-12
Due Period.............................. S-22
Enhancement Act...........................S-8
ERISA.....................................S-7
Excess Subordinated Amount.............. S-22
Exemption............................... S-7
Freddie Mac............................. S-12
Future Distribution Amounts............. S-23
holders................................. ii
Initial Mortgage Loan................... S-2
Initial Mortgage Loans.....................ii
Insured Distribution Amount............. S-24
Insured Payment......................... S-6
Interest Accrual Period...................S-4
IRS..................................... S-38
Liquidated Loan Loss.................... S-22
Liquidated Mortgage Loan................ S-22
Mortgage................................ S-2
Mortgage Loans............................iii
Mortgage Note........................... S-2
Mortgage Rate........................... S-3
Mortgaged Property...................... S-2
Net Monthly Excess Cashflow............. S-21
NIV..................................... S-36
Notice.................................. S-26
OID Regulations......................... S-38
Other Originators....................... S-12
Owned and Managed Servicing Portfolio... S-35
Owner................................... S-26
Pass-Through Rate....................... S-4
Plans................................... S-39
Pooling and Servicing Agreement...........S-4
Preference Amount....................... S-27
Pre-Funded Amount..........................ii
Pre-Funding Account..................... ii
Pre-Funding Period........................iii
Premium Amount.......................... S-24
Principal Balance....................... S-25
PTE 83-1................................ S-39
Record Date............................. S-20
Reimbursement Amount.................... S-23
REMIC......................................ii
Required Subordinated Amount............ S-21
Residual Certificates...................Cover
Riegle Act.............................. S-11
Securities Act.......................... S-39
Security Balance........................ S-25
Servicer..................................S-1
Servicer Remittance Date................ S-24
Servicing Fee........................... S-1
Servicing Fee Rate...................... S-37
Similar Law..............................S-39
SPA..................................... S-29
Standard Non-Conforming Program......... S-12
Subordinated Amount..................... S-21
Subordination Deficit................... S-22
Subordination Increase Amount........... S-21
Subordination Reduction Amount.......... S-22
Subsequent Cut-off Date................. S-6
Subsequent Mortgage Loans.................iii
Subsequent Transfer Date................ S-10
Third-Party Servicing Portfolio......... S-35
Trust Fund.................................ii
Trustee....................................ii
Trustee's Fee........................... S-37
Underwriter.............................Cover
Underwriting Agreement.................. S-40
</TABLE>
S-43
<PAGE> 49
======================================================
NO DEALER, SALESMAN 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 COMPANY
OR BY THE UNDERWRITER. 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 OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS 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
Summary.................................... S-1
Risk Factors............................... S-9
Description of the Mortgage Loans.......... S-12
Description of the Certificates............ S-19
Certificate Insurer........................ S-27
Certain Yield and Prepayment
Considerations........................... S-28
The Servicer............................... S-34
Pooling and Servicing Agreement............ S-36
Federal Income Tax Consequences............ S-38
Legal Investment........................... S-39
ERISA Considerations....................... S-39
Method of Distribution..................... S-40
Secondary Market........................... S-41
Legal Opinions............................. S-41
Ratings.................................... S-41
Experts.................................... S-42
Index of Principal Definitions............. S-43
Prospectus
Summary of Prospectus...................... 1
Risk Factors............................... 11
Description of the Trust Funds............. 18
Use of Proceeds............................ 25
Yield Considerations....................... 26
The Depositor.............................. 31
Description of the Securities.............. 31
Description of the Agreements.............. 40
Description of Credit Support.............. 59
Certain Legal Aspects of Mortgage Loans.... 61
Certain Legal Aspects of the Contracts..... 73
Federal Income Tax Consequences............ 77
State and Other Tax Consequences........... 110
ERISA Considerations....................... 110
Legal Investment........................... 113
Methods of Distribution.................... 115
Legal Matters.............................. 116
Financial Information...................... 116
Rating..................................... 116
Index of Principal Definitions............. 117
</TABLE>
======================================================
======================================================
NATIONSBANC ASSET
SECURITIES, INC.
DEPOSITOR
$
ASSET BACKED CERTIFICATES,
SERIES 199 -
$ CLASS A-1 CERTIFICATES
$ CLASS A-2 CERTIFICATES
$ CLASS A-3 CERTIFICATES
$ CLASS A-4 CERTIFICATES
-----------------------------------------
PROSPECTUS SUPPLEMENT
-----------------------------------------
[NATIONSBANC
MONTGOMERY SECURITIES, INC.]
[OTHER UNDERWRITER]
, 199
======================================================
<PAGE> 50
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, AUGUST 31, 1998
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
NATIONSBANC ASSET SECURITIES, INC.
DEPOSITOR
---------------------
The Asset Backed Certificates (the "Certificates") and Asset Backed Notes
(the "Notes" and, together with the Certificates, the "Securities") offered
hereby and by Supplements to this Prospectus (the "Offered Securities") will be
offered from time to time in one or more series. Each series of Certificates
will represent in the aggregate the entire beneficial ownership interest in a
trust fund (with respect to any series, the "Trust Fund") consisting of one or
more segregated pools of various types of single family and/or multifamily
mortgage loans (or certain balances thereof) (collectively, the "Mortgage
Loans"), unsecured home improvement installment sales contracts and installment
loans ("Unsecured Home Improvement Loans"), manufactured housing installment
sale contracts or installment loan agreements ("Contracts") or a combination of
Mortgage Loans, Unsecured Home Improvement Loans and/or Contracts (with respect
to any series, collectively, "Assets"). If so specified in the related
Prospectus Supplement, all or a portion of the Mortgage Loans will consist of
Sub-prime Mortgage Loans as described under "Risk Factors -- Increased Risk of
Delinquencies and Foreclosures on Sub-prime Mortgage Loans." If a series of
Securities includes Notes, such Notes will be issued and secured pursuant to an
indenture and will represent indebtedness of the Trust Fund. If so specified in
the related Prospectus Supplement, the Trust Fund for a series of Securities may
include letters of credit, insurance policies, guarantees, reserve funds or
other types of credit support, or any combination thereof (with respect to any
series, collectively, "Credit Support"), and currency or interest rate exchange
agreements and other financial assets, or any combination thereof (with respect
to any series, collectively, "Cash Flow Agreements"). In addition, as so
specified in the related Prospectus Supplement, the Trust Fund will include
monies on deposit in one or more trust accounts to be established with a
Trustee, which may include a Pre-Funding Account, as described herein, which
would be used to purchase additional Assets for the related Trust Fund during
the period specified in the related Prospectus Supplement. See "Description of
the Trust Funds," "Description of the Securities" and "Description of Credit
Support."
(cover continued on next page)
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OF EACH SERIES WILL NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
THE DEPOSITOR, NATIONSBANC MONTGOMERY SECURITIES LLC, ANY MASTER SERVICER, ANY
SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT TO THE
LIMITED EXTENT DESCRIBED HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT.
NEITHER THE SECURITIES NOR ANY ASSETS IN THE RELATED TRUST FUND WILL BE
GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY ANY
OTHER PERSON, UNLESS AND TO THE EXTENT PROVIDED IN THE RELATED PROSPECTUS
SUPPLEMENT.
PROSPECTIVE INVESTORS SHOULD REVIEW THE MATERIAL RISKS APPEARING UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE 11 HEREIN AND SUCH INFORMATION AS MAY
BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT BEFORE PURCHASING ANY OFFERED SECURITY.
---------------------
Prior to issuance there will have been no market for the Securities of any
series and there can be no assurance that a secondary market for any Offered
Securities will develop or that, if it does develop, it will continue. It is not
expected that any application will be made to list the Securities of a series on
any securities exchange. Accordingly the liquidity of the Securities may be
limited. This Prospectus may not be used to consummate sales of the Offered
Securities of any series unless accompanied by the Prospectus Supplement for
such series.
Offers of the Offered Securities may be made through one or more different
methods, including offerings through underwriters, including NationsBanc
Montgomery Securities LLC, an affiliate of the Depositor, as more fully
described under "Methods of Distribution" herein and in the related Prospectus
Supplement.
---------------------
The date of this Prospectus is , 1997.
<PAGE> 51
(cover continued from previous page)
Each series of Securities will consist of one or more classes of Securities
that may (i) provide for the accrual of interest thereon based on fixed,
variable or adjustable rates; (ii) be senior or subordinate to one or more other
classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions; (iv) be entitled to interest
distributions, with disproportionately low, nominal or no principal
distributions; (v) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of Securities of such series; (vi)
provide for distributions of principal as described in the related Prospectus
Supplement; and/or (vii) provide for distributions based on a combination of two
or more components thereof with one or more of the characteristics described in
this paragraph, to the extent of available funds, in each case as described in
the related Prospectus Supplement. Any such classes may include classes of
Offered Securities. See "Description of the Securities."
Principal and interest with respect to Securities will be distributable
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the Securities
of any series will be made only from the assets of the related Trust Fund.
The yield on each class of Securities of a series will be affected by,
among other things, the rate of payment of principal (including prepayments,
repurchase and defaults) on the Assets in the related Trust Fund and the timing
of receipt of such payments as described under the caption "Yield
Considerations" herein and in the related Prospectus Supplement. A Trust Fund
may be subject to early termination or one or more classes of Securities of a
series may be subject to purchase or redemption under the circumstances
described herein and in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof as a
"real estate mortgage investment conduit" or as a "financial asset
securitization investment trust" for federal income tax purposes. See also
"Federal Income Tax Consequences" herein.
---------------------
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Offered Securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to the Offered Securities of each series will, among other things, set forth
with respect to such Securities, as appropriate: (i) a description of the class
or classes of Securities, the payment provisions with respect to each such class
and the Pass-Through Rate or interest rate or method of determining the
Pass-Through Rate or interest rate with respect to each such class; (ii) the
aggregate principal amount and distribution dates relating to such series and,
if applicable, the initial and final scheduled distribution dates for each
class; (iii) information as to the assets comprising the Trust Fund, including
the general characteristics of the assets included therein, including the Assets
and any Credit Support and Cash Flow Agreements (with respect to the Securities
of any series, the "Trust Assets"); (iv) the circumstances, if any, under which
the Trust Fund may be subject to early termination; (v) additional information
with respect to the method of distribution of such Securities; (vi) whether one
or more elections to treat the Trust Fund or portion thereof as a real estate
mortgage investment conduit ("REMIC") or a financial asset securitization
investment trust ("FASIT") will be made and designation of the regular interests
and residual interests; (vii) the aggregate original percentage ownership
interest in the Trust Fund to be evidenced by each class of Securities; (viii)
information as to any Master Servicer, any Servicer and the Trustee, as
applicable; (ix) information as to the nature and extent of subordination with
respect to any class of Securities that is subordinate in right of payment to
any other class; and (x) whether such Securities will be initially issued in
definitive or book-entry form.
(ii)
<PAGE> 52
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Offered
Securities. This Prospectus and the Prospectus Supplement relating to each
series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the rules and regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661; and New York Regional Office, Seven World Trade Center,
13th Floor, New York, New York 10048. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Depositor, that file
electronically with the Commission.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Offered Securities
or an offer of the Offered Securities to any person in any state or other
jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus and any Prospectus Supplement hereto at any time does not imply that
information herein is correct as of any time subsequent to its date.
The Servicer, the Master Servicer or the Trustee will be required to mail
to registered holders of Securities (the "Securityholders") of each series
periodic unaudited reports concerning the related Trust Fund. If the Prospectus
Supplement for a series of Securities provides that one or more Classes of
Securities are to be issued in book-entry form, then unless and until definitive
Securities are issued, such reports with respect to book-entry Securities will
be sent on behalf of the related Trust Fund to Cede & Co. ("Cede"), as nominee
of The Depository Trust Company ("DTC") and registered holder of such
Securities, pursuant to the applicable Agreement or to such other entity set
forth in the related Prospectus Supplement. Such reports may be available to
beneficial owners of the Securities (the "Security Owners") upon request to
their respective DTC participants and indirect participants. See "Description of
the Securities -- Reports to Securityholders" and "Description of the
Agreements -- Certain Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements -- Evidence as to Compliance." The Depositor
will file or cause to be filed with the Commission such periodic reports with
respect to each Trust Fund as are required under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations of the
Commission thereunder, as interpreted by the staff of the Commission thereunder.
The Depositor does not intend to file periodic reports under the Exchange Act
following the expiration of the reporting period prescribed by Rule 15d-1 of
Regulation 15D under the Exchange Act.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
All documents subsequently filed by or on behalf of the Depositor with
respect to each Trust Fund referred to in the accompanying Prospectus Supplement
with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act, after the date of this Prospectus and prior to the termination of
any offering of the Securities issued by such Trust Fund shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date of the filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for all purposes of this Prospectus to the
extent that a statement contained herein (or in the accompanying Prospectus
Supplement) or in any other subsequently filed document which also is or is
deemed to be incorporated by reference modifies or replaces such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
(iii)
<PAGE> 53
Upon request, the Depositor will provide or cause to be provided without
charge to each person to whom this Prospectus is delivered in connection with
the offering of one or more classes of Offered Securities, a copy of any or all
documents or reports incorporated herein by reference, in each case to the
extent such documents or reports relate to one or more of such classes of such
Offered Securities, other than the exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such documents). Requests
to the Depositor should be directed in writing to NationsBanc Asset Securities,
Inc., NationsBank Corporate Center, Charlotte, North Carolina 28255, Attention:
Secretary, or by telephone at (704) 386-2400. The Depositor has determined that
its financial statements are not material to the offering of any Offered
Securities.
(iv)
<PAGE> 54
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT....................................... ii
AVAILABLE INFORMATION....................................... iii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE........... iii
TABLE OF CONTENTS........................................... v
SUMMARY OF PROSPECTUS....................................... 1
Title of Securities....................................... 1
Depositor................................................. 1
Issuer.................................................... 1
Servicers................................................. 1
Master Servicer........................................... 1
Trustee; Indenture Trustee................................ 1
The Trust Assets.......................................... 2
Special Payment Provisions............................. 2
Mortgage Loans......................................... 2
Unsecured Home Improvement Loans....................... 3
Contracts.............................................. 3
Collection Accounts.................................... 4
Credit Support......................................... 4
Cash Flow Agreements................................... 4
Pre-Funding Account.................................... 5
Description of Securities................................. 5
Distributions on Securities............................... 6
Interest............................................... 6
Principal.............................................. 7
Advances.................................................. 7
Termination............................................... 7
Registration of Securities................................ 8
Tax Status of the Securities.............................. 8
Legal Investment.......................................... 9
ERISA Considerations...................................... 9
Rating.................................................... 10
Material Risks............................................ 10
RISK FACTORS................................................ 11
Limited Liquidity for Securities.......................... 11
Limited Assets for Payment of Securities.................. 11
Rate of Prepayments on Assets and Priority of Payment of
Securities May Adversely Affect Average Lives and
Yields of Securities................................... 12
Limited Nature of Ratings................................. 12
Location of Mortgaged Properties and Other Factors Which
May Increase the Risk of Losses on Mortgage Loans...... 13
Risks of Loss on Balloon Payment Asset if Obligor is
Unable to Refinance or Sell Related Property........... 13
Increased Risk of Losses on Foreclosure of Junior Mortgage
Loans.................................................. 14
Increased Risk of Delinquencies and Foreclosures on
Sub-prime Mortgage Loans............................... 14
Increased Risk of Loss if Assets are Delinquent........... 14
Effects of Failure to Comply with Consumer Protection
Laws; Other Legal Considerations....................... 15
Location and Other Factors Which May Increase the Risk of
Losses on Contracts and Manufactured Homes............. 15
</TABLE>
(v)
<PAGE> 55
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Grant of Security Interest in Contracts; Risks of
Defective Security Interest and Effects of Certain
Other Legal Aspects of the Contracts................... 16
Risk of Bankruptcy Losses Associated with Unsecured Home
Improvement Loans...................................... 16
Credit Support Limitations................................ 16
Lowering of Rating on Securities.......................... 17
Increased Risk of Loss as a Result of Subordination of the
Subordinate Securities; Effect of Losses on the
Assets................................................. 17
Special Federal Tax Considerations Regarding Residual
Securities and FASIT Securities........................ 18
Owners of Book-Entry Securities Not Entitled to Exercise
Rights of Holders of Securities........................ 18
DESCRIPTION OF THE TRUST FUNDS.............................. 18
Assets.................................................... 18
Mortgage Loans............................................ 19
General................................................ 19
Loan-to-Value Ratio.................................... 20
Mortgage Loan Information in Prospectus Supplements.... 20
Payment Provisions of the Mortgage Loans............... 21
Revolving Credit Line Loans............................ 21
Unsecured Home Improvement Loans.......................... 22
Unsecured Home Improvement Loan Information in
Prospectus Supplements................................ 22
Contracts................................................. 22
General................................................ 22
Contract Information in Prospectus Supplements......... 23
Payment Provisions of the Contracts.................... 23
Pre-Funding Account....................................... 23
Accounts.................................................. 24
Credit Support............................................ 24
Cash Flow Agreements...................................... 24
USE OF PROCEEDS............................................. 25
YIELD CONSIDERATIONS........................................ 26
General................................................... 26
Pass-Through Rate and Interest Rate....................... 26
Timing of Payment of Interest............................. 26
Payments of Principal; Prepayments........................ 26
Prepayments -- Maturity and Weighted Average Life......... 27
Other Factors Affecting Weighted Average Life............. 28
Type of Asset.......................................... 28
Termination............................................ 30
Defaults............................................... 30
Foreclosures........................................... 30
Refinancing............................................ 30
Due-on-Sale Clauses.................................... 30
THE DEPOSITOR............................................... 31
DESCRIPTION OF THE SECURITIES............................... 31
General................................................... 31
Distributions............................................. 32
Available Distribution Amount............................. 32
Distributions of Interest on the Securities............... 33
Distributions of Principal of the Securities.............. 34
Components................................................ 34
Distributions on the Securities of Prepayment Premiums.... 34
Allocation of Losses and Shortfalls....................... 34
</TABLE>
(vi)
<PAGE> 56
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Advances in Respect of Delinquencies...................... 35
Reports to Securityholders................................ 36
Termination............................................... 37
Optional Purchases........................................ 38
Book-Entry Registration and Definitive Securities......... 38
DESCRIPTION OF THE AGREEMENTS............................... 40
Agreements Applicable to a Series......................... 40
REMIC Securities, FASIT Securities, Grantor Trust
Securities............................................ 40
Securities That Are Partnership Interests for Tax
Purposes and Notes.................................... 40
Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements........................ 40
General................................................ 40
Assignment of Assets; Repurchases...................... 41
Representations and Warranties; Repurchases............ 42
Collection Account and Related Accounts................ 43
General.............................................. 43
Deposits............................................. 44
Withdrawals.......................................... 45
Other Collection Accounts............................ 46
Collection and Other Servicing Procedures............ 46
Realization Upon Defaulted Assets...................... 47
Hazard Insurance Policies.............................. 48
Mortgage Loans....................................... 48
Contracts.............................................. 50
Fidelity Bonds and Errors and Omissions Insurance...... 50
Due-on-Sale Provisions................................. 50
Retained Interest; Servicing Compensation and Payment
of Expenses........................................... 51
Evidence as to Compliance.............................. 51
Certain Matters Regarding Servicers, the Master
Servicer and the Depositor............................ 52
Special Servicers...................................... 52
Events of Default under the Agreement.................. 53
Rights Upon Event of Default under the Agreements...... 53
Amendment.............................................. 54
The Trustee............................................ 54
Duties of the Trustee.................................. 54
Certain Matters Regarding the Trustee.................. 55
Resignation and Removal of the Trustee................. 55
Material Terms of the Indenture........................... 55
General................................................ 55
Events of Default...................................... 56
Discharge Indenture.................................... 57
Indenture Trustee's Annual Report...................... 57
The Indenture Trustee.................................. 57
DESCRIPTION OF CREDIT SUPPORT............................... 59
General................................................... 59
Subordinate Securities.................................... 59
Cross-Support Provisions.................................. 59
Limited Guarantee......................................... 60
Financial Guaranty Insurance Policy or Surety Bond........ 60
Letter of Credit.......................................... 60
Pool Insurance Policies................................... 60
Special Hazard Insurance Policies......................... 60
</TABLE>
(vii)
<PAGE> 57
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Mortgagor Bankruptcy Bond................................. 60
Reserve Funds............................................. 60
Overcollateralization..................................... 61
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS..................... 61
General................................................... 61
Types of Mortgage Instruments............................. 62
Interest in Real Property................................. 62
Cooperative Loans......................................... 62
Land Sale Contracts....................................... 63
Foreclosure............................................... 64
General................................................ 64
Judicial Foreclosure................................... 64
Equitable Limitations on Enforceability of Certain
Provisions............................................ 65
Non-Judicial Foreclosure/Power of Sale................. 65
Public Sale............................................ 66
Rights of Redemption................................... 66
Cooperative Loans...................................... 67
Junior Mortgages.......................................... 68
Anti-Deficiency Legislation and Other Limitations on
Lenders................................................ 69
Environmental Considerations.............................. 71
Due-on-Sale Clauses....................................... 71
Prepayment Charges........................................ 71
Subordinate Financing..................................... 72
Applicability of Usury Laws............................... 72
Alternative Mortgage Instruments.......................... 73
Soldiers' and Sailors' Civil Relief Act of 1940........... 73
Forfeitures in Drug and RICO Proceedings.................. 73
CERTAIN LEGAL ASPECTS OF THE CONTRACTS...................... 73
General................................................... 73
Security Interests in the Manufactured Homes.............. 74
Enforcement of Security Interests in Manufactured Homes... 75
Soldiers' and Sailors' Civil Relief Act of 1940........... 76
Consumer Protection Laws.................................. 76
Transfers of Manufactured Homes; Enforceability of
"Due-on-Sale" Clauses.................................. 76
Applicability of Usury Laws............................... 76
FEDERAL INCOME TAX CONSEQUENCES............................. 77
General................................................... 77
Taxable Mortgage Pools................................. 78
REMICS.................................................... 78
Classification of REMICS............................... 78
Characterization of Investments in REMIC Securities.... 80
Tiered REMIC Structures................................ 80
Taxation of Owners of Regular Securities............... 81
General.............................................. 81
Original Issue Discount.............................. 81
Acquisition Premium.................................. 83
Variable Rate Regular Securities..................... 83
Market Discount...................................... 84
Amortizable Premium.................................. 85
Election to Treat All Interest Under the Constant Yield
Method................................................. 86
Treatment of Losses.................................... 86
</TABLE>
(viii)
<PAGE> 58
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Sale or Exchange of Regular Securities................. 87
Taxation of Owners of Residual Securities................. 88
Taxation of REMIC Income............................... 88
Basis and Losses....................................... 89
Treatment of Certain Items of REMIC Income and
Expense............................................... 89
Original Issue Discount and Premium.................. 89
Market Discount...................................... 90
Premium.............................................. 90
Limitations on Offset or Exemption of REMIC Income..... 90
Tax-Related Restrictions on Transfer of Residual
Securities............................................ 91
Disqualified Organizations........................... 91
Noneconomic Residual Interests....................... 92
Foreign Investors.................................... 93
Sale or Exchange of a Residual Security................ 93
Mark to Market Regulations............................. 94
Taxes That May Be Imposed on the REMIC Pool............... 94
Prohibited Transactions................................ 94
Contributions to the REMIC Pool After the Startup
Day................................................... 94
Net Income from Foreclosure Property................... 94
Liquidation of the REMIC Pool.......................... 95
Administrative Matters................................. 95
Limitations on Deduction of Certain Expenses........... 95
Taxation of Certain Foreign Investors..................... 96
Regular Securities..................................... 96
Residual Securities.................................... 96
Backup Withholding..................................... 97
Reporting Requirements................................. 97
Grantor Trust Funds....................................... 98
Classification of Grantor Trust Funds.................. 98
Standard Securities....................................... 98
General................................................ 98
Tax Status............................................. 99
Premium and Discount................................... 99
Premium.............................................. 99
Original Issue Discount.............................. 99
Market Discount...................................... 100
Recharacterization of Servicing Fees................... 100
Sale or Exchange of Standard Securities................ 100
Stripped Securities....................................... 101
General................................................ 101
Status of Stripped Securities.......................... 102
Taxation of Stripped Securities........................ 102
Original Issue Discount.............................. 102
Sale or Exchange of Stripped Securities.............. 103
Purchase of More Than One Class of Stripped
Securities.......................................... 103
Possible Alternative Characterization................ 103
Reporting Requirements and Backup Withholding.......... 104
Taxation of Certain Foreign Investors.................. 104
Partnership Trust Funds................................... 104
Classification of Partnership Trust Funds.............. 104
Characterization of Investments in Partnership
Securities and Debt Securities........................ 105
</TABLE>
(ix)
<PAGE> 59
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Taxation of Debt Securityholders.......................... 105
Treatment of the Debt Securities as Indebtedness....... 105
Taxation of Owners of Partnership Securities.............. 105
Treatment of the Partnership Trust Fund as a
Partnership........................................... 105
Partnership Taxation................................... 106
Discount and Premium................................... 107
Section 708 Termination................................ 107
Disposition of Securities.............................. 107
Allocations Between Transferors and Transferees........ 108
Section 731 Distributions.............................. 108
Section 754 Election................................... 108
Administrative Matters................................. 108
Tax Consequences to Foreign Securityholders............ 109
Backup Withholding..................................... 109
STATE AND OTHER TAX CONSEQUENCES............................ 110
ERISA CONSIDERATIONS........................................ 110
LEGAL INVESTMENT............................................ 112
METHODS OF DISTRIBUTION..................................... 115
LEGAL MATTERS............................................... 116
FINANCIAL INFORMATION....................................... 116
RATING...................................................... 116
INDEX OF PRINCIPAL DEFINITIONS.............................. 117
</TABLE>
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<PAGE> 60
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the more
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. An Index of Principal Definitions is included at the
end of this Prospectus beginning on page [ ].
Title of Securities........ Asset Backed Certificates (the "Certificates") and
Asset Backed Notes (the "Notes" and, together
with the Certificates, the "Securities"),
issuable in series.
Depositor.................. NationsBanc Asset Securities, Inc. (the
"Depositor"), a wholly-owned indirect subsidiary
of NationsBank Corporation. The Depositor is an
affiliate of NationsBanc Montgomery Securities
LLC Neither NationsBank Corporation nor any of
its affiliates, including the Depositor and
NationsBanc Montgomery Securities LLC, will
insure or guarantee the Securities or the Assets
or be otherwise obligated in respect thereof.
Issuer..................... With respect to each series of Securities, the
Trust Fund to be formed pursuant to either a
deposit trust agreement or a pooling and
servicing agreement.
Servicers.................. To the extent specified in the related Prospectus
Supplement, one or more entities identified
therein (each, a "Servicer") that will service
the Assets contained in each Trust Fund. In the
event there is only one Servicer performing the
servicing functions with respect to the Assets in
a Trust Fund, such Assets will be serviced
pursuant to a related pooling and servicing
agreement (each, a "Pooling and Servicing
Agreement"). In the event there are multiple
Servicers, or in the event the Securities consist
of Notes, each Servicer will perform such
servicing functions pursuant to a related
servicing agreement (each, an "Underlying
Servicing Agreement"). A Servicer may be an
affiliate of the Depositor. See "Description of
the Agreements."
Master Servicer............ In the event that there is more than one Servicer
for the Assets of the Trust Fund relating to a
series of Certificates, a master servicer (the
"Master Servicer") will perform certain
administration, calculation and reporting
functions with respect to the Trust Fund and will
supervise the Servicers pursuant to a Pooling and
Servicing Agreement. In addition, to the extent
described in the related Prospectus Supplement,
if advances are required to be made with respect
to delinquent scheduled payments on the Assets in
the Trust Fund the Master Servicer may be
required to make such advances to the extent the
related Servicer fails to do so. The Master
Servicer may be an affiliate of the Depositor.
See "Description of the Agreements" and
"Description of the Securities -- Advances in
Respect of Delinquencies."
Trustee; Indenture
Trustee.................... The trustee (the "Trustee") or indenture trustee
(the "Indenture Trustee") for each series of
Securities will be named in the related
Prospectus Supplement. See "Description of the
Agreements -- Certain Terms of the Pooling and
Servicing Agreements, Trust Agreements and
Underlying Servicing Agreements -- The Trustee"
and "Certain Terms of the Indenture -- The
Indenture Trustee."
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The Trust Assets........... Each series of Certificates will represent in the
aggregate the entire beneficial ownership
interest in a Trust Fund. If a series of
Securities includes Notes, such Notes will
represent indebtedness of the Trust Fund and will
be secured by a security interest in the Assets
of the Trust Fund. A Trust Fund will consist
primarily of any of the following assets: the
Mortgage Loans, Unsecured Home Improvement Loans
and Contracts (referred to collectively or
individually as "Assets").
(a) Special Payment
Provisions............... The Assets included in a Trust Fund may be subject
to various types of payment provisions as
specified in the related Prospectus Supplement,
and may include Level Payment Assets, Adjustable
Rate Assets, Buydown Assets, GPM Assets, Step-up
Rate Assets, Interest Reduction Assets, GEM
Assets, Balloon Payment Assets, Convertible
Assets, Bi-Weekly Assets or Increasing Payment
Assets. See "Description of the Trust
Funds -- Assets."
(b) Mortgage Loans......... The Mortgage Loans with respect to a series of
Securities will consist of a pool of single
family and/or multifamily loans (or certain
balances thereof) (collectively, the "Mortgage
Loans"). The Mortgage Loans will not be
guaranteed or insured by the Depositor or any of
its affiliates. The Mortgage Loans will be
guaranteed or insured by a governmental agency or
instrumentality or other person only if and to
the extent expressly provided in the related
Prospectus Supplement. The Mortgage Loans will be
secured by first and/or junior liens on (i) one-
to four-family residential real properties or
security interests in shares issued by
cooperative housing corporations ("Single Family
Properties") and/or (ii) primarily residential
properties consisting of five or more residential
dwelling units and which may include limited
retail, office or other commercial space
("Multifamily Properties") (Single Family
Properties and Multifamily Properties are
sometimes referred to herein collectively as
"Mortgaged Properties"). The Mortgaged Properties
may be located in any one of the fifty states,
the District of Columbia, Guam, Puerto Rico or
any other territory of the United States. The
Mortgage Loans may include (i) closed-end and/or
revolving home equity loans or certain balances
thereof ("Home Equity Loans") and/or (ii) secured
home improvement installment sales contracts and
secured installment loan agreements ("Home
Improvement Contracts"). In addition, the
Mortgage Loans may include certain Mortgage Loans
evidenced by contracts ("Land Sale Contracts")
for the sale of properties pursuant to which the
mortgagor promises to pay the amount due thereon
to the holder thereof with fee title to the
related property held by such holder until the
mortgagor has made all of the payments required
pursuant to such Land Sale Contract, at which
time fee title is conveyed to the mortgagor. All
Mortgage Loans will have been originated by
persons other than the Depositor, and all
Mortgage Loans will have been purchased, either
directly or indirectly, by the Depositor on or
before the date of initial issuance of the
related series of Securities or, if the related
Trust Fund includes a Pre-Funding Account, as
described herein, within the period specified in
the related Prospectus Supplement following such
date. The related Prospectus Supplement will
indicate if any such persons are affiliates of
the Depositor. To the extent specified in the
related Prospectus Supplement, all or a portion
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<PAGE> 62
of the Mortgage Loans will be Sub-prime Mortgage
Loans, as described under "Risk
Factors -- Increased Risk of Delinquencies and
Foreclosures on Sub-prime Mortgage Loans."
Each Mortgage Loan may provide for accrual of
interest thereon at an interest rate (a "Mortgage
Rate") that is fixed over its term or that
adjusts from time to time, or that may be
converted from an adjustable to a fixed Mortgage
Rate, or from a fixed to an adjustable Mortgage
Rate, from time to time at the mortgagor's
election, in each case as described in the
related Prospectus Supplement. Adjustable
Mortgage Rates on the Mortgage Loans in a Trust
Fund may be based on one or more indices. Each
Mortgage Loan may provide for scheduled payments
to maturity, payments that adjust from time to
time to accommodate changes in the Mortgage Rate
or to reflect the occurrence of certain events,
and may provide for negative amortization or
accelerated amortization, in each case as
described in the related Prospectus Supplement.
Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated
maturity date, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan
may contain prohibitions on prepayment or require
payment of a premium or a yield maintenance
penalty in connection with a prepayment, in each
case as described in the related Prospectus
Supplement. The Mortgage Loans may provide for
payments of principal, interest or both, on due
dates that occur monthly, quarterly,
semi-annually or at such other interval as is
specified in the related Prospectus Supplement.
See "Description of the Trust Funds -- Assets."
(c) Unsecured Home
Improvement Loans...... The Assets with respect to a series of Securities
may consist of or include home improvement
installment sales contracts or installment loans
that are unsecured ("Unsecured Home Improvement
Loans"). The Unsecured Home Improvement Loans
will not be insured or guaranteed by the
Depositor or any of its affiliates. The Unsecured
Home Improvement Loans will be insured or
guaranteed by a governmental agency or
instrumentality or other person only if and to
the extent expressly provided in the related
Prospectus Supplement. The Unsecured Home
Improvement Loans may have any of the features
described under "(a) Mortgage Loans" above,
except that they will not be secured by a lien on
or other security interest in any property.
(d) Contracts.............. The Contracts with respect to a series of
Securities will consist of manufactured housing
installment sale contracts and installment loan
agreements secured by a security interest in a
new or used manufactured home (each, a
"Manufactured Home"), and, to the extent, if any,
indicated in the related Prospectus Supplement,
by real property. The Contracts will not be
insured or guaranteed by the Depositor or any of
its affiliates. The Contracts will be insured or
guaranteed by a governmental agency or
instrumentality or other person only if and to
the extent expressly provided in the related
Prospectus Supplement. All Contracts will have
been originated by persons other than the
Depositor, and all Contracts will have been
purchased, either directly or indirectly, by the
Depositor on or before the date of initial
issuance of the related series of Securities or,
if the related Trust Fund includes a Pre-Funding
Account, as described herein, within the period
speci-
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<PAGE> 63
fied in the related Prospectus Supplement
following such date. The related Prospectus
Supplement will indicate if any such persons are
affiliates of the Depositor. Each Contract may
provide for an annual percentage rate thereon (a
"Contract Rate") that is fixed over its term or
that adjusts as described in the related
Prospectus Supplement. The manner of determining
scheduled payments due on the Contract will be
described in the Prospectus Supplement. The
Prospectus Supplement will describe the minimum
principal balance of the Contracts at origination
and the maximum original term to maturity of the
Contracts.
(e) Collection Accounts.... Each Trust Fund will include one or more accounts
established and maintained on behalf of the
Securityholders into which the person or persons
designated in the related Prospectus Supplement
will, to the extent described herein and in such
Prospectus Supplement, deposit all payments and
collections received or advanced with respect to
the Assets and other assets in the Trust Fund.
Such an account may be maintained as an interest
bearing or a non-interest bearing account, and
funds held therein may be held as cash or
invested in certain short-term, investment grade
obligations, in each case as described in the
related Prospectus Supplement. See "Description
of the Agreements -- Certain Terms of the Pooling
and Servicing Agreements and Underlying Servicing
Agreements -- Collection Account and Related
Accounts."
(f) Credit Support......... If so provided in the related Prospectus
Supplement, partial or full protection against
certain defaults and losses on the Assets in the
related Trust Fund may be provided to one or more
classes of Securities of the related series in
the form of subordination of one or more other
classes of Securities of such series, which other
classes may include one or more classes of
Offered Securities, or by one or more other types
of credit support, such as a letter of credit,
insurance policy, guarantee, reserve fund or
another type of credit support, or a combination
thereof (any such coverage with respect to the
Securities of any series, "Credit Support"). The
amount and types of coverage, the identification
of the entity providing the coverage (if
applicable) and related information with respect
to each type of Credit Support, if any, will be
described in the Prospectus Supplement for a
series of Securities. See "Risk Factors -- Credit
Support Limitations" and "Description of Credit
Support."
(g) Cash Flow Agreements... If so provided in the related Prospectus
Supplement, the Trust Fund may include guaranteed
investment contracts pursuant to which moneys
held in the funds and accounts established for
the related series will be invested at a
specified rate. The Trust Fund may also include
certain other agreements, such as interest rate
exchange agreements, interest rate cap or floor
agreements, currency exchange agreements or
similar agreements provided to reduce the effects
of interest rate or currency exchange rate
fluctuations on the Assets or on one or more
classes of Securities. Currency exchange
agreements might be included in the Trust Fund if
some or all of the Assets (such as Mortgage Loans
secured by Mortgaged Properties located outside
the United States) were denominated in a
non-United States currency. The principal terms
of any such guaranteed investment contract or
other agreement
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<PAGE> 64
(any such agreement, a "Cash Flow Agreement"),
including, without limitation, provisions
relating to the timing, manner and amount of
payments thereunder and provisions relating to
the termination thereof, will be described in the
Prospectus Supplement for the related series. In
addition, the related Prospectus Supplement will
provide certain information with respect to the
obligor under any such Cash Flow Agreement. See
"Description of the Trust Funds -- Cash Flow
Agreements."
(h) Pre-Funding Account.... To the extent provided in the related Prospectus
Supplement, a portion of the proceeds of the
issuance of Securities may be deposited into an
account maintained with the Trustee (a
"Pre-Funding Account"). In such event, the
Depositor will be obligated (subject only to the
availability thereof) to sell at a predetermined
price, and the Trust Fund for the related series
of Securities will be obligated to purchase
(subject to the satisfaction of certain
conditions described in the applicable
Agreement), additional Assets (the "Subsequent
Assets") from time to time (as frequently as
daily) within the period (generally not to exceed
three months) specified in the Prospectus
Supplement (the "Pre-Funding Period") after the
issuance of such series of Securities having an
aggregate principal balance approximately equal
to the amount on deposit in the Pre-Funding
Account (the "Pre-Funded Amount") for such series
on date of such issuance. The Pre-Funded Amount
with respect to a series is not expected to
exceed 25% of the aggregate initial Security
Balance of the related Securities. Any portion of
the Pre-Funded Amount remaining in the
Pre-Funding Account at the end of the Pre-Funding
Period will be used to prepay one or more classes
of Securities in the amounts and in the manner
specified in the related Prospectus Supplement.
In addition, if specified in the related
Prospectus Supplement, the Depositor may be
required to deposit cash into an account
maintained by the Trustee (the "Capitalized
Interest Account") for the purpose of assuring
the availability of funds to pay interest with
respect to the Securities during the Pre-Funding
Period. Any amount remaining in the Capitalized
Interest Account at the end of the Pre-Funding
Period will be remitted as specified in the
related Prospectus Supplement. See "Description
of the Trust Funds -- Pre-Funding Account".
Description of
Securities................. Each series of Certificates will evidence an
interest in the related Trust Fund and will be
issued pursuant to a Pooling and Servicing
Agreement. If a series of Securities includes
Notes, such Notes will represent indebtedness of
the related Trust Fund (which will be formed
pursuant to a deposit trust agreement (each, a
"Deposit Trust Agreement") between the Depositor
and an owner trustee specified in the related
Prospectus Supplement) and will be secured by a
security interest in the Assets of the Trust Fund
(or a specified group thereof) pursuant to an
indenture (each, an "Indenture"). Some or all of
the Assets in a Trust Fund may be serviced
pursuant to one or more Underlying Servicing
Agreements. The Pooling and Servicing Agreements
and Underlying Servicing Agreements are referred
to herein as the "Agreements."
Each series of Securities will include one or more
classes. Each class of Securities (other than
certain Strip Securities, as defined below) will
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<PAGE> 65
have a stated principal amount (a "Security
Balance") and except for certain Strip
Securities, as defined below, will accrue
interest thereon based on a fixed, variable or
adjustable interest rate (in the case of
Certificates, a "Pass-Through Rate"). The related
Prospectus Supplement will specify the Security
Balance, if any, and the Pass-Through Rate or
interest rate for each class of Securities or, in
the case of a variable or adjustable Pass-Through
Rate or interest rate, the method for determining
the Pass-Through Rate or interest rate.
Distributions on
Securities................. Each series of Securities will consist of one or
more classes of Securities that may (i) provide
for the accrual of interest thereon based on
fixed, variable or adjustable rates; (ii) be
senior (collectively, "Senior Securities") or
subordinate (collectively, "Subordinate
Securities") to one or more other classes of
Securities in respect of certain distributions on
the Securities; (iii) be entitled either to (A)
principal distributions, with disproportionately
low, nominal or no interest distributions or (B)
interest distributions, with disproportionately
low, nominal or no principal distributions
(collectively, "Strip Securities"); (iv) provide
for distributions of accrued interest thereon
commencing only following the occurrence of
certain events, such as the retirement of one or
more other classes of Securities of such series
(collectively, "Accrual Securities"); (v) provide
for distributions of principal as described in
the related Prospectus Supplement; and/or (vi)
provide for distributions based on a combination
of two or more components thereof with one or
more of the characteristics described in this
paragraph, including one or more Strip Security
or Accrual Security components, to the extent of
available funds, in each case as described in the
related Prospectus Supplement. If so specified in
the related Prospectus Supplement, distributions
on one or more classes of a series of Securities
may be limited to collections from a designated
portion of the Assets in the related Trust Fund
(each such portion of Assets, an "Asset Group").
See "Description of the Securities -- General."
Any such classes may include classes of Offered
Securities. With respect to Securities with two
or more components, references herein to Security
Balance, notional amount and Pass-Through Rate or
interest rate refer to the principal balance, if
any, notional amount, if any, and the
Pass-Through Rate or interest rate, if any, for
any such component.
The Securities will not be guaranteed or insured by
the Depositor or any of its affiliates, by any
governmental agency or instrumentality or by any
other person, unless and to the extent provided
in the related Prospectus Supplement. See "Risk
Factors -- Limited Assets for Payment of
Securities" and "Description of the Securities."
(a) Interest............... Interest on each class of Offered Securities (other
than certain classes of Strip Securities) of each
series will accrue at the applicable Pass-
Through Rate or interest rate on the outstanding
Security Balance thereof and will be distributed
to Securityholders as provided in the related
Prospectus Supplement. The specified date on
which distributions are to be made is a
"Distribution Date." Distributions with respect
to interest on certain classes of Strip
Securities may be made on each Distribution Date
on the basis of a notional amount as described in
the related Prospectus Supplement. Distributions
of
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<PAGE> 66
interest with respect to one or more classes of
Securities may be reduced to the extent of
certain delinquencies, losses, prepayment
interest shortfalls, and other contingencies
described herein and in the related Prospectus
Supplement. See "Risk Factors -- Rate of
Prepayments on Assets and Priority of Payment of
Securities May Adversely Affect Average Lives and
Yields of Securities," "Yield Considerations" and
"Description of the Securities -- Distributions
of Interest on the Securities."
(b) Principal.............. The Securities of each series initially will have
an aggregate Security Balance no greater than the
outstanding principal balance of the Assets as
of, unless the related Prospectus Supplement
provides otherwise, the close of business on the
first day of the month of formation of the
related Trust Fund (the "Cut-off Date"), after
application of scheduled payments due on or
before such date, whether or not received. The
Security Balance of a Security outstanding from
time to time represents the maximum amount that
the holder thereof is then entitled to receive in
respect of principal from future cash flow on the
assets in the related Trust Fund. Distributions
of principal will be made on each Distribution
Date to the class or classes of Securities in the
amounts and in accordance with the priorities
specified in the related Prospectus Supplement.
Distributions of principal of any class of
Securities will be made on a pro rata basis among
all of the Securityholders of such class, by
random selection, or as described in the related
Prospectus Supplement. Certain classes of Strip
Securities with no Security Balance will not
receive distributions in respect of principal.
See "Description of the
Securities -- Distributions of Principal of the
Securities."
Advances................... If so specified in the related Prospectus
Supplement, the Servicer will be obligated as
part of its servicing responsibilities to make
certain advances that in its good faith judgment
it deems recoverable with respect to delinquent
scheduled payments on the Assets serviced by such
Servicer in such Trust Fund. If so specified in
the related Prospectus Supplement, the Master
Servicer, the Trustee or other entity so
specified will be required to make such advances
in the event a Servicer fails to do so. Neither
the Depositor nor, except to the extent specified
in the related Prospectus Supplement, any of its
affiliates will have any responsibility to make
such advances. Advances are reimbursable
generally from subsequent recoveries in respect
of such Assets and otherwise to the extent
described herein and in the related Prospectus
Supplement. If and to the extent provided in the
Prospectus Supplement for any series, a Servicer
or another entity will be entitled to receive
interest on its outstanding advances, payable
from amounts in the related Trust Fund. See
"Description of the Securities -- Advances in
Respect of Delinquencies."
Termination................ If so specified in the related Prospectus
Supplement, a series of Securities may be subject
to optional early termination through the
repurchase of the Assets in the related Trust
Fund by the party specified therein, under the
circumstances and in the manner set forth
therein. If so provided in the related Prospectus
Supplement, upon the reduction of the Security
Balance of a specified class or classes of
Securities to a specified percentage or on and
after a date specified in such
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<PAGE> 67
pectus Supplement, the party specified therein
will solicit bids for the purchase of all of the
Assets of the Trust Fund, or of a sufficient
portion of such Assets to retire such class or
classes, or purchase such Assets at a price set
forth in the related Prospectus Supplement. Any
such purchase or solicitation of bids may be made
only when the aggregate security balance of such
class or classes declines to a percentage of the
initial Security Balance of such Securities (not
to exceed 10%) specified in the related
Prospectus Supplement. In addition, if so
provided in the related Prospectus Supplement,
certain classes of Securities may be purchased or
redeemed in the manner set forth therein. See
"Description of the Securities -- Termination."
Registration of
Securities................. If so provided in the related Prospectus
Supplement, one or more classes of the Offered
Securities will initially be represented by one
or more certificates or notes, as applicable,
registered in the name of Cede & Co., as the
nominee of DTC. No person acquiring an interest
in Offered Securities so registered will be
entitled to receive a definitive certificate or
note, as applicable, representing such person's
interest except in the event that definitive
certificates or notes, as applicable, are issued
under the limited circumstances described herein.
See "Risk Factors -- Owners of Book-Entry
Securities Not Entitled to Exercise Rights of
Holders of Securities" and "Description of the
Securities -- Book-Entry Registration and
Definitive Securities."
Tax Status of the
Securities................. The following discussion represents the opinion of
Cadwalader, Wickersham & Taft or Hunton and
Williams, as specified in the related Prospectus
Supplement. The Securities of each series offered
hereby will constitute either (i) "regular
interests" ("Regular Securities") and "residual
interests" ("Residual Securities") in a Trust
Fund treated as a real estate mortgage investment
conduit ("REMIC") under Sections 860A through
860G of the Internal Revenue Code of 1986, as
amended (the "Code"), (ii) interests ("Grantor
Trust Securities") in a Trust Fund treated as a
grantor trust under applicable provisions of the
Code, (iii) interests ("Partnership Securities")
in a Trust Fund treated as a partnership under
applicable provisions of the Code, (iv) evidences
of indebtedness ("Debt Securities") of a Trust
Fund treated as debt instruments for federal
income tax purposes or (v) "regular interests" or
"ownership interests" ("FASIT Securities") in a
Trust Fund treated as a financial asset
securitization investment trust ("FASIT") under
Sections 860H through 860L of the Code.
In general, to the extent the assets and income of
the Trust Fund are treated as qualifying assets
and income under the following sections of the
Code, Regular Securities (i) owned by a "domestic
building and loan association" will be treated as
"loans . . . secured by an interest in real
property which is . . . residential real
property" within the meaning of Code Section
7701(a)(19)(C) and (ii) owned by a real estate
investment trust will be treated as "real estate
assets" for purposes of Section 856(c)(4)(A) of
the Code and interest income therefrom will be
treated as "interest on obligations secured by
mortgages on real property" for purposes of
Section 856(c)(3)(B) of the Code. In addition,
Regular Securities will be "qualified mortgages"
within the meaning of Section 860G(a)(3) of the
Code if transferred to another REMIC on its
startup in exchange for regular or residual
interests
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therein. Moreover, if 95% or more of the assets
and the income of the Trust Fund qualify for any
of the foregoing treatments, the Regular
Securities will qualify for the foregoing
treatments in their entirety.
Residual Securities generally will be treated as
representing an interest in qualifying assets and
income to the same extent described above for
institutions subject to Sections 7701(a)(19)(C),
856(c)(4)(A) and 856(c)(3)(B) of the Code. A
portion (or, in certain cases, all) of the income
from Residual Securities (i) may not be offset by
any losses from other activities of the holder of
such Residual Securities, (ii) may be treated as
unrelated business taxable income, for holders of
Residual Securities that are subject to tax on
unrelated business taxable income (as defined in
Section 511 of the Code), and (iii) may be
subject to U.S. federal income tax withholding
rules. In addition, transfers of certain Residual
Securities may be disregarded under some
circumstances for all federal income tax
purposes. See "Federal Income Tax
Consequences -- REMICs -- Taxation of Owners of
Residual Securities-Excess Inclusions," and
"Noneconomic Residual Securities" herein.
Grantor Trust Securities may be either Standard
Securities having the same percentage ownership
of principal and interest payments on the
Mortgage Loans or Strip Securities having a
different percentage ownership interests in such
principal and interest payments. Holders of
Grantor Trust Securities generally will be
treated as owning an interest in qualifying
assets and income under Sections 7701(a)(19)(C),
856(c)(4)(A), 856(c)(3)(B) and 860G(a)(3)(A) of
the Code.
Partnership Securities will be treated as
partnership interests for purposes of federal
income taxation, and accordingly, will not
represent an interest in qualifying assets for
purposes of Section 7701(a)(19)(C) of the Code,
but will represent qualifying assets and income
under Sections 856(c)(4)(A) and 856(c)(3)(B) of
the Code to the extent their proportionate share
of the assets of the related Trust Fund so
qualify. Debt Securities will not represent
qualifying assets or income for purposes of any
of the preceding sections. FASIT Securities will
qualify for purposes of the preceding sections to
the extent provided in the applicable Prospectus
Supplement.
See "Federal Income Tax Consequences" herein and in
the related Prospectus Supplement.
Legal Investment........... The Prospectus Supplement for each series of
Securities will specify which class or classes of
Offered Securities of such series, if any, will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended ("SMMEA").
Investors whose investment authority is subject
to legal restrictions should consult their own
legal advisors to determine whether and to what
extent the Offered Securities constitute legal
investments for them. See "Legal Investment"
herein and in the related Prospectus Supplement.
ERISA Considerations....... An investment in Offered Securities by an employee
benefit plan or other retirement plan or
arrangement that is subject to Title I of the
Employee Retirement Income Security Act of 1974,
as amended ("ERISA") or Section 4975 of the Code
(each, a "Plan") may cause
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the Assets of the related Trust Fund to be deemed
"plan assets" and could give rise to a
"prohibited transaction" within the meaning of
ERISA and the Code. The U.S. Department of Labor
has issued an individual exemption, Prohibited
Transaction Exemption 93-31 (the "Exemption"), to
NationsBank Corporation ("NationsBank") that
generally exempts from the application of certain
of the prohibited transaction provisions of ERISA
and the excise taxes imposed on such prohibited
transactions by Section 4975 of the Code,
transactions relating to the purchase, sale and
holding of pass-through securities underwritten
by NationsBank and certain affiliates thereof,
including NationsBanc Montgomery Securities LLC
("NMS") and the servicing and operation of pools
of assets such as certain of the Assets, provided
that certain conditions are satisfied. To the
extent the Securities are not treated as equity
interests in the related Trust Fund for purposes
of ERISA, a Plan's investment in such Securities
would not cause the Assets to be deemed "plan
assets." However, the purchase or holding of such
non-equity Securities by a Plan with respect to
which an affiliate of the Depositor or an equity
investor is a "party in interest" (within the
meaning of ERISA) or a "disqualified person"
(within the meaning of the Code) could give rise
to a prohibited transaction unless one or more
statutory or administrative exemptions apply to
such investment. The Prospectus Supplement with
respect to a series of Securities may contain
additional information regarding the application
of the Exemption or any other exemption with
respect to the Securities offered thereby. See
"ERISA Considerations" herein.
Rating..................... At the date of issuance, as to each series, each
class of Offered Securities will be rated in one
of the four highest rating categories by one or
more nationally recognized statistical rating
agencies (each, a "Rating Agency"). A security
rating is not a recommendation to buy, sell or
hold such Securities and is subject to revision
or withdrawal at any time by the assigning Rating
Agency. Further, such ratings do not address the
possibility that, as a result of principal
prepayments, holders of Securities may receive a
lower than anticipated yield. See "Rating"
herein.
Material Risks............. Prospective investors are urged to read "Risk
Factors" herein and in the applicable Prospectus
Supplement for a discussion of the material risks
associated with an investment in the Securities.
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RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Securities, among other things, the following factors.
LIMITED LIQUIDITY FOR SECURITIES
At the time of issuance of a series of Securities, there will be no
secondary market for any of the Securities. NationsBanc Montgomery Securities
LLC and the other underwriters, if any, specified in the related Prospectus
Supplement, currently expect to make a secondary market in the Offered
Securities, but have no obligation to do so. There can be no assurance that a
secondary market for the Securities of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or will
continue while Securities of such series remain outstanding. It is not expected
that any application will be made to list the Securities of a series on any
securities exchange. Accordingly, the liquidity of the Securities may be
limited.
LIMITED ASSETS FOR PAYMENT OF SECURITIES
The Securities will not represent an interest in or obligation of the
Depositor, any Master Servicer, any Servicer, the Trustee or any of their
affiliates. The only obligations with respect to the Securities or the Assets
will be the obligations (if any) of the Warranting Party (as defined herein)
pursuant to certain limited representations and warranties made with respect to
the Assets, the Master Servicer's obligations and any Servicer's servicing
obligations under the related Agreement (including the limited obligation to
make certain advances in the event of delinquencies on the Assets, but only to
the extent deemed recoverable) and, if and to the extent expressly described in
the related Prospectus Supplement, certain limited obligations of a Servicer or
Master Servicer in connection with an agreement to purchase or act as
remarketing agent with respect to a convertible ARM Loan (as defined herein)
upon conversion to a fixed rate or a different index. Since certain
representations and warranties with respect to the Assets may have been made
and/or assigned in connection with transfers of such Assets prior to the
issuance of the Securities, the rights of the Trustee and the Securityholders
with respect to such representations or warranties will be limited to their
rights as an assignee thereof. Except to the extent, if any, specified in the
related Prospectus Supplement, none of the Depositor, any Master Servicer, any
Servicer, the Trustee or any of their affiliates will have any obligation with
respect to representations or warranties made by any other entity. Except to the
extent, if any, specified in the related Prospectus Supplement, neither the
Securities nor the underlying Assets will be guaranteed or insured by any
governmental agency or instrumentality, or by the Depositor, any Master
Servicer, any Servicer, the Trustee or any of their affiliates. Proceeds of the
assets included in the related Trust Fund for each series of Securities
(including the Assets and any form of credit enhancement) will be the sole
source of payments on the Securities, and there will be no recourse to the
Depositor or any other entity in the event that such proceeds are insufficient
or otherwise unavailable to make all payments provided for under the Securities.
EXCEPT TO THE EXTENT, IF ANY, SPECIFIED IN THE RELATED PROSPECTUS
SUPPLEMENT, A SERIES OF SECURITIES WILL NOT HAVE ANY CLAIM AGAINST OR SECURITY
INTEREST IN THE TRUST FUNDS FOR ANY OTHER SERIES AND THE ASSETS INCLUDED IN THE
RELATED TRUST FUND WILL BE THE SOLE SOURCE OF PAYMENTS ON THE SECURITIES OF A
SERIES. IF THE RELATED TRUST FUND IS INSUFFICIENT TO MAKE PAYMENTS ON SUCH
SECURITIES, NO OTHER ASSETS WILL BE AVAILABLE FOR PAYMENT OF THE DEFICIENCY.
Additionally, certain amounts remaining in certain funds or accounts, including
the Collection Account and any accounts maintained as Credit Support, may be
withdrawn under certain conditions, as described in the related Prospectus
Supplement. In the event of such withdrawal, such amounts will not be available
for future payment of principal of or interest on the Securities. If so provided
in the Prospectus Supplement for a series of Securities containing one or more
classes of Subordinate Securities, on any Distribution Date in respect of which
losses or shortfalls in collections on the Assets have been incurred, the amount
of such losses or shortfalls will be borne first by one or more classes of the
Subordinate Securities, and, thereafter, by the remaining classes of Securities
in the priority and manner and subject to the limitations specified in such
Prospectus Supplement.
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<PAGE> 71
RATE OF PREPAYMENTS ON ASSETS AND PRIORITY OF PAYMENT OF SECURITIES MAY
ADVERSELY AFFECT AVERAGE LIVES AND YIELDS OF SECURITIES
Prepayments (including those caused by defaults) on the Assets in any Trust
Fund generally will result in a faster rate of principal payments on one or more
classes of the related Securities than if payments on such Assets were made as
scheduled. Thus, the prepayment experience on the Assets may affect the average
life of each class of related Securities. The rate of principal payments on
pools of mortgage loans or manufactured housing contracts varies between pools
and from time to time is influenced by a variety of economic, demographic,
geographic, social, tax, legal and other factors. There can be no assurance as
to the rate of prepayment on the Assets in any Trust Fund or that the rate of
payments will conform to any model described herein or in any Prospectus
Supplement. If prevailing interest rates fall significantly below the applicable
mortgage interest rates, principal prepayments are likely to be higher than if
prevailing rates remain at or above the rates borne by the Mortgage Loans
underlying or comprising the Mortgage Loans in any Trust Fund. As a result, the
actual maturity of any class of Securities evidencing an interest in or an
obligation of a Trust Fund containing Mortgage Loans could occur significantly
earlier than expected. Conversely, if prevailing interest rates rise
significantly above the applicable mortgage interest rates, principal
prepayments are likely to be lower than if prevailing rates remain at or below
the rates borne by the Mortgage Loans underlying or comprising the Mortgage
Loans in any Trust Fund and the maturity of any class of Securities evidencing
an interest in or an obligation of such Trust Fund could occur significantly
later than expected. The relationship of prevailing interest rates and
prepayment rates on Contracts will be discussed in the related Prospectus
Supplement. In addition, certain prepayments may result in the collection of
less interest than would otherwise be the case in the month of prepayment.
A series of Securities may include one or more classes of Securities with
priorities of payment and, as a result, yields on other classes of Securities,
including classes of Offered Securities, of such series may be more sensitive to
prepayments on Assets. A series of Securities may include one or more classes
offered at a significant premium or discount. Yields on such classes of
Securities will be sensitive, and in some cases extremely sensitive, to
prepayments on Assets and, where the amount of interest payable with respect to
a class is disproportionately high, as compared to the amount of principal, as
with certain classes of Strip Securities, a holder might, in some prepayment
scenarios, fail to recoup its original investment. A series of Securities may
include one or more classes of Securities, including classes of Offered
Securities, that provide for distribution of principal thereof from amounts
attributable to interest accrued but not currently distributable on one or more
classes of Accrual Securities and, as a result, yields on such Securities will
be sensitive to (a) the provisions of such Accrual Securities relating to the
timing of distributions of interest thereon and (b) if such Accrual Securities
accrue interest at a variable or adjustable Pass-Through Rate or interest rate,
changes in such rate. See "Yield Considerations" herein and, if applicable, in
the related Prospectus Supplement.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Securities will
reflect such Rating Agency's assessment solely of the likelihood that holders of
Securities of such class will receive payments to which such Securityholders are
entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments (including those caused
by defaults) on the related Assets will be made, the degree to which the rate of
such prepayments might differ from that originally anticipated or the likelihood
of early optional termination or redemption of the series of Securities. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios. Each Prospectus Supplement will identify any payment to
which holders of Offered Securities of the related series are entitled that is
not covered by the applicable rating.
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<PAGE> 72
LOCATION OF MORTGAGED PROPERTIES AND OTHER FACTORS WHICH MAY INCREASE THE RISK
OF LOSSES ON MORTGAGE LOANS
An investment in securities such as the Securities which represent
interests in Mortgage Loans may be affected generally by, among other things, a
decline in real estate values and changes in the mortgagors' 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 the
Mortgage Loans, and any secondary financing on the Mortgaged Properties, become
equal to or greater than the value of the Mortgaged Properties, the actual rates
of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, in the case
of Mortgage Loans that are subject to negative amortization, due to the addition
to the principal balance of 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 Support, if any, holders of Securities of the series evidencing interests
in the related Mortgage Loans 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.
Certain of the types of Mortgage Loans may involve additional uncertainties
not present in traditional types of loans. For example, certain Mortgage Loans
provide for escalating or variable payments by the mortgagor under the Mortgage
Loan, 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. In addition
to the foregoing, certain geographic regions of the United States from time to
time will experience weaker regional economic conditions and housing markets,
and, consequently, will experience higher rates of loss and delinquency than
will be experienced on mortgage loans generally. The Mortgage Loans underlying
certain series of Securities may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Furthermore, the rate of default on Mortgage Loans that are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Additionally, a
decline in the value of the Mortgaged Properties will increase the risk of loss
particularly with respect to any related junior Mortgage Loans. See
"-- Increased Risk of Losses on Foreclosure of Junior Mortgage Loans."
Mortgage Loans secured by Multifamily Properties may entail risks of
delinquency and foreclosure, and risks of loss in the event thereof, that are
greater than similar risks associated with loans secured by Single Family
Properties. The ability of a borrower to repay a loan secured by an
income-producing property typically is dependent primarily upon the successful
operation of such property rather than upon the existence of independent income
or assets of the borrower; thus, the value of an income-producing property
typically is directly related to the net operating income derived from such
property. If the net operating income of the property is reduced (for example,
if rental or occupancy rates decline or real estate tax rates or other operating
expenses increase), the borrower's ability to repay the loan may be impaired. In
addition, the concentration of default, foreclosure and loss risk for a pool of
Mortgage Loans secured by Multifamily Properties may be greater than for a pool
of Mortgage Loans secured by Single Family Properties of comparable aggregate
unpaid principal balance because the pool of Mortgage Loans secured by
Multifamily Properties is likely to consist of a smaller number of higher
balance loans.
If applicable, certain legal aspects of the Mortgage Loans for a series of
Securities may be described in the related Prospectus Supplement. See also
"Certain Legal Aspects of Mortgage Loans" herein.
RISKS OF LOSS ON BALLOON PAYMENT ASSET IF OBLIGOR IS UNABLE TO REFINANCE OR SELL
RELATED PROPERTY
Certain of the Mortgage Loans (the "Balloon Payment Assets") as of the
Cut-off Date may not be fully amortizing over their terms to maturity and, thus,
will require substantial principal payments (i.e., balloon
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<PAGE> 73
payments) at their stated maturity. Mortgage Loans with balloon payments involve
a greater degree of risk because the ability of an obligor to make a balloon
payment typically will depend upon its ability either to timely refinance the
loan or to timely sell the related property. The ability of a mortgagor to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage interest rates at the time of sale or
refinancing, the obligor's equity in the related property, the financial
condition of the obligor, the value of the property, tax laws, prevailing
general economic conditions and the availability of credit for single family or
multifamily real properties generally.
INCREASED RISK OF LOSSES ON FORECLOSURE OF JUNIOR MORTGAGE LOANS
Certain of the Mortgage Loans may be secured by junior liens and the
related first and other senior liens, if any (collectively, the "senior lien"),
may not be included in the Trust Fund. The primary risk to holders of Mortgage
Loans secured by junior liens is the possibility that adequate funds will not be
received in connection with a foreclosure of the related senior lien to satisfy
fully both the senior lien and the Mortgage Loan. In the event that a holder of
the senior lien forecloses on a Mortgaged Property, the proceeds of the
foreclosure or similar sale will be applied first to the payment of court costs
and fees in connection with the foreclosure, second to real estate taxes, third
in satisfaction of all principal, interest, prepayment or acceleration
penalties, if any, and any other sums due and owing to the holder of the senior
lien. The claims of the holder of the senior lien will be satisfied in full out
of proceeds of the liquidation of the Mortgaged Property, if such proceeds are
sufficient, before the Trust Fund as holder of the junior lien receives any
payments in respect of the Mortgage Loan. If a Servicer were to foreclose on any
Mortgaged Property, it would do so subject to any related senior lien. In order
for the debt related to the Mortgaged Property to be paid in full at such sale,
a bidder at the foreclosure sale of such Mortgage Loan would have to bid an
amount sufficient to pay off all sums due under the Mortgage Loan and the senior
lien or purchase the Mortgaged Property subject to the senior lien. In the event
that such proceeds from a foreclosure or similar sale of the related Mortgaged
Property were insufficient to satisfy both loans in the aggregate, the Trust
Fund, as the holder of the junior lien, and, accordingly, holders of the related
Securities, would bear the risk of delay in distributions while a deficiency
judgment against the borrower was being obtained and the risk of loss if the
deficiency judgment were not realized upon. Moreover, deficiency judgments may
not be available in certain jurisdictions. In addition, a junior mortgagee may
not foreclose on the property securing a junior mortgage unless it forecloses
subject to the senior mortgage.
INCREASED RISK OF DELINQUENCIES AND FORECLOSURES ON SUB-PRIME MORTGAGE LOANS
All or a portion of the Assets may consist of mortgage loans underwritten
in accordance with the underwriting for "Sub-prime Mortgage Loans." A Sub-prime
Mortgage Loan is a mortgage loan that is ineligible for purchase by Fannie Mae
("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac") due
to borrower credit characteristics, property characteristics, loan documentation
guidelines or other credit characteristics that do not meet Fannie Mae or
Freddie Mac underwriting guidelines, including a loan made to a borrower whose
creditworthiness and repayment ability do not satisfy such Fannie Mae or Freddie
Mac underwriting guidelines and a borrower who may have a record of major
derogatory credit items such as default on a prior mortgage loan, credit
write-offs, outstanding judgments or prior bankruptcies. As a consequence,
delinquencies and foreclosures can be expected to be more prevalent with respect
to Sub-prime Mortgage Loans than with respect to mortgage loans originated in
accordance with Fannie Mae or Freddie Mac underwriting guidelines, and changes
in the values of the Mortgaged Properties may have a greater effect on the loss
experience of Sub-prime Mortgage Loans than on mortgage loans originated in
accordance with Fannie Mae or Freddie Mac underwriting guidelines.
INCREASED RISK OF LOSS IF ASSETS ARE DELINQUENT
A portion of the Assets may be delinquent upon the issuance of the related
Securities. Credit enhancement provided with respect to a particular series of
Securities may not cover all losses related thereto. Prospective investors
should consider the risk that the inclusion of such Assets in the Trust Fund for
a series may cause the rate of defaults and prepayments on the Assets to
increase and, in turn, may cause losses to exceed the available credit
enhancement for such series and affect the yield on the Securities of such
series.
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<PAGE> 74
EFFECTS OF FAILURE TO COMPLY WITH CONSUMER PROTECTION LAWS; OTHER LEGAL
CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and may require licensing of the persons who
originated the Mortgage Loans (the "Originators") and 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 which 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 a 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 such Servicer
to damages and administrative sanctions. See "Certain Legal Aspects of Mortgage
Loans."
The Mortgage Loans may also be subject to federal laws, including: (i) the
Federal Truth in Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the 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; (iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and (iv)
the National Housing Act of 1934 (the "National Housing Act") with respect to
Mortgage Loans insured thereunder.
The Mortgage Loans may be subject to the Home Ownership and Equity
Protection Act of 1994 (the "Home Ownership Act"), which amended the Federal
Truth in Lending Act as it applies to mortgages subject to the Home Ownership
Act. The Home Ownership Act requires certain additional disclosures, specifies
the timing of such disclosures and limits or prohibits the inclusion of certain
provisions in mortgages subject to the Home Ownership Act. The Home Ownership
Act also provides that any purchaser or assignee of a mortgage covered by the
Home Ownership Act is subject to all of the claims and defenses which the
borrower could assert against the original lender. The maximum damages that may
be recovered in an action under the Home Ownership Act from an assignee is the
remaining amount of indebtedness plus the total amount paid by the borrower in
connection with the mortgage loan. Any Trust Fund for which the Mortgage Loans
include Mortgage Loans subject to the Home Ownership Act would be subject to all
of the claims and defenses that the borrower could assert against the original
lender. Any violation of the Home Ownership Act that would result in such
liability would be a breach of the applicable Warranting Party's representations
and warranties, and the Warranting Party would be obligated to cure, repurchase
or, if permitted by the related Agreement, substitute for the Mortgage Loan in
question.
LOCATION AND OTHER FACTORS WHICH MAY INCREASE THE RISK OF LOSSES ON CONTRACTS
AND MANUFACTURED HOMES
An investment in Securities evidencing an interest in or obligation of a
Trust Fund containing Contracts may be affected by, among other things, a
downturn in national, regional or local economic conditions. The geographic
location of the Manufactured Homes securing the Contracts in any Trust Fund at
origination of the related Contract will be set forth in the related Prospectus
Supplement. Regional and local economic conditions are often volatile and,
historically, regional and local economic conditions, as well as national
economic conditions, have affected the delinquency, loan loss and repossession
experience of manufactured housing installment sales contracts and/or
installment loan contracts (hereinafter generally referred to as "contracts" or
"manufactured housing contracts"). Moreover, regardless of its location,
manufactured housing generally depreciates in value. Thus, Securityholders
should expect that, as a general matter, the market value of any Manufactured
Home will be lower than the outstanding principal balance of the related
Contract. Sufficiently high delinquencies and liquidation losses on the
Contracts in a Trust Fund will have the effect of reducing, and could eliminate,
the protection against loss afforded by any credit enhancement supporting any
class of the related Securities. If such protection is eliminated with respect
to a class of Securities, the holders of such Securities will bear all risk of
loss on the related Contracts and will have to rely on the value of the related
Manufactured Homes for recovery of the outstanding principal of and unpaid
interest on any defaulted Contracts in the related Trust Fund. See "Description
of Credit Support."
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GRANT OF SECURITY INTEREST IN CONTRACTS; RISKS OF DEFECTIVE SECURITY INTEREST
AND EFFECTS OF CERTAIN OTHER LEGAL ASPECTS OF THE CONTRACTS
The Asset Seller in respect of a Contract will represent that such Contract
is secured by a security interest in a Manufactured Home. Perfection of security
interests in the Manufactured Homes and enforcement of rights to realize upon
the value of the Manufactured Homes as collateral for the Contracts are subject
to a number of federal and state laws, including the Uniform Commercial Code as
adopted in each state and each state's certificate of title statutes. The steps
necessary to perfect the security interest in a Manufactured Home will vary from
state to state. Because of the expense and administrative inconvenience
involved, the Servicer will not amend any certificates of title to change the
lienholder specified therein from the Asset Seller to the Trustee and will not
deliver any certificate of title to the Trustee or note thereon the Trustee's
interest. Consequently, in some states, in the absence of such an amendment, the
assignment to the Trustee of the security interest in the Manufactured Home may
not be effective or such security interest may not be perfected and, in the
absence of such notation or delivery to the Trustee, the assignment of the
security interest in the Manufactured Home may not be effective against
creditors of the Asset Seller or a trustee in bankruptcy of the Asset Seller. In
addition, numerous federal and state consumer protection laws impose
requirements on lending under installment sales contracts and installment loan
agreements such as the Contracts, and the failure by the lender or seller of
goods to comply with such requirements could give rise to liabilities of
assignees for amounts due under such agreements and claims by such assignees may
be subject to set-off as result of such lender's or seller's noncompliance.
These laws would apply to the Trustee as assignee of the Contracts. The Asset
Seller of the Contracts to the Depositor will warrant that each Contract
complies with all requirements of law and will make certain warranties relating
to the validity, subsistence, perfection and priority of the security interest
in each Manufactured Home securing a Contract. A breach of any such warranty
that materially adversely affects any Contract would create an obligation of the
Asset Seller to repurchase, or if permitted by the applicable Agreement,
substitute for, such Contract unless such breach is cured. If the Credit Support
is exhausted and recovery of amounts due on the Contracts is dependent on
repossession and resale of Manufactured Homes securing Contracts that are in
default, certain other factors may limit the ability to realize upon the
Manufactured Home or may limit the amount realized by Securityholders to less
than the amount due. See "Certain Legal Aspects of the Contracts."
RISK OF BANKRUPTCY LOSSES ASSOCIATED WITH UNSECURED HOME IMPROVEMENT LOANS
The obligations of the borrower under any Unsecured Home Improvement Loan
included in a Trust Fund will not be secured by an interest in the related real
estate or any other property, and the Trust Fund will be a general unsecured
creditor as to such obligations. In the event of a default under an Unsecured
Home Improvement Loan, the related Trust Fund will have recourse only against
the borrower's assets generally, along with all other general unsecured
creditors of the borrower. In a bankruptcy or insolvency proceeding relating to
a borrower on an Unsecured Home Improvement Loan, the obligations of the
borrower under such Unsecured Home Improvement Loan may be discharged in their
entirety, notwithstanding the fact that the portion of such borrower's assets
made available to the related Trust Fund as a general unsecured creditor to pay
amounts due and owing thereunder are insufficient to pay all such amounts. A
borrower on an Unsecured Home Improvement Loan may not demonstrate the same
degree of concern over performance of the borrower's obligations under such Home
Improvement Loan as if such obligations were secured by the real estate or other
assets owned by such borrower.
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a series of Securities will describe any
Credit Support in the related Trust Fund, which may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support,
or combinations thereof. Use of Credit Support will be subject to the conditions
and limitations described herein and in the related Prospectus Supplement.
Moreover, such Credit Support may not cover all potential losses or risks; for
example, Credit Support may or may not cover fraud or negligence by a mortgage
loan or contract originator or other parties.
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<PAGE> 76
A series of Securities may include one or more classes of Subordinate
Securities (which may include Offered Securities), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the risk to
holders of Senior Securities of delinquent distributions or ultimate losses, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
Securities of a series are made in a specified order of priority, any limits
with respect to the aggregate amount of claims under any related Credit Support
may be exhausted before the principal of the lower priority classes of
Securities of such series has been repaid. As a result, the impact of
significant losses and shortfalls on the Assets may fall primarily upon those
classes of Securities having a lower priority of payment. Moreover, if a form of
Credit Support covers more than one series of Securities (each, a "Covered
Trust"), holders of Securities evidencing an interest in a Covered Trust will be
subject to the risk that such Credit Support will be exhausted by the claims of
other Covered Trusts.
The amount of any applicable Credit Support supporting one or more classes
of Offered Securities, including the subordination of one or more classes of
Securities, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Securities based on an assumed level of
defaults, delinquencies, other losses or other factors. There can, however, be
no assurance that the loss experience on the related Assets will not exceed such
assumed levels. See "-- Limited Nature of Ratings," "Description of the
Securities" and "Description of Credit Support."
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. The Servicer or 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.
LOWERING OF RATING ON SECURITIES
The rating of any series of Securities by any applicable Rating Agency may
be lowered following the initial issuance thereof as a result of the downgrading
of the obligations of any applicable Credit Support provider, or as a result of
losses on the related Assets substantially in excess of the levels contemplated
by such Rating Agency at the time of its initial rating analysis. The lowering
of a rating on a series or class of Securities may adversely affect the market
value of such Securities and the liquidity of such Securities. None of the
Depositor, any Master Servicer, any Servicer or any of their affiliates will
have any obligation to replace or supplement any Credit Support or to take any
other action to maintain any rating of any series of Securities.
INCREASED RISK OF LOSS AS A RESULT OF SUBORDINATION OF THE SUBORDINATE
SECURITIES; EFFECT OF LOSSES ON THE ASSETS
The rights of Subordinate Securityholders to receive distributions to which
they would otherwise be entitled with respect to the Assets will be subordinate
to the rights of the Servicer (to the extent of its servicing fee, including any
unpaid servicing fees with respect to one or more prior Due Periods, and is
reimbursed for certain unreimbursed advances and unreimbursed liquidation
expenses), any Master Servicer (to the extent of its master servicing fee,
including any unpaid master servicing fee with respect to one or more prior Due
Periods, and is reimbursed for certain unreimbursed advances) and the Senior
Securityholders to the extent described in the related Prospectus Supplement. As
a result of the foregoing, investors must be prepared to bear the risk that they
may be subject to delays in payment and may not recover their initial
investments in the Subordinate Securities. See "Description of the
Securities -- General" and "-- Allocation of Losses and Shortfalls."
The yields on the Subordinate Securities may be extremely sensitive to the
loss experience of the Assets and the timing of any such losses. If the actual
rate and amount of losses experienced by the Assets exceed the rate and amount
of such losses assumed by an investor, the yields to maturity on the Subordinate
Securities may be lower than anticipated.
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SPECIAL FEDERAL TAX CONSIDERATIONS REGARDING RESIDUAL SECURITIES AND FASIT
SECURITIES
Holders of Residual Securities will be required to report on their federal
income tax returns as ordinary income their pro rata share of the taxable income
of the related REMIC, regardless of the amount or timing of their receipt of
cash payments, as described in "Federal Income Tax Consequences -- REMICs."
Accordingly, under certain circumstances, holders of Offered Securities that
constitute Residual Securities may have taxable income and tax liabilities
arising from such investment during a taxable year in excess of the cash
received during such period. Individual holders of Residual Securities may be
limited in their ability to deduct servicing fees and other expenses of the
REMIC. In addition, Residual Securities are subject to certain restrictions on
transfer. Because of the special tax treatment of Residual Securities, the
taxable income arising in a given year on a Residual Security will not be equal
to the taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on the Residual Securities may be significantly
less than that of a corporate bond or stripped instrument having similar cash
flow characteristics. Additionally, prospective purchasers of Residual
Securities should be aware that applicable regulations prevent the ability to
mark-to-market REMIC residual interests. See "Federal Income Tax
Consequences -- REMICs." Special tax considerations relating to FASIT Securities
will be discussed in the related Prospectus Supplement.
OWNERS OF BOOK-ENTRY SECURITIES NOT ENTITLED TO EXERCISE RIGHTS OF HOLDERS OF
SECURITIES
If so provided in the Prospectus Supplement, one or more classes of the
Offered Securities will be initially represented by one or more certificates or
notes registered in the name of Cede, the nominee for DTC, and will not be
registered in the names of the Security Owners or their nominees. Because of
this, unless and until Securities are issued in fully registered, certificated
form ("Definitive Securities"), Security Owners will not be recognized by the
Trustee as "Securityholders" (as that term is to be used in the related
Agreement). Hence, until such time, Security Owners will be able to exercise the
rights of Securityholders only indirectly through DTC and its participating
organizations. See "Description of the Securities -- Book-Entry Registration and
Definitive Securities."
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the "Assets") will include (i)
single family and/or multifamily mortgage loans (or certain balances thereof)
(collectively, the "Mortgage Loans"), including without limitation, Home Equity
Loans, Home Improvement Contracts and Land Sale Contracts, (ii) unsecured home
improvement loans ("Unsecured Home Improvement Loans"), (iii) manufactured
housing installment sale contracts or installment loan agreements (the
"Contracts"), or (iv) a combination of Mortgage Loans, Unsecured Home
Improvement Loans and/or Contracts. The Mortgage Loans will not be guaranteed or
insured by NationsBanc Asset Securities, Inc. (the "Depositor") or any of its
affiliates. The Mortgage Loans will be guaranteed or insured by a governmental
agency or instrumentality or other person only if and to the extent expressly
provided in the related Prospectus Supplement. Each Asset will be selected by
the Depositor for inclusion in a Trust Fund from among those purchased, either
directly or indirectly, from a prior holder thereof (an "Asset Seller"), which
may be an affiliate of the Depositor and which prior holder may or may not be
the originator of such Mortgage Loan, Unsecured Home Improvement Loan or
Contract.
The Assets included in the Trust Fund for a series may be subject to
various types of payment provisions. Such Assets may consist of (1) "Level
Payment Assets," which may provide for the payment of interest and full
repayment of principal in level monthly payments with a fixed rate of interest
computed on their declining principal balances; (2) "Adjustable Rate Assets,"
which may provide for periodic adjustments to their rates of interest to equal
the sum (which may be rounded) of a fixed margin and an index; (3) "Buy Down
Assets," which are Assets for which funds have been provided by someone other
than the related Obligors to reduce the Obligors' monthly payments during the
early period after origination of such Assets; (4) "Increasing Payment Assets,"
as described below; (5) "Interest Reduction Assets," which provide for the
one-time reduction of the
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interest rate payable thereon; (6) "GEM Assets," which provide for (a) monthly
payments during the first year after origination that are at least sufficient to
pay interest due thereon, and (b) an increase in such monthly payments in
subsequent years at a predetermined rate resulting in full repayment over a
shorter term than the initial amortization terms of such Assets; (7) "GPM
Assets," which allow for payments during a portion of their terms which are or
may be less than the amount of interest due on the unpaid principal balances
thereof, and which unpaid interest will be added to the principal balances of
such Assets and will be paid, together with interest thereon, in later years;
(8) "Step-up Rate Assets" which provide for interest rates that increase over
time; (9) "Balloon Payment Assets;" (10) "Convertible Assets" which are
Adjustable Rate Assets subject to provisions pursuant to which, subject to
certain limitations, the related Obligors may exercise an option to convert the
adjustable interest rate to a fixed interest rate; and (11) "Bi-weekly Assets,"
which provide for Obligor payments to be made on a bi-weekly basis.
An Increasing Payment Asset is an Asset that provides for monthly payments
that are fixed for an initial period to be specified in the related Prospectus
Supplement and which increase thereafter (at a predetermined rate expressed as a
percentage of the monthly payment during the preceding payment period, subject
to any caps on the amount of any single monthly payment increase) for a period
to be specified in the related Prospectus Supplement from the date of
origination, after which the monthly payment is fixed at a level-payment amount
so as to fully amortize the Asset over its remaining term to maturity. The
scheduled monthly payment with respect to an Increasing Payment Asset is the
total amount required to be paid each month in accordance with its terms and
equals the sum of (1) the Obligor's monthly payments referred to in the
preceding sentence and (2) in the case of certain Increasing Payment Assets,
payments made by the respective Servicers pursuant to buy-down or subsidy
agreements. The Obligor's initial monthly payments for each Increasing Payment
Asset are set at the level-payment amount that would apply to an otherwise
identical Level Payment Asset having an interest rate a certain number of
percentage points below the Asset Rate of such Increasing Payment Asset. The
Obligor's Monthly Payments on each Increasing Payment Asset, together with any
payments made thereon by the related Servicers pursuant to buy-down or subsidy
agreements, will in all cases be sufficient to allow payment of accrued interest
on such Increasing Payment Asset at the related interest rate, without negative
amortization. An Obligor's monthly payments on such an Asset may, however, not
be sufficient to result in any reduction of the principal balance of such Asset
until after the period when such payments may be increased.
The Securities will be entitled to payment only from the assets of the
related Trust Fund and will not be entitled to payments in respect of the assets
of any other trust fund established by the Depositor. If specified in the
related Prospectus Supplement, the assets of a Trust Fund will consist of
certificates representing beneficial ownership interests in, or indebtedness of,
another trust fund that contains the Assets.
MORTGAGE LOANS
General
Each Mortgage Loan will generally be secured by a lien on (i) a one- to
four-family residential property or a security interest in shares issued by a
cooperative housing corporation (a "Single Family Property" and the related
Mortgage Loan a "Single Family Mortgage Loan") or (ii) a primarily residential
property which consists of five or more residential dwelling units, and which
may include limited retail, office or other commercial space (a "Multifamily
Property" and the related Mortgage Loan a "Multifamily Mortgage Loan"). Single
Family Properties and Multifamily Properties are sometimes referred to herein
collectively as "Mortgaged Properties." To the extent specified in the related
Prospectus Supplement, the Mortgage Loans will be secured by first and/or junior
mortgages or deeds of trust or other similar security instruments creating a
first or junior lien on Mortgaged Property. The Mortgaged Properties may include
apartments owned by cooperative housing corporations ("Cooperatives"). The
Mortgaged Properties may include leasehold interests in properties, the title to
which is held by third party lessors. The term of any such leasehold shall
exceed the term of the related mortgage note by at least five years or such
other time period specified in the related Prospectus Supplement. The Mortgage
Loans may include (i) closed-end and/or revolving home equity loans or certain
balances thereof ("Home Equity Loans") and/or (ii) secured home improvement
installment sales contracts and secured installment loan agreements ("Home
Improvement Contracts"). In addition, the
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Mortgage Loans may include certain Mortgage Loans evidenced by contracts ("Land
Sale Contracts") for the sale of properties pursuant to which the mortgagor
promises to pay the amount due thereon to the holder thereof with fee title to
the related property held by such holder until the mortgagor has made all of the
payments required pursuant to such Land Sale Contract, at which time fee title
is conveyed to the mortgagor. The Originator of each Mortgage Loan will have
been a person other than the Depositor. The related Prospectus Supplement will
indicate if any Originator is an affiliate of the Depositor. The Mortgage Loans
will be evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages, deeds of trust or other security instruments (the "Mortgages")
creating a lien on the Mortgaged Properties.
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of the then outstanding principal balance of the
Mortgage Loan to the Value of the related Mortgaged Property. The "Value" of a
Mortgaged Property, other than with respect to Refinance Loans, is generally the
lesser of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such loan and (b) the sales price for such
property. "Refinance Loans" are loans made to refinance existing loans. Unless
otherwise set forth in the related Prospectus Supplement, the Value of the
Mortgaged Property securing a Refinance Loan is the appraised value thereof
determined in an appraisal obtained at the time of origination of the Refinance
Loan. The value of a Mortgaged Property as of the date of initial issuance of
the related series of Securities may be less than the Value at origination and
will fluctuate from time to time based upon changes in economic conditions and
the real estate market.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as of
the applicable Cut-off Date, (ii) the type of property securing the Mortgage
Loans, (iii) the weighted average (by principal balance) of the original and
remaining terms to maturity of the Mortgage Loans, (iv) the earliest and latest
origination date and maturity date of the Mortgage Loans, (v) the range of the
Loan-to-Value Ratios at origination of the Mortgage Loans, (vi) the Mortgage
Rates or range of Mortgage Rates and the weighted average Mortgage Rate borne by
the Mortgage Loans, (vii) the state or states in which most of the Mortgaged
Properties are located, (viii) information with respect to the prepayment
provisions, if any, of the Mortgage Loans, (ix) with respect to Mortgage Loans
with adjustable Mortgage Rates ("ARM Loans"), the index, the frequency of the
adjustment dates, the range of margins added to the index, and the maximum
Mortgage Rate or monthly payment variation at the time of any adjustment thereof
and over the life of the ARM Loan, (x) information regarding the payment
characteristics of the Mortgage Loans, including without limitation balloon
payment and other amortization provisions, (xi) the number of Mortgage Loans
that are delinquent and the number of days or ranges of the number of days such
Mortgage Loans are delinquent and (xii) the material underwriting standards used
for the Mortgage Loans. If specific information respecting the Mortgage Loans is
not known to the Depositor at the time Securities are initially offered, more
general information of the nature described above will be provided in the
Prospectus Supplement, and specific information will be set forth in a report
which will be available to purchasers of the related Securities at or before the
initial issuance thereof and will be filed as part of a Current Report on Form
8-K with the Securities and Exchange Commission within fifteen days after such
initial issuance. Notwithstanding the foregoing, the characteristics of the
Mortgage Loans included in a Trust Fund will not vary by more than five percent
(by aggregate principal balance as of the Cut-off Date) from the characteristics
thereof that are described in the related Prospectus Supplement.
The related Prospectus Supplement will specify whether the Mortgage Loans
include (i) Home Equity Loans, which may be secured by Mortgages that are junior
to other liens on the related Mortgaged Property and/or (ii) Home Improvement
Contracts originated by a home improvement contractor and secured by a Mortgage
on the related Mortgaged Property that is junior to other liens on the Mortgaged
Property. The home improvements purchased with the Home Improvement Contracts
typically include replacement
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windows, house siding, roofs, swimming pools, satellite dishes, kitchen and
bathroom remodeling goods, solar heating panels, patios, decks, room additions
and garages. The related Prospectus Supplement will specify whether the Home
Improvement Contracts are partially insured under Title I of the National
Housing Act and, if so, the limitations on such insurance. In addition, the
related Prospectus Supplement will specify whether the Mortgage Loans contain
certain Mortgage Loans evidenced by Land Sale Contracts.
Payment Provisions of the Mortgage Loans
All of the Mortgage Loans will provide for payments of principal, interest
or both, on due dates that occur monthly, quarterly or semi-annually or at such
other interval as is specified in the related Prospectus Supplement or for
payments in another manner described in the related Prospectus Supplement. Each
Mortgage Loan may provide for no accrual of interest or for accrual of interest
thereon at an interest rate (a "Mortgage Rate") that is fixed over its term or
that adjusts from time to time, or that may be converted from an adjustable to a
fixed Mortgage Rate or a different adjustable Mortgage Rate, or from a fixed to
an adjustable Mortgage Rate, from time to time pursuant to an election or as
otherwise specified on the related Mortgage Note, in each case as described in
the related Prospectus Supplement. Each Mortgage Loan may provide for scheduled
payments to maturity or payments that adjust from time to time to accommodate
changes in the Mortgage Rate or to reflect the occurrence of certain events or
that adjust on the basis of other methodologies, and may provide for negative
amortization or accelerated amortization, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related Prospectus Supplement. Each Mortgage Loan may contain
prohibitions on prepayment (a "Lock-out Period" and, the date of expiration
thereof, a "Lock-out Date") or require payment of a premium or a yield
maintenance penalty (a "Prepayment Premium") in connection with a prepayment, in
each case as described in the related Prospectus Supplement. In the event that
holders of any class or classes of Offered Securities will be entitled to all or
a portion of any Prepayment Premiums collected in respect of Mortgage Loans, the
related Prospectus Supplement will specify the method or methods by which any
such amounts will be allocated. See "-- The Assets" above.
Revolving Credit Line Loans
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 Fund 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 Fund 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.
UNSECURED HOME IMPROVEMENT LOANS
The Unsecured Home Improvement Loans may consist of conventional unsecured
home improvement loans and FHA insured unsecured home improvement loans. Except
as otherwise set forth in the related
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Prospectus Supplement, the Unsecured Home Improvement Loans will be fully
amortizing and will bear interest at a fixed or variable annual percentage rate.
Unsecured Home Improvement Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Unsecured Home
Improvement Loans, including (i) the aggregate outstanding principal balance and
the largest, smallest and average outstanding principal balance of the Unsecured
Home Improvement Loans as of the applicable Cut-Off Date, (ii) the weighted
average (by principal balance) of the original and remaining terms to maturity
of the Unsecured Home Improvement Loans, (iii) the earliest and latest
origination date and maturity date of the Unsecured Home Improvements Loans,
(iv) the interest rates or range of interest rates and the weighted average
interest rates borne by the Unsecured Home Improvement Loans, (v) the state or
states in which most of the Unsecured Home Improvement Loans were originated,
(vi) information with respect to the prepayment provisions, if any, of the
Unsecured Home Improvement Loans, (vii) with respect to the Unsecured Home
Improvement Loans with adjustable interest rates ("ARM Unsecured Home
Improvement Loans"), the index, the frequency of the adjustment dates, the range
of margins added to the index, and the maximum interest rate or monthly payment
variation at the time of any adjustment thereof and over the life of the ARM
Unsecured Home Improvement Loan, (viii) information regarding the payment
characteristics of the Unsecured Home Improvement Loan, (ix) the number of
Unsecured Home Improvement Loans that are delinquent and the number of days or
ranges of the number of days such Unsecured Home Improvement Loans are
delinquent and (x) the material underwriting standards used for the Unsecured
Home Improvement Loans. If specific information respecting the Unsecured Home
Improvement Loans is not known to the Depositor at the time Securities are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement, and specific information will be set
forth in a report which will be available to purchasers of the related
Securities at or before the initial issuance thereof and will be filed as part
of a Current Report on Form 8-K with the Securities and Exchange Commission
within fifteen days after such initial issuance. Notwithstanding the foregoing,
the characteristics of the Unsecured Home Improvement Loans included in a Trust
Fund will not vary by more than five percent (by aggregate principal balance as
of the Cut-off Date) from the characteristics thereof that are described in the
related Prospectus Supplement.
CONTRACTS
General
To the extent provided in the related Prospectus Supplement, each Contract
will be secured by a security interest in a new or used Manufactured Home. Such
Prospectus Supplement will specify the states or other jurisdictions in which
the Manufactured Homes are located as of the related Cut-off Date. The method of
computing the "Loan-to-Value Ratio" of a Contract will be described in the
related Prospectus Supplement.
Contract Information in Prospectus Supplements
Each Prospectus Supplement will contain certain information, as of the
dates specified in such Prospectus Supplement and to the extent then applicable
and specifically known to the Depositor, with respect to the Contracts,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Contracts as of the
applicable Cut-off Date, (ii) whether the Manufactured Homes were new or used as
of the origination of the related Contracts, (iii) the weighted average (by
principal balance) of the original and remaining terms to maturity of the
Contracts, (iv) the earliest and latest origination date and maturity date of
the Contracts, (v) the range of the Loan-to-Value Ratios at origination of the
Contracts, (vi) the Contract Rates or range of Contract Rates and the weighted
average Contract Rate borne by the Contracts, (vii) the state or states in which
most of the Manufactured Homes are located at origination, (viii) information
with respect to the prepayment provisions, if any, of the Contracts, (ix) with
respect to Contracts with adjustable Contract Rates ("ARM Contracts"), the
index, the frequency of the adjustment dates, and the maximum Contract Rate or
monthly payment variation at the time
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of any adjustment thereof and over the life of the ARM Contract, (x) the number
of Contracts that are delinquent and the number of days or ranges of the number
of days such Contracts are delinquent, (xi) information regarding the payment
characteristics of the Contracts and (xii) the material underwriting standards
used for the Contracts. If specific information respecting the Contracts is not
known to the Depositor at the time Securities are initially offered, more
general information of the nature described above will be provided in the
Prospectus Supplement, and specific information will be set forth in a report
which will be available to purchasers of the related Securities at or before the
initial issuance thereof and will be filed as part of a Current Report on Form
8-K with the Securities and Exchange Commission within fifteen days after such
initial issuance. Notwithstanding the foregoing, the characteristics of the
Contracts included in a Trust Fund will not vary by more than five percent (by
aggregate principal balance as of the Cut-off Date) from the characteristics
thereof that are described in the related Prospectus Supplement.
Payment Provisions of the Contracts
All of the Contracts will provide for payments of principal, interest or
both, on due dates that occur monthly or at such other interval as is specified
in the related Prospectus Supplement or for payments in another manner described
in the Prospectus Supplement. Each Contract may provide for no accrual of
interest or for accrual of interest thereon at an annual percentage rate (a
"Contract Rate") that is fixed over its term or that adjusts from time to time,
or as otherwise specified in the related Prospectus Supplement. Each Contract
may provide for scheduled payments to maturity or payments that adjust from time
to time to accommodate changes in the Contract Rate as otherwise described in
the related Prospectus Supplement. See "-- Assets" above.
PRE-FUNDING ACCOUNT
To the extent provided in a Prospectus Supplement, a portion of the
proceeds of the issuance of Securities may be deposited into an account
maintained with the Trustee (a "Pre-Funding Account"). In such event, the
Depositor will be obligated (subject only to the availability thereof) to sell
at a predetermined price, and the Trust Fund for the related series of
Securities will be obligated to purchase (subject to the availability thereof),
additional Assets (the "Subsequent Assets") from time to time (as frequently as
daily) within the period (generally not to exceed three months) specified in the
related Prospectus Supplement (the "Pre-Funding Period") after the issuance of
such series of Securities having an aggregate principal balance approximately
equal to the amount on deposit in the Pre-Funding Account (the "Pre-Funded
Amount") for such series on the date of such issuance. The Pre-Funded Amount
with respect to a series is not expected to exceed 25% of the aggregate initial
Security Balance of the related Securities. Any Subsequent Assets will be
required to satisfy certain eligibility criteria more fully set forth in the
related Prospectus Supplement, which eligibility criteria will be consistent
with the eligibility criteria of the Assets initially included in the Trust
Fund, subject to such exceptions as are expressly stated in the Prospectus
Supplement. For example, the Subsequent Assets will be subject to the same
underwriting standards, representations and warranties as the Assets initially
included in the Trust Fund. In addition, certain conditions must be satisfied
before the Subsequent Assets are transferred into the Trust Fund such as the
delivery to the Rating Agencies and the Trustee of certain opinions of counsel
(including bankruptcy, corporate and tax opinions).
Any portion of the Pre-Funded Amount remaining in the Pre-Funding Account
at the end of the Pre-Funding Period will be used to prepay one or more classes
of Securities in the amounts and in the manner specified in the related
Prospectus Supplement. In addition, if specified in the related Prospectus
Supplement,
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the Depositor may be required to deposit cash into an account maintained by the
Trustee (the "Capitalized Interest Account") for the purpose of assuring the
availability of funds to pay interest with respect to the Securities during the
Pre-Funding Period. Any amount remaining in the Capitalized Interest Account at
the end of the Pre-Funding Period will be remitted as specified in the related
Prospectus Supplement.
ACCOUNTS
Each Trust Fund will include one or more accounts, established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related Prospectus Supplement. See "Description of the Agreements -- Certain
Terms of the Pooling and Servicing Agreements, Trust Agreements and Underlying
Servicing Agreement -- Collection Account and Related Accounts."
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the related
series in the form of subordination of one or more other classes of Securities
in such series or by one or more other types of credit support, such as a letter
of credit, insurance policy, guarantee, reserve fund or another type of credit
support, or a combination thereof (any such coverage with respect to the
Securities of any series, "Credit Support"). The amount and types of coverage,
the identification of the entity providing the coverage (if applicable) and
related information with respect to each type of Credit Support, if any, will be
described in the Prospectus Supplement for a series of Securities. See "Risk
Factors -- Credit Support Limitations" and "Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements provided to reduce the
effects of interest rate or currency exchange rate fluctuations on the Assets or
on one or more classes of Securities. (Currency exchange agreements might be
included in the Trust Fund if some or all of the Mortgage Loans were denominated
in a non-United States currency.) The principal terms of any such guaranteed
investment contract or other agreement (any such agreement, a "Cash Flow
Agreement"), including, without limitation, provisions relating to the timing,
manner and amount of payments thereunder and provisions relating to the
termination thereof, will be described in the Prospectus Supplement for the
related series. In addition, the related Prospectus Supplement will provide
certain information with respect to the obligor under any such Cash Flow
Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the repayment of the
financing incurred in such purchase, and to pay for certain expenses incurred in
connection with such purchase of Assets and sale of Securities. The Depositor
expects to sell the Securities from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the volume
of Assets acquired by the Depositor, prevailing interest rates, availability of
funds and general market conditions.
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YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
Securityholder, the Pass-Through Rate of the Security, the receipt and timing of
receipt of distributions on the Security and the weighted average life of the
Assets in the related Trust Fund (which may be affected by prepayments,
defaults, liquidations or repurchases). See "Risk Factors."
PASS-THROUGH RATE AND INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
Prospectus Supplement with respect to any series of Securities will specify the
Pass-Through Rate or interest rate for each class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more classes of Securities; and whether the distributions of interest on the
Securities of any class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Pass-Through Rate or interest
rate and purchase price of such Security because, while interest may accrue on
each Asset during a certain period (each, an "Interest Accrual Period"), the
distribution of such interest will be made on a day which may be several days,
weeks or months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the Security
Balance of a class of Accrual Securities) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution Date.
As indicated above under "-- Pass-Through Rate and Interest Rate," if the
Interest Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of such
Securities may be lower than the yield that would result if the Interest Accrual
Period ended on such day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on Mortgage
Loans and Contracts resulting from both voluntary prepayments by the borrowers
and involuntary liquidations). The rate at which principal prepayments occur on
the Mortgage Loans and Contracts will be affected by a variety of factors,
including, without limitation, the terms of the Mortgage Loans and Contracts,
the level of prevailing interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates on the Mortgage Loans comprising or underlying the Assets in a particular
Trust Fund, such Mortgage Loans are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the rates borne by such
Mortgage Loans. In this regard, it should be noted that certain Assets may
consist of Mortgage Loans with different Mortgage Rates. The rate of principal
payments on some or all of the classes of Securities of a series will correspond
to the rate of principal payments on the Assets in the related Trust Fund and is
likely to be affected by the existence of Lock-out Periods and Prepayment
Premium provisions of the Mortgage Loans underlying or comprising such Assets,
and by the extent to which the servicer of any such Mortgage Loan is able to
enforce such provisions. Mortgage Loans with a Lock-out Period or a Prepayment
Premium provision, to the extent enforceable, generally would be expected to
experience a lower rate of principal prepayments than otherwise identical
Mortgage Loans without such provisions, with shorter Lock-out Periods or with
lower Prepayment Premiums. Because of the depreciating nature of manufactured
housing, which limits the possibilities for refinancing, and because the
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terms and principal amounts of manufactured housing contracts are generally
shorter and smaller than the terms and principal amounts of mortgage loans
secured by site-built homes, changes in interest rates have a correspondingly
smaller effect on the amount of the monthly payments on manufactured housing
contracts than on the amount of the monthly payments on mortgage loans secured
by site-built homes. Consequently, changes in interest rates may play a smaller
role in prepayment behavior of manufactured housing contracts than they do in
the prepayment behavior of loans secured by mortgage on site-built homes.
Conversely, local economic conditions and certain of the other factors mentioned
above may play a larger role in the prepayment behavior of manufactured housing
contracts than they do in the prepayment behavior of loans secured by mortgages
on site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the Prospectus Supplement for a series of Securities, the effect on yield on
one or more classes of the Securities of such series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
classes.
When a full prepayment is made on a Mortgage Loan or a Contract, the
obligor is charged interest on the principal amount of the Mortgage Loan or
Contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or such other period specified in the related
Prospectus Supplement. Generally, the effect of prepayments in full will be to
reduce the amount of interest paid in the following month to holders of
Securities entitled to payments of interest because interest on the principal
amount of any Mortgage Loan or Contract so prepaid will be paid only to the date
of prepayment rather than for a full month. A partial prepayment of principal is
applied so as to reduce the outstanding principal balance of the related
Mortgage Loan or Contract as of the Due Date in the month in which such partial
prepayment is receive or such other date as is specified in the related
Prospectus Supplement.
The timing of changes in the rate of principal payments on the Assets may
significantly affect an investor's actual yield to maturity, even if the average
rate of distributions of principal is consistent with an investor's expectation.
In general, the earlier a principal payment is received on the Mortgage Loans
and distributed on a Security, the greater the effect on such investor's yield
to maturity. The effect on an investor's yield of principal payments occurring
at a rate higher (or lower) than the rate anticipated by the investor during a
given period may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest principal
received in respect of a Security at a yield at least equal to the yield on such
Security.
PREPAYMENTS -- MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets included
in or comprising a Trust Fund and the rate at which payments are made from any
Credit Support or Cash Flow Agreement for the related series of Securities may
affect the ultimate maturity and the weighted average life of each class of such
series. Prepayments on the Mortgage Loans or Contracts comprising or underlying
the Assets in a particular Trust Fund will generally accelerate the rate at
which principal is paid on some or all of the classes of the Securities of the
related series.
If so provided in the Prospectus Supplement for a series of Securities, one
or more classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the Security Balance thereof is scheduled
to be reduced to zero, calculated on the basis of the assumptions applicable to
such series set forth therein. Weighted average life refers to the average
amount of time that will elapse from the date of issue of a security until each
dollar of principal of such security will be repaid to the investor. The
weighted average life of a class of Securities of a series will be influenced by
the rate at which principal on the Assets is
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paid to such class, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes prepayments, in
whole or in part, and liquidations due to default).
In addition, the weighted average life of the Securities may be affected by
the varying maturities of the Assets in a Trust Fund. If any Assets in a
particular Trust Fund have actual terms to maturity less than those assumed in
calculating final scheduled Distribution Dates for the classes of Securities of
the related series, one or more classes of such Securities may be fully paid
prior to their respective final scheduled Distribution Dates, even in the
absence of prepayments. Accordingly, the prepayment experience of the Assets
will, to some extent, be a function of the mix of Mortgage Rates or Contract
Rates and maturities of the Mortgage Loans or Contracts comprising or underlying
such Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans for the
life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans or Contracts underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Securities may
contain tables, if applicable, setting forth the projected weighted average life
of each class of Offered Securities of such series and the percentage of the
initial Security Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
Prospectus Supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities. It is unlikely that prepayment of any Mortgage Loans or Contracts
comprising or underlying the Assets for any series will conform to any
particular level of CPR, SPA or any other rate specified in the related
Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Asset
If so specified in the related Prospectus Supplement, a number of Mortgage
Loans may have balloon payments due at maturity (which, based on the
amortization schedule of such Mortgage Loans, may be a substantial amount), and
because the ability of a mortgagor to make a balloon payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a risk that a number of Balloon Payment Assets may
default at maturity. 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. Neither
the Depositor, the Servicer, the Master Servicer, nor any of their affiliates
will be obligated to refinance or repurchase any Mortgage Loan or to sell the
Mortgaged Property except to the extent provided in the related Prospectus
Supplement. In the case of defaults, recovery of proceeds may be delayed by,
among other things, bankruptcy of the mortgagor or adverse conditions in the
market where the property is located. In order to minimize losses on defaulted
Mortgage Loans, the Servicer may, to the extent and under the circumstances set
forth in the related Prospectus Supplement, be permitted to modify Mortgage
Loans that are in default or
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as to which a payment default is reasonably foreseeable. Any defaulted balloon
payment or modification that extends the maturity of a Mortgage Loan will tend
to extend the weighted average life of the Securities and may thereby lengthen
the period of time elapsed from the date of issuance of a Security until it is
retired.
With respect to certain Mortgage Loans, including 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. With respect to certain
Contracts, the Contract Rate may be "stepped up" during its term or may
otherwise vary or be adjusted. Under the applicable underwriting standards, the
mortgagor or obligor under each Mortgage Loan or Contract generally will be
qualified on the basis of the Mortgage Rate or Contract Rate in effect at
origination. The repayment of any such Mortgage Loan or Contract may thus be
dependent on the ability of the mortgagor or obligor to make larger level
monthly payments following the adjustment of the Mortgage Rate or Contract Rate.
In addition, 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 will be less than the
scheduled monthly payments thereon (the "Buydown Period"). The periodic increase
in the amount paid by the mortgagor of a Buydown Mortgage Loan during or at the
end of the applicable Buydown Period may create a greater financial burden for
the mortgagor, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally 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 applicable index at origination and the related margin over such index at
which interest accrues), 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 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 of any related class or
classes of Securities will lengthen the weighted average life thereof 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 the principal balance of the related class or classes of Securities,
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.
As may be described in the related Prospectus Supplement, the related
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 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
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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.
Termination
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, on any
date on which the aggregate Security Balance of the Securities of such series
declines to a percentage specified in the related Prospectus Supplement (not to
exceed 10%) of the Initial Security Balance, under the circumstances and in the
manner set forth therein. In addition, if so provided in the related Prospectus
Supplement, certain classes of Securities may be purchased or redeemed in the
manner set forth therein. See "Description of the Securities -- Termination."
Defaults
The rate of defaults on the Assets will also affect the rate, timing and
amount of principal payments on the Assets and thus the yield on the Securities.
In general, defaults on mortgage loans or contracts are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans and Contracts will be affected by the general
economic condition of the region of the country in which the related Mortgage
Properties or Manufactured Homes are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of the
Mortgage Loans or Contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
Mortgage Loans or Contracts that are repaid in accordance with their terms will
affect the weighted average life of the Mortgage Loans or Contracts comprising
or underlying the Assets and that of the related series of Securities.
Refinancing
At the request of a mortgagor, the Servicer may allow the refinancing of a
Mortgage Loan or Contract in any Trust Fund by accepting prepayments thereon and
permitting a new loan secured by a mortgage on the same property. In the event
of such a refinancing, the new loan would not be included in the related Trust
Fund and, therefore, such refinancing would have the same effect as a prepayment
in full of the related Mortgage Loan or Contract. A Servicer may, from time to
time, implement programs designed to encourage refinancing. Such programs may
include, without limitation, modifications of existing loans, general or
targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. In addition,
Servicers may encourage the refinancing of Mortgage Loans or Contracts,
including defaulted Mortgage Loans or Contracts, that would permit creditworthy
borrowers to assume the outstanding indebtedness of such Mortgage Loans or
Contracts.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
Prospectus Supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include "due-on-sale clauses" that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Mortgage Loans, except as set forth in the related
Prospectus
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Supplement, the 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 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. See "Certain Legal
Aspects of Mortgage Loans -- Due-on-Sale Clauses" and "Description of the
Agreements -- Certain Terms of the Pooling and Servicing Agreements, Trust
Agreements and Underlying Servicing Agreements -- Due-on-Sale Provisions." The
Contracts, in general, prohibit the sale or transfer of the related Manufactured
Homes without the consent of the Servicer and permit the acceleration of the
maturity of the Contracts by the Servicer upon any such sale or transfer that is
not consented to. It is expected that the Servicer will permit most transfers of
Manufactured Homes and not accelerate the maturity of the related Contracts. In
certain cases, the transfer may be made by a delinquent obligor in order to
avoid a repossession of the Manufactured Home. In the case of a transfer of a
Manufactured Home after which the Servicer desires to accelerate the maturity of
the related Contract, the Servicer's ability to do so will depend on the
enforceability under state law of the "due-on-sale clause". See "Certain Legal
Aspects of the Contracts -- Transfers of Manufactured Homes; Enforceability of
Due-on-Sale Clauses."
THE DEPOSITOR
NationsBanc Asset Securities, Inc., the Depositor, is a direct wholly-owned
subsidiary of NationsBanc Mortgage Capital Corporation and was incorporated in
the State of Delaware on July 23, 1997. The principal executive offices of the
Depositor are located at NationsBank Corporate Center, Charlotte, North Carolina
28255. Its telephone number is (704) 386-2400.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
DESCRIPTION OF THE SECURITIES
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to the related Agreement. If a series of Securities
includes Notes, such Notes will represent indebtedness of the related Trust Fund
and will be issued and secured pursuant to an Indenture. Each series of
Securities will consist of one or more classes of Securities that may (i)
provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, "Senior Securities") or
subordinate (collectively, "Subordinate Securities") to one or more other
classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled either to (A) principal distributions, with disproportionately
low, nominal or no interest distributions or (B) interest distributions, with
disproportionately low, nominal or no principal distributions (collectively,
"Strip Securities"); (iv) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of Securities of such series
(collectively, "Accrual Securities"); (v) provide for payments of principal as
described in the related Prospectus Supplement, from all or only a portion of
the Assets in such Trust Fund, to the extent of available funds, in each case as
described in the related Prospectus Supplement; and/or (vi) provide for
distributions based on a combination of two or more components thereof with one
or more of the characteristics described in this paragraph including a Strip
Security component. If so specified in the related Prospectus Supplement,
distributions on one or more classes of a series of Securities may be limited to
collections from a designated portion of the Assets in the related Trust Fund
(each such portion of Assets, an "Asset Group"). Any such classes may include
classes of Offered Securities.
Each class of Offered Securities of a series will be issued in minimum
denominations corresponding to the Security Balances or, in the case of certain
classes of Strip Securities, notional amounts or percentage interests specified
in the related Prospectus Supplement. The transfer of any Offered Securities may
be registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent
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thereof may require payment of a sum sufficient to cover any tax or other
governmental charge. One or more classes of Securities of a series may be issued
as Definitive Securities or in book-entry form ("Book-Entry Securities"), as
provided in the related Prospectus Supplement. See "Risk Factors -- Owners of
Book-Entry Securities Not Entitled to Exercise Rights of Holders of Securities"
and "Description of the Securities -- Book-Entry Registration and Definitive
Securities." Definitive Securities will be exchangeable for other Securities of
the same class and series of a like aggregate Security Balance, notional amount
or percentage interest but of different authorized denominations. See "Risk
Factors -- Limited Liquidity for Securities" and "-- Limited Assets for Payment
of Securities."
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on behalf
of the Trustee on each Distribution Date as specified in the related Prospectus
Supplement from the Available Distribution Amount for such series and such
Distribution Date. Distributions (other than the final distribution) will be
made to the persons in whose names the Securities are registered at the close of
business on, unless a different date is specified in the related Prospectus
Supplement, the last business day of the month preceding the month in which the
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the "Determination Date"). All
distributions with respect to each class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securityholders in such class
or by random selection or as described in the related Prospectus Supplement.
Payments will be made either by wire transfer in immediately available funds 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 other
person required to make such payments no later than the date specified in the
related Prospectus Supplement (and, if so provided in the related Prospectus
Supplement, holds Securities in the requisite amount specified therein), 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 will be made only upon presentation and surrender of the
Securities at the location specified in the notice to Securityholders of such
final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement.
Generally, the "Available Distribution Amount" for each Distribution Date equals
the sum of the following amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Period (unless a different
period is specified in the related Prospectus Supplement, a "Due Period"
with respect to any Distribution Date will commence on the second day of
the month in which the immediately preceding Distribution Date occurs,
or the day after the Cut-off Date in the case of the first Due Period,
and will end on the first day of the month of the related Distribution
Date),
(b) all prepayments, together with related payments of the interest
thereon and related Prepayment Premiums, all proceeds of any insurance
policies to be maintained in respect of each Asset (to the extent such
proceeds are not applied to the restoration of the Asset or released in
accordance with the normal servicing procedures of a Servicer, subject
to the terms and conditions applicable to the related Asset)
(collectively, "Insurance Proceeds"), all other amounts received and
retained in connection with the liquidation of Assets in default in the
Trust Fund ("Liquidation Proceeds"), and other unscheduled recoveries
received subsequent to the related Due Period,
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a Servicer,
the Master Servicer or any other entity as specified in the
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related Prospectus Supplement or that are payable in respect of certain
expenses of the related Trust Fund, and
(d) all amounts received for a repurchase of an Asset from the
Trust Fund for defective documentation or a breach of representation or
warranty received subsequent to the related Due Period;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Servicer or the Master Servicer or any
other entity as specified in the related Prospectus Supplement with respect
to such Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Servicer or any other entity as specified in
the related Prospectus Supplement with respect to interest shortfalls
resulting from prepayments during the related Prepayment Period; and
(v) to the extent not on deposit in the related Collection Account as
of the corresponding Determination Date, any amounts collected under, from
or in respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
The related Prospectus Supplement for a series of Securities will describe
any variation in the calculation of the Available Distribution Amount for such
series.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Strip Securities that have
no Pass-Through Rate or interest rate) may have a different Pass-Through Rate or
interest rate, which will be a fixed, variable or adjustable rate at which
interest will accrue on such class or a component thereof (the "Pass-Through
Rate" in the case of Certificates). The related Prospectus Supplement will
specify the Pass-Through Rate or interest rate for each class or component or,
in the case of a variable or adjustable Pass-Through Rate or interest rate, the
method for determining the Pass-Through Rate or interest rate. Interest on the
Securities will be calculated on the basis of a 360-day year consisting of
twelve 30-day months unless the related Prospectus Supplement specifies a
different basis.
Distributions of interest in respect of the Securities of any class will be
made on each Distribution Date (other than any class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any class of Strip Securities that are not entitled
to any distributions of interest) based on the Accrued Security Interest for
such class and such Distribution Date, subject to the sufficiency of the portion
of the Available Distribution Amount allocable to such class on such
Distribution Date. Prior to the time interest is distributable on any class of
Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such class will be added to the Security Balance thereof on
each Distribution Date. With respect to each class of Securities and each
Distribution Date (other than certain classes of Strip Securities), "Accrued
Security Interest" will be equal to interest accrued during the related Interest
Accrual Period on the outstanding Security Balance thereof immediately prior to
the Distribution Date, at the applicable Pass-Through Rate or interest rate,
reduced as described below. Accrued Security Interest on certain classes of
Strip Securities will be equal to interest accrued during the related Interest
Accrual Period on the outstanding notional amount thereof immediately prior to
each Distribution Date, at the applicable Pass-Through Rate or interest rate,
reduced as described below, or interest accrual in the manner described in the
related Prospectus Supplement. The method of determining the notional amount for
a certain class of Strip Securities will be described in the related Prospectus
Supplement. Reference to notional amount is solely for convenience in certain
calculations and does not represent the right to receive any distributions of
principal. Unless otherwise
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provided in the related Prospectus Supplement, the Accrued Security Interest on
a series of Securities will be reduced in the event of prepayment interest
shortfalls, which are shortfalls in collections of interest for a full accrual
period resulting from prepayments prior to the due date in such accrual period
on the Mortgage Loans or Contracts comprising or underlying the Assets in the
Trust Fund for such series. The particular manner in which such shortfalls are
to be allocated among some or all of the classes of Securities of that series
will be specified in the related Prospectus Supplement. The related Prospectus
Supplement will also describe the extent to which the amount of Accrued
Certificate Interest that is otherwise distributable on (or, in the case of
Accrual Securities, that may otherwise be added to the Security Balance of) a
class of Offered Securities may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on or in
respect of the Mortgage Loans or Contracts comprising or underlying the Assets
in the related Trust Fund. Unless otherwise provided in the related Prospectus
Supplement, any reduction in the amount of Accrued Security Interest otherwise
distributable on a class of Securities by reason of the allocation to such class
of a portion of any deferred interest on the Mortgage Loans or Contracts
comprising or underlying the Assets in the related Trust Fund will result in a
corresponding increase in the Security Balance of such class. See "Risk
Factors -- Rate of Prepayments on Assets and Priority of Payment of Securities
May Adversely Affect Average Lives and Yields of Securities" and "Yield
Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain classes of Strip
Securities, will have a "Security Balance" which, at any time, will equal the
then maximum amount that the holder will be entitled to receive in respect of
principal out of the future cash flow on the Assets and other assets included in
the related Trust Fund. The outstanding Security Balance of a Security will be
reduced to the extent of distributions of principal thereon from time to time
and, if and to the extent so provided in the related Prospectus Supplement, by
the amount of losses incurred in respect of the related Assets, may be increased
in respect of deferred interest on the related Mortgage Loans to the extent
provided in the related Prospectus Supplement and, in the case of Accrual
Securities prior to the Distribution Date on which distributions of interest are
required to commence, will be increased by any related Accrued Security
Interest. If so specified in the related Prospectus Supplement, the initial
aggregate Security Balance of all classes of Securities of a series will be
greater than the outstanding aggregate principal balance of the related Assets
as of the applicable Cut-off Date. The initial aggregate Security Balance of a
series and each class thereof will be specified in the related Prospectus
Supplement. Distributions of principal will be made on each Distribution Date to
the class or classes of Securities in the amounts and in accordance with the
priorities specified in the related Prospectus Supplement. Certain classes of
Strip Securities with no Security Balance are not entitled to any distributions
of principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement, distribution
on a class of Securities may be based on a combination of two or more different
components as described under "-- General" above. To such extent, the
descriptions set forth under "-- Distributions of Interest on the Securities"
and "-- Distributions of Principal of the Securities" above also relate to
components of such a class of Securities. In such case, reference in such
sections to Security Balance and Pass-Through Rate or interest rate refer to the
principal balance, if any, of any such component and the Pass-Through Rate or
interest rate, if any, on any such component, respectively.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the related Prospectus Supplement, Prepayment Premiums
that are collected on the Mortgage Loans in the related Trust Fund will be
distributed on each Distribution Date to the class or classes of Securities
entitled thereto in accordance with the provisions described in such Prospectus
Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the
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Assets have been incurred, the amount of such losses or shortfalls will be borne
first by a class of Subordinate Securities in the priority and manner and
subject to the limitations specified in such Prospectus Supplement. See
"Description of Credit Support" for a description of the types of protection
that may be included in a Trust Fund against losses and shortfalls on Assets
comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities evidencing an interest in a Trust
Fund, if so provided in the related Prospectus Supplement, the Servicer or
another entity described therein will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds or
funds held in the Collection Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Assets in such Trust Fund during the related Due Period and were delinquent
on the related Determination Date, subject to the Servicer's (or another
entity's) good faith determination that such advances will be reimbursable from
Related Proceeds (as defined below). In the case of a series of Securities that
includes one or more classes of Subordinate Securities and if so provided in the
related Prospectus Supplement, the Servicer's (or another entity's) advance
obligation may be limited only to the portion of such delinquencies necessary to
make the required distributions on one or more classes of Senior Securities
and/or may be subject to the Servicer's (or another entity's) good faith
determination that such advances will be reimbursable not only from Related
Proceeds but also from collections on other Assets otherwise distributable on
one or more classes of such Subordinate Securities. See "Description of Credit
Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Securities entitled
thereto, rather than to guarantee or insure against losses. Advances of the
Servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Assets (including amounts received under any form of Credit
Support) respecting which such advances were made (as to any Assets, "Related
Proceeds") and from any other amounts specified in the related Prospectus
Supplement, including out of any amounts otherwise distributable on one or more
classes of Subordinate Securities of such series; provided, however, that any
such advance will be reimbursable from any amounts in the Collection Account
prior to any distributions being made on the Securities to the extent that the
Servicer (or such other entity) shall determine in good faith that such advance
(a "Nonrecoverable Advance") is not ultimately recoverable from Related Proceeds
or, if applicable, from collections on other Assets otherwise distributable on
such Subordinate Securities. If advances have been made by the Servicer from
excess funds in the Collection Account, the Servicer is required to replace such
funds in the Collection Account on any future Distribution Date to the extent
that funds in the Collection Account on such Distribution Date are less than
payments required to be made to Securityholders on such date. If so specified in
the related Prospectus Supplement, the obligations of the Servicer (or another
entity) to make advances may be secured by a cash advance reserve fund, a surety
bond, a letter of credit or another form of limited guaranty. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
If and to the extent so provided in the related Prospectus Supplement, the
Servicer (or another entity) will be entitled to receive interest at the rate
specified therein on its outstanding advances and will be entitled to pay itself
such interest periodically from general collections on the Assets prior to any
payment to Securityholders or as otherwise provided in the related Agreement and
described in such Prospectus Supplement.
If specified in the related Prospectus Supplement, the Master Servicer or
the Trustee will be required to make advances, subject to certain conditions
described in the Prospectus Supplement, in the event of a Servicer default.
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REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of Securities of a series,
the Servicer, the Master Servicer or the Trustee, as provided in the related
Prospectus Supplement, will forward or cause to be forwarded to each such
holder, to the Depositor and to such other parties as may be specified in the
related Agreement, a statement generally setting forth, in each case to the
extent applicable and available:
(i) the amount of such distribution to holders of Securities of such
class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of such
class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to Prepayment
Premiums;
(iv) the amount of related servicing compensation and such other
customary information as is required to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of unreimbursed advances at the close of business
on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Mortgage Loans or
Contracts in respect of which (a) one scheduled payment is delinquent, (b)
two scheduled payments are delinquent, (c) three or more scheduled payments
are delinquent and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Mortgage Loan or Contract liquidated during
the related Due Period, (a) the portion of such liquidation proceeds
payable or reimbursable to a Servicer (or any other entity) in respect of
such Mortgage Loan and (b) the amount of any loss to Securityholders;
(ix) with respect to collateral acquired by the Trust Fund through
foreclosure or otherwise (an "REO Property") relating to a Mortgage Loan or
Contract and included in the Trust Fund as of the end of the related Due
Period, the date of acquisition;
(x) with respect to each REO Property relating to a Mortgage Loan or
Contract and included in the Trust Fund as of the end of the related Due
Period, (a) the book value, (b) the principal balance of the related
Mortgage Loan or Contract immediately following such Distribution Date
(calculated as if such Mortgage Loan or Contract were still outstanding
taking into account certain limited modifications to the terms thereof
specified in the Agreement), (c) the aggregate amount of unreimbursed
servicing expenses and unreimbursed advances in respect thereof and (d) if
applicable, the aggregate amount of interest accrued and payable on related
servicing expenses and related advances;
(xi) with respect to any such REO Property sold during the related Due
Period (a) the aggregate amount of sale proceeds, (b) the portion of such
sales proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan or Contract and (c) the
amount of any loss to Securityholders in respect of the related Mortgage
Loan;
(xii) the aggregate Security Balance or notional amount, as the case
may be, of each class of Securities (including any class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a class of
Accrual Securities in the event that Accrued Security Interest has been
added to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the close
of business on such Distribution Date;
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(xvi) the aggregate unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on such Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method specified in
the related Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through Rate
or interest rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the
close of business on such Distribution Date;
(xx) during the Pre-Funding Period, the remaining Pre-Funded Amount
and the portion of the Pre-Funding Amount used to acquire Subsequent
Mortgage Loans since the preceding Distribution Date;
(xxi) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(xxii) the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
Within a reasonable period of time after the end of each calendar year, the
Servicer, the Master Servicer or the Trustee, as provided in the related
Prospectus Supplement, shall furnish to each Securityholder of record at any
time during the calendar year such information required by the Code and
applicable regulations thereunder to enable Securityholders to prepare their tax
returns. See "Description of the Securities -- Book-Entry Registration and
Definitive Securities."
TERMINATION
The obligations created by the related Agreement for each series of
Securities will terminate upon the payment to Securityholders of that series of
all amounts held in the Collection Account or by a Servicer, the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all property
acquired upon foreclosure of any Mortgage Loan or Contract subject thereto and
(ii) the purchase of all of the assets of the Trust Fund by the party entitled
to effect such termination, under the circumstances and in the manner set forth
in the related Prospectus Supplement. In no event, however, will the Trust Fund
continue beyond the date specified in the related Prospectus Supplement. Written
notice of termination of the Agreement will be given to each Securityholder, and
the final distribution will be made only upon presentation and surrender of the
Securities at the location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities by a specified percentage, the party
specified therein will solicit bids for the purchase of all assets of the Trust
Fund, or of a sufficient portion of such assets to retire such class or classes
or purchase such class or classes at a price set forth in the related Prospectus
Supplement, in each case, under the circumstances and in the manner set forth
therein. Such price will at least equal the outstanding Security Balances and
any accrued and unpaid interest thereon (including any unpaid interest
shortfalls for prior Distribution Dates). Any sale of the Assets of the Trust
Fund will be without recourse to the Trust Fund or the Securityholders. Any such
purchase or solicitation of bids may be made only when the aggregate Security
Balance of such class or classes declines to a percentage of the Initial
Security Balance of such Securities (not to exceed 10%) specified in the
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related Prospectus Supplement. In addition, if so provided in the related
Prospectus Supplement, certain classes of Securities may be purchased or
redeemed in the manner set forth therein.
OPTIONAL PURCHASES
Subject to the provisions of the applicable Agreement, the Depositor, the
Servicer or such other party specified in the related Prospectus Supplement may,
at such party's option, repurchase any Mortgage Loan which is in default or as
to which default is reasonably foreseeable if, in the Depositor's, the
Servicer's or such other party's judgment, the related default is not likely to
be cured by the borrower or default is not likely to be averted, at a price
equal to the unpaid principal balance thereof plus accrued interest thereon and
under the conditions set forth in the applicable Prospectus Supplement.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
If so provided in the related Prospectus Supplement, one or more classes of
the Offered Securities of any series will be issued as Book-Entry Securities,
and each such class will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ("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 banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Investors that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of, or other interests in,
Book-Entry Securities may do so only through Participants and Indirect
Participants or in such other manner as is provided for in the related
Prospectus Supplement. In addition, such investors ("Security Owners") will
receive all distributions on the Book-Entry Securities through DTC and its
Participants. Under a book-entry format, Security Owners will receive payments
after the related Distribution Date because, while payments are required to be
forwarded to Cede & Co., as nominee for DTC ("Cede"), on each such date, DTC
will forward such payments to its Participants which thereafter will be required
to forward them to Indirect Participants or Security Owners. The only
"Securityholder" (as such term is used in the Agreement or Indenture, as
applicable) will be Cede, as nominee of DTC or such other entity specified in
the related Prospectus Supplement, and the Security Owners will not be
recognized by the Trustee as Securityholders under the Agreement or Indenture,
as applicable. Security Owners will be permitted to exercise the rights of
Securityholders under the related Agreement or Indenture, as applicable, only
indirectly through the 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 Book-Entry Securities and is
required to receive and transmit distributions of principal of and interest on
the Book-Entry Securities. Participants and Indirect Participants with which
Security Owners have accounts with respect to the Book-Entry Securities
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Security Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or entities
that do not participate in the DTC system, or otherwise take actions in respect
of its interest in the Book-Entry Securities, may be limited due to the lack of
a physical certificate evidencing such interest.
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DTC has advised the Depositor that it will take any action permitted to be
taken by a Securityholder under an Agreement only at the direction of one or
more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Securities initially issued in book-entry form will be issued as Definitive
Securities to Security Owners or their nominees, rather than to DTC or its
nominee only (i) if the Depositor advises the Trustee in writing that DTC is no
longer willing or able to properly discharge its responsibilities as depository
with respect to the Securities and the Depositor is unable to locate a qualified
successor, (ii) if the Depositor, at its option, elects to terminate the
book-entry system through DTC or (iii) in accordance with such other provisions
described in the related Prospectus Supplement.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Security Owners. Upon
surrender by DTC of the certificate or certificates representing the Book-Entry
Securities, together with instructions for registration, the Trustee will issue
(or cause to be issued) to the Security Owners identified in such instructions
the Definitive Securities to which they are entitled, and thereafter the Trustee
will recognize the holders of such Definitive Securities as Securityholders
under the Agreement.
None of the Depositor, any Master Servicer, any Servicer, the Trustee, or
any of their affiliates will have any responsibility for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the Book-Entry Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
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DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Securities, FASIT Securities, Grantor Trust Securities
Securities representing interests in a Trust Fund, or a portion thereof,
that the Trustee will elect to have treated as a real estate mortgage investment
conduit under Sections 860A through 860G of the Code ("REMIC Securities"), FASIT
Securities or Grantor Trust Securities will be issued, and the related Trust
Fund will be created, pursuant to a pooling and servicing agreement (a "Pooling
and Servicing Agreement") among the Depositor, the Trustee and the sole Servicer
or Master Servicer, as applicable. The Assets of such Trust Fund will be
transferred to the Trust Fund and thereafter serviced in accordance with the
terms of the Pooling and Servicing Agreement. In the event there are multiple
Servicers of the Assets of such Trust Fund, each Servicer will perform its
servicing functions pursuant to a servicing agreement (each, a "Pooling
Servicing Agreement").
Securities That Are Partnership Interests for Tax Purposes and Notes
Securities that are partnership interests for tax purposes will be issued,
and the related Trust Fund will be created, pursuant to a Pooling and Servicing
Agreement.
A series of Notes issued by a Trust Fund will be issued pursuant to an
indenture (the "Indenture") between the related Trust Fund and an indenture
trustee (the "Indenture Trustee") named in the related Prospectus Supplement.
The Trust Fund will be established pursuant to a deposit trust agreement (each,
a "Deposit Trust Agreement") between the Depositor and an owner trustee
specified in the Prospectus Supplement relating to such series of Notes. The
Assets securing payment on the Notes will be serviced in accordance with a
servicing agreement (each, an "Indenture Servicing Agreement") between the
related Trust Fund as issuer of the Notes, the Servicer and the Indenture
Trustee. The Pooling Servicing Agreements and the Indenture Servicing Agreements
are referred to herein as "Underlying Servicing Agreements."
MATERIAL TERMS OF THE POOLING AND SERVICING AGREEMENTS AND UNDERLYING SERVICING
AGREEMENTS
General
The following summaries describe the material provisions that may appear in
each Pooling and Servicing Agreement and Underlying Servicing Agreement (each an
"Agreement"). The Prospectus Supplement for a series of Securities will describe
any provision of the Agreement relating to such series that materially differs
from the description thereof contained in this Prospectus. 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 Agreement for each Trust Fund and
the description of such provisions in the related Prospectus Supplement. The
provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust Fund. As
used herein with respect to any series, the term "Security" refers to all of the
Securities of that series, whether or not offered hereby and by the related
Prospectus Supplement, unless the context otherwise requires. A form of a
Pooling and Servicing Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Depositor will provide a copy
of the Pooling and Servicing Agreement (without exhibits) relating to any series
of Securities without charge upon written request of a Securityholder of such
series addressed to NationsBanc Asset Securities, Inc., NationsBank Corporate
Center, Charlotte, North Carolina 28255, Attention: Vice President.
The Servicers, any Master Servicer and the Trustee with respect to any
series of Securities will be named in the related Prospectus Supplement. In the
event there are multiple Servicers for the Assets in a Trust Fund, a Master
Servicer will perform certain administration, calculation and reporting
functions with respect to such Trust Fund and will supervise the related
Servicers pursuant to a Pooling and Servicing Agreement. With respect to series
involving a Master Servicer, references in this Prospectus to the Servicer will
apply to the Master Servicer where non-servicing obligations are described. If
so specified in the related Prospectus Supplement, a manager or administrator
may be appointed pursuant to the Pooling and Servicing Agreement for any Trust
Fund to administer such Trust Fund.
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Assignment of Assets; Repurchases
At the time of issuance of any series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The Trustee will, concurrently with such assignment, deliver
the Securities to the Depositor in exchange for the Assets and the other assets
comprising the Trust Fund for such series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. Such schedule will
include detailed information to the extent available and relevant (i) in respect
of each Mortgage Loan included in the related Trust Fund, including without
limitation, the city and state of the related Mortgaged Property and type of
such property, the Mortgage Rate and, if applicable, the applicable index,
margin, adjustment date and any rate cap information, the original and remaining
term to maturity, the original and outstanding principal balance and balloon
payment, if any, the Loan-to-Value Ratio as of the date indicated and payment
and prepayment provisions, if applicable; and (ii) in respect of each Contract
included in the related Trust Fund, including without limitation the outstanding
principal amount and the Contract Rate.
With respect to each Mortgage Loan, except as otherwise specified in the
related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which will generally include the original Mortgage Note
endorsed, without recourse, in blank or to the order of the Trustee, the
original Mortgage (or a certified copy thereof) with evidence of recording
indicated thereon and an assignment of the Mortgage to the Trustee in recordable
form. Notwithstanding the foregoing, a Trust Fund may include Mortgage Loans
where the original Mortgage Note is not delivered to the Trustee if the
Depositor delivers to the Trustee or the custodian a copy or a duplicate
original of the Mortgage Note, together with an affidavit certifying that the
original thereof has been lost or destroyed. With respect to such Mortgage
Loans, the Trustee (or its nominee) may not be able to enforce the Mortgage Note
against the related borrower. The Asset Seller or other entity specified in the
related Prospectus Supplement will be required to agree to repurchase, or
substitute for, each such Mortgage Loan that is subsequently in default if the
enforcement thereof or of the related Mortgage is materially adversely affected
by the absence of the original Mortgage Note. The related Agreement will
generally require the Depositor or another party specified in the related
Prospectus Supplement to promptly cause each such assignment of Mortgage to be
recorded in the appropriate public office for real property records, except in
the State of California or in other states where, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the related Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Depositor, the
Servicer, the relevant Asset Seller or any other prior holder of the Mortgage
Loan.
The Trustee (or a custodian) will review such Mortgage Loan documents
within a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the benefit of the
Securityholders. If any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall immediately notify the
Servicer and the Depositor, and the Servicer shall immediately notify the
relevant Asset Seller or other entity specified in the related Prospectus
Supplement. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice, then unless otherwise
specified in the related Prospectus Supplement, the Asset Seller or other entity
specified in the related Prospectus Supplement will be obligated, within a
specified number of days of receipt of such notice, to repurchase the related
Mortgage Loan from the Trustee at a price equal to the sum of the unpaid
principal balance thereof, plus unpaid accrued interest at the interest rate for
such Asset from the date as to which interest was last paid to the due date in
the Due Period in which the relevant purchase is to occur, plus certain
servicing expenses that are payable to the Servicer or such other price as
specified in the related Prospectus Supplement (the "Purchase Price") or
substitute for such Mortgage Loan. There can be no assurance that an Asset
Seller or other named entity will fulfill this repurchase or substitution
obligation, and neither the Servicer nor the Depositor will be obligated to
repurchase or substitute for such Mortgage Loan if the Asset Seller or other
named entity defaults on its obligation. This repurchase or substitution
obligation constitutes the sole remedy available to the Securityholders or the
Trustee for omission of, or a material defect
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in, a constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the Trust Fund as a result of
such breach or defect.
Notwithstanding the preceding two paragraphs, the documents with respect to
Home Equity Loans, Home Improvement Contracts and Unsecured Home Improvement
Loans will be delivered to the Trustee (or a custodian) only to the extent
specified in the related Prospectus Supplement. Generally such documents will be
retained by the Servicer, which may also be the Asset Seller. In addition,
assignments of the related Mortgages to the Trustee will be recorded only to the
extent specified in the related Prospectus Supplement.
With respect to each Contract, the Servicer (which may also be the Asset
Seller) generally will maintain custody of the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. In order to give notice of the
right, title and interest of the Trustee in the Contracts, the Depositor will
cause UCC-1 financing statements to be executed by the related Asset Seller
identifying the Depositor as secured party and by the Depositor identifying the
Trustee as the secured party and, in each case, identifying all Contracts as
collateral. The Contracts will be stamped or otherwise marked to reflect their
assignment from the Company to the Trust Fund only to the extent specified in
the related Prospectus Supplement. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the interest of the Trustee in the
Contracts could be defeated. See "Certain Legal Aspects of the Contracts."
While the Contract documents will not be reviewed by the Trustee or the
Servicer, if the Servicer finds that any such document is missing or defective
in any material respect, the Servicer will be required to immediately notify the
Depositor and the relevant Asset Seller or other entity specified in the related
Prospectus Supplement. If the Asset Seller or such other entity cannot cure the
omission or defect within a specified number of days after receipt of such
notice, then the Asset Seller or such other entity will be obligated, within a
specified number of days of receipt of such notice, to repurchase the related
Contract from the Trustee at the Purchase Price or substitute for such Contract.
There can be no assurance that an Asset Seller or such other entity will fulfill
this repurchase or substitution obligation, and neither the Servicer nor the
Depositor will be obligated to repurchase or substitute for such Contract if the
Asset Seller or such other entity defaults on its obligation. This repurchase or
substitution obligation constitutes the sole remedy available to the
Securityholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
Representations and Warranties; Repurchases
To the extent provided in the related Prospectus Supplement the Depositor
will, with respect to each Asset, assign certain representations and warranties,
as of a specified date (the person making such representations and warranties,
the "Warranting Party") covering, by way of example, the following types of
matters: (i) the accuracy of the information set forth for such Asset on the
schedule of Assets appearing as an exhibit to the related Agreement; (ii) in the
case of a Mortgage Loan, the existence of title insurance insuring the lien
priority of the Mortgage Loan and, in the case of a Contract, that the Contract
creates a valid first security interest in or lien on the related Manufactured
Home; (iii) the authority of the Warranting Party to sell the Asset; (iv) the
payment status of the Asset; (v) in the case of a Mortgage Loan, the existence
of customary provisions in the related Mortgage Note and Mortgage to permit
realization against the Mortgaged Property of the benefit of the security of the
Mortgage; and (vi) the existence of hazard and extended perils insurance
coverage on the Mortgaged Property or Manufactured Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date prior to the applicable Cut-off Date. A substantial period of
time may have elapsed between such date and the date of
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initial issuance of the related series of Securities evidencing an interest in
such Asset. In the event of a breach of any such representation or warranty, the
Warranting Party will be obligated to reimburse the Trust Fund for losses caused
by any such breach or either cure such breach or repurchase or replace the
affected Asset as described below. Since the representations and warranties may
not address events that may occur following the date as of which they were made,
the Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to such date.
Such party would have no such obligations if the relevant event that causes such
breach occurs after such date.
Each Agreement will provide that the Servicer and/or Trustee or such other
entity identified in the related Prospectus Supplement will be required to
notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of an Asset that materially and
adversely affects the value of such Asset or the interests therein of the
Securityholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Asset
from the Trustee within a specified period from the date on which the Warranting
Party was notified of such breach, at the Purchase Price therefor. If so
provided in the Prospectus Supplement for a series, a Warranting Party, rather
than repurchase an Asset as to which a breach has occurred, will have the
option, within a specified period after initial issuance of such series of
Securities, to cause the removal of such Asset from the Trust Fund and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the related Prospectus Supplement. If so
provided in the Prospectus Supplement for a series, a Warranting Party, rather
than repurchase or substitute an Asset as to which a breach has occurred, will
have the option to reimburse the Trust Fund or the Securityholders for any
losses caused by such breach. This reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to Securityholders or the
Trustee for a breach of representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Servicer will be obligated to purchase or substitute for an Asset
if a Warranting Party defaults on its obligation to do so, and no assurance can
be given that Warranting Parties will carry out such obligations with respect to
the Assets.
A Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
related Agreement. A breach of any such representation of the Servicer which
materially and adversely affects the interests of the Securityholders and which
continues unremedied for the number of days specified in the Agreement after the
giving of written notice of such breach to the Servicer by the Trustee or the
Depositor, or to the Servicer, the Depositor and the Trustee by the holders of
Securities evidencing not less than 25% of the Voting Rights or such other
percentage specified in the related Prospectus Supplement, will constitute an
Event of Default under such Agreement. See "Events of Default" and "Rights Upon
Event of Default."
Collection Account and Related Accounts
General. The Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be either (i) an account or
accounts the deposits in which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") (to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured such that the Securityholders have a claim with
respect to the funds in the Collection Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the institution with
which the Collection Account is maintained or (ii) otherwise maintained with a
bank or trust company, and in a manner, satisfactory to the Rating Agency or
Agencies rating any class of Securities of such series. The collateral eligible
to secure amounts in the Collection Account is limited to United States
government securities and other investment grade obligations specified in the
Agreement ("Permitted Investments"). A Collection Account may be maintained as
an interest bearing or a non-interest bearing account and the funds held therein
may be invested pending each succeeding Distribution Date in certain short-term
Permitted Investments. Any
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interest or other income earned on funds in the Collection Account will be paid
to the Servicer or its designee as additional servicing compensation. The
Collection Account may be maintained with an institution that is an affiliate of
the Servicer, if applicable, provided that such institution meets the standards
imposed by the Rating Agency or Agencies. If permitted by the Rating Agency or
Agencies, a Collection Account may contain funds relating to more than one
series of mortgage pass-through certificates and may contain other funds
respecting payments on mortgage loans belonging to the Servicer or serviced or
master serviced by it on behalf of others.
Deposits. A Servicer or the Trustee will deposit or cause to be deposited
in the Collection Account for one or more Trust Funds on a daily basis, or such
other period provided in the related Agreement, the following payments and
collections received, or advances made, by the Servicer or the Trustee or on its
behalf subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date, and exclusive of any amounts representing a Retained Interest):
(i) all payments on account of principal, including principal
prepayments, on the Assets;
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof
retained by a Servicer as its servicing compensation and net of any
Retained Interest;
(iii) Liquidation Proceeds and Insurance Proceeds, together with the
net proceeds on a monthly basis with respect to any Assets acquired for the
benefit of Securityholders;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Securities as
described under "Description of Credit Support";
(v) any advances made as described under "Description of the
Securities -- Advances in Respect of Delinquencies";
(vi) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds -- Cash Flow Agreements";
(vii) all proceeds of any Asset or, with respect to a Mortgage Loan,
property acquired in respect thereof purchased by the Depositor, any Asset
Seller or any other specified person as described under "Assignment of
Assets; Repurchases" and "Representations and Warranties; Repurchases," all
proceeds of any defaulted Mortgage Loan purchased as described under
"Realization Upon Defaulted Assets," and all proceeds of any Asset
purchased as described under "Description of the
Securities -- Termination";
(viii) any amounts paid by a Servicer to cover certain interest
shortfalls arising out of the prepayment of Assets in the Trust Fund as
described under "Description of the Agreements -- Retained Interest;
Servicing Compensation and Payment of Expenses";
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment
Premiums on the Assets;
(x) all payments required to be deposited in the Collection Account
with respect to any deductible clause in any blanket insurance policy
described under "Hazard Insurance Policies";
(xi) any amount required to be deposited by a Servicer or the Trustee
in connection with losses realized on investments for the benefit of the
Servicer or the Trustee, as the case may be, of funds held in the
Collection Account; and
(xii) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the related
Prospectus Supplement.
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Withdrawals. A Servicer or the Trustee may, from time to time, make
withdrawals from the Collection Account for each Trust Fund for any of the
following purposes:
(i) to make distributions to the Securityholders on each Distribution
Date;
(ii) to reimburse a Servicer for unreimbursed amounts advanced as
described under "Description of the Securities -- Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received which
were identified and applied by the Servicer as late collections of interest
(net of related servicing fees and Retained Interest) on and principal of
the particular Assets with respect to which the advances were made or out
of amounts drawn under any form of Credit Support with respect to such
Assets;
(iii) to reimburse a Servicer for unpaid servicing fees earned and
certain unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect thereof, such reimbursement to be made out
of amounts that represent Liquidation Proceeds and Insurance Proceeds
collected on the particular Assets and properties, and net income collected
on the particular properties, with respect to which such fees were earned
or such expenses were incurred or out of amounts drawn under any form of
Credit Support with respect to such Assets and properties;
(iv) to reimburse a Servicer for any advances described in clause (ii)
above and any servicing expenses described in clause (iii) above which, in
the Servicer's good faith judgment, will not be recoverable from the
amounts described in clauses (ii) and (iii), respectively, such
reimbursement to be made from amounts collected on other Assets or, if and
to the extent so provided by the related Agreement and described in the
related Prospectus Supplement, just from that portion of amounts collected
on other Assets that is otherwise distributable on one or more classes of
Subordinate Securities, if any, remain outstanding, and otherwise any
outstanding class of Securities, of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay a Servicer interest accrued on the advances described in
clause (ii) above and the servicing expenses described in clause (iii)
above while such advances and servicing expenses remain outstanding and
unreimbursed;
(vi) to reimburse a Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be,
for certain expenses, costs and liabilities incurred thereby, as and to the
extent described under "Certain Matters Regarding Servicers, the Master
Servicer and the Depositor";
(vii) if and to the extent described in the related Prospectus
Supplement, to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under "Certain
Matters Regarding the Trustee";
(ix) to pay a Servicer, as additional servicing compensation, interest
and investment income earned in respect of amounts held in the Collection
Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Servicer as
recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired for
the benefit of Securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, such payments to be made out of income received
on such property;
(xii) if one or more elections have been made to treat the Trust Fund
or designated portions thereof as a REMIC or a FASIT, to pay any federal,
state or local taxes imposed on the Trust Fund or its assets or
transactions, as and to the extent described under "Federal Income Tax
Consequences -- REMICs -- Taxes That May Be Imposed on the REMIC Pool" or
in the applicable Prospectus Supplement, respectively;
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(xiii) to pay for the cost of an independent appraiser or other expert
in real estate matters retained to determine a fair sale price for a
defaulted Mortgage Loan or a property acquired in respect thereof in
connection with the liquidation of such Mortgage Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of Securityholders;
(xv) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any breach
of representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after
its removal from the Trust Fund whether by reason of purchase or
substitution as contemplated by "Assignment of Assets; Repurchase" and
"Representations and Warranties; Repurchases" or otherwise;
(xvii) to make any other withdrawals permitted by the related Agreement;
and
(xviii) to clear and terminate the Collection Account at the
termination of the Trust Fund.
Other Collection Accounts. Notwithstanding the foregoing, if so specified
in the related Prospectus Supplement, the Agreement for any series of Securities
may provide for the establishment and maintenance of a separate collection
account into which the Servicer will deposit on a daily basis the amounts
described under "-- Deposits" above for one or more series of Securities. Any
amounts on deposit in any such collection account will be withdrawn therefrom
and deposited into the appropriate Collection Account by a time specified in the
related Prospectus Supplement. To the extent specified in the related Prospectus
Supplement, any amounts which could be withdrawn from the Collection Account as
described under "-- Withdrawals" above, may also be withdrawn from any such
collection account. The Prospectus Supplement will set forth any restrictions
with respect to any such collection account, including investment restrictions
and any restrictions with respect to financial institutions with which any such
collection account may be maintained.
Collection and Other Servicing Procedures. The Servicer is required to
make reasonable efforts to collect all scheduled payments under the Assets and
will follow or cause to be followed such collection procedures as it would
follow with respect to assets that are comparable to the Assets and held for its
own account, provided such procedures are consistent with (i) the terms of the
related Agreement and any related hazard insurance policy or instrument of
Credit Support, if any, included in the related Trust Fund described herein or
under "Description of Credit Support," (ii) applicable law and (iii) the general
servicing standard specified in the related Prospectus Supplement or, if no such
standard is so specified, its normal servicing practices (in either case, the
"Servicing Standard"). In connection therewith, the Servicer will be permitted
in its discretion to waive any late payment charge or penalty interest in
respect of a late payment on an Asset.
Each Servicer will also be required to perform other customary functions of
a servicer of comparable assets, including maintaining hazard insurance policies
as described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder; maintaining, to the extent required by the
Agreement, escrow or impoundment accounts of obligors for payment of taxes,
insurance and other items required to be paid by any obligor pursuant to the
terms of the Assets; processing assumptions or substitutions in those cases
where the Servicer has determined not to enforce any applicable due-on-sale
clause; attempting to cure delinquencies; supervising foreclosures or
repossessions; inspecting and managing Mortgaged Properties or Manufactured
Homes under certain circumstances; and maintaining accounting records relating
to the Assets. The Servicer or such other entity specified in the related
Prospectus Supplement will be responsible for filing and settling claims in
respect of particular Assets under any applicable instrument of Credit Support.
See "Description of Credit Support."
The Servicer may agree to modify, waive or amend any term of any Asset in a
manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (i) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (ii) in its judgment,
materially impair the
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security for the Asset or reduce the likelihood of timely payment of amounts due
thereon. The Servicer also may agree to any modification, waiver or amendment
that would so affect or impair the payments on, or the security for, an Asset
if, unless otherwise provided in the related Prospectus Supplement, (i) in its
judgment, a material default on the Asset has occurred or a payment default is
reasonably foreseeable and (ii) in its judgment, such modification, waiver or
amendment is reasonably likely to produce a greater recovery with respect to the
Asset on a present value basis than would liquidation. The Servicer is required
to notify the Trustee in the event of any modification, waiver or amendment of
any Asset.
In the case of Multifamily Loans, a mortgagor's failure to make required
Mortgage Loan payments may mean that operating income is insufficient to service
the Mortgage Loan debt, or may reflect the diversion of that income from the
servicing of the Mortgage Loan debt. In addition, a mortgagor under a
Multifamily Loan that is unable to make Mortgage Loan payments may also be
unable to make timely payment of all required taxes and otherwise to maintain
and insure the related Mortgaged Property. In general, the Servicer will be
required to monitor any Multifamily Loan that is in default, evaluate whether
the causes of the default can be corrected over a reasonable period without
significant impairment of the value of the related Mortgaged Property, initiate
corrective action in cooperation with the mortgagor if cure is likely, inspect
the related Multifamily Property and take such other actions as are consistent
with the related Agreement. A significant period of time may elapse before the
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Servicer can make the
initial determination of appropriate action, evaluate the success of corrective
action, develop additional initiatives, institute foreclosure proceedings and
actually foreclose may vary considerably depending on the particular Multifamily
Loan, the Multifamily Property, the mortgagor, the presence of an acceptable
party to assume the Multifamily Loan and the laws of the jurisdiction in which
the Multifamily Property is located.
Realization Upon Defaulted Assets
Generally, the Servicer is required to monitor any Assets which is in
default, initiate corrective action in cooperation with the mortgagor or obligor
if cure is likely, inspect the Asset and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Servicer is able to assess the success of such corrective action or
the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Mortgage Loans or
Contracts may grant to the Servicer and/or the holder or holders of certain
classes of Securities a right of first refusal to purchase from the Trust Fund
at a predetermined purchase price any such Mortgage Loan or Contract as to which
a specified number of scheduled payments thereunder are delinquent. Any such
right granted to the holder of an Offered Security will be described in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe any such right granted to any person if the predetermined purchase
price is less than the Purchase Price described under "Representations and
Warranties; Repurchases."
If so specified in the related Prospectus Supplement, the Servicer may
offer to sell any defaulted Mortgage Loan or Contract described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect thereto, if and when the Servicer determines, consistent
with the Servicing Standard, that such a sale would produce a greater recovery
on a present value basis than would liquidation through foreclosure,
repossession or similar proceedings. The related Agreement will provide that any
such offering be made in a commercially reasonable manner for a specified period
and that the Servicer accept the highest cash bid received from any person
(including itself, an affiliate of the Servicer or any Securityholder) that
constitutes a fair price for such defaulted Mortgage Loan or Contract. In the
absence of any bid determined in accordance with the related Agreement to be
fair, the Servicer shall proceed with respect to such defaulted Mortgage Loan or
Contract as described below. Any bid in an amount at least equal to the Purchase
Price described under "Representations and Warranties; Repurchases" will in all
cases be deemed fair.
The Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Mortgage Loan by operation of law or otherwise and may at
any time repossess
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and realize upon any Manufactured Home, if such action is consistent with the
Servicing Standard and a default on such Mortgage Loan or Contract has occurred
or, in the Servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a Trust Fund as to which
a REMIC election or a FASIT election has been made, the Servicer, on behalf of
the Trust Fund, will be required to sell the Mortgaged Property within two years
of acquisition, unless (i) the Internal Revenue Service grants an extension of
time to sell such property or (ii) the Trustee receives an opinion of
independent counsel to the effect that the holding of the property by the Trust
Fund subsequent to two years after its acquisition will not result in the
imposition of a tax on the Trust Fund or cause the Trust Fund to fail to qualify
as a REMIC or as a FASIT, as the case may be, under the Code at any time that
any Securities are outstanding. Subject to the foregoing, the Servicer will be
required to (i) solicit bids for any Mortgaged Property so acquired in such a
manner as will be reasonably likely to realize a fair price for such property
and (ii) accept the first (and, if multiple bids are contemporaneously received,
the highest) cash bid received from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC provisions
or the FASIT provisions of the Code (if a REMIC election or a FASIT election,
respectively, has been made with respect to the related Trust Fund) on the
ownership and management of any Mortgaged Property acquired on behalf of the
Trust Fund may result in the recovery of an amount less than the amount that
would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans -- Foreclosure."
If recovery on a defaulted Asset under any related instrument of Credit
Support is not available, the Servicer nevertheless will be obligated to follow
or cause to be followed such normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued
thereon at the applicable interest rate, plus the aggregate amount of expenses
incurred by the Servicer in connection with such proceedings and which are
reimbursable under the Agreement, the Trust Fund will realize a loss in the
amount of such difference. The Servicer will be entitled to withdraw or cause to
be withdrawn from the Collection Account out of the Liquidation Proceeds
recovered on any defaulted Asset, prior to the distribution of such Liquidation
Proceeds to Securityholders, amounts representing its normal servicing
compensation on the Security, unreimbursed servicing expenses incurred with
respect to the Asset and any unreimbursed advances of delinquent payments made
with respect to the Asset.
If any property securing a defaulted Asset is damaged the 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
Securityholders on liquidation of the Asset after reimbursement of the Servicer
for its expenses and (ii) that such expenses will be recoverable by it from
related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Assets, a Servicer, on behalf of itself, the Trustee and
the Securityholders, will present claims to the obligor under each instrument of
Credit Support, and will take such reasonable steps as are necessary to receive
payment or to permit recovery thereunder with respect to defaulted Assets.
If a Servicer or its designee recovers payments under any instrument of
Credit Support with respect to any defaulted Assets, the Servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out of
such proceeds, prior to distribution thereof to Securityholders, amounts
representing its normal servicing compensation on such Asset, unreimbursed
servicing expenses incurred with respect to the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "Hazard
Insurance Policies" and "Description of Credit Support."
Hazard Insurance Policies
Mortgage Loans. Generally, each Agreement for a Trust Fund comprised of
Mortgage Loans will require the Servicer to cause the mortgagor on each Mortgage
Loan to maintain a hazard insurance policy providing for such coverage as is
required under the related Mortgage or, if any Mortgage permits the holder
thereof to dictate to the mortgagor the insurance coverage to be maintained on
the related Mortgaged Property, then such coverage as is consistent with the
Servicing Standard. Such coverage will be in general in an amount equal to the
lesser of the principal balance owing on such Mortgage Loan (but not less than
the
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amount necessary to avoid the application of any co-insurance clause contained
in the hazard insurance policy) and the amount necessary to fully compensate for
any damage or loss to the improvements on the Mortgaged Property on a
replacement cost basis or such other amount specified in the related Prospectus
Supplement. The ability of the Servicer to assure that hazard insurance proceeds
are appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance policy
referred to below, or upon the extent to which information in this regard is
furnished by mortgagors. All amounts collected by the Servicer under any such
policy (except for amounts to be applied to the restoration or repair of the
Mortgaged Property or released to the mortgagor in accordance with the
Servicer's normal servicing procedures, subject to the terms and conditions of
the related Mortgage and Mortgage Note) will be deposited in the Collection
Account. The Agreement may provide that the Servicer may satisfy its obligation
to cause each mortgagor to maintain such a hazard insurance policy by the
Servicer's maintaining a blanket policy insuring against hazard losses on the
Mortgage Loans. If such blanket policy contains a deductible clause, the
Servicer will be required to deposit in the Collection Account all sums that
would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties securing
the Mortgage Loans will typically contain a coinsurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Each Agreement for a Trust Fund comprised of Mortgage Loans will require
the Servicer to cause the mortgagor on each Mortgage Loan to maintain all such
other insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Servicer in maintaining any such insurance policy
will be added to the amount owing under the Mortgage Loan where the terms of the
Mortgage Loan so permit; provided, however, that the addition of such cost will
not be taken into account for purposes of calculating the distribution to be
made to Securityholders. Such costs may be recovered by the Servicer from the
Collection Account, with interest thereon, as provided by the Agreement.
Under the terms of the Mortgage Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Servicer, on behalf of the
Trustee and Securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the Mortgage Loans. However, the ability of the
Servicer to present or cause to be presented such claims is dependent upon the
extent to which information in this regard is furnished to the Servicer by
mortgagors.
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Contracts
Generally, the terms of the Agreement for a Trust Fund comprised of
Contracts will require the Servicer to cause to be maintained with respect to
each Contract one or more hazard insurance policies which provide, at a minimum,
the same coverage as a standard form fire and extended coverage insurance policy
that is customary for manufactured housing, issued by a company authorized to
issue such policies in the state in which the Manufactured Home is located, and
in an amount which is not less than the maximum insurable value of such
Manufactured Home or the principal balance due from the obligor on the related
Contract, whichever is less; provided, however, that the amount of coverage
provided by each such hazard insurance policy shall be sufficient to avoid the
application of any co-insurance clause contained therein. When a Manufactured
Home's location was, at the time of origination of the related Contract, within
a federally designated special flood hazard area, the Servicer shall cause such
flood insurance to be maintained, which coverage shall be at least equal to the
minimum amount specified in the preceding sentence or such lesser amount as may
be available under the federal flood insurance program. Each hazard insurance
policy caused to be maintained by the Servicer shall contain a standard loss
payee clause in favor of the Servicer and its successors and assigns. If any
obligor is in default in the payment of premiums on its hazard insurance policy
or policies, the Servicer shall pay such premiums out of its own funds, and may
add separately such premium to the obligor's obligation as provided by the
Contract, but may not add such premium to the remaining principal balance of the
Contract.
The Servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained with respect to each Manufactured Home, and shall
maintain, to the extent that the related Contract does not require the obligor
to maintain a hazard insurance policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on the obligor's
interest in the Contracts resulting from the absence or insufficiency of
individual hazard insurance policies. The Servicer shall pay the premium for
such blanket policy on the basis described therein and shall pay any deductible
amount with respect to claims under such policy relating to the Contracts.
Fidelity Bonds and Errors and Omissions Insurance
Each Agreement will require that the Servicer obtain and maintain in effect
a fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the Servicer. The related Agreement will allow the Servicer to self-insure
against loss occasioned by the errors and omissions of the officers, employees
and agents of the Servicer so long as certain criteria set forth in the
Agreement are met.
Due-on-Sale Provisions
The Mortgage Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
Mortgage Loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The 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 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. Any fee collected by
or on behalf of the Servicer for entering into an assumption agreement will be
retained by or on behalf of the Servicer as additional servicing compensation.
See "Certain Legal Aspects of Mortgage Loans -- Due-on-Sale Clauses." The
Contracts may also contain such clauses. The Servicer will generally permit such
transfer so long as the transferee satisfies the Servicer's then applicable
underwriting standards. The purpose of such transfers is often to avoid a
default by the transferring obligor. See "Certain Legal Aspects of the
Contracts -- Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses."
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Retained Interest; Servicing Compensation and Payment of Expenses
The Prospectus Supplement for a series of Securities will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial owner
thereof. If so, the Retained Interest will be established on a loan-by-loan
basis and will be specified on an exhibit to the related Agreement. A "Retained
Interest" in an Asset represents a specified portion of the interest payable
thereon. The Retained Interest will be deducted from mortgagor payments as
received and will not be part of the related Trust Fund.
The Servicer's primary servicing compensation with respect to a series of
Securities will come from the periodic payment to it of a portion of the
interest payment on each Asset or such other amount specified in the related
Prospectus Supplement. Since any Retained Interest and a Servicer's primary
compensation are percentages of the principal balance of each Asset, such
amounts will decrease in accordance with the amortization of the Assets. The
Prospectus Supplement with respect to a series of Securities evidencing
interests in a Trust Fund that includes Mortgage Loans or Contracts may provide
that, as additional compensation, the Servicer may retain all or a portion of
assumption fees, modification fees, late payment charges or Prepayment Premiums
collected from mortgagors and any interest or other income which may be earned
on funds held in the Collection Account or any account established by a Servicer
pursuant to the Agreement.
The Servicer may, to the extent provided in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Securityholders, and payment of any other expenses described in the
related Prospectus Supplement. Certain other expenses, including certain
expenses relating to defaults and liquidations on the Assets and, to the extent
so provided in the related Prospectus Supplement, interest thereon at the rate
specified therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Assets in the related
Trust Fund during such period prior to their respective due dates therein.
Evidence as to Compliance
Each Agreement relating to Assets which include Mortgage Loans or Contracts
will provide that on or before a specified date in each year, beginning with the
first such date at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for Freddie Mac
or such other program used by the Servicer, the servicing by or on behalf of the
Servicer of mortgage loans under agreements substantially similar to each other
(including the related Agreement) was conducted in compliance with the terms of
such agreements or such program except for any significant exceptions or errors
in records that, in the opinion of the firm, either the Audit Program for
Mortgages serviced for Freddie Mac, or paragraph 4 of the Uniform Single
Attestation Program for Mortgage Bankers, or such other program, requires it to
report.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Servicer to the effect that the Servicer has fulfilled its
obligations under the Agreement throughout the preceding calendar year or other
specified twelve-month period.
Copies of such annual accountants' statement and such statements of
officers will be obtainable by Securityholders without charge upon written
request to the Servicer or other entity specified in the related Prospectus
Supplement at the address set forth in the related Prospectus Supplement.
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Certain Matters Regarding Servicers, the Master Servicer and the Depositor
The Servicers and Master Servicer under each Agreement will be named in the
related Prospectus Supplement. The entities serving as Servicer or Master
Servicer may be affiliates of the Depositor and may have other normal business
relationships with the Depositor or the Depositor's affiliates. Reference herein
to the Servicer shall be deemed to be to the Master Servicer, if applicable.
The related Agreement will provide that the Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Servicer so causing such a conflict being
of a type and nature carried on by the Servicer at the date of the Agreement. No
such resignation will become effective until the Trustee or a successor servicer
has assumed the Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither any Servicer, the
Depositor nor any director, officer, employee, or agent of a Servicer or the
Depositor will be under any liability to the related Trust Fund or
Securityholders for any action taken, or for refraining from the taking of any
action, in good faith pursuant to the Agreement; provided, however, that neither
a Servicer, the Depositor nor any such person will be protected against any
breach of a representation, warranty or covenant made in such Agreement, or
against any liability specifically imposed thereby, or against any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. Each
Agreement will further provide that any Servicer, the Depositor and any
director, officer, employee or agent of a Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the Agreement or the Securities; provided, however, that such
indemnification will not extend to any loss, liability or expense (i)
specifically imposed by such Agreement or otherwise incidental to the
performance of obligations and duties thereunder, including, in the case of a
Servicer, the prosecution of an enforcement action in respect of any specific
Mortgage Loan or Mortgage Loans or Contract or Contracts (except as any such
loss, liability or expense shall be otherwise reimbursable pursuant to such
Agreement); (ii) incurred in connection with any breach of a representation,
warranty or covenant made in such Agreement; (iii) incurred by reason of
misfeasance, bad faith or gross negligence in the performance of obligations or
duties thereunder, or by reason of reckless disregard of such obligations or
duties; (iv) incurred in connection with any violation of any state or federal
securities law; or (v) imposed by any taxing authority if such loss, liability
or expense is not specifically reimbursable pursuant to the terms of the related
Agreement. In addition, each Agreement will provide that neither any Servicer
nor the Depositor will be under any obligation to appear in, prosecute or defend
any legal action which is not incidental to its respective responsibilities
under the Agreement and which in its opinion may involve it in any expense or
liability. Any such Servicer or the Depositor may, however, in its discretion
undertake any such action which it may deem necessary or desirable with respect
to the Agreement and the rights and duties of the parties thereto and the
interests of the Securityholders thereunder. In such event, the legal expenses
and costs of such action and any liability resulting therefrom will be expenses,
costs and liabilities of the Securityholders, and the Servicer or the Depositor,
as the case may be, will be entitled to be reimbursed therefor and to charge the
Collection Account.
Any person into which the Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Servicer or the Depositor is a party, or any person succeeding to the
business of the Servicer or the Depositor, will be the successor of the Servicer
or the Depositor, as the case may be, under the related Agreement.
Special Servicers
If and to the extent specified in the related Prospectus Supplement, a
special servicer (a "Special Servicer") may be a party to the related Agreement
or may be appointed by the Servicer or another specified party to perform
certain specified duties in respect of servicing the related Mortgage Loans that
would otherwise be performed by the Servicer (for example, the workout and/or
foreclosure of defaulted Mortgage
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Loans). The rights and obligations of any Special Servicer will be specified in
the related Prospectus Supplement, and the Servicer will be liable for the
performance of a Special Servicer only if, and to the extent, set forth in such
Prospectus Supplement.
Events of Default under the Agreement
Events of default under the related Agreement will generally include (i)
any failure by the Servicer to distribute or cause to be distributed to
Securityholders, or to remit to the Trustee for distribution to Securityholders,
any required payment that continues after a grace period, if any; (ii) any
failure by the Servicer duly to observe or perform in any material respect any
of its other covenants or obligations under the Agreement which continues
unremedied for 30 days after written notice of such failure has been given to
the Servicer by the Trustee or the Depositor, or to the Servicer, the Depositor
and the Trustee by Securityholders evidencing not less than 25% of the Voting
Rights; (iii) any breach of a representation or warranty made by the Servicer
under the Agreement which materially and adversely affects the interests of
Securityholders and which continues unremedied for 30 days after written notice
of such breach has been given to the Servicer by the Trustee or the Depositor,
or to the Servicer, the Depositor and the Trustee by the holders of Securities
evidencing not less than 25% of the Voting Rights; and (iv) certain events of
insolvency, readjustment of debt, marshaling of assets and liabilities or
similar proceedings and certain actions by or on behalf of the Servicer
indicating its insolvency or inability to pay its obligations. Material
variations to the foregoing events of default (other than to shorten cure
periods or eliminate notice requirements) will be specified in the related
Prospectus Supplement. The Trustee will, not later than the later of 60 days or
such other period specified in the related Prospectus Supplement after the
occurrence of any event which constitutes or, with notice or lapse of time or
both, would constitute an event of default and five days after certain officers
of the Trustee become aware of the occurrence of such an event, transmit by mail
to the Depositor and all Securityholders of the applicable series notice of such
occurrence, unless such default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or class or
classes of Securities will be specified in the related Prospectus Supplement.
Rights Upon Event of Default under the Agreements
So long as an event of default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, the Trustee shall terminate all of
the rights and obligations of the Servicer under the Agreement and in and to the
Mortgage Loans (other than as a Securityholder or as the owner of any Retained
Interest), whereupon the Trustee will succeed to all of the responsibilities,
duties and liabilities of the Servicer under the Agreement (except that if the
Trustee is prohibited by law from obligating itself to make advances regarding
delinquent Assets, or if the related Prospectus Supplement so specifies, then
the Trustee will not be obligated to make such advances) and will be entitled to
similar compensation arrangements. In the event that the Trustee is unwilling or
unable so to act, it may or, at the written request of the holders of Securities
entitled to at least 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, it shall appoint, or petition a
court of competent jurisdiction for the appointment of, a loan servicing
institution acceptable to the Rating Agency with a net worth at the time of such
appointment of at least $15,000,000 (or such other amount specified in the
related Prospectus Supplement) to act as successor to the Servicer under the
Agreement. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and any such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Servicer under the Agreement.
The holders of Securities representing at least 66 2/3% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
allocated to the respective classes of Securities affected by any event of
default will be entitled to waive such event of default; provided, however, that
an Event of Default involving a failure to distribute a required payment to
Securityholders described in clause (i) under "Events of Default under the
Agreements" may be waived only by all of the Securityholders. Upon any such
waiver of an
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event of default, such event of default shall cease to exist and shall be deemed
to have been remedied for every purpose under the Agreement.
No Securityholders will have the right under any Agreement to institute any
proceeding with respect thereto unless such holder previously has given to the
Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights have made written request upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for 60 days
(or such other number of days specified in the related Prospectus Supplement)
has neglected or refused to institute any such proceeding. The Trustee, however,
is under no obligation to exercise any of the trusts or powers vested in it by
any Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the Securityholders covered by such
Agreement, unless such Securityholders have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
Amendment
Each Agreement may be amended by the parties thereto, without the consent
of any Securityholders covered by the Agreement, (i) to cure any ambiguity or
mistake, (ii) to correct, modify or supplement any provision therein which may
be inconsistent with any other provision therein or with the related Prospectus
Supplement, (iii) to make any other provisions with respect to matters or
questions arising under the Agreement which are not materially inconsistent with
the provisions thereof, or (iv) to comply with any requirements imposed by the
Code; provided that, in the case of clause (iii), such amendment will not
adversely affect in any material respect the interests of any Securityholders
covered by the Agreement as evidenced either by an opinion of counsel to such
effect or the delivery to the Trustee of written notification from each Rating
Agency that provides, at the request of the Depositor, a rating for the Offered
Securities of the related series to the effect that such amendment or supplement
will not cause such Rating Agency to lower or withdraw the then current rating
assigned to such Securities. Each Agreement may also be amended by the
Depositor, the Servicer, if any, and the Trustee, with the consent of the
Securityholders affected thereby evidencing not less than 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights,
for any purpose; provided, however, no such amendment may (i) reduce in any
manner the amount of, or delay the timing of, payments received or advanced on
Assets which are required to be distributed on any Security without the consent
of the Securityholder or (ii) reduce the consent percentages described in this
paragraph without the consent of all the Securityholders covered by such
Agreement then outstanding. However, with respect to any series of Securities as
to which a REMIC election or a FASIT election is to be made, the Trustee will
not consent to any amendment of the Agreement unless it shall first have
received an opinion of counsel to the effect that such amendment will not result
in the imposition of a tax on the related Trust Fund or cause the related Trust
Fund to fail to qualify as a REMIC or a FASIT, as the case may be, at any time
that the related Securities are outstanding.
The Trustee
The Trustee under each Agreement will be named in the related Prospectus
Supplement. The commercial bank, national banking association, banking
corporation or trust company serving as Trustee may have a banking relationship
with the Depositor and its affiliates, with any Servicer and its affiliates and
with any Master Servicer and its affiliates.
Duties of the Trustee
The Trustee will make no representations as to the validity or sufficiency
of any Agreement, the Securities or any Asset or related document and is not
accountable for the use or application by or on behalf of any Servicer of any
funds paid to the Master Servicer or its designee in respect of the Securities
or the Assets, or deposited into or withdrawn from the Collection Account or any
other account by or on behalf of the Servicer. If no Event of Default has
occurred and is continuing, the Trustee is required to perform only those
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duties specifically required under the related Agreement, as applicable.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the Trustee is required to examine such
documents and to determine whether they conform to the requirements of the
Agreement.
Certain Matters Regarding the Trustee
The Trustee and any director, officer, employee or agent of the Trustee
shall be entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's (i) enforcing its rights and remedies
and protecting the interests, of the Securityholders during the continuance of
an Event of Default, (ii) defending or prosecuting any legal action in respect
of the related Agreement or series of Securities (iii) being the mortgagee of
record with respect to the Mortgage Loans in a Trust Fund and the owner of
record with respect to any Mortgaged Property acquired in respect thereof for
the benefit of Securityholders, or (iv) acting or refraining from acting in good
faith at the direction of the holders of the related series of Securities
entitled to not less than 25% (or such other percentage as is specified in the
related Agreement with respect to any particular matter) of the Voting Rights
for such series; provided, however, that such indemnification will not extend to
any loss, liability or expense that constitutes a specific liability of the
Trustee pursuant to the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
Resignation and Removal of the Trustee
The Trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to the Depositor, the Servicer, if
any, and all Securityholders. Upon receiving such notice of resignation, the
Depositor is required promptly to appoint a successor trustee acceptable to the
Servicer, if any. If no successor trustee shall have been so appointed and have
accepted appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any class of the Securities, then the Depositor may remove
the Trustee and appoint a successor trustee acceptable to the Master Servicer,
if any. Securityholders of any series entitled to at least 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series may at any time remove the Trustee without cause and appoint a
successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
MATERIAL TERMS OF THE INDENTURE
General
The following summary describes the material provisions that may appear in
each Indenture. The Prospectus Supplement for a series of Notes will describe
any provision of the Indenture relating to such series that materially differs
from the description thereof contained in this Prospectus. 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 Indenture for a series of Notes. A
form of an Indenture has been filed as an exhibit to the Registration Statement
of which this Prospectus is a part. The Depositor will provide a copy of the
Indenture (without exhibits) relating to any series of Notes without charge upon
written request of a Securityholder of such series
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addressed to NationsBanc Asset Securities, Inc., NationsBank Corporate Center,
Charlotte, North Carolina 28255, Attention: Vice President.
Events of Default
Events of default under the Indenture for each series of Notes will
generally include: (i) a default for thirty (30) days (or such other number of
days specified in such Prospectus Supplement) or more in the payment of any
principal of or interest on any Note of such series; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days (or such other number of days
specified in such Prospectus Supplement) after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant thereto
or in connection therewith with respect to or affecting such series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iv) certain events
of bankruptcy, insolvency, receivership or liquidation of the Depositor or the
Trust Fund; or (v) any other event of default provided with respect to Notes of
that series.
If an event of default with respect to the Notes of any series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such series may declare the principal amount (or, if the Notes of that
series are Accrual Securities, such portion of the principal amount as may be
specified in the terms of that series, as provided in the related Prospectus
Supplement) of all the Notes of such series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled by
the Securityholders of a majority in aggregate outstanding amount of the Notes
of such series.
If, following an event of default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a series following an event of default, other
than a default in the payment of any principal or interest on any Note of such
series for thirty (30) days or more, unless (a) the Securityholders of 100% (or
such other percentage specified in the related Prospectus Supplement) of the
then aggregate outstanding amount of the Notes of such series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding Notes
of such series at the date of such sale or (c) the Indenture Trustee determines
that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes had
not been declared due and payable, and the Indenture Trustee obtains the consent
of the Securityholders of 66 2/3% (or such other percentage specified in the
related Prospectus Supplement) of the then aggregate outstanding amount of the
Notes of such series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days (or
such other number of days specified in the related Prospectus Supplement) or
more in the payment of principal of or interest on the Notes of a series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result, upon
the occurrence of such an event of default, the amount available for
distribution to the Securityholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Securityholders
after the occurrence of such an event of default.
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To the extent provided in the related Prospectus Supplement, in the event
the principal of the Notes of a series is declared due and payable, as described
above, the Securityholders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an event of default shall occur and be continuing
with respect to a series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the Securityholders of such series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such series shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Indenture Trustee
or exercising any trust or power conferred on the Indenture Trustee with respect
to the Notes of such series, and the Securityholders of a majority of the then
aggregate outstanding amount of the Notes of such series may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of the
Indenture that cannot be modified without the waiver or consent of all the
Securityholders of the outstanding Notes of such series affected thereby.
Discharge Indenture
The Indenture will be discharged with respect to a series of Notes (except
with respect to certain continuing rights specified in the Indenture) upon the
delivery to the Indenture Trustee for cancellation of all the Notes of such
series or, with certain limitations, upon deposit with the Indenture Trustee of
funds sufficient for the payment in full of all of the Notes of such series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such series, to replace stolen, lost or mutilated Notes of such series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such series on the maturity date
for such Notes and any installment of interest on such Notes in accordance with
the terms of the Indenture and the Notes of such series. In the event of any
such defeasance and discharge of Notes of such series, holders of Notes of such
series would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report
The Indenture Trustee for each series of Notes will be required to mail
each year to all related Securityholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the related
Indenture, any amounts advanced by it under the Indenture, the amount, interest
rate and maturity date of certain indebtedness owing by such Trust to the
applicable Indenture Trustee in its individual capacity, the property and funds
physically held by such Indenture Trustee as such and any action taken by it
that materially affects such Notes and that has not been previously reported.
The Indenture Trustee
The Indenture Trustee for a series of Notes will be specified in the
related Prospectus Supplement. The Indenture Trustee for any series may resign
at any time, in which event the Depositor will be obligated to appoint a
successor trustee for such series. The Depositor may also remove any such
Indenture Trustee if such
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Indenture Trustee ceases to be eligible to continue as such under the related
Indenture or if such Indenture Trustee becomes insolvent. In such circumstances
the Depositor will be obligated to appoint a successor trustee for the
applicable series of Notes. Any resignation or removal of the Indenture Trustee
and appointment of a successor trustee for any series of Notes does not become
effective until acceptance of the appointment by the successor trustee for such
series.
The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Depositor or any of its affiliates, a Servicer or any of
its affiliates or the Master Servicer or any of its affiliates.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities, Credit Support may be provided with respect
to one or more classes thereof or the related Assets. Credit Support may be in
the form of the subordination of one or more classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more reserve
funds or another method of Credit Support described in the related Prospectus
Supplement, or any combination of the foregoing. If so provided in the related
Prospectus Supplement, any form of Credit Support may be structured so as to be
drawn upon by more than one series to the extent described therein.
The coverage provided by any Credit Support will be described in the
related Prospectus Supplement. Generally, such coverage will not provide
protection against all risks of loss and will not guarantee repayment of the
entire Security Balance of the Securities and interest thereon. If losses or
shortfalls occur that exceed the amount covered by Credit Support or that are
not covered by Credit Support, Securityholders will bear their allocable share
of deficiencies. Moreover, if a form of Credit Support covers more than one
series of Securities (each, a "Covered Trust"), Securityholders evidencing
interests in any of such Covered Trusts will be subject to the risk that such
Credit Support will be exhausted by the claims of other Covered Trusts prior to
such Covered Trust receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus Supplement
will include a description of (a) the nature and amount of coverage under such
Credit Support, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions (if any) under which the amount of coverage under
such Credit Support may be reduced and under which such Credit Support may be
terminated or replaced and (d) the material provisions relating to such Credit
Support. Additionally, the related Prospectus Supplement will set forth certain
information with respect to the obligor under any instrument of Credit Support,
including (i) a brief description of its principal business activities, (ii) its
principal place of business, place of incorporation and the jurisdiction under
which it is chartered or licensed to do business, (iii) if applicable, the
identity of regulatory agencies that exercise primary jurisdiction over the
conduct of its business and (iv) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
Prospectus Supplement. See "Risk Factors -- Credit Support Limitations."
SUBORDINATE SECURITIES
If so specified in the related Prospectus Supplement, one or more classes
of Securities of a series may be Subordinate Securities. To the extent specified
in the related Prospectus Supplement, the rights of the holders of Subordinate
Securities to receive distributions of principal and interest from the
Collection Account on any Distribution Date will be subordinated to such rights
of the holders of Senior Securities. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the amount of subordination of
a class or classes of Subordinate Securities in a series, the circumstances in
which such subordination will be applicable and the manner, if any, in which the
amount of subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, Credit Support
may be provided by cross-support provisions requiring that distributions be made
on Senior Securities evidencing interests in one group of Mortgage Loans prior
to distributions on Subordinate Securities evidencing interests in a different
group of Mortgage Loans within the Trust Fund. The Prospectus Supplement for a
series that includes a cross-support provision will describe the manner and
conditions for applying such provisions.
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LIMITED GUARANTEE
If so specified in the related Prospectus Supplement with respect to a
series of Securities, credit enhancement may be provided in the form of a
limited guarantee issued by a guarantor named therein.
FINANCIAL GUARANTY INSURANCE POLICY OR SURETY BOND
If so specified in the related Prospectus Supplement with respect to a
series of Securities, credit enhancement may be provided in the form of a
financial guaranty insurance policy or a surety bond issued by an insurer named
therein.
LETTER OF CREDIT
Alternative credit support with respect to a series of Securities may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the related Prospectus Supplement. The coverage, amount
and frequency of any reduction in coverage provided by a letter of credit issued
with respect to a series of Securities will be set forth in the Prospectus
Supplement relating to such series.
POOL INSURANCE POLICIES
If so specified in the related Prospectus Supplement relating to a series
of Securities, a pool insurance policy for the Mortgage Loans in the related
Trust Fund will be obtained. The pool insurance policy will cover any loss
(subject to the limitations described in the related Prospectus Supplement) by
reason of default to the extent a related Mortgage Loan is not covered by any
primary mortgage insurance policy. The amount and principal terms of any such
coverage will be set forth in the Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a special hazard
insurance policy may also be obtained for the related Trust Fund in the amount
set forth in such Prospectus Supplement. The special hazard insurance policy
will, subject to the limitations described in the related Prospectus Supplement,
protect against loss by reason of damage to Mortgaged Properties caused by
certain hazards not insured against under the standard form of hazard insurance
policy for the respective states, in which the Mortgaged Properties are located.
The amount and principal terms of any such coverage will be set forth in the
Prospectus Supplement.
MORTGAGOR BANKRUPTCY BOND
If so specified in the related Prospectus Supplement, losses resulting from
a bankruptcy proceeding relating to a mortgagor affecting the Mortgage Loans in
a Trust Fund with respect to a series of Securities will be covered under a
mortgagor bankruptcy bond (or any other instrument that will not result in a
downgrading of the rating of the Securities of a series by the Rating Agency or
Rating Agencies that rate such series). Any mortgagor bankruptcy bond or such
other instrument will provide for coverage in an amount meeting the criteria of
the Rating Agency or Rating Agencies rating the Securities of the related
series, which amount will be set forth in the related Prospectus Supplement. The
amount and principal terms of any such coverage will be set forth in the
Prospectus Supplement.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more reserve funds in which cash, a letter of
credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in such Prospectus Supplement. The
reserve funds for a series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Assets as
specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus
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Supplement. A reserve fund may be provided to increase the likelihood of timely
distributions of principal of and interest on the Securities. If so specified in
the related Prospectus Supplement, reserve funds may be established to provide
limited protection against only certain types of losses and shortfalls.
Following each Distribution Date amounts in a reserve fund in excess of any
amount required to be maintained therein may be released from the reserve fund
under the conditions and to the extent specified in the related Prospectus
Supplement and will not be available for further application to the Securities.
Moneys deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the related Prospectus Supplement. To
the extent specified in the related Prospectus Supplement, any reinvestment
income or other gain from such investments will be credited to the related
reserve fund for such series, and any loss resulting from such investments will
be charged to such reserve fund. However, such income may be payable to any
related Servicer or another service provider as additional compensation. To the
extent specified in the related Prospectus Supplement, the reserve fund, if any,
for a series will not be a part of the Trust Fund.
Additional information concerning any reserve fund will be set forth in the
related Prospectus Supplement, including the initial balance of such reserve
fund, the balance required to be maintained in the reserve fund, the manner in
which such required balance will decrease over time, the manner of funding such
reserve fund, the purposes for which funds in the reserve fund may be applied to
make distributions to Securityholders and use of investment earnings from the
reserve fund, if any.
OVERCOLLATERALIZATION
If specified in the related Prospectus Supplement, subordination provisions
of a Trust Fund 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
Assets. 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 Assets or
groups thereof, overcollateralization which results from the excess of the
aggregate principal balance of the related Assets, or a group thereof, over the
principal balance of the related class or classes 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.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal aspects of loans secured by single-family or multi-family
residential properties. Because such legal aspects are governed primarily 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 security for the Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See "Description
of the Trust Funds -- Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
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TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties -- a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Soldiers' and
Sailors' Civil Relief Act of 1940) and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
The Mortgages that encumber Multifamily Properties may contain an
assignment of rents and leases, pursuant to which the Mortgagor assigns to the
lender the Mortgagor's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to collect
the rents for so long as there is no default. If the Mortgagor defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. The Depositor, the Asset Seller or other entity specified
in the related Prospectus Supplement will make certain representations and
warranties in the Agreement or certain representations and warranties will be
assigned to the Trustee with respect to any Mortgage Loans that are secured by
an interest in a leasehold estate. Such representation and warranties, if
applicable, will be set forth in the Prospectus Supplement.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of Offered
Securities, the Mortgage Loans may also consist of cooperative apartment loans
("Cooperative Loans") secured by security interests in shares issued by a
cooperative housing corporation (a "Cooperative") 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
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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, is also
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 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 are
generally 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 agreement. 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 that
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 lease or occupancy
agreements which 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 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 -- Cooperative
Loans" below.
LAND SALE CONTRACTS
Under an installment land sale contract for the sale of real estate (a
"land sale contract") the contract seller (hereinafter referred to as the
"Contract Lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "contract
borrower") for the payment of the purchase price, plus interest, over the term
of the land sale contract. Only after full performance by the borrower of the
contract is the contract lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the effective
period of the land sale contract, the contract borrower is responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending upon the extent
to which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to its terms. The terms of land sale contracts
generally provide that upon default by the contract borrower, the borrower loses
his or her right to occupy the property, the entire
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indebtedness is accelerated, and the buyer's equitable interest in the property
is forfeited. The contract lender in such a situation does not have to foreclose
in order to obtain title to the property, although in some cases a quiet title
action is in order if the contract borrower has filed the land sale contract in
local land records and an ejectment action may be necessary to recover
possession. In a few states, particularly in cases of contract borrower default
during the early years of a land sale contract, the courts will permit ejectment
of the buyer and a forfeiture of his or her interest in the property. However,
most state legislatures have enacted provisions by analogy to mortgage law
protecting borrowers under land sale contracts from the harsh consequences of
forfeiture. Under such statues, a judicial contract may be reinstated upon full
payment of the default amount and the borrower may have a post-foreclosure
statutory redemption right. In other states, courts in equity may permit a
contract borrower with significant investment in the property under a land sale
contract for the sale of real estate to share the proceeds of sale of the
property after the indebtedness is repaid or may otherwise refuse to enforce the
forfeiture clause. Nevertheless, generally speaking, the contract lender's
procedures for obtaining possession and clear title under a land sale contract
for the sale of real estate in a given state are simpler and less time consuming
and costly than are the procedures for foreclosing and obtaining clear title to
a mortgaged property.
FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. 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 defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage
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on the mortgaged property. The exercise by the court of its equity powers will
depend on the individual circumstances of each case presented to it. Finally,
some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a mortgagor receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness of
the notice provisions or have found that a public sale under a mortgage
providing for a power of sale does not involve sufficient state action to afford
constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without acceleration) plus the expenses incurred in enforcing the obligation.
In other states, the mortgagor or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, the procedure for public sale, the
parties entitled to notice, the method of giving notice and the applicable time
periods are governed by state law and vary among the states. Foreclosure of a
deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of such property at the
time of sale, due to, among other things, redemption rights which may exist and
the possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses which may be recovered
by a lender. Thereafter, subject to the mortgagor's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will become
obligated to pay taxes, obtain casualty insurance and to make 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. Moreover, a lender commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. Generally, state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may
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be required to pay the full amount of the senior mortgage to avoid its
foreclosure. Accordingly, with respect to those Mortgage Loans, if any, that are
junior mortgage loans, if the lender purchases the property the lender's title
will be subject to all senior mortgages, prior liens and certain governmental
liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale 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, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three calendar years
following the year the Trust Fund acquired the property. With respect to a
series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the Agreement will permit foreclosed property to be
held for more than such period of time if the Internal Revenue Service grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such additional
period is permissible under the REMIC Provisions. The applicability of these
limitations if a FASIT election is made with respect to all or a part of the
Trust Fund will be described in the applicable Prospectus Supplement.
Cooperative Loans
The Cooperative shares 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
the proprietary lease or occupancy agreement, and may be canceled 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. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required
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thereunder. Typically, the lender and the Cooperative enter into a recognition
agreement which establishes the rights and obligations of both parties in the
event of a default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually 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 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 the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such 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 value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements 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-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
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 foreclosure 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
foreclosure. 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 Cooperatives 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.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in a building so converted.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "-- Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or
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beneficiary, subject to the terms of the senior mortgage or deed of trust, may
have the right to perform the obligation itself. Generally, all sums so expended
by the mortgagee or beneficiary become part of the indebtedness secured by the
mortgage or deed of trust. To the extent a first mortgagee expends such sums,
such sums will generally have priority over all sums due under the junior
mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed of
trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the mortgagor following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former mortgagor equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Some states require the lender to
exhaust the security afforded under a mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the mortgagor.
In certain other states, the lender has the option of bringing a personal action
against the mortgagor 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. In some cases, a lender
will be precluded from exercising any additional rights under the note or
mortgage if it has taken any prior enforcement action. 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 mortgagor. Finally, other statutory
provisions limit any deficiency judgment against the former mortgagor following
a judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the public sale. The purpose of these statutes is
generally to prevent a lender from obtaining a large deficiency judgment against
the former mortgagor as a result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
numerous statutory provisions under the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq., (the "Bankruptcy Code") may interfere with or affect the
ability of the secured mortgage lender to obtain payment of a Mortgage Loan, to
realize upon collateral and/or enforce a deficiency judgment. For example, under
federal bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and often no interest or principal payments are made during
the course of the bankruptcy proceeding. In a case under the Bankruptcy Code,
the secured party is precluded from foreclosing without authorization from the
bankruptcy court. In addition, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 plan to cure a
monetary default in respect of a Mortgage Loan 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 foreclosure sale 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 case, that effected the curing of a mortgage loan default by paying
arrearages over a number of years.
If a Mortgage Loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits such Mortgage
Loan to be modified. Such modifications may include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
and reducing the lender's security interest to the value of the property, thus
leaving the lender in the position of a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
Mortgage Loan. Some courts have permitted such modifications when the Mortgage
Loan is secured both by the debtor's principal residence and by personal
property.
In the case of income-producing Multifamily Properties, federal bankruptcy
law may also have the effect of interfering with or affecting the ability of the
secured lender to enforce the borrower's assignment of rents and leases related
to the mortgaged property. Under Section 362 of the Bankruptcy Code, the lender
will be
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stayed from enforcing the assignment, and the legal proceedings necessary to
resolve the issue could be time-consuming, with resulting delays in the lender's
receipt of the rents.
Certain tax liens arising under the Code 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 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. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases this liability may affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to such a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. Such laws may regulate, among
other things: emissions of air pollutants; discharges of wastewater or storm
water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; management of
electrical or other equipment containing polychlorinated biphenyls ("PCBs").
Failure to comply with such laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain states,
environmental contamination on a property may give rise to a lien on the
property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on such property are subordinated to such a lien
and, in some states, even prior recorded liens are subordinated to such liens
("Superliens"). In the latter states, the security interest of the Trustee in a
property that is subject to such Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the costs of remedial
action ("Cleanup Costs") if hazardous wastes or hazardous substances have been
released or disposed of on the property. Such Cleanup Costs may be substantial.
CERCLA imposes strict, as well as joint and several liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation and/or
damages at those off-site locations. Many states also have laws that are similar
to CERCLA. Liability under CERCLA or under similar state law could exceed the
value of the property itself as well as the aggregate assets of the property
owner.
The law is unclear as to whether and under what precise circumstances
cleanup costs, or the obligation to take remedial actions, could be imposed on a
secured lender such as the Trust Fund. Under the laws of some states and under
CERCLA, a lender may be liable as an "owner or operator" for costs of addressing
releases or threatened releases of hazardous substances on a mortgaged property
if such lender or its agents or employees have "participated in the management"
of the operations of the borrower, even though the environmental damage or
threat was caused by a prior owner or current owner or operator or other third
party.
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Excluded from CERCLA's definition of "owner or operator" is a person "who
without participating in the management of . . . [the] facility, holds indicia
of ownership primarily to protect his security interest" (the "secured-creditor
exemption"). This exemption for holders of a security interest such as a secured
lender applies only to the extent that a lender seeks to protect its security
interest in the contaminated facility or property. Thus, if a lender's
activities begin to encroach on the actual management of such facility or
property, the lender faces potential liability as an "owner or operator" under
CERCLA. Similarly, when a lender forecloses and takes title to a contaminated
facility or property, the lender may incur potential CERCLA liability in various
circumstances, including among others, when it holds the facility or property as
an investment (including leasing the facility or property to a third party),
fails to market the property in a timely fashion or fails to properly address
environmental conditions at the property or facility.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence such decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in In re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
On April 29, 1992, the United States Environmental Protection Agency (the
"EPA") issued a final rule interpreting and delineating CERCLA's
secured-creditor exemption and the range of permissible actions that may be
undertaken by a holder of a contaminated facility without exceeding the bounds
of the secured-creditor exemption. However, on February 4, 1994, the United
States Court of Appeals for the District of Columbia Circuit in Kelley v. EPA
invalidated the EPA rule. As a result of the Kelley case, the state of the law
with respect to the secured creditor exemption was, until recently, very
unclear.
On September 28, 1996, Congress enacted, and on September 30, 1996 the
President signed into law the Asset Conservation Lender Liability and Deposit
Insurance Protection Act of 1996 (the "Asset Conservation Act"). The Asset
Conservation Act was intended to clarify the scope of the secured creditor
exemption. This legislation more clearly defines the kinds of activities that
would constitute "participation in management" and that therefore would trigger
liability for secured parties under CERCLA. It also identified certain
activities that ordinarily would not trigger liability, provided, however, that
such activities did not otherwise rise to the level of "participation in
management." The Asset Conservation Act specifically reverses the Fleet Factors
"capacity to influence" standard. The Asset Conservation Act also provides
additional protection against liability in the event of foreclosure. However,
since the courts have not yet had the opportunity to interpret the new statutory
provisions, the scope of the additional protections offered by the Asset
Conservation Act is not fully defined. It also is important to note that the
Asset Conservation Act does not offer complete protection to lenders and that
the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the Trust Fund and occasion a loss to the Trust Fund and to Securityholders in
certain circumstances. The new secured creditor amendments to CERCLA, also,
would not necessarily affect the potential for liability in actions by either a
state or a private party under other federal or state laws which may impose
liability on "owners or operators" but do not incorporate the secured-creditor
exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property prior to the origination of the mortgage loan
or prior to foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
Depositor nor any
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Servicer makes any representations or warranties or assumes any liability with
respect to: environmental conditions of such Mortgaged Property; the absence,
presence or effect of hazardous wastes or hazardous substances on, near or
emanating from such Mortgaged Property; the impact on Securityholders of any
environmental condition or presence of any substance on or near such Mortgaged
Property; or the compliance of any Mortgaged Property with any environmental
laws. In addition, no agent, person or entity otherwise affiliated with the
Depositor is authorized or able to make any such representation, warranty or
assumption of liability relative to any such Mortgaged Property.
DUE-ON-SALE CLAUSES
Unless the related Prospectus Supplement indicates otherwise, the Mortgage
Loans will contain due-on-sale clauses. These clauses generally provide that the
lender may accelerate the maturity of the loan if the mortgagor sells, transfers
or conveys the related Mortgaged Property. The enforceability of due-on-sale
clauses has been the subject of legislation or litigation in many states and, in
some cases, the enforceability of these clauses was limited or denied. However,
with respect to certain loans the Garn-St. Germain Depository Institutions Act
of 1982 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.
Due-on-sale clauses contained in mortgage loans originated by federal savings
and loan associations of federal savings banks are fully enforceable pursuant to
regulations of the United States Federal Home Loan Bank Board, as succeeded by
the Office of Thrift Supervision, which preempt state law restrictions on the
enforcement of such clauses. Similarly, "due-on-sale" clauses in mortgage loans
made by national banks and federal credit unions are now fully enforceable
pursuant to preemptive regulations of the Comptroller of the Currency and the
National Credit Union Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) 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 that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if such loans are paid
prior to maturity. With respect to Mortgaged Properties that are owner-occupied,
it is anticipated that prepayment charges may not be imposed with respect to
many of the Mortgage Loans. The absence of such a restraint on prepayment,
particularly with respect to fixed rate Mortgage Loans having higher Mortgage
Rates, may increase the likelihood of refinancing or other early retirement of
such loans.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with
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or delay the taking of action by the senior lender. Moreover, the bankruptcy of
a junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
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 that 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 and/or to limit
discount points or other charges.
The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1, 1980
are subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of such state action will be eligible for
inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject 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
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adopting, prior to October 15, 1985, a law or constitutional provision expressly
rejecting the applicability of such provisions. Certain states have taken such
action.
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 Servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfalls in interest collections resulting from the
application of the Relief Act would result in a reduction of the amounts
distributable to the holders of the related series of Securities, and would not
be covered by advances. Such shortfalls will be covered by the Credit Support
provided in connection with such Securities only to the extent provided in the
related Prospectus Supplement. In addition, the Relief Act imposes limitations
that would impair the ability of the 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 such a Mortgage Loan goes into default, there may be delays
and losses occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Contracts. Because such legal aspects
are governed primarily 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 security for the Contracts is situated. The summaries are qualified in their
entirety by reference to the appropriate laws of the states in which Contracts
may be originated.
GENERAL
As a result of the assignment of the Contracts to the Trustee, the Trustee
will succeed collectively to all of the rights (including the right to receive
payment on the Contracts) of the obligee under the Contracts. Each Contract
evidences both (a) the obligation of the obligor to repay the loan evidenced
thereby, and (b) the grant of a security interest in the Manufactured Home to
secure repayment of such loan. Certain aspects of both features of the Contracts
are described more fully below.
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The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel paper
is treated in a manner similar to perfection of a security interest in chattel
paper. Under the Agreement, the Servicer will transfer physical possession of
the Contracts to the Trustee or its custodian or may retain possession of the
Contracts as custodian for the Trustee. In addition, the Servicer will make an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the Trustee's ownership of the Contracts. The Contracts will be
stamped or marked otherwise to reflect their assignment from the Company to the
Trustee only if provided in the related Prospectus Supplement. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Contracts without notice of such assignment, the
Trustee's interest in Contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some nontitle states, perfection pursuant
to the provisions of the UCC is required. The Asset Seller may effect such
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in which
any manufactured home securing a manufactured housing conditional sales contract
is registered. In the event the Asset Seller fails, due to clerical error, to
effect such notation or delivery, or files the security interest under the wrong
law (for example, under a motor vehicle title statute rather than under the UCC,
in a few states), the Asset Seller may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located.
Substantially all of the Contracts contain provisions prohibiting the borrower
from permanently attaching the Manufactured Home to its site. So long as the
borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the Manufactured Home. If, however, a Manufactured
Home is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home which is prior to the security interest originally
retained by the Asset Seller and transferred to the Depositor. With respect to a
series of Securities and if so described in the related Prospectus Supplement,
the Servicer may be required to perfect a security interest in the Manufactured
Home under applicable real estate laws. The Warranting Party will represent that
as of the date of the sale to the Depositor it has obtained a perfected first
priority security interest by proper notation or delivery of the required
documents and fees with respect to substantially all of the Manufactured Homes
securing the Contracts.
The Depositor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the Securityholders. The Depositor or
the Trustee will amend the certificates of title (or file UCC-3 statements) to
identify the Trustee as the new secured party, and will deliver the certificates
of title to the Trustee or note thereon the interest of the Trustee only if
specified in the related Prospectus Supplement. Accordingly, the Asset Seller
(or other originator of the Contracts) will continue to be named as the secured
party on the certificates of title relating to the Manufactured Homes. In some
states, such assignment is an effective conveyance of such security interest
without amendment of any lien noted on the related certificate of title and the
new secured party succeeds to Servicer's rights as the secured party. However,
in some states, in the absence of an amendment to the certificate of title (or
the filing of a UCC-3 statement), such assignment of the security interest in
the Manufactured Home may not be held effective or such security interests may
not
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be perfected and in the absence of such notation or delivery to the Trustee, the
assignment of the security interest in the Manufactured Home may not be
effective against creditors of the Asset Seller (or such other originator of the
Contracts) or a trustee in bankruptcy of the Asset Seller (or such other
originator).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Asset Seller
(or other originator of the Contracts) on the certificate of title or delivery
of the required documents and fees will be sufficient to protect the
Securityholders against the rights of subsequent purchasers of a Manufactured
Home or subsequent lenders who take a security interest in the Manufactured
Home. If there are any Manufactured Homes as to which the security interest
assigned to the Trustee is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying the Trustee as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the Trustee could be
released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactured Home in such state, and if steps are not
taken to re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Servicer must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Asset Seller (or other originator) would receive notice of surrender if the
security interest in the Manufactured Home is noted on the certificate of title.
Accordingly, the Trustee would have the opportunity to re-perfect its security
interest in the Manufactured Home in the state of relocation. In states which do
not require a certificate of title for registration of a manufactured home,
re-registration could defeat perfection. In the ordinary course of servicing the
manufactured housing contracts, the Servicer takes steps to effect such
re-perfection upon receipt of notice of re-registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing contract sells a manufactured home, the Servicer must surrender
possession of the certificate of title or, if it is noted as lienholder on the
certificate of title, will receive notice as a result of its lien noted thereon
and accordingly will have an opportunity to require satisfaction of the related
manufactured housing conditional sales contract before release of the lien.
Under the Agreement, the Servicer is obligated to take such steps, at the
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority even over
a perfected security interest. The Warranting Party will represent in the
Agreement that it has no knowledge of any such liens with respect to any
Manufactured Home securing payment on any Contract. However, such liens could
arise at any time during the term of a Contract. No notice will be given to the
Trustee or Securityholders in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Servicer on behalf of the Trustee, to the extent required by the
related Agreement, may take action to enforce the Trustee's security interest
with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing such defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of
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any sale prior to resale of the unit so that the debtor may redeem at or before
such resale. In the event of such repossession and resale of a Manufactured
Home, the Trustee would be entitled to be paid out of the sale proceeds before
such proceeds could be applied to the payment of the claims of unsecured
creditors or the holders of subsequently perfected security interests or,
thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
The terms of the Relief Act apply to an obligor on a Contract as described
for a mortgagor on a Mortgage Loan under "Certain Legal Aspects of Mortgage
Loans -- Soldiers' and Sailors' Civil Relief Act of 1940."
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to. Generally, it is expected that the
Servicer will permit most transfers of Manufactured Homes and not accelerate the
maturity of the related Contracts. In certain cases, the transfer may be made by
a delinquent obligor in order to avoid a repossession proceeding with respect to
a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St. Germain Depositary Institutions Act of 1982
preempts, subject to certain exceptions and conditions, state laws prohibiting
enforcement of "due-on-sale" clauses applicable to the Manufactured Homes.
Consequently, in some states the Servicer may be prohibited from enforcing a
"due-on-sale" clause in respect of certain Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan which is secured
by a first lien on certain kinds of manufactured housing. The Contracts would be
covered if they satisfy certain conditions, among other things, governing the
terms of any prepayments, late charges
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and deferral fees and requiring a 30-day notice period prior to instituting any
action leading to repossession of or foreclosure with respect to the related
unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The related Asset Seller will represent that all of the Contracts comply with
applicable usury law.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion represents the opinion of Cadwalader, Wickersham &
Taft or Hunton & Williams, as specified in the related Prospectus Supplement, as
to the anticipated material federal income tax consequences of the purchase,
ownership and disposition of the Securities offered hereunder. This discussion
is directed solely to Securityholders that hold the Securities as capital assets
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"), and does not purport to discuss all federal income tax
consequences that may be applicable to particular categories of investors, some
of which (such as banks, insurance companies and foreign investors) may be
subject to special rules. Further, the authorities on which this discussion, and
the opinion referred to below, are based are subject to change or differing
interpretations, which could apply retroactively. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the Securities. See "State and Other Tax Consequences."
Securityholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Securities offered hereunder.
The following discussion addresses securities of four general types: (i)
securities ("REMIC Securities") representing interests in a Trust Fund, or a
portion thereof, that the Trustee will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 860G (the
"REMIC Provisions") of the Code, (ii) securities ("Grantor Trust Securities")
representing interests in a Trust Fund ("Grantor Trust Fund") as to which no
such election will be made, (iii) securities ("Partnership Securities")
representing interests in a Trust Fund ("Partnership Trust Fund") which is
treated as a partnership for federal income tax purposes, and (iv) securities
("Debt Securities") representing indebtedness of a Partnership Trust Fund for
federal income tax purposes. The Prospectus Supplement for each series of
Securities will indicate which of the foregoing treatments will apply to such
series and, if a REMIC election (or elections) will be made for the related
Trust Fund, will identify all "regular interests" and "residual interests" in
the REMIC. For purposes of this tax discussion, (i) references to a
"Securityholder" or a "holder" are to the beneficial owner of a Security, (ii)
references to "REMIC Pool" are to an entity or portion thereof as to which a
REMIC election will be made and (iii) unless indicated otherwise in the
applicable Prospectus Supplement, references to "Mortgage Loans" include
Contracts. Except as set forth in the applicable Prospectus Supplement, no REMIC
election will be made with respect to Unsecured Home Improvement Loans. The
discussion below assumes that no election will be made to treat the Trust Fund,
or any portion thereof, as a financial asset securitization investment trust (a
"FASIT") under Sections 860H through 860L of the Code. If a FASIT election is
made for a particular series, the Prospectus Supplement for that series will
address the material federal income tax consequences of such election.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Securities.
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Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of certain entities
issuing non-REMIC debt obligations secured by real estate mortgages ("Taxable
Mortgage Pools"). Any entity other than a REMIC, a FASIT or a REIT will be
considered a Taxable Mortgage Pool if (i) substantially all of the assets of the
entity consist of debt obligations and more than 50% of such obligations consist
of "real estate mortgages," (ii) such entity is the obligor under debt
obligations with two or more maturities, and (iii) under the terms of the debt
obligations on which the entity is the obligor, payments on such obligations
bear a relationship to payments on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The Depositor generally will structure offerings of non-REMIC Securities to
avoid the application of the Taxable Mortgage Pool rules.
REMICS
Classification of REMICS
With respect to each series of REMIC Securities, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the related Trust
Fund (or each applicable portion thereof) will qualify as a REMIC and the REMIC
Securities offered with respect thereto will be considered to evidence ownership
of "regular interests" ("Regular Securities") or "residual interests" ("Residual
Securities") in that REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Securities) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the de minimis requirement will be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de minimis
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
organizations" or agents thereof and must furnish applicable tax information to
transferors or agents that violate this requirement. The Pooling and Servicing
Agreement with respect to each Series of REMIC Securities will contain
provisions meeting these requirements. See "Taxation of Owners of Residual
Securities -- Tax-Related Restrictions on Transfer of Residual
Securities -- Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans and regular interests in another REMIC, such as lower-tier
regular interests in a tiered REMIC. The REMIC Regulations specify that loans
secured by timeshare interests, shares held by a tenant stockholder in a
cooperative housing corporation, and manufactured housing that qualifies as a
"single family residence" under Code section 25(e)(10) can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage, which
is any property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either (i)
in exchange for any qualified mortgage within a three-month period thereafter or
(ii) in exchange for a "defective obligation" within a two-year period
thereafter. A "defective obligation" includes (i) a mortgage in default or as to
which default is reasonably foreseeable, (ii) a mortgage as to which a customary
representation or warranty made at the time of transfer to the REMIC Pool has
been breached, (iii) a mortgage that was fraudulently procured by the mortgagor,
and (iv) a mortgage that was not in fact principally secured by real property
(but only if such mortgage is disposed of within 90 days of discovery). A
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Mortgage Loan that is "defective" as described in clause (iv) that is not sold
or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in such fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the Mortgage Loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally may not be held beyond the close of the third calendar year beginning
after the taxable year of acquisition unless an extension is granted by the
Internal Revenue Service.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests or
(ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. Such a specified portion may
consist of a fixed number of basis points, a fixed percentage of the total
interest, or a qualified variable rate, inverse variable rate or difference
between two fixed or qualified variable rates on some or all of the qualified
mortgages. The specified principal amount of a regular interest that provides
for interest payments consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero. A residual interest is an interest
in a REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual interest. An interest in a REMIC Pool may
be treated as a regular interest even if payments of principal with respect to
such interest are subordinated to payments on other regular interests or the
residual interest in the REMIC Pool, and are dependent on the absence of
defaults or delinquencies on qualified mortgages or permitted investments, lower
thanreasonably expected returns on permitted investments, unanticipated expenses
incurred by the REMIC Pool or prepayment interest shortfalls. Accordingly, the
Regular Securities of a Series will constitute one or more classes of regular
interests, and the Residual Securities with respect to that Series will
constitute a single class of residual interests with respect to each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Securities may not be accorded
the status or given the tax treatment described below. Although the Code
authorizes the Treasury Department to issue regulations providing relief in the
event of an inadvertent termination of REMIC status, no such regulations have
been issued. Any such relief, moreover, may be accompanied by sanctions, such as
the imposition of a corporate tax on all or a portion of the Trust Fund's income
for the period in which the requirements for such status are not satisfied. The
Pooling and Servicing Agreement with respect to each REMIC Pool will include
provisions designed to maintain the Trust Fund's status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any Trust Fund as a
REMIC will be terminated.
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Characterization of Investments in REMIC Securities
In general, the REMIC Securities will be treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion that the assets of the
REMIC Pool underlying such Securities would be so treated. Moreover, if 95% or
more of the assets of the REMIC Pool qualify for either of the foregoing
treatments at all times during a calendar year, the REMIC Securities will
qualify for the corresponding status in their entirety for that calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is possible
that the percentage of such assets constituting "loans . . . secured by an
interest in real property which is . . . residential real property" for purposes
of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the amount of
the related funds paid thereon (the "Buydown Funds"). Interest (including
original issue discount) on the Regular Securities and income allocated to the
class of Residual Securities will be interest described in Section 856(c)(3)(B)
of the Code to the extent that such Securities are treated as "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code. In addition, the
Regular Securities generally will be "qualified mortgages" within the meaning of
Section 860G(a)(3) of the Code if transferred to another REMIC on its Startup
Day in exchange for regular or residual interests therein. Regular Securities
held by a FASIT will qualify for treatment as "permitted assets" within the
meaning of Section 860L(c)(1)(G) of the Code. The determination as to the
percentage of the REMIC Pool's assets that constitute assets described in the
foregoing sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis of each category of the assets held
by the REMIC Pool during such calendar quarter. The REMIC will report those
determinations to Securityholders in the manner and at the times required by
applicable Treasury regulations. The Small Business Job Protection Act of 1996
(the "SBJPA of 1996") repealed the reserve method of bad debts of domestic
building and loan associations and mutual savings banks, and thus has eliminated
the asset category of "qualifying real property loans" in former Code Section
593(d) for taxable years beginning after December 31, 1995. The requirements in
the SBJPA of 1996 that such institutions must "recapture" a portion of their
existing bad debt reserves is suspended if a certain portion of their assets are
maintained in "residential loans" under Code Section 7701(a)(19)(C)(v), but only
if such loans were made to acquire, construct or improve the related real
property and not for the purpose of refinancing. However, no effort will be made
to identify the portion of the Mortgage Loans of any Series meeting this
requirement, and no representation is made in this regard.
The assets of the REMIC Pool will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Securities and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. The REMIC
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Section
856(c)(4)(A) of the Code. Furthermore, foreclosure property generally will
qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures
For certain series of REMIC Securities, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
series of REMIC Securities, Cadwalader, Wickersham & Taft or Hunton & Williams
will deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the Tiered REMICs
will each qualify as a REMIC and the REMIC Securities issued by the Tiered
REMICs, respectively, will be considered to evidence ownership of Regular
Securities or Residual Securities in the related REMIC within the meaning of the
REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Securities is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
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Taxation of Owners of Regular Securities
General
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the "Regular Securityholder"), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by such
Regular Securityholder.
Original Issue Discount
Accrual Securities will be, and other classes of Regular Securities may be,
issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or Subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, in advance of
the receipt of the cash attributable to such income. The following discussion is
based in part on temporary and final Treasury regulations issued on February 2,
1994, as amended on June 14, 1996, (the "OID Regulations") under Code Section
1271 through 1273 and 1275 and in part on the provisions of the 1986 Act.
Regular Securityholders should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such as
the Regular Securities. To the extent such issues are not addressed in such
regulations, the Seller intends to apply the methodology described in the
Conference Committee Report to the 1986 Act. No assurance can be provided that
the Internal Revenue Service will not take a different position as to those
matters not currently addressed by the OID Regulations. Moreover, the OID
Regulations include an anti-abuse rule allowing the Internal Revenue Service to
apply or depart from the OID Regulations where necessary or appropriate to
ensure a reasonable tax result in light of the applicable statutory provisions.
A tax result will not be considered unreasonable under the anti-abuse rule in
the absence of a substantial effect on the present value of a taxpayer's tax
liability. Investors are advised to consult their own tax advisors as to the
discussion therein and the appropriate method for reporting interest and
original issue discount with respect to the Regular Securities.
Each Regular Security (except to the extent described below with respect to
a Regular Security on which principal is distributed in a single installment or
by lots of specified principal amounts upon the request of a Securityholder or
by random lot (a "Non-Pro Rata Security")) will be treated as a single
installment obligation for purposes of determining the original issue discount
includible in a Regular Securityholder's income. The total amount of original
issue discount on a Regular Security is the excess of the "stated redemption
price at maturity" of the Regular Security over its "issue price." The issue
price of a Class of Regular Securities offered pursuant to this Prospectus
generally is the first price at which a substantial amount of such Class is sold
to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, it is anticipated that the Trustee will treat
the issue price of a Class as to which there is no substantial sale as of the
issue date or that is retained by the Depositor as the fair market value of the
Class as of the issue date. The issue price of a Regular Security also includes
any amount paid by an initial Regular Securityholder for accrued interest that
relates to a period prior to the issue date of the Regular Security, unless the
Regular Securityholder elects on its federal income tax return to exclude such
amount from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Security always includes
the original principal amount of the Regular Security, but generally will not
include distributions of interest if such distributions constitute "qualified
stated interest." Under the OID Regulations, qualified stated interest generally
means interest payable at a single fixed rate or a qualified variable rate (as
described below), provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Regular
Security. Because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Security, it is possible that
no interest on any Class of Regular Securities will be treated as qualified
stated interest. However, except as provided in the following three sentences or
in the applicable Prospectus Supplement, because the underlying Mortgage Loans
provide for remedies in the event of default, it is anticipated that the Trustee
will treat
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interest with respect to the Regular Securities as qualified stated interest.
Distributions of interest on an Accrual Security, or on other Regular Securities
with respect to which deferred interest will accrue, will not constitute
qualified stated interest, in which case the stated redemption price at maturity
of such Regular Securities includes all distributions of interest as well as
principal thereon. Likewise, it is anticipated that the Trustee will treat an
interest-only Class or a Class on which interest is substantially
disproportionate to its principal amount (a so-called "super-premium" Class) as
having no qualified stated interest. Where the interval between the issue date
and the first Distribution Date on a Regular Security is shorter than the
interval between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security will
be considered to be zero if such original issue discount is less than 0.25% of
the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular Security is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of such
distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption with respect to a Series of Regular Securities will be set
forth in the applicable Prospectus Supplement. Holders generally must report de
minimis original issue discount pro rata as principal payments are received, and
such income will be capital gain if the Regular Security is held as a capital
asset. Under the OID Regulations, however, Regular Securityholders may elect to
accrue all de minimis original issue discount as well as market discount and
market premium, under the constant yield method. See "Election to Treat All
Interest Under the Constant Yield Method."
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The Trustee will treat the monthly period
ending on the day before each Distribution Date as the accrual period. With
respect to each Regular Security, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date on the Regular Security. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the Prepayment Assumption. The original
issue discount accruing in a full accrual period would be the excess, if any, of
(i) the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Security as of the end of that accrual period, and (b) the
distributions made on the Regular Security during the accrual period that are
included in the Regular Security's stated redemption price at maturity, over
(ii) the adjusted issue price of the Regular Security at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence is calculated based on (i) the yield to maturity of the
Regular Security at the issue date, (ii) events (including actual prepayments)
that have occurred prior to the end of the accrual period, and (iii) the
Prepayment Assumption. For these purposes, the adjusted issue price of a Regular
Security at the beginning of any accrual period equals the issue price of the
Regular Security, increased by the aggregate amount of original issue discount
with respect to the Regular Security that accrued in all prior accrual periods
and reduced by the amount of distributions included in the Regular Security's
stated redemption price at maturity that were made on the Regular Security in
such prior periods. The original issue discount accruing during any accrual
period (as determined in this paragraph) will then be divided by the number of
days in the period to determine the daily portion of original issue discount for
each day in the period. With respect to an initial accrual period shorter than a
full accrual period, the daily portions of original issue discount must be
determined according to an appropriate allocation under any reasonable method.
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Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the Mortgage Loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. An increase in
prepayments on the Mortgage Loans with respect to a Series of Regular Securities
can result in both a change in the priority of principal payments with respect
to certain Classes of Regular Securities and either an increase or decrease in
the daily portions of original issue discount with respect to such Regular
Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the Trustee
will determine the yield to maturity of such Security based upon the anticipated
payment characteristics of the Class as a whole under the Prepayment Assumption.
In general, the original issue discount accruing on each Non-Pro Rata Security
in a full accrual period would be its allocable share of the original issue
discount with respect to the entire Class, as determined in accordance with the
preceding paragraph. However, in the case of a distribution in retirement of the
entire unpaid principal balance of any Non-Pro Rata Security (or portion of such
unpaid principal balance), (a) the remaining unaccrued original issue discount
allocable to such Security (or to such portion) will accrue at the time of such
distribution, and (b) the accrual of original issue discount allocable to each
remaining Security of such Class will be adjusted by reducing the present value
of the remaining payments on such Class and the adjusted issue price of such
Class to the extent attributable to the portion of the unpaid principal balance
thereof that was distributed. The Depositor believes that the foregoing
treatment is consistent with the "pro rata prepayment" rules of the OID
Regulations, but with the rate of accrual of original issue discount determined
based on the Prepayment Assumption for the Class as a whole. Investors are
advised to consult their tax advisors as to this treatment.
Acquisition Premium
A purchaser of a Regular Security having original issue discount at a price
greater than its adjusted issue price but less than its stated redemption price
at maturity will be required to include in gross income the daily portions of
the original issue discount on the Regular Security reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over such
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, such a subsequent purchaser may elect to treat all such
acquisition premium under the constant yield method, as described below under
the heading "Election to Treat All Interest Under the Constant Yield Method."
Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate. Under
the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance by
more than a specified amount and (ii) the interest compounds or is payable at
least annually at current values of (a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates, (c) a single
"objective rate," or (d) a single fixed rate and a single objective rate that is
a "qualified inverse floating rate." A floating rate is a qualified floating
rate if variations can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds. A multiple of a qualified
floating rate is considered a qualified floating rate only if the rate is equal
to either (a) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (b) the product of a qualified
floating rate and a fixed multiple that is greater that 0.65 but not more than
1.35, increased or decreased by a fixed rate. Such rate may also be subject to a
fixed cap or floor, or a cap or floor that is not reasonably expected as of the
issue date to affect the yield of the instrument significantly. An objective
rate is any rate (other than a qualified floating rate) that is determined using
a single fixed formula and that is based on objective financial or economic
information, provided that such information is not (i) within the control of the
issuer or a related party or (ii) unique to the circumstances of the issuer or a
related party. A qualified inverse floating rate is a rate equal to a fixed rate
minus a qualified floating rate that inversely reflects contemporaneous
variations in the cost of newly borrowed funds; an inverse floating rate that is
not a qualified inverse floating rate may nevertheless be an objective rate. A
Class of Regular Securities may be issued under
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this Prospectus that does not have a variable rate under the foregoing rules,
for example, a Class that bears different rates at different times during the
period it is outstanding such that it is considered significantly "front-loaded"
or "back-loaded" within the meaning of the OID Regulations. It is possible that
such a Class may be considered to bear "contingent interest" within the meaning
of the OID Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to Regular Securities.
However, if final regulations dealing with contingent interest with respect to
Regular Securities apply the same principles as the OID Regulations, such
regulations may lead to different timing of income inclusion that would be the
case under the OID Regulations. Furthermore, application of such principles
could lead to the characterization of gain on the sale of contingent interest
Regular Securities as ordinary income. Investors should consult their tax
advisors regarding the appropriate treatment of any Regular Security that does
not pay interest at a fixed rate or variable rate as described in this
paragraph.
Under the REMIC Regulations, a Regular Security (i) bearing interest at a
rate that qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two or
more variable rates, including a rate based on the average cost of funds of one
or more financial institutions), or a positive or negative multiple of such a
rate (plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such a
rate that is subject to one or more caps or floors, or (ii) bearing one or more
such variable rates for one or more periods, or one or more fixed rates for one
or more periods, and a different variable rate or fixed rate for other periods,
qualifies as a regular interest in a REMIC. Accordingly, unless otherwise
indicated in the applicable Prospectus Supplement, it is anticipated that the
Trustee will treat Regular Securities that qualify as regular interests under
this rule in the same manner as obligations bearing a variable rate for original
issue discount reporting purposes.
The amount of original issue discount with respect to a Regular Security
bearing a variable rate of interest will accrue in the manner described above
under "Original Issue Discount," with the yield to maturity and future payments
on such Regular Security generally to be determined by assuming that interest
will be payable for the life of the Regular Security based on the initial rate
(or, if different, the value of the applicable variable rate as of the pricing
date) for the relevant Class. Unless required otherwise by applicable final
regulations, it is anticipated that the Trustee will treat such variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class or a Class bearing interest at a rate equal
to the weighted average of the net rates on the Mortgage Loans, which will be
treated as non-qualified stated interest includible in the stated redemption
price at maturity. Ordinary income reportable for any period will be adjusted
based on subsequent changes in the applicable interest rate index.
Market Discount
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (i) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified stated
interest payments due on a Regular Security, or (ii) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue price
of such Regular Security at the time of purchase. Such purchaser generally will
be required to recognize ordinary income to the extent of accrued market
discount on such Regular Security as distributions includible in the stated
redemption price at maturity thereof are received, in an amount not exceeding
any such distribution. Such market discount would accrue in a manner to be
provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
such regulations are issued, such market discount would accrue either (i) on the
basis of a constant interest rate, or (ii) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for such period plus
the remaining interest as of the end of such period, or in the case of a Regular
Security issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for such period plus the remaining original issue discount as
of the end of such period. Such purchaser also generally will be required to
treat a portion of any gain on a sale or exchange of the Regular Security as
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ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial distributions in reduction of
the stated redemption price at maturity were received. Such purchaser will be
required to defer deduction of a portion of the excess of the interest paid or
accrued on indebtedness incurred to purchase or carry a Regular Security over
the interest distributable thereon. The deferred portion of such interest
expense in any taxable year generally will not exceed the accrued market
discount on the Regular Security for such year. Any such deferred interest
expense is, in general, allowed as a deduction not later than the year in which
the related market discount income is recognized or the Regular Security is
disposed of. As an alternative to the inclusion of market discount in income on
the foregoing basis, the Regular Securityholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by such Regular Securityholder in that taxable year or thereafter, in
which case the interest deferral rule will not apply. See "Election to Treat All
Interest Under the Constant Yield Method" below regarding an alternative manner
in which such election may be deemed to be made. A person who purchases a
Regular Security at a price lower than the remaining amounts includible in the
stated redemption price at maturity of the security, but higher than its
adjusted issue price, does not acquire the Regular Security with market
discount, but will be required to report original issue discount, appropriately
adjusted to reflect the excess of the price paid over the adjusted issue price.
Market discount with respect to a Regular Security will be considered to be
zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Security (or, in the case of a
Regular Security having original issue discount, the adjusted issue price of
such Regular Security) multiplied by the weighted average maturity of the
Regular Security (determined as described above in the third paragraph under
"Original Issue Discount") remaining after the date of purchase. It appears that
de minimis market discount would be reported in a manner similar to de minimis
original issue discount. See "Original Issue Discount" above.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Security that has "contingent
interest" at a discount generally would continue to accrue interest and
determine adjustments on the Regular Security based on the original projected
payment schedule devised by the issuer of the Security. The holder of such a
Regular Security would be required, however, to allocate the difference between
the adjusted issue price of the Regular Security and its basis in the Regular
Security as positive adjustments to the accruals or projected payments on the
Regular Security over the remaining term of the Regular Security in a manner
that is reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those rules.
Due to the substantial lack of regulatory guidance with respect to the market
discount rules, it is unclear how those rules will affect any secondary market
that develops for a given Class of Regular Securities. Prospective investors in
Regular Securities should consult their own tax advisors regarding the
application of the market discount rules to the Regular Securities. Investors
should also consult Revenue Procedure 92-67 concerning the elections to include
market discount in income currently and to accrue market discount on the basis
of the constant yield method.
Amortizable Premium
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds such Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize such premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Security. Such election will apply to all taxable debt obligations
(including REMIC regular interests) acquired by the Regular Securityholder at a
premium held in that taxable year or thereafter, unless revoked with the
permission of the Internal Revenue Service. Final Treasury regulations have been
issued with respect to amortizable bond premiums which do not by their terms
apply to prepayable debt instruments such as the Regular Securities. However,
the Conference Committee Report to the 1986 Act indicates a Congressional intent
that the same rules that apply to the accrual of market
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discount on installment obligations will also apply to amortizing bond premium
under Code Section 171 on installment obligations such as the Regular
Securities, although it is unclear whether the alternatives to the constant
interest method described above under "Market Discount" are available.
Amortizable bond premium generally will be treated as an offset to interest
income on a Regular Security, rather than as a separate deductible item. See
"Election to Treat All Interest Under the Constant Yield Method" below regarding
an alternative manner in which the Code Section 171 election may be deemed to be
made.
Amortizable premium on a Regular Security that is subject to redemption at
the option of the issuer generally must be amortized as if the optional
redemption price and date were the Security's principal amount and maturity date
if doing so would result in a smaller amount of premium amortization during the
period ending with the optional redemption date. Thus, a holder of a Regular
Security would not be able to amortize any premium on a Regular Security that is
subject to optional redemption at a price equal to or greater than the
Securityholder's acquisition price unless and until the redemption option
expires. A Regular Security subject to redemption at the option of the issuer
described in the preceding sentence will be treated as having matured on the
redemption date for the redemption price and then as having been reissued on
that date for that price. Any premium remaining on the Regular Security at the
time of the deemed reissuance will be amortized on the basis of (i) the original
principal amount and maturity date or (ii) the price and date of any succeeding
optional redemption, under the principles described above.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to treat
all interest that accrues on the instrument using the constant yield method,
with none of the interest being treated as qualified stated interest. For
purposes of applying the constant yield method to a debt instrument subject to
such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or for
a class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the Internal Revenue Service. Investors should consult their own tax
advisors regarding the advisability of making such an election.
Treatment of Losses
Regular Securityholders will be required to report income with respect to
Regular Securities on the accrual method of accounting, without giving effect to
delays or reductions in distributions attributable to defaults or delinquencies
on the Mortgage Loans, except to the extent it can be established that such
losses are uncollectible. Accordingly, the holder of a Regular Security,
particularly a Subordinate Security, may have income, or may incur a diminution
in cash flow as a result of a default or delinquency, but may not be able to
take a deduction (subject to the discussion below) for the corresponding loss
until a subsequent taxable year. In this regard, investors are cautioned that
while they may generally cease to accrue interest income if it reasonably
appears that the interest will be uncollectible, the Internal Revenue Service
may take the position that original issue discount must continue to be accrued
in spite of its uncollectibility until the debt instrument is disposed of in a
taxable transaction or becomes worthless in accordance with the rules of Code
Section 166. To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss such loss
with respect to principal
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sustained during the taxable year on account of any such Regular Securities
becoming wholly or partially worthless, and that, in general, Regular
Securityholders that are not corporations and do not hold the Regular Securities
in connection with a trade or business should be allowed to deduct as a
short-term capital loss any loss sustained during the taxable year on account of
a portion of any such Regular Securities becoming wholly worthless. Although the
matter is not free from doubt, such non-corporate Regular Securityholders should
be allowed a bad debt deduction at such time as the principal balance of such
Regular Securities is reduced to reflect losses resulting from any liquidated
Mortgage Loans. The Internal Revenue Service, however, could take the position
that non-corporate holders will be allowed a bad debt deduction to reflect such
losses only after all the Mortgage Loans remaining in the Trust Estate have been
liquidated or the applicable Class of Regular Securities has been otherwise
retired. The Internal Revenue Service could also assert that losses on the
Regular Securities are deductible based on some other method that may defer such
deductions for all holders, such as reducing future cashflow for purposes of
computing original issue discount. This may have the effect of creating
"negative" original issue discount which would be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with respect
to such Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the Internal Revenue Service may take the position that
losses attributable to accrued original issue discount may only be deducted as
capital losses in the case of non-corporate holders who do not hold the Regular
Securities in connection with a trade or business. Special loss rules are
applicable to banks and thrift institutions, including rules regarding reserves
for bad debts. Such taxpayers are advised to consult their tax advisors
regarding the treatment of losses on Regular Securities.
Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the original cost
of the Regular Security to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income with respect
to the Regular Security and reduced by amounts included in the stated redemption
price at maturity of the Regular Security that were previously received by the
seller, by any amortized premium, and by any recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). Such gain will be
treated as ordinary income (i) if a Regular Security is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net investment
in the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as part of such transaction, (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates, or (iii) to the extent that such gain does not exceed the
excess, if any, of (a) the amount that would have been includible in the gross
income of the holder if its yield on such Regular Security were 110% of the
applicable Federal rate as of the date of purchase, over (b) the amount of
income actually includible in the gross income of such holder with respect to
such Regular Security. In addition, gain or loss recognized from the sale of a
Regular Security by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c). Long-term capital gains
of certain noncorporate taxpayers generally are subject to a lower maximum tax
rate (20%) than ordinary income or short-term capital gains of such taxpayers
(39.6%) for property held for more than one year. Currently, the maximum tax
rate for corporations is the same with respect to both ordinary income and
capital gains.
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Taxation of Owners of Residual Securities
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Securities ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarterratably to each day in such quarter
and by allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Securities in the REMIC Pool on such day.
REMIC taxable income is generally determined in the same manner as the taxable
income of an individual using the accrual method of accounting, except that (i)
the limitations on deductibility of investment interest expense and expenses for
the production of income do not apply, (ii) all bad loans will be deductible as
business bad debts, and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. The REMIC Pool's gross
income includes interest, original issue discount income and market discount
income, if any, on the Mortgage Loans, reduced by amortization of any premium on
the Mortgage Loans, plus income from amortization of issue premium, if any, on
the Regular Securities, plus income on reinvestment of cash flows and reserve
assets, plus any cancellation of indebtedness income upon allocation of realized
losses to the Regular Securities. The REMIC Pool's deductions include interest
and original issue discount expense on the Regular Securities, servicing fees on
the Mortgage Loans, other administrative expenses of the REMIC Pool and realized
losses on the Mortgage Loans. The requirement that Residual Holders report their
pro rata share of taxable income or net loss of the REMIC Pool will continue
until there are no Securities of any class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium with respect to the Mortgage Loans, on the one hand, and
the timing of deductions for interest (including original issue discount) or
income from amortization of issue premium on the Regular Securities, on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the prepayment may be used in whole or in part to make distributions in
reduction of principal on the Regular Securities, and (ii) the discount on the
Mortgage Loans which is includible in income may exceed the deduction allowed
upon such distributions on those Regular Securities on account of any unaccrued
original issue discount relating to those Regular Securities. When there is more
than one Class of Regular Securities that distribute principal sequentially,
this mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Securities when distributions in
reduction of principal are being made in respect of earlier Classes of Regular
Securities to the extent that such Classes are not issued with substantial
discount or are issued at a premium. If taxable income attributable to such a
mismatching is realized, in general, losses would be allowed in later years as
distributions on the later maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years as a
result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of such a Series of Regular Securities, may
increase over time as distributions in reduction of principal are made on the
lower yielding Classes of Regular Securities, whereas, to the extent the REMIC
Pool consists of fixed rate Mortgage Loans, interest income with respect to any
given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual Holders must
have sufficient other sources of cash to pay any federal, state, or local income
taxes due as a result of such mismatching or unrelated deductions against which
to offset such income, subject to the discussion of "excess inclusions" below
under "-- Limitations on Offset or Exemption of REMIC Income." The timing of
such mismatching of income and deductions described in this paragraph, if
present with respect to a Series of Securities, may have a significant adverse
effect upon a Residual Holder's after-tax rate of return.
A portion of the income of a Residual Securityholder may be treated
unfavorably in three contexts: (i) it may not be offset by current or net
operating loss deductions; (ii) it will be considered unrelated business taxable
income to tax-exempt entities; and (iii) it is ineligible for any statutory or
treaty reduction in the 30% withholding tax otherwise available to a foreign
Residual Securityholder. See "--Limitations on Offset or
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Exemption of REMIC Income" below. In addition, a Residual Holder's taxable
income during certain periods may exceed the income reflected by such Residual
Holders for such periods in accordance with generally accepted accounting
principles. Investors should consult their own accountants concerning the
accounting treatment of their investment in Residual Securities.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual Security
as of the close of the quarter (or time of disposition of the Residual Security
if earlier), determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a Residual Security is the
amount paid for such Residual Security. Such adjusted basis will be increased by
the amount of taxable income of the REMIC Pool reportable by the Residual Holder
and will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable
by the Residual Holder. Any loss that is disallowed on account of this
limitation may be carried over indefinitely with respect to the Residual Holder
as to whom such loss was disallowed and may be used by such Residual Holder only
to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in certain respects, such recovery of basis
by the REMIC Pool will have the effect of amortization of the issue price of the
Residual Securities over their life. However, in view of the possible
acceleration of the income of Residual Holders described above under "Taxation
of REMIC Income," the period of time over which such issue price is effectively
amortized may be longer than the economic life of the Residual Securities.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Internal Revenue Service may provide future guidance on the
proper tax treatment of payments made by a transferor of such a residual
interest to induce the transferee to acquire the interest, and Residual Holders
should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Security is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "--Treatment of Certain
Items of REMIC Income and Expense--Market Discount" below regarding the basis of
Mortgage Loans to the REMIC Pool and "Sale or Exchange of a Residual Security"
below regarding possible treatment of a loss upon termination of the REMIC Pool
as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the Trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The Depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Securities, and
different methods could result in different timing or reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "Taxation of Owners of Regular
Securi-
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ties -- Original Issue Discount" and "-- Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "-- Premium."
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such
Mortgage Loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Loans is generally the fair market value of the Mortgage
Loans immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of such market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market discount
income generally should accrue in the manner described above under "Taxation of
Owners of Regular Securities -- Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "Taxation of Owners of Regular Securities -- Premium," a person that
holds a Mortgage Loan as a capital asset under Code Section 1221 may elect under
Code Section 171 to amortize premium on Mortgage Loans originated after
September 27, 1985 under the constant yield method. Amortizable bond premium
will be treated as an offset to interest income on the Mortgage Loans, rather
than as a separate deduction item. Because substantially all of the mortgagors
on the Mortgage Loans are expected to be individuals, Code Section 171 will not
be available for premium on Mortgage Loans originated on or prior to September
27, 1985. Premium with respect to such Mortgage Loans may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may argue
that such premium should be allocated in a different manner, such as allocating
such premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining
the federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Security over the daily accruals for such quarterly period of (i) 120% of the
long-term applicable Federal rate that would have applied to the Residual
Security (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of such Residual Security
at the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Security at the beginning of a quarter is the issue price of
the Residual Security, plus the amount of such daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to such Residual Security prior to the beginning
of such quarterly period. Accordingly, the portion of the REMIC Pool's taxable
income that will be treated as excess inclusions will be a larger portion of
such income as the adjusted issue price of the Residual Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on such Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who are
not U.S. Persons (as defined below under "Tax-Related Restrictions on Transfer
of Residual Securities -- Foreign Investors"), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See "Taxation of Certain Foreign
Investors -- Residual Securities" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Security, a portion
(allocated
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under Treasury regulations yet to be issued) of dividends paid by the real
estate investment trust or regulated investment company could not be offset by
net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons. The SBJPA
of 1996 has eliminated the special rule permitting Section 593 institutions
("thrift institutions") to use net operating losses and other allowable
deductions to offset their excess inclusion income from Residual Securities that
have "significant value" within the meaning of the REMIC Regulations, effective
for taxable years beginning after December 31, 1995, except with respect to
Residual Securities continuously held by a thrift institution since November 1,
1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual Holder
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after December
31, 1986, unless a Residual Holder elects to have such rules apply only to
taxable years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The REMIC Regulations
provide that the anticipated excess inclusions are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value rate equals the applicable Federal rate
under Code Section 1274(d) as of the date of the transfer for a term ending with
the last calendar quarter in which excess inclusions are expected to accrue.
Such rate is applied to the anticipated excess inclusions from the end of the
remaining calendar quarters in which they arise to the date of the transfer.
Such a tax generally would be imposed on the transferor of the Residual
Security, except that where such transfer is through an agent (including a
broker, nominee, or other middleman) for a Disqualified Organization, the tax
would instead be imposed on such agent. However, a transferor of a Residual
Security would in no event be liable for such tax with respect to a transfer if
the transferee furnished to the transferor an affidavit stating that the
transferee is not a Disqualified Organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. The tax also may be waived by the Internal Revenue Service if the
Disqualified Organization promptly disposes of the Residual Security and the
transferor pays income tax at the highest corporate rate on the excess inclusion
for the period the Residual Security is actually held by the Disqualified
Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that it is not
a Disqualified Organization or stating such holder's taxpayer identification
number and, during the period such person is the record holder of the Residual
Security, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Security, all interests in the electing
large partnership are treated as held by Disqualified Organizations for purposes
of the tax imposed upon a Pass-Through Entity by section 860E(c) of the Code. An
exception to this tax, otherwise available to a Pass-Through Entity that is
furnished certain affidavits by
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record holders of interests in the entity and that does not know such affidavits
are false, is not available to an electing large partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors in
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service or persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity, and (iii) an "electing large partnership" means any
partnership having more than 100 members during the preceding tax year (other
than certain service partnerships and commodity pools), which elect to apply
simplified reporting provisions under the Code.
The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Security may be transferred
or registered unless (i) the proposed transferee furnished to the transferor and
the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing such Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman thereof) and (ii) the transferor provides a statement in writing to
the Trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Pooling and Servicing Agreement will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null and
void and will vest no rights in any purported transferee. Each Residual Security
with respect to a Series will bear a legend referring to such restrictions on
transfer, and each Residual Holder will be deemed to have agreed, as a condition
of ownership thereof, to any amendments to the related Pooling and Servicing
Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "Foreign Investors") is
disregarded to all federal income tax purposes if a significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, 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. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts
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as they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of the non-economic residual
interest, the transferee may incur liabilities in excess of any cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Pooling
and Servicing Agreement with respect to each Series of Certificates will require
the transferee of a Residual Security to certify to the matters in the preceding
sentence as part of the affidavit described above under the heading
"Disqualified Organizations."
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to the Certificates of a Series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizens or resident of the United States, a corporation,
partnership (except as provided in applicable Treasury regulations) 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 is able to exercise primary supervision over the administration of
such trust and one or more such U.S. Persons have the authority to control all
substantial decisions of such trust (or, to the extent provided in applicable
Treasury regulations, certain trusts in existence on August 20, 1996 which are
eligible to elect to be treated as U.S. Persons).
Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "Taxation of Owners of Residual
Securities -- Basis and Losses") of such Residual Holder in such Residual
Security at the time of the sale or exchange. In addition to reporting the
taxable income of the REMIC Pool, a Residual Holder will have taxable income to
the extent that any cash distribution to it from the REMIC Pool exceeds such
adjusted basis on that Distribution Date. Such income will be treated as gain
from the sale or exchange of the Residual Holder's Residual Security, in which
case, if the Residual Holder has an adjusted basis in its Residual Security
remaining when its interest in the REMIC Pool terminates, and if it holds such
Residual Security as a capital asset under Code Section 1221, then it will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (i) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable Federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as a part of such transaction or (ii) in the case of a non-corporate taxpayer,
to the extent such taxpayer has made an election under Code Section 163(d)(4) to
have net capital gains taxed as investment income at ordinary income rates. In
addition, gain or loss recognized from the sale of a Residual Security by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c).
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The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Securities where the seller
of the Residual Security, during the period beginning six months before the sale
or disposition of the Residual Security and ending six months after such sale or
disposition, acquires (or enters into any other transaction that results in the
application of Code Section 1091) any residual interest in any REMIC or any
interest in a "taxable mortgage pool" (such as a non-REMIC owner trust) that is
economically comparable to a Residual Security.
Mark to Market Regulations
On December 24, 1996, the Internal Revenue Service issued final regulations
(the "Mark to Market Regulations") under Code Section 475 relating to the
requirement that a securities dealer mark to market securities held for sale to
customers. This mark-to-market requirement applies to all securities of a
dealer, except to the extent that the dealer has specifically identified a
security as held for investment. The Mark to Market Regulations provide that,
for purposes of this mark to market requirement, a Residual Security is not
treated as a security and thus may not be marked to market. The Mark to Market
Regulations apply to all Residual Securities acquired on or after January 4,
1995.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions
Income from certain transaction by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include (i) the disposition of a qualified mortgages other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default, or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC Pool,
or (d) a qualified (complete) liquidation, (ii) the receipt of income from
assets that are not the type of mortgages or investments that the REMIC Pool is
permitted to hold, (iii) the receipt of compensation for services, or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant to
a qualified liquidation. Notwithstanding (i) and (iv), it is not a prohibited
transaction to sell a qualified mortgage or cash flow investment held by a REMIC
Pool to prevent a default on Regular Securities as a result of a default on
qualified mortgages or to facilitate a clean-up call (generally, an optional
termination to save administrative costs when no more than a small percentage of
the Securities is outstanding). The REMIC Regulations indicate that the
modification of a Mortgage Loan generally will not be treated as a disposition
if it is occasioned by a default or reasonably foreseeable default, an
assumption of the Mortgage Loan, the waiver of a due-on-sale or
due-on-encumbrance clause, or the conversion of an interest rate by a mortgagor
pursuant to the terms of a convertible adjustable rate Mortgage Loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund by
a Residual Holder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call, and (v) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a
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period ending with the close of the third calendar year beginning after the year
in which the REMIC Pool acquires such property, with a possible extension. Net
income from foreclosure property generally means gain from the sale of a
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. It is not anticipated that the REMIC Pool will
have any taxable net income from foreclosure property.
Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Securities
and Residual Holders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The Master Servicer will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, with respect to
the REMIC Pool as agent of the Residual Holders holding the largest percentage
interest in the Residual Securities. If the Code or applicable Treasury
regulations do not permit the Master Servicer to act as tax matters person in
its capacity as agent of such Residual Holder, such Residual Holder or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person. The tax matters person generally has responsibility for
overseeing and providing notice to the other Residual Holders of certain
administrative and judicial proceedings regarding the REMIC Pool's tax affairs,
although other holders of the Residual Securities of the same series would be
able to participate in such proceedings in appropriate circumstances.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser or (i) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (subject to annual adjustments for
inflation after 1991), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for the Servicing Fee and all
administrative and other expenses relating to the REMIC Pool, or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Securities in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. With
respect to a REMIC Pool that
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would be classified as an investment trust in the absence of a REMIC election or
that is substantially similar to an investment trust, any holder of a Regular
Security that is an individual, trust, estate, or pass-through entity also will
be allocated its pro rata share of such expenses and a corresponding amount of
income and will be subject to the limitations or deductions imposed by Code
Sections 67 and 68, as described above. Unless indicated otherwise in the
applicable Prospectus Supplement, all such expenses will be allocable to the
Residual Securities. In general, such allocable portion will be determined based
on the ratio that a REMIC Securityholder's income, determined on a daily basis,
bears to the income of all holders of Regular Securities and Residual Securities
with respect to a REMIC Pool. As a result, individuals, estates or trusts
holding REMIC Securities (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing temporary Treasury regulations) may have taxable
income in excess of the interest income at the pass-through rate on Regular
Securities that are issued in a single class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the related
period on Residual Securities.
Taxation of Certain Foreign Investors
Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (i) such interest is not effectively connected
with the conduct of a trade or business in the United States of the
Securityholder, (ii) such Non-U.S. Person is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (iii) such Non-U.S.
Person provides the Trustee, or the person who would otherwise be required to
withhold tax from such distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Security is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
The IRS recently issued final regulations (the "New Regulations") which
would provide alternative methods of satisfying the beneficial ownership
certification requirement described above. The New Regulations are effective
January 1, 2000, although valid withholding certificates that are held on
December 31, 1999, remain valid until the earlier of December 31, 2000 or the
due date of expiration of the certificate under the rules as currently if
effect. The New Regulations would require, in the case of Regular Securities
held by a foreign partnership, that (x) the certification described above be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide certain information, including a United States taxpayer
identification number. A look-through rule would apply in the case of tiered
partnerships. Non-U.S. Persons should consult their own tax advisors concerning
the application of the certification requirements in the New Regulations.
Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Estate or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Security relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163(f)(1).
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Generally, Mortgage Loans will not be, but regular interests in another REMIC
Pool will be, considered obligations issued in registered form. Furthermore,
Residual Holders will not be entitled to any exemption from the 30% withholding
tax (or lower treaty rate) to the extent of that portion of REMIC taxable income
that constitutes an "excess inclusion." See "Taxation of Owners of Residual
Securities -- Limitations on Offset or Exemption of REMIC Income." If the
amounts paid to Residual Holders who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Security is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
"Tax-Related Restrictions on Transfer of Residual Securities -- Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential." Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Securities.
Backup Withholding
Distributions made on the Regular Securities, and proceeds from the sale of
the Regular Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Holder complies with
certain reporting and/or certification procedures, including the provision of
its taxpayer identification number to the Trustee, its agent or the broker who
effected the sale of the Regular Security, or such Holder is otherwise an exempt
recipient under applicable provisions of the Code. Any amounts to be withheld
from distribution on the Regular Securities would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Holder's federal
income tax liability. The New Regulations change certain of the rules relating
to certain presumptions currently available relating to information reporting
and backup withholding. Non-U.S. Persons are urged to contact their own tax
advisors regarding the application to them of backup withholding and information
reporting.
Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular Series of Regular
Securities. Holders through nominees must request such information from the
nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence).Treasury
regulations require that, in addition to the foregoing requirements, information
must be furnished quarterly to Residual Holders, furnished annually, if
applicable, to holders of Regular Securities, and filed annually with the
Internal Revenue Service concerning Code Section 67 expenses (see "Limitations
on Deduction of Certain Expenses" above) allocable to such holders. Furthermore,
under such regulations, information must be furnished quarterly to Residual
Holders, furnished annually to holders of Regular Securities, and filed annually
with the Internal Revenue Service concerning the
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percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "Characterization of Investments in REMIC Securities."
Residual Holders should be aware that their responsibilities as holders of
the residual interest in a REMIC Pool, including the duty to account for their
shares of the REMIC Pool's income or loss on their returns, continue for the
life of the REMIC Pool, even after the principal and interest on their Residual
Securities have been paid in full.
Treasury regulations provide that a Residual Holder is not required to
treat items on its return consistently with their treatment on the REMIC Pool's
return if the Holder owns 100% of the Residual Securities for the entire
calendar year. Otherwise, each Residual Holder is required to treat items on its
returns consistently with their treatment on the REMIC Pool's return, unless the
Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Pool. The Internal Revenue Service may assess a deficiency resulting from
a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC Pool level. A REMIC Pool typically will
not register as a tax shelter pursuant to Code section 6111 because it generally
will not have a net loss for any of the first five taxable years of its
existence. Any person that holds a Residual Security as a nominee for another
person may be required to furnish the related REMIC Pool, in a manner to be
provided in Treasury regulations, with the name and address of such person and
other specified information.
GRANTOR TRUST FUNDS
Classification of Grantor Trust Funds
With respect to each series of Grantor Trust Securities, assuming
compliance with all provisions of the related Agreement, the related Grantor
Trust Fund will be classified as a grantor trust under subpart E, part I of
subchapter J of the Code and not as a partnership, an association taxable as a
corporation, or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Accordingly, each holder of a Grantor Trust Security generally will be
treated as the beneficial owner of an undivided interest in the Mortgage Loans
included in the Grantor Trust Fund.
STANDARD SECURITIES
General
Where there is no Retained Interest or "excess" servicing with respect to
the Mortgage Loans underlying the Securities of a Series, and where such
Securities are not designated as "Stripped Securities," the holder of each such
Security in such Series (referred to herein as "Standard Securities") will be
treated as the owner of a pro rata undivided interest in the ordinary income and
corpus portions of the Grantor Trust Fund represented by its Standard Security
and will be considered the beneficial owner of a pro rata undivided interest in
each of the Mortgage Loans, subject to the discussion below under
"Recharacterization of Servicing Fees." Accordingly, the holder of a Standard
Security of a particular Series will be required to report on its federal income
tax return its pro rata share of the entire income from the Mortgage Loans
represented by its Standard Security, including interest at the coupon rate on
such Mortgage Loans, original issue discount (if any), prepayment fees,
assumption fees, and late payment charges received by the Servicer, in
accordance with such Securityholder's method of accounting. A Securityholder
generally will be able to deduct its share of the Servicing Fee and all
administrative and other expenses of the Trust Estate in accordance with its
method of accounting, provided that such amounts are reasonable compensation for
services rendered to that Grantor Trust Fund. However, investors who are
individuals, estates or trusts who own Securities, either directly or indirectly
through certain pass-through entities, will be subject to limitations with
respect to certain itemized deductions described in Code Section 67, including
deductions under Code Section 212 for the Servicing Fee and all such
administrative and other expenses of the Grantor Trust Fund, to the extent that
such deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser of (i) 3% of the excess, if any, of adjusted gross
income over $100,000 ($50,000
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in the case of a married individual filing a separate return) (in each case, as
adjusted annually for post-1991 inflation), or (ii) 80% of the amount of
itemized deductions otherwise allowable for such year. As a result, such
investors holding Standard Securities, directly or indirectly through a
pass-through entity, may have aggregate taxable income in excess of the
aggregate amount of cash received on such Standard Securities with respect to
interest at the pass-through rate or as discount income on such Standard
Securities. In addition, such expenses are not deductible at all for purposes of
computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Moreover, where there is
Retained Interest with respect to the Mortgage Loans underlying a Series of
Securities or where the servicing fees are in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "Stripped Securities" and "Recharacterization of Servicing Fees,"
respectively.
Holders of Standard Securities, particularly any class of a Series which is
a Subordinate Security, may incur losses of interest or principal with respect
to the Mortgage Loans. Such losses would be deductible generally only as
described above under "REMICs -- Taxation of Owners of Regular
Securities -- Treatment of Losses," except that Securityholders on the cash
method of accounting would not be required to report qualified stated interest
as income until actual receipt.
Tax Status
With respect to a series, Cadwalader, Wickersham & Taft or Hunton &
Williams has advised the Depositor that, except with respect to a Trust Fund
consisting of Unsecured Home Improvement Loans:
1. A Standard Security owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of
Code Section 7701(a)(19)(C)(v), provided that the real property securing
the Mortgage Loans represented by that Standard Security is of the type
described in such section of the Code.
2. A Standard Security owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A) to the extent that the assets of the related Grantor
Trust Fund consist of qualified assets, and interest income on such assets
will be considered "interest on obligations secured by mortgages on real
property" to such extent within the meaning of Code Section 856(c)(3)(B).
3. A Standard Security owned by a REMIC will be considered to
represent an "obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an interest
in real property" within the meaning of Code Section 860G(a)(3)(A) to the
extent that the assets of the related Grantor Trust Fund consist of
"qualified mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be characterized
in their entirety under the Code provisions cited in clauses 1 and 2 of the
immediately preceding paragraph or whether the amount qualifying for such
treatment must be reduced by the amount of the Buydown Mortgage Funds. There is
indirect authority supporting treatment of an investment in a Buydown Mortgage
Loan as entirely secured by real property if the fair market value of the real
property securing the loan exceeds the principal amount of the loan at the time
of issuance or acquisition, as the case may be. There is no assurance that the
treatment described above is proper. Accordingly, Securityholders are urged to
consult their own tax advisors concerning the effects of such arrangements on
the characterization of such Securityholder's investment for federal income tax
purposes.
Premium and Discount
Securityholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon initial
acquisition of Standard Securities or thereafter.
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Premium. The treatment of premium incurred upon the purchase of a Standard
Security will be determined generally as described above under
"REMICs -- Taxation of Owners of Residual Securities -- Premium."
Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a Securityholder's interest in those
Mortgage Loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
generally are applicable to mortgages originated after March 2, 1984. The rules
allowing for the amortization of premium are available with respect to mortgage
loans originated after September 27, 1985. Under the OID Regulations, original
issue discount could arise by the charging of points by the originator of the
mortgages in an amount greater than the statutory de minimis exception,
including a payment of points that is currently deductible by the borrower under
applicable Code provisions or, under certain circumstances, by the presence of
"teaser" rates on the Mortgage Loans. See "Stripped Securities" below regarding
original issue discount on Stripped Securities.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Unless indicated otherwise in the applicable Prospectus Supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires the
obligation after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued original issue discount, less
prior payments of principal. Accordingly, if such Mortgage Loans acquired by a
Securityholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Loans (i.e., points) will be includible by such holder.
Market Discount. Securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "REMICs -- Taxation of Owners of Regular Securities -- Market Discount,"
except that the ratable accrual methods described therein will not apply.
Rather, the holder will accrue market discount pro rata over the life of the
Mortgage Loans, unless the constant yield method is elected. Unless indicated
otherwise in the applicable Prospectus Supplement, no prepayment assumption will
be assumed for purposes of such accrual.
Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither income
nor a deduction to Securityholders. In this regard, there are no authoritative
guidelines for federal income tax purposes as to either the maximum amount of
servicing compensation that may be considered reasonable in the context of this
or similar transactions or whether, in the case of Standard Securities, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that such amount would exceed reasonable servicing compensation as to
some of the Mortgage Loans would be increased. Internal Revenue Service guidance
indicates that a servicing fee in excess of reasonable compensation ("excess
servicing") will cause the Mortgage Loans to be treated under the "stripped
bond" rules. Such guidance provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of such amounts is not greater than the value of the services
provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
Mortgage Loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "Stripped Securities,"
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each stripped bond or stripped coupon could be considered for this purpose as a
non-interest bearing obligation issued on the date of issue of the Standard
Securities, and the original issue discount rules of the Code would apply to the
holder thereof. While Securityholders would still be treated as owners of
beneficial interests in a grantor trust for federal income tax purposes, the
corpus of such trust could be viewed as excluding the portion of the Mortgage
Loans the ownership of which is attributed to the Servicer, or as including such
portion as a second class of equitable interest. Applicable Treasury regulations
treat such an arrangement as a fixed investment trust, since the multiple
classes of trust interests should be treated as merely facilitating direct
investments in the trust assets and the existence of multiple classes of
ownership interests is incidental to that purpose. In general, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Securityholder, except that the income reported
by a cash method holder may be slightly accelerated. See "Stripped Securities"
below for a further description of the federal income tax treatment of stripped
bonds and stripped coupons.
Sale or Exchange of Standard Securities
Upon sale or exchange of a Standard Securities, a Securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other assets
represented by the Security. In general, the aggregate adjusted basis will equal
the Securityholder's cost for the Standard Security, exclusive of accrued
interest, increased by the amount of any income previously reported with respect
to the Standard Security and decreased by the amount of any losses previously
reported with respect to the Standard Security and the amount of any
distributions (other than accrued interest) received thereon. Except as provided
above with respect to market discount on any Mortgage Loans, and except for
certain financial institutions subject to the provisions of Code Section 582(c),
any such gain or loss generally would be capital gain or loss if the Standard
Security was held as a capital asset. However, gain on the sale of a Standard
Security will be treated as ordinary income (i) if a Standard Security is held
as part of a "conversion transaction" as defined in Code Section 1258(c), up to
the amount of interest that would have accrued on the Securityholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any prior
disposition of property that was held as part of such transaction or (ii) in the
case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. Long-term capital gains of certain
noncorporate taxpayers generally are subject to a lower maximum tax rate (20%)
than ordinary income or short-term capital gains of such taxpayers (39.6%) for
property held for more than one year. The maximum tax rate for corporations
currently is the same with respect to both ordinary income and capital gains.
STRIPPED SECURITIES
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Securities that are subject to those rules will be referred to as "Stripped
Securities." The Securities will be subject to those rules if (i) the Depositor
or any of its affiliates retains (for its own account or for purposes of
resale), in the form of Retained Interest or otherwise, an ownership interest in
a portion of the payments on the Mortgage Loans, (ii) the Depositor or any of
its affiliates is treated as having an ownership interest in the Mortgage Loans
to the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
"Standard Securities -- Recharacterization of Servicing Fees" above), and (iii)
a Class of Securities are issued in two or more Classes or Subclasses
representing the right to non-pro-rata percentages of the interest and principal
payments on the Mortgage Loans.
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In general, a holder of a Stripped Security will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Security's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"Standard Securities -- Recharacterization of Servicing Fees." Although not free
from doubt, for purposes of reporting to Stripped Securityholders, the servicing
fees will be allocated to the classes of Stripped Securities in proportion to
the distributions to such Classes for the related period or periods. The holder
of a Stripped Security generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under "Standard
Securities -- General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Securities
for federal income tax purposes is not clear in certain respects, particularly
where such Stripped Securities are issued with respect to a Mortgage Pool
containing variable-rate Mortgage Loans, the Depositor has been advised by
counsel that (i) the Grantor Trust Fund will be treated as a grantor trust under
subpart E, Part I of subchapter J of the Code and not as an association taxable
as a corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i), and (ii) each Stripped Security should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship of
Code Section 1286, Code Sections 1272 through 1275, and the OID Regulations.
Although it is possible that computations with respect to Stripped Securities
could be made in one of the ways described below under "Possible Alternative
Characterizations," the OID Regulations state, in general, that two or more debt
instruments issued by a single issuer to a single investor in a single
transaction should be treated as a single debt instrument. Accordingly, for
original issue discount purposes, all payments on any Stripped Securities should
be aggregated and treated as though they were made on a single debt instrument.
The Pooling and Servicing Agreement will require that the Trustee make and
report all computations described below using this aggregate approach, unless
substantial legal authority requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under such
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original issue
discount, or, presumably, at a premium. This treatment indicates that the
interest component of such a Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that the
purchaser of such a Stripped Security will be required to account for any
discount as market discount rather than original issue discount if either (i)
the initial discount with respect to the Stripped Security was treated as zero
under the de minimis rule, or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such market
discount would be reportable as described above under "REMICs -- Taxation of
Owners of Regular Securities -- Market Discount," without regard to the de
minimis rule therein, assuming that a prepayment assumption is employed in such
computation.
The holder of a Stripped Security will be treated as owning an interest in
each of the Mortgage Loans held by the Grantor Trust Fund and will recognize an
appropriate share of the income and expenses associated with the Mortgage Loans.
Accordingly, an individual, trust or estate that holds a Stripped Security
directly or through a pass-through entity will be subject to the limitations on
deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any class of a Series which
is a Subordinate Security, may deduct losses incurred with respect to the
Stripped Security as described above under "Standard Securities -- General."
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Status of Stripped Securities
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Depositor that, except with respect to a Trust Fund consisting of
Unsecured Home Improvement Loans, Stripped Securities owned by applicable
holders should be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A), "obligation[s] . . . principally secured
by an interest in real property which is . . . residential real estate" within
the meaning of Code Section 860G(a)(3)(A), and "loans . . . secured by an
interest in real property" within the meaning of Code Section 7701(a)(19)(C)(v),
and interest (including original issue discount) income attributable to Stripped
Securities should be considered to represent "interest on obligations secured by
mortgages on real property" within the meaning of Code Section 856(c)(3)(B),
provided that in each case the Mortgage Loans and interest on such Mortgage
Loans qualify for such treatment. The application of such Code provisions to
Buydown Mortgage Loans is uncertain. See "Standard Securities -- Tax Status"
above.
Taxation of Stripped Securities
Original Issue Discount. Except as described above under "General," each
Stripped Security will be considered to have been issued at an original issue
discount for federal income tax purposes. Original issue discount with respect
to a Stripped Security must be included in ordinary income as it accrues, in
accordance with a constant yield method that takes into account the compounding
of interest, which may be prior to the receipt of the cash attributable to such
income. Based in part on the issue discount required to be included in the
income of a holder of a Stripped Security (referred to in this discussion as a
"Stripped Securityholder") in any taxable year likely will be computed generally
as described above under "REMICs -- Taxation of Owner of Regular
Securities -- Original Issue Discount" and "-- Variable Rate Regular
Securities." However, with the apparent exception of a Stripped Security
qualifying as a market discount obligation as described above under "General,"
the issue price of a Stripped Security will be the purchase price paid by each
holder thereof, and the stated redemption price at maturity will include the
aggregate amount of the payments to be made on the Stripped Security to such
Securityholder, presumably under the Prepayment Assumption, other than qualified
stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Securityholder's recognition of original
issue discount will be either accelerated or decelerated and the amount of such
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each Mortgage Loan represented
by such Securityholder's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in such Stripped Security to recognize a
loss (which may be a capital loss) equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Securities will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Securities. However, if final regulations dealing with contingent
interest with respect to the Stripped Securities apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on the
sale of contingent interest Stripped Securities as ordinary income. Investors
should consult their tax advisors regarding the appropriate tax treatment of
Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Securityholder's
adjusted basis in such Stripped Security, as described above under
"REMICs -- Taxation of Owners of Regular Securities -- Sale or Exchange of
Regular Securities." Gain or loss from the sale or exchange of a
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Stripped Security generally will be capital gain or loss to the Securityholder
if the Stripped Security is held as a "capital asset" within the meaning of Code
section 1221, and will be long-term or short-term depending on whether the
Stripped Security has been held for the long-term capital gain holding period
(currently, more than one year). To the extent that a subsequent purchaser's
purchase price is exceeded by the remaining payments on the Stripped Securities,
such subsequent purchaser will be required for federal income tax purposes to
accrue and report such excess as if it were original issue discount in the
manner described above. It is not clear for this purpose whether the assumed
prepayment rate that is to be used in the case of a Securityholder other than an
original Securityholder should be the Prepayment Assumption or a new rate based
on the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Securities. When an investor
purchases more than one Class of Stripped Securities, it is currently unclear
whether for federal income tax purposes such Classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterization. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations of
the applicable Code provisions. For example, the Securityholder may be treated
as the owner of (i) one installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to principal on each
Mortgage Loan and a second installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to interest on each
Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each Mortgage Loan, or (iii)
a separate installment obligation for each Mortgage Loan, representing the
Stripped Security's pro rata share of payments of principal and/or interest to
be made with respect thereto. Alternatively, the holder of one or more Classes
of Stripped Securities may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Security, or Classes of Stripped Securities in the aggregate, represent the same
pro rata portion of principal and interest on each such Mortgage Loan, and a
stripped bond or stripped coupon (as the case may be), treated as an installment
obligation or contingent payment obligation, as to the remainder. Treasury
regulations regarding original issue discount on stripped obligations make the
foregoing interpretations less likely to be applicable. The preamble to such
regulations states that they are premised on the assumption that an aggregation
approach is appropriate for determining whether original issue discount on a
stripped bond or stripped coupon is de minimis, and solicits comments on
appropriate rules for aggregating stripped bonds and stripped coupons under Code
Section 1286.
Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, Securityholders are
urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Securityholder at any time during such year, such
information (prepared on the basis described above) as is necessary to enable
such Securityholder to prepare its federal income tax returns. Such information
will include the amount of original issue discount accrued on Securities held by
persons other than Securityholders exempted from the reporting requirements.
However, the amount required to be reported by the Trustee may not be equal to
the proper amount of original issue discount required to be reported as taxable
income by a Securityholder, other than an original Securityholder that purchased
at the issue price. In particular, in the case of Stripped Securities, unless
provided otherwise in the applicable Prospectus Supplement, such reporting will
be based upon a representative initial offering price of each Class of Stripped
Securities. The Trustee will also file such original issue discount information
with the Internal Revenue Service. If a Securityholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Securityholder has not reported all interest and dividend
income required to be shown on his federal income tax return, 31% backup
withholding may be required in respect of any reportable payments, as described
above under "REMICs -- Backup Withholding."
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Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Securityholder on the sale or exchange of such a
Security also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under
"REMICs -- Taxation of Certain Foreign Investors -- Regular Securities."
PARTNERSHIP TRUST FUNDS
Classification of Partnership Trust Funds
With respect to each series of Partnership Securities or Debt Securities,
Cadwalader, Wickersham & Taft or Hunton & Williams will deliver its opinion that
the Trust Fund will not be a taxable mortgage pool or an association (or
publicly traded partnership) taxable as a corporation for federal income tax
purposes. This opinion will be based on the assumption that the terms of the
related Agreement and related documents will be complied with, and on counsel's
conclusion that the nature of the income of the Trust Fund will exempt it from
the rule that certain publicly traded partnerships are taxable as corporations.
Characterization of Investments in Partnership Securities and Debt Securities
For federal income tax purposes, (i) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residual real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (ii) interest on Debt Securities held by a real
estate investment trust will not be treated as "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Code Section 856(c)(3)(B), and Debt Securities held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will qualify under those sections based on the real estate
investments trust's proportionate interest in the assets of the Partnership
Trust Fund based on capital accounts.
Taxation of Debt Securityholders
Treatment of the Debt Securities as Indebtedness
The Depositor will agree, and the Securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
with respect to each Series of Debt Securities, Cadwalader, Wickersham & Taft or
Hunton & Williams will deliver its opinion that the Debt Securities will be
classified as indebtedness for federal income tax purposes. The discussion below
assumes this characterization of the Debt Securities is correct.
If, contrary to the opinion of counsel, the IRS successfully asserted that
the Debt Securities were not debt for federal income tax purposes, the Debt
Securities might be treated as equity interests in the Partnership Trust, and
the timing and amount of income allocable to holders of such Debt Securities may
be different than as described in the following paragraph.
Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (i) income
reportable on Debt Securities is not required to be
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reported under the accrual method unless the holder otherwise uses the accrual
method and (ii) the special rule treating a portion of the gain on sale or
exchange of a Regular Security as ordinary income is inapplicable to Debt
Securities. See "REMICs -- Taxation of Owners of Regular Securities" and
"-- Sale or Exchange of Regular Securities."
Taxation of Owners of Partnership Securities
Treatment of the Partnership Trust Fund as a Partnership
If so specified in the applicable Prospectus Supplement, the Depositor will
agree, and the Securityholders will agree by their purchase of Securities, to
treat the Partnership Trust Fund as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Partnership Trust Fund, the partners of the partnership being the
Securityholders (including the Depositor), and the Debt Securities (if any)
being debt of the partnership. However, the proper characterization of the
arrangement involving the Partnership Trust Fund, the Partnership Securities,
the Debt Securities, and the Depositor is not clear, because there is no
authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Securities have certain
features characteristic of debt, the Partnership Securities might be considered
debt of the Depositor or the Partnership Trust Fund. Any such characterization
would not result in materially adverse tax consequences to Securityholders as
compared to the consequences from treatment of the Partnership Securities as
equity in a partnership, described below. The following discussion assumes that
the Partnership Securities represent equity interests in a partnership.
Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each Securityholder will be required to separately take into
account such holder's allocated share of income, gains, losses, deductions and
credits of the Partnership Trust Fund. It is anticipated that the Partnership
Trust Fund's income will consist primarily of interest earned on the Mortgage
Loans (including appropriate adjustments for market discount, original issue
discount and bond premium) as described above under "-- Grantor Trust
Funds -- Standard Securities -- General", and "-- Premium and Discount") and any
gain upon collection or disposition of Mortgage Loans. The Partnership Trust
Fund's deductions will consist primarily of interest accruing with respect to
the Debt Securities, servicing and other fees, and losses or deductions upon
collection or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Agreement and related documents). The Agreement will provide, in general, that
the Securityholders will be allocated taxable income of the Partnership Trust
Fund for each Due Period equal to the sum of (i) the interest that accrues on
the Partnership Securities in accordance with their terms for such Due Period,
including interest accruing at the applicable pass-through rate for such Due
Period and interest on amounts previously due on the Partnership Securities but
not yet distributed; (ii) any Partnership Trust Fund income attributable to
discount on the Mortgage Loans that corresponds to any excess of the principal
amount of the Partnership Securities over their initial issue price; and (iii)
any other amounts of income payable to the Securityholders for such Due Period.
Such allocation will be reduced by any amortization by the Partnership Trust
Fund of premium on Mortgage Loans that corresponds to any excess of the issue
price of Partnership Securities over their principal amount. All remaining
taxable income of the Partnership Trust Fund will be allocated to the Depositor.
Based on the economic arrangement of the parties, this approach for allocating
Partnership Trust Fund income should be permissible under applicable Treasury
regulations, although no assurance can be given that the IRS would not require a
greater amount of income to be allocated to Securityholders. Moreover, even
under the foregoing method of allocation, Securityholders may be allocated
income equal to the entire pass-through rate plus the other items described
above even though the Trust Fund might not have sufficient cash to make current
cash distributions of such amount. Thus, cash basis holders will in effect be
required to report income from the Partnership Securities on
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the accrual basis and Securityholders may become liable for taxes on Partnership
Trust Fund income even if they have not received cash from the Partnership Trust
Fund to pay such taxes.
Part or all of the taxable income allocated to a Securityholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Securityholder would be miscellaneous itemized deductions subject to the
limitations described above under "-- Grantor Trust Funds -- Standard
Securities -- General". Accordingly, such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to such
holder over the life of the Partnership Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under
"-- Grantor Trust Funds -- Standard Securities -- General" and "-- Premium and
Discount." Notwithstanding such description, it is intended that the Partnership
Trust Fund will make all tax calculations relating to income and allocations to
Securityholders on an aggregate basis with respect to all Mortgage Loans held by
the Partnership Trust Fund rather than on a Mortgage Loan-by-Mortgage Loan
basis. If the IRS were to require that such calculations be made separately for
each Mortgage Loan, the Partnership Trust Fund might be required to incur
additional expense, but it is believed that there would not be a material
adverse effect on Securityholders.
Discount and Premium
Unless indicated otherwise in the applicable Prospectus Supplement, it is
not anticipated that the Mortgage Loans will have been issued with original
issue discount and, therefore, the Partnership Trust Fund should not have
original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. See "Grantor Trust Funds -- Standard Securities -- Premium and
Discount." (As indicated above, the Partnership Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Mortgage Loan-by-Mortgage Loan basis).
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Securityholders.
Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, it would cause a deemed
contribution of the assets of a Partnership Trust Fund (the "old partnership")
to a new Partnership Trust Fund (the "new partnership") in exchange for
interests in the new partnership. Such interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange. The Partnership Trust Fund will not comply with
certain technical requirements that might apply when such a constructive
termination occurs. As a result, the Partnership Trust Fund may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Partnership Trust Fund might
not be able to comply due to lack of data.
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Disposition of Securities
Generally, capital gain or loss will be recognized on a sale of Partnership
Securities in an amount equal to the difference between the amount realized and
the seller's tax basis in the Partnership Securities sold. A Securityholder's
tax basis in an Partnership Security will generally equal the holder's cost
increased by the holder's share of Partnership Trust Fund income (includible in
income) and decreased by any distributions received with respect to such
Partnership Security. In addition, both the tax basis in the Partnership
Securities and the amount realized on a sale of an Partnership Security would
include the holder's share of the Debt Securities and other liabilities of the
Partnership Trust Fund. A holder acquiring Partnership Securities at different
prices may be required to maintain a single aggregate adjusted tax basis in such
Partnership Securities, and, upon sale or other disposition of some of the
Partnership Securities, allocate a portion of such aggregate tax basis to the
Partnership Securities sold (rather than maintaining a separate tax basis in
each Partnership Security for purposes of computing gain or loss on a sale of
that Partnership Security).
Any gain on the sale of an Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the Mortgage Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Securityholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Partnership Securities.
Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the Securityholders in proportion to the principal amount of
Partnership Securities owned by them as of the close of the last day of such Due
Period. As a result, a holder purchasing Partnership Securities may be allocated
tax items (which will affect its tax liability and tax basis) attributable to
periods before the actual transaction.
The use of such a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the Securityholders.
The Depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
Section 731 Distributions
In the case of any distribution to a Securityholder, no gain will be
recognized to that Securityholder to the extent that the amount of any money
distributed with respect to such Security exceeds the adjusted basis of such
Securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds such Securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Securityholder, no
loss will be recognized except upon a distribution in liquidation of a
Securityholder's interest. Any gain or loss recognized by a Securityholder will
be capital gain or loss.
Section 754 Election
In the event that a Securityholder sells its Partnership Securities at a
profit (loss), the purchasing Securityholder will have a higher (lower) basis in
the Partnership Securities than the selling Securityholder had. The tax basis of
the Partnership Trust Fund's assets would not be adjusted to reflect that higher
(or lower) basis unless the Partnership Trust Fund were to file an election
under Section 754 of the Code. In order to avoid the administrative complexities
that would be involved in keeping accurate accounting records, as well as
potentially onerous information reporting requirements, the Partnership Trust
Fund will not make such an
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election. As a result, Securityholder might be allocated a greater or lesser
amount of Partnership Trust Fund income than would be appropriate based on their
own purchase price for Partnership Securities.
Administrative Matters
The Trustee is required to keep or have kept complete and accurate books of
the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Securityholder's
allocable share of items of Partnership Trust Fund income and expense to holders
and the IRS on Schedule K-1. The Trustee will provide the Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership Securities.
Generally, holders must file tax returns that are consistent with the
information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership Securities
so held. Such information includes (i) the name, address and taxpayer
identification number of the nominee and (ii) as to each beneficial owner (x)
the name, address and identification number of such person, (y) whether such
person is a United States person, a tax-exempt entity or a foreign government,
an international organization, or any wholly-owned agency or instrumentality of
either of the foregoing, and (z) certain information on Partnership Securities
that were held, bought or sold on behalf of such person throughout the year. In
addition, brokers and financial institutions that hold Partnership Securities
through a nominee are required to furnish directly to the Trustee information as
to themselves and their ownership of Partnership Securities. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Partnership Trust Fund. The information
referred to above for any calendar year must be furnished to the Partnership
Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Partnership Trust Fund with the
information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the Pooling
and Servicing Agreement and, as such, will be responsible for representing the
Securityholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the Securityholders,
and, under certain circumstances, a Securityholder may be precluded from
separately litigating a proposed adjustment to the items of the Partnership
Trust Fund. An adjustment could also result in an audit of a Securityholder's
returns and adjustments of items not related to the income and losses of the
Partnership Trust Fund.
Tax Consequences to Foreign Securityholders
It is not clear whether the Partnership Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to Non-U.S. Persons, because there is no clear
authority dealing with that issue under facts substantially similar to those
described herein. Although it is not expected that the Partnership Trust Fund
would be engaged in a trade or business in the United States for such purposes,
if so specified in the applicable Prospectus Supplement, the Partnership Trust
Fund may withhold as if it were so engaged in order to protect the Partnership
Trust Fund from possible adverse consequences of a failure to withhold. The
Partnership Trust Fund may withhold on the portion of its taxable income that is
allocable to Securityholders who are Non-U.S. Persons pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for Non-U.S. Persons that are taxable as corporations
and 39.6% for all other foreign holders. Amounts withheld will be
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deemed distributed to the Non-U.S. Person Securityholders. Subsequent adoption
of Treasury regulations or the issuance of other administrative pronouncements
may require the Partnership Trust Fund to change its withholding procedures. In
determining a holder's withholding status, the Partnership Trust Fund may rely
on IRS Form W-8, IRS Form W-9 or the holder's certification of nonforeign status
signed under penalties of perjury.
To the extent specified in the applicable Prospectus Supplement, (i) each
Non-U.S. Person holder might be required to file a U.S. individual or corporate
income tax return (including, in the case of a corporation, the branch profits
tax) on its share of the Partnership Trust Fund's income; (ii) each Non-U.S.
Person holder must obtain a taxpayer identification number from the IRS and
submit that number to the Partnership Trust Fund on Form W-8 in order to assure
appropriate crediting of the taxes withheld; and (iii) a Non-U.S. Person holder
generally would be entitled to file with the IRS a claim for refund with respect
to taxes withheld by the Partnership Trust Fund, taking the position that no
taxes were due because the Partnership Trust Fund was not engaged in a U.S.
trade or business. Notwithstanding the foregoing, interest payments made (or
accrued) to a Securityholder who is a Non-U.S. Person may be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Partnership Trust Fund. If these interest payments are
properly characterized as guaranteed payments, then the interest may not be
considered "portfolio interest." As a result, Securityholders who are Non-U.S.
Persons may be subject to United States federal income tax and withholding tax
at a rate of 30 percent, unless reduced or eliminated pursuant to an applicable
treaty. In such case, a Non-U.S. Person holder would only be entitled to claim a
refund for that portion of the taxes in excess of the taxes that should be
withheld with respect to the guaranteed payments.
Backup Withholding
Distributions made on the Partnership Securities and proceeds from the sale
of the Partnership Securities will be subject to a "backup" withholding tax of
31% if, in general, the Securityholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF REMIC SECURITIES, GRANTOR TRUST SECURITIES, PARTNERSHIP
SECURITIES AND DEBT SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Securities offered
hereunder.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which such plans, accounts or arrangements are invested, that are
subject to Title I of ERISA and Section 4975 of the Code ("Plans") and on
persons who are fiduciaries with respect to such Plans
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in connection with the investment of Plan assets. Certain employee benefit
plans, such as governmental plans (as defined in ERISA Section 3(32)), and, if
no election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Securities without regard
to the ERISA considerations described below, subject to the provisions of other
applicable federal, state and local law. Any such plan which is qualified 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.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, ERISA and the Code prohibit a broad range of
transactions involving assets of a Plan and persons ("Parties in Interest") who
have certain specified relationships to the Plan unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code, unless a statutory or administrative
exemption is available. These prohibited transactions generally are set forth in
Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the Mortgage Loans, Contracts,
Unsecured Home Improvement Loans, Government Securities and other assets
included in a related Trust Fund to be deemed Plan assets. Section 2510.3-101 of
the regulations of the United States Department of Labor ("DOL") provides that
when a Plan acquires an equity interest in an entity, the Plan's assets include
both such equity interest and an undivided interest in each of the underlying
assets of the entity, unless certain exceptions not applicable here apply, or
unless the equity participation in the entity by "benefit plan investors" (i.e.,
Plans and certain employee benefit plans not subject to ERISA) is not
"significant", both as defined therein. For this purpose, in general, equity
participation by benefit plan investors will be "significant" on any date if 25%
or more of the value of any class of equity interests in the entity is held by
benefit plan investors. To the extent the Securities are treated as equity
interests for purposes of DOL regulations section 2510.3-101, equity
participation in a Trust Fund will be significant on any date if immediately
after the most recent acquisition of any Security, 25% or more of any class of
Securities is held by benefit plan investors.
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, is a fiduciary of the investing
Plan. If the Mortgage Loans, Contracts, Unsecured Home Improvement Loans,
Government Securities and other assets included in a Trust Fund constitute Plan
assets, then any party exercising management or discretionary control regarding
those assets, such as the Servicer or Master Servicer, may be deemed to be a
Plan "fiduciary" and thus subject to the fiduciary responsibility provisions and
prohibited transaction provisions of ERISA and the Code with respect to the
investing Plan. In addition, if the Mortgage Loans, Contracts, Unsecured Home
Improvement Loans, Government Securities and other assets included in a Trust
Fund constitute Plan assets, the purchase of Securities by a Plan, as well as
the operation of the Trust Fund, may constitute or involve a prohibited
transaction under ERISA and the Code.
The DOL issued an individual exemption, Prohibited Transaction Exemption
93-31 (the "Exemption"), on May 14, 1993 to NationsBank Corporation
("NationsBank"), which generally exempts from the application of the prohibited
transaction provisions of Sections 406(a) and 407 of ERISA, and the excise taxes
imposed on such prohibited transactions pursuant to Section 4975(a) and (b) of
the Code, certain transactions, among others, relating to the servicing and
operation of mortgage pools and the purchase, sale and holding of Securities
underwritten by an Underwriter (as hereinafter defined), that (a) represent a
beneficial ownership interest in the assets of a Trust Fund and entitle the
holder the pass-through payments of principal, interest and/or other payments
made with respect to the assets of the Trust Fund or (b) are denominated as a
debt instrument and represent an interest in a REMIC, provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
Section "ERISA Considerations," the term "Underwriter" shall include (a)
NationsBank, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
NationsBank, including NationsBank, Inc., and (c) any member of the underwriting
syndicate or selling group of which a person described in (a) or (b) is a
manager or co-manager with respect to a class of Securities.
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<PAGE> 170
The Exemption sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder. First, the acquisition of Securities
by a Plan must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Exemption only applies to Securities evidencing rights and interests not
subordinated to the rights and interests evidenced by the other Securities of
the same series. Third, the Securities at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by Standard
& Poor's ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps
Credit Rating Co. ("DCR") or Fitch Investors Service, L.P. ("Fitch"). Fourth,
the Trustee cannot be an affiliate of any member of the "Restricted Group" which
consists of the Underwriter, the Depositor, the Trustee, the Master Servicer,
any Servicer, any insurer and any obligor with respect to Assets constituting
more than 5% of the aggregate unamortized principal balance of the Assets in the
related Trust Fund as of the date of initial issuance of the Securities. Fifth,
the sum of all payments made to and retained by the Underwriter(s) must
represent not more than reasonable compensation for underwriting the Securities;
the sum of all payments made to and retained by the Depositor pursuant to the
assignment of the Assets to the related Trust Fund must represent not more than
the fair market value of such obligations; and the sum of all payments made to
and retained by the Servicer must represent not more than reasonable
compensation for such person's services under the related Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the investing Plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Securities and Exchange Commission under the
Securities Act of 1933, as amended. In addition, the Trust Fund must meet the
following requirements: (i) the assets of the Trust Fund must consist solely of
assets of the type that have been included in other investment pools; (ii)
securities evidencing interests in such other investment pools must have been
rated in one of the three highest generic rating categories by S&P, Moody's,
DCR, or Fitch for at least one year prior to the Plan's acquisition of the
securities; and (iii) securities evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of the Securities.
A fiduciary of a Plan contemplating purchasing a Security must make its own
determination that the general conditions set forth above will be satisfied with
respect to such Security. However, to the extent Securities are subordinate, the
Exemption will not apply to an investment by a Plan. In addition, any Securities
representing a beneficial ownership interest in Unsecured Home Improvement Loans
or Revolving Credit Line Loans will not satisfy the general conditions of the
Exemption.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407 of
ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Sections 4975(c)(1)(A) through (D) of the Code) in connection
with the direct or indirect sale, exchange, transfer, holding or the direct or
indirect acquisition or disposition in the secondary market of Securities by
Plans. However, no exemption is provided from the restrictions of Sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
Security on behalf of an "Excluded Plan" by any person who has discretionary
authority or renders investment advice with respect to the assets of such
Excluded Plan. For purposes of the Securities, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Sections 4975(a) and (b)
of the Code by reason of Section 4975(c)(1)(E) of the Code in connection with
(1) the direct or indirect sale, exchange or transfer of Securities in the
initial issuance of Securities between the Depositor or an Underwriter and a
Plan when the person who has discretionary authority or renders investment
advice with respect to the investment of Plan assets in the Securities is (a) an
obligor with respect to 5% or less of the fair market value of the Assets or (b)
an affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Securities by a Plan and (3) the holding
of Securities by a Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Section 4975(c) of the Code for transactions
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<PAGE> 171
in connection with the servicing, management and operation of the Trust Fund.
The Depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied with respect to the Securities so that the
Exemption would provide an exemption from the restrictions imposed by Sections
406(a) and (b) of ERISA (as well as the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code) for transactions
in connection with the servicing, management and operation of the Mortgage
Pools, provided that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" (within the meaning of Section 3(14) of
ERISA) or a "disqualified person" (within the meaning of Section 4975(e)(2) of
the Code) with respect to an investing Plan by virtue of providing services to
the Plan (or by virtue of having certain specified relationships to such a
person) solely as a result of the Plan's ownership of Securities.
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations section 2510.3-101, a Plan's investment in such
Securities ("Non-Equity Securities") would not cause the assets included in a
related Trust Fund to be deemed Plan assets. However, the Depositor, the
Servicer, the Trustee, or Underwriter may be the sponsor of or investment
advisor with respect to one or more Plans. Because such parties may receive
certain benefits in connection with the sale of Non-Equity Securities, the
purchase of Non-Equity Securities using Plan assets over which any such parties
has investment authority might be deemed to be a violation of the prohibited
transaction rules of ERISA and the Code for which no exemption may be available.
Accordingly, Non-Equity Securities may not be purchased using the assets of any
Plan if any of the Depositor, the Servicer, the Trustee or Underwriter has
investment authority with respect to such assets.
In addition, certain affiliates of the Depositor might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by such holder. In either
case, the acquisition or holding of Non-Equity Securities by or on behalf of
such a Plan could be considered to give rise to an indirect prohibited
transaction within the meaning of ERISA and the Code, unless it is subject to
one or more statutory or administrative exemptions such as Prohibited
Transaction Class Exemption ("PTCE") 84-14, which exempts certain transactions
effected on behalf of a Plan by a "qualified professional asset manager", PTCE
90-1, which exempts certain transactions involving insurance company pooled
separate accounts, PTCE-91-38, which exempts certain transactions involving bank
collective investment funds, PTCE 95-60, which exempts certain transactions
involving insurance company general accounts, or PTCE 96-23, which exempts
certain transactions effected on behalf of a Plan by certain "in-house" asset
managers. It should be noted, however, that even if the conditions specified in
one or more of these exemptions are met, the scope of relief provided by these
exemptions may not necessarily cover all acts that might be construed as
prohibited transactions.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment, the availability of the exemptive relief
provided in the Exemption and the potential applicability of any other
prohibited transaction exemption in connection therewith. In particular, a Plan
fiduciary which proposes to cause a Plan to purchase Securities representing a
beneficial ownership interest in a poolof single-family residential first
mortgage loans, a Plan fiduciary should consider the applicability of PTCE 83-1,
which provides exemptive relief for certain transactions involving mortgage pool
investment trusts. The Prospectus Supplement with respect to a series of
Securities may contain additional information regarding the application of the
Exemption, PTCE 83-1 or any other exemption, with respect to the Securities
offered thereby. In addition, any Plan fiduciary that proposes to cause a Plan
to purchase Strip Securities should consider the federal income tax consequences
of such investment.
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<PAGE> 172
ANY PLAN FIDUCIARY CONSIDERING WHETHER TO PURCHASE A SECURITY ON BEHALF OF
A PLAN SHOULD CONSULT WITH ITS COUNSEL REGARDING THE APPLICABILITY OF THE
FIDUCIARY RESPONSIBILITY AND PROHIBITED TRANSACTION PROVISIONS OF ERISA AND THE
CODE TO SUCH INVESTMENT.
THE SALE OF SECURITIES TO A PLAN IS IN NO RESPECT A REPRESENTATION BY THE
DEPOSITOR OR THE UNDERWRITER THAT THIS INVESTMENT MEETS ALL RELEVANT LEGAL
REQUIREMENTS WITH RESPECT TO INVESTMENTS BY PLANS GENERALLY OR ANY PARTICULAR
PLAN, OR THAT THIS INVESTMENT IS APPROPRIATE FOR PLANS GENERALLY OR ANY
PARTICULAR PLAN.
LEGAL INVESTMENT
Each class of Offered Securities will be rated at the date of issuance in
one of the four highest rating categories by at least one Rating Agency. The
related Prospectus Supplement will specify which classes of the Securities, if
any, will constitute "mortgage related securities" ("SMMEA Securities") for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"), so long as (i) they are rated in one of the two highest rating
categories by at least one Rating Agency, and (ii) are part of a series
representing interests in a Trust Fund consisting of Mortgage Loans originated
by certain types of originators specified in SMMEA. SMMEA Securities will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including, but not limited
to, state chartered depository institutions, insurance companies and pension
funds) created pursuant to or existing under the laws of the United States or of
any state (including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state 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. Pursuant to SMMEA, a number of states enacted
legislation before the October 4, 1991 cut-off for such enactments, limiting to
varying extents, the ability of certain entities (in particular, insurance
companies) to invest in "mortgage related securities," in most cases by
requiring the affected investors to rely solely upon existing state law, and not
SMMEA. Accordingly, the investors affected by such legislation will be
authorized to invest in the Offered Securities only to the extent provided in
such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "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.
sec. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, effective
December 31, 1996, the Office of the Comptroller of the Currency (the "OCC") has
amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with certain general standards in 12
C.F.R. Section 1.5 concerning "safety and soundness" and retention of credit
information), certain "Type IV securities," defined in 12 C.F.R. Section 1.2(1)
to include certain "residential mortgage-related securities." As so defined,
"residential mortgage-related security" means, in relevant part,
"mortgage-related security" within the meaning of SMMEA. The National Credit
Union Administration (the "NCUA") has adopted rules, codified at 12 C.F.R. Part
703, which permit federal credit unions to invest in "mortgage related
securities" under certain limited circumstances, other than stripped mortgage
related securities, residual interests in mortgage related securities, and
commercial mortgage related securities, unless the credit union has obtained
written approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. sec. 703.140.
All depository institutions considering an investment in the Offered
Securities should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 Policy Statement") of
the Federal Financial Institutions Examination Council ("FFIEC"), which has been
adopted by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the OCC and the Office of Thrift Supervision,
effective May 26, 1998, and by the NCUA, effective October 1, 1998. The 1998
Policy Statement sets forth general guidelines which depository
113
<PAGE> 173
institutions must follow in managing risks (including market, credit, liquidity,
operational (transaction), and legal risks) applicable to all securities
(including mortgage pass-through securities and mortgage-derivative products)
used for investment purposes. Until October 1, 1998, federal credit unions will
still be subject to the FFIEC's now-superseded "Supervisory Policy Statement on
Securities Activities" dated January 28, 1992, as adopted by the NCUA with
certain modifications, which prohibited depository institutions from investing
in certain "high-risk mortgage securities," except under limited circumstances,
and set forth certain investment practices deemed to be unsuitable for regulated
institutions.
If specified in the related Prospectus Supplement, other classes of Offered
Securities offered pursuant to this Prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of this
Offered Security under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such Offered
Securities, may be subject to significant interpretive uncertainties.
Except as to the status of SMMEA Securities identified in the Prospectus
Supplement for a series as "mortgage related securities" under SMMEA, the
Depositor will make no representations as to the proper characterization of the
Offered Securities for legal investment or financial institution regulatory
purposes, or as to the ability of particular investors to purchase any Offered
Securities under applicable legal investment restrictions. The uncertainties
described above (and any unfavorable future determinations concerning legal
investment or financial institution regulatory characteristics of the Offered
Securities) may adversely affect the liquidity of the Offered Securities.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing the Offered
Securities, as certain classes or subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Securities or to
purchase Offered Securities representing more than a specified percentage of the
investor's assets. 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 Offered Securities
of any class constitute legal investments for them or are subject to investment,
capital or other restrictions, and, if applicable, whether SMMEA has been
overridden in any jurisdiction relevant to such investor.
Investors should consult their own legal advisors in determining whether
and to what extent the Securities constitute legal investments for such
investors.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the Supplements to this Prospectus
will be offered in series. The distribution of the Securities may be effected
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by NationsBanc Montgomery Securities
LLC ("NMS") acting as underwriter with other underwriters, if any, named
therein. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Securities agreed to be
purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of the Securities, underwriters may
receive compensation from the Depositor or from purchasers of the Securities in
the form of discounts,
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<PAGE> 174
concessions or commissions. The Prospectus Supplement will describe any such
compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that the Securities
will be distributed by NMS acting as agent or in some cases as principal with
respect to Securities which it has previously purchased or agreed to purchase.
If NMS acts as agent in the sale of Securities, NMS will receive a selling
commission with respect to each series of Securities, depending on market
conditions, expressed as a percentage of the aggregate principal balance of the
related Mortgage Loans as of the Cut-off Date. The exact percentage for each
series of Securities will be disclosed in the related Prospectus Supplement. To
the extent that NMS elects to purchase Securities as principal, NMS may realize
losses or profits based upon the difference between its purchase price and the
sales price. The Prospectus Supplement with respect to any series offered other
than through underwriters will contain information regarding the nature of such
offering and any agreements to be entered into between the Depositor and
purchasers of Securities of such series.
NMS is an affiliate of the Depositor. This Prospectus may be used by NMS,
to the extent required, in connection with market making transactions in the
Securities. NMS may act as principal or agent in such transactions.
The Depositor will indemnify NMS and any underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, or will
contribute to payments NMS and any underwriters may be required to make in
respect thereof.
In the ordinary course of business, NMS and the Depositor may engage in
various securities and financing transactions,including repurchase agreements to
provide interim financing of the Depositor's mortgage loans pending the sale of
such mortgage loans or interests therein, including the Securities.
The Depositor anticipates that the Securities 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 in connection
with reoffers and sales by them of Securities. Securityholders should consult
with their legal advisors in this regard prior to any such reoffer or sale.
As to each series of Securities, only those classes rated in one of the
four highest rating categories by any Rating Agency will be offered hereby. Any
unrated class may be initially retained by the Depositor, and may be sold by the
Depositor at any time to one or more institutional investors.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
Securityholders of an investment in the Securities of a series, will be passed
upon for the Depositor by Cadwalader, Wickersham & Taft, Charlotte, North
Carolina or Hunton & Williams, Charlotte, North Carolina.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
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RATING
It is a condition to the issuance of any class of Offered Securities that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and other asset backed securities do not represent any assessment
of the likelihood of principal prepayments by borrowers or of the degree by
which such prepayments might differ from those originally anticipated. As a
result, securityholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS FIRST
DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
1998 Policy Statement........ 113
Accrual Securities........... 6
Accrued Security Interest.... 32
Adjustable Rate Assets....... 18
Agreements................... 5
ARM Contracts................ 23
ARM Loans.................... 20
ARM Unsecured Home
Improvement Loans.......... 22
Asset Conservation Act....... 69
Asset Group.................. 6
Asset Seller................. 18
Assets....................... i
Available Distribution
Amount..................... 31
Balloon Payment Assets....... 13
Bankruptcy Code.............. 67
Bi-weekly Assets............. 19
Book-Entry Securities........ 31
Buydown Assets............... 18
Buydown Funds................ 79
Buydown Mortgage Loans....... 28
Buydown Period............... 28
Capitalized Interest
Account.................... 5
Cash Flow Agreements......... i
Cede......................... iii
CERCLA....................... 68
Certificates................. i, 1
Cleanup Costs................ 68
Code......................... 8
Collection Account........... 42
Commission................... iii
Contract Borrower............ 62
Contract Lender.............. 62
Contract Rate................ 4
Contracts.................... i
Convertible Assets........... 19
Cooperative Loans............ 61
Cooperatives................. 19
Covered Trust................ 17
CPR.......................... 27
Credit Support............... i
Crime Control Act............ 72
Cut-off Date................. 7
DCR.......................... 111
</TABLE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS FIRST
DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
Debt Securities.............. 8
Definitive Securities........ 18
Deposit Trust Agreement...... 5
Depositor.................... 1
Determination Date........... 31
Disqualified Organization.... 91
Distribution Date............ 6
DOL.......................... 110
DTC.......................... iii
Due-on-Sale Clauses.......... 29
Due Period................... 31
electing large partnership... 91
EPA.......................... 69
ERISA........................ 9
Excess servicing............. 99
Exchange Act................. iii
Excluded Plan................ 111
Exemption.................... 10
Fannie Mae................... 14
FASIT........................ ii
FASIT Securities............. 8
FDIC......................... 42
FFIEC........................ 113
Fitch........................ 111
Freddie Mac.................. 14
GEM Assets................... 19
GPM Assets................... 19
Grantor Trust Fund........... 76
Grantor Trust Securities..... 8
Home Equity Loans............ 2
Home Improvement Contracts... 2
Home Ownership Act........... 15
Increasing Payment Assets.... 18
Indenture.................... 5
Indenture Servicing
Agreement.................. 39
Indenture Trustee............ 1
Indirect Participants........ 37
Insurance Proceeds........... 31
Interest Accrual Period...... 25
Interest Reduction Assets.... 19
Land Sale Contracts.......... 2
Level Payment Assets......... 18
Liquidation Proceeds......... 31
Loan-to-Value Ratio.......... 20
</TABLE>
<PAGE> 177
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS FIRST
DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
Lock-out Date................ 21
Lock-out Period.............. 21
Manufactured Home............ 3
Manufactured Housing
Contracts.................. 15
Mark to Market Regulations... 93
Master Servicer.............. 1
Moody's...................... 111
Mortgage Loans............... i
Mortgage Notes............... 20
Mortgage Rate................ 3
Mortgaged Properties......... 2
Mortgages.................... 20
Mortgagor.................... 61
Multifamily Mortgage Loan.... 19
Multifamily Properties....... 2
NAIC......................... 113
National Housing Act......... 15
NationsBank.................. 10
NCUA......................... 113
New Regulations.............. 95
NMS.......................... 10
Non-Equity Securities........ 112
Non-Pro Rata Security........ 80
Nonrecoverable Advance....... 34
Non-U.S. Person.............. 95
Notes........................ i
OCC.......................... 113
Offered Securities........... i
OID Regulations.............. 76
Originators.................. 15
Participants................. 37
Parties in Interest.......... 110
Partnership Securities....... 8
Partnership Trust Fund....... 76
Pass-Through Entity.......... 90
Pass-Through Rate............ 6
PCBs......................... 68
Permitted Investments........ 42
Plan......................... 9
Pooling and Servicing
Agreement.................. 1
Pooling Servicing
Agreement.................. 39
Pre-Funded Amount............ 5
Pre-Funding Account.......... 5
Pre-Funding Period........... 5
</TABLE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS FIRST
DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
Prepayment................... 27
Prepayment Assumption........ 81
Prepayment Premium........... 21
PTCE......................... 112
Purchase Price............... 40
Rating Agency................ 10
Record Date.................. 31
Refinance Loans.............. 20
Regular Securities........... 8
Regular Securityholder....... 80
Related Proceeds............. 34
Relief Act................... 72
REMIC........................ ii
REMIC Pool................... 76
REMIC Provisions............. 76
REMIC Regulations............ 76
REMIC Securities............. 39
REO Property................. 35
Residual Holders............. 87
Residual Securities.......... 8
Restricted Group............. 111
Retained Interest............ 50
Revolving Credit Line
Loans...................... 21
RICO......................... 72
S&P.......................... 111
SBJPA of 1996................ 79
Secured-creditor exemption... 69
Securities................... i
Security Balance............. 6
Security Owners.............. iii
Securityholders.............. iii
Senior Lien.................. 14
Senior Securities............ 6
Servicer..................... 1
Servicing Standard........... 45
Single Family Mortgage
Loan....................... 19
Single Family Properties..... 2
SMMEA........................ 9
SMMEA Securities............. 113
SPA.......................... 27
Special Servicer............. 51
Standard Securities.......... 97
Startup Day.................. 77
Step-up Rate Assets.......... 19
Strip Securities............. 6
Stripped Securities.......... 100
</TABLE>
<PAGE> 178
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS FIRST
DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
Stripped Securityholder...... 102
Subordinate Securities....... 6
Sub-prime Mortgage Loans..... 14
Subsequent Assets............ 5
Superliens................... 68
Taxable Mortgage Pools....... 77
Thrift institutions.......... 90
Tiered REMICs................ 79
Title V...................... 71
Title VIII................... 71
Trust Assets................. ii
</TABLE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS FIRST
DEFINED
TERMS IN THE PROSPECTUS
- ----- -----------------
<S> <C>
Trust Fund................... i
Trustee...................... 1
U.S. Person.................. 92
UCC.......................... 37
Underlying Servicing
Agreement.................. 1
Underwriter.................. 110
Unsecured Home Improvement
Loans...................... i
Value........................ 20
Voting Rights................ 52
Warranting Party............. 41
</TABLE>
<PAGE> 179
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses expected to be incurred in connection with the issuance and
distribution of the Securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 590,000
----------
Printing and Engraving Fees................................. 140,000
----------
Legal Fees and Expenses..................................... 560,000
----------
Accounting Fees and Expenses................................ 80,000
----------
Trustee Fees and Expenses................................... 60,000
----------
Rating Agency Fees.......................................... 375,000
----------
Miscellaneous............................................... 20,000
----------
Total............................................. $1,825,000
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides that a
Delaware corporation may indemnify any persons, including officers and
directors, who are made, or are threatened to be made, parties to any
threatened, pending or completed legal action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of such corporation), by reason of the fact that such person is or was
an officer or director of such corporation, or is or was serving at the request
of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such officer or director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests and, for criminal proceedings, had no reasonable cause to believe that
his conduct was illegal. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses which such officer or director actually and reasonably
incurred.
The By-laws of the Depositor provide for indemnification of officers and
directors to the full extent permitted by the Delaware General Corporation Law.
The Pooling and Servicing Agreement or Indenture for each series of
Securities will provide either that the Depositor and the partners, directors,
officers, employees and agents of the Depositor, or that the Servicer or Master
Servicer and the partners, directors, officers, employees and agents of the
Servicer or Master Servicer, will be entitled to indemnification by the Trust
Fund and will be held harmless against any loss, liability or expense incurred
in connection with any legal action relating to the Agreement or the Securities,
other than any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of his or its
duties thereunder or by reason of reckless disregard of his or its obligations
and duties thereunder.
The directors and officers of the Depositor are covered by a directors' and
officers' liability insurance policy maintained by NationsBank Corporation for
the benefit of all of its subsidiaries.
II-1
<PAGE> 180
ITEM 16. EXHIBITS
<TABLE>
<C> <C> <S>
1.1 -- Form of Underwriting Agreement incorporated by reference
from Exhibit 1.1 to the Registration Statement on Form S-3
(File No. 333-32857).
4.1 -- Form of Pooling and Servicing Agreement incorporated by
reference from Exhibit 4.1 to the Registration Statement on
Form S-3 (File No. 333-32857).
4.2 -- Form of Indenture incorporated by reference from Exhibit 4.2
to the Registration Statement on Form S-3 (File No.
333-32857).
5.1 -- Opinion of Cadwalader, Wickersham & Taft.
5.2 -- Opinion of Hunton & Williams.
8.1 -- Opinion of Cadwalader, Wickersham & Taft with respect to
certain tax matters.
8.2 -- Opinion of Hunton & Williams with respect to certain tax
matters.
24.1 -- Consent of Cadwalader, Wickersham & Taft (included as part
of Exhibits 5.1 and 8.1).
24.2 -- Consent of Hunton & Williams (included as part of Exhibit
5.2 and 8.2).
25.1 -- Powers of Attorney (included on Page II-5 of this
Registration Statement).
</TABLE>
ITEM 17. UNDERTAKINGS
A. Undertaking pursuant to Rule 415
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change of such information in the
Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the information
required to be included in the post-effective amendment is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
B. Undertaking in connection with incorporation by reference of certain
filings under the Securities Exchange Act of 1934
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
C. Undertaking in respect of indemnification
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item 15 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore,
II-2
<PAGE> 181
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issues.
II-3
<PAGE> 182
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 (including the requirement that the
securities be rated investment grade at the time of sale) and has duly caused
this Form S-3 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Charlotte, State of North
Carolina, on the 31st day of August, 1998.
NationsBanc Asset Securities, Inc.
By: /s/ MICHAEL WARDEN
------------------------------------
Name: Michael Warden
----------------------------------
Title: President
-----------------------------------
II-4
<PAGE> 183
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael Warden, Pat J. Augustine and Robert J.
Perret, and each of them, his true and lawful attorneys-in-fact and agents for
him and in his name, place and stead, in any and all capacities, to sign any and
all post-effective amendments to this Registration Statement and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as they might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agents may lawfully do or cause to be done by virtue thereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ MICHAEL WARDEN President and Chief Executive August 31, 1998
- --------------------------------------------------- Officer
Michael Warden
/s/ NEIL COTTY Senior Vice President and August 31, 1998
- --------------------------------------------------- Chief Accounting Officer
Neil Cotty
/s/ CRAIG WINTERFIELD Treasurer and Chief Accounting August 31, 1998
- --------------------------------------------------- Officer
Craig Winterfield
/s/ F. WILLIAM VANDIVER, JR. Director August 31, 1998
- ---------------------------------------------------
F. William Vandiver, Jr.
/s/ WILLIAM A. HODGES Director August 31, 1998
- ---------------------------------------------------
William A. Hodges
/s/ WILLIAM L. MAXWELL Director August 31, 1998
- ---------------------------------------------------
William L. Maxwell
Director August , 1998
- ---------------------------------------------------
James H. Luther
</TABLE>
II-5
<PAGE> 184
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER NUMBERED PAGE
- ------- -------------
<C> <C> <S> <C>
1.1 -- Form of Underwriting Agreement incorporated by reference
from Exhibit 1.1 to the Registration Statement on Form S-3
(File No. 333-32857).
4.1 -- Form of Pooling and Servicing Agreement incorporated by
reference from Exhibit 4.1 to the Registration Statement on
Form S-3 (File No. 333-32857).
4.2 -- Form of Indenture incorporated by reference from Exhibit 4.2
to the Registration Statement on Form S-3 (File No.
333-32857).
5.1 -- Opinion of Cadwalader, Wickersham & Taft.
5.2 -- Opinion of Hunton & Williams.
8.1 -- Opinion of Cadwalader, Wickersham & Taft with respect to
certain tax matters.
8.2 -- Opinion of Hunton & Williams with respect to certain tax
matters.
24.1 -- Consent of Cadwalader, Wickersham & Taft (included as part
of Exhibits 5.1 and 8.1).
24.2 -- Consent of Hunton & Williams (included as part of Exhibit
5.2 and 8.2).
25.1 -- Powers of Attorney (included on Page II-5 of this
Registration Statement).
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[CADWALADER LETTERHEAD]
August 31, 1998
NationsBanc Asset Securities, Inc.
NationsBank Corporate Center
Charlotte, North Carolina 28255
Re: Asset Backed Certificates and Asset Backed Notes
------------------------------------------------
Ladies and Gentlemen:
We have acted as your counsel in connection with the registration
statement on Form S-3 to be filed with the Securities and Exchange Commission
(the "Commission") on the date hereof, pursuant to the Securities Act of 1933,
as amended (the "Registration Statement"). The Registration Statement covers
Asset Backed Certificates ("Certificates") and Asset Backed Notes ("Notes" and,
together with the Certificates, the "Securities") to be sold by NationsBanc
Asset Securities, Inc. (the "Company") in one or more series (each, a "Series")
of Securities. Each Series of Certificates will be issued under a separate
pooling and servicing agreement (each, a "Pooling and Servicing Agreement")
among the Company, a trustee to be identified in the Prospectus Supplement for
such Series of Certificates (a "Trustee"), and a servicer (the "Servicer") or a
master servicer (the "Master Servicer") to be identified in the Prospectus
Supplement for such Series of Certificates. Each Series of Notes will be issued
under a separate indenture (each, an "Indenture") between the Company and an
indenture trustee to be identified in the Prospectus Supplement for such Series
of Notes (an "Indenture Trustee"). A form of Pooling and Servicing Agreement and
a form of Indenture are incorporated by reference as Exhibits to the
Registration Statement. Capitalized terms used and not otherwise defined herein
have the respective meanings ascribed to such terms in the Registration
Statement.
<PAGE> 2
NationsBanc Asset Securities, Inc. -2- August 31, 1998
We have examined originals or copies certified or otherwise identified to
our satisfaction of such documents and records of the Company, and such public
documents and records as we have deemed necessary as a basis for the opinions
hereinafter expressed.
Based on the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement for a Series of Certificates
has been duly and validly authorized, executed and delivered by the
Company, a Trustee and the Servicer or Master Servicer, such Pooling
and Servicing Agreement will constitute a valid and legally binding
agreement of the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy,
reorganization, insolvency, moratorium and other laws affecting the
enforcement of rights of creditors generally and to general principles
of equity and the discretion of the court (regardless of whether
enforceability is considered in a proceeding in equity or at law);
2. When a Pooling and Servicing Agreement for a Series of Certificates
has been duly and validly authorized, executed and delivered by the
Company, a Trustee and the Servicer or Master Servicer, and the
Certificates of such Series have been duly executed, authenticated,
delivered and sold as contemplated in the Registration Statement, such
Certificates will be legally and validly issued, fully paid and
nonassessable, and the holders of such Certificates will be entitled
to the benefits of such Pooling and Servicing Agreement;
3. When an Indenture for a Series of Notes has been duly and validly
authorized, executed and delivered by the Company and an Indenture
Trustee, such Indenture will constitute a valid and legally binding
agreement of the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy,
reorganization, insolvency, moratorium and other laws affecting the
enforcement of rights of creditors generally and to general
principles of equity and the discretion of the court (regardless of
whether enforceability is considered in a proceeding in equity or at
law); and
4. When an Indenture for a Series of Notes has been duly and validly
authorized, executed and delivered by the Company and an Indenture
Trustee, and the Notes of such Series have been duly executed,
authenticated, delivered and sold as contemplated in the Registration
Statement, such Notes will be legally and validly issued, fully paid
and nonassessable, and the holders of such Notes will be entitled to
the benefits of such Indenture.
<PAGE> 3
NationsBanc Asset Securities, Inc. -3- August 31, 1998
We hereby consent to the filing of this letter as an Exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration Statement.
This consent is not to be construed as an admission that we are a person whose
consent is required to be filed with the Registration Statement under the
provisions of the Act.
Very truly yours,
/s/ Cadwalader, Wickersham & Taft
<PAGE> 1
EXHIBIT 5.2
August 31, 1998
NationsBanc Asset Securities, Inc.
NationsBank Corporate Center
Charlotte, N.C. 28255
Re: Asset Backed Certificates and Asset Backed Notes
Ladies and Gentlemen:
We have acted as your counsel in connection with the registration
statement filed with the Securities and Exchange Commission (the "Commission")
on the date hereof, pursuant to the Securities Act of 1933, as amended (the
"Act") (as amended, the "Registration Statement"). The Registration Statement
covers Asset Backed Certificates ("Certificates") and Asset Backed Notes
("Notes" and, together with the Certificates, the "Securities") to be sold by
NationsBanc Asset Securities, Inc. (the "Company") in one or more series (each,
a "Series") of Securities. Each Series of Certificates will be issued under a
separate pooling and servicing agreement (each, a "Pooling and Servicing
Agreement") among the Company, a trustee to be identified in the Prospectus
Supplement for such Series of Certificates (a "Trustee"), and a servicer (the
"Servicer") or a master servicer (the "Master Servicer") to be identified in the
Prospectus Supplement for such Series of Certificates. Each Series of Notes will
be issued under a separate indenture (each, an "Indenture") between the Company
and an indenture trustee to be identified in the Prospectus Supplement for such
Series of Notes (an "Indenture Trustee"). A form of Pooling and Servicing
Agreement and a form of Indenture are included as Exhibits to the Registration
Statement. Capitalized terms used and not otherwise defined herein have the
respective meanings ascribed to such terms in the Registration Statement.
We have examined originals or copies certified or otherwise identified
to our satisfaction of such documents and records of the Company, and such
public documents and records as we have deemed necessary as a basis for the
opinions hereinafter expressed.
Based on the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement for a Series
of Certificates has been duly and validly authorized,
executed and delivered by the Company, a Trustee and
the Servicer or Master Servicer, such Pooling and
Servicing Agreement will constitute a valid and
legally binding agreement of the Company, enforceable
against the Company in accordance with its terms,
subject to applicable bankruptcy, reorganization,
insolvency, moratorium and other laws affecting the
enforcement of rights of creditors generally
<PAGE> 2
NationsBanc Asset Securities, Inc.
August 31, 1998
and to general principles of equity and the
discretion of the court (regardless of whether
enforceability is considered in a proceeding in
equity or at law);
2. When a Pooling and Servicing Agreement for a Series
of Certificates has been duly and validly authorized,
executed and delivered by the Company, a Trustee and
the Servicer or Master Servicer, and the Certificates
of such Series have been duly executed,
authenticated, delivered and sold as contemplated in
the Registration Statement, such Certificates will be
legally and validly issued, fully paid and
nonassessable, and the holders of such Certificates
will be entitled to the benefits of such Pooling and
Servicing Agreement;
3. When an Indenture for a Series of Notes has been duly
and validly authorized, executed and delivered by the
Company and an Indenture Trustee, such Indenture will
constitute a valid and legally binding agreement of
the Company, enforceable against the Company in
accordance with its terms, subject to applicable
bankruptcy, reorganization, insolvency, moratorium
and other laws affecting the enforcement of rights of
creditors generally and to general principles of
equity and the discretion of the court (regardless of
whether enforceability is considered in a proceeding
in equity or at law); and
4. When an Indenture for a Series of Notes has been duly
and validly authorized, executed and delivered by the
Company and an Indenture Trustee, and the Notes of
such Series have been duly executed, authenticated,
delivered and sold as contemplated in the
Registration Statement, such Notes will be legally
and validly issued, fully paid and nonassessable, and
the holders of such Notes will be entitled to the
benefits of such Indenture.
We hereby consent to the filing of this letter as an Exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration Statement.
This consent is not to be construed as an admission that we are a person whose
consent is required to be filed with the Registration Statement under the
provisions of the Act.
Very truly yours,
/s/ Hunton & Williams
2
<PAGE> 1
EXHIBIT 8.1
[CADWALADER LETTERHEAD]
August 31, 1998
NationsBanc Asset Securities, Inc.
NationsBank Corporate Center
Charlotte, North Carolina 28255
Ladies and Gentlemen:
We have acted as your special tax counsel in connection with the
registration statement on Form S-3 to be filed with the Securities and Exchange
Commission (the "Commission") on the date hereof, pursuant to the Securities Act
of 1933, as amended (the "Registration Statement"). The Registration Statement
covers Asset Backed Certificates ("Certificates") and Asset Backed Notes
("Notes" and, together with the Certificates, the "Securities") to be sold by
NationsBanc Asset Securities, Inc. (the "Company") in one or more series (each,
a "Series") of Securities. Each Series of Certificates will be issued under a
separate pooling and servicing agreement (each, a "Pooling and Servicing
Agreement") among the Company, a trustee to be identified in the Prospectus
Supplement for such Series of Certificates and a servicer or a master servicer
to be identified in the Prospectus Supplement for such Series of Certificates.
Each Series of Notes will be issued under a separate indenture (each, an
"Indenture") between the Company and an indenture trustee to be identified in
the Prospectus Supplement for such Series of Notes. A form of Pooling and
Servicing Agreement and a form of Indenture are included as Exhibits to the
Registration Statement. Capitalized terms used and not otherwise defined herein
have the respective meanings ascribed to such terms in the Registration
Statement.
In rendering the opinion set forth below, we have examined and relied
upon the following: (i) the Registration Statement, the Prospectus and the form
of Prospectus Supplement constituting a part thereof, each substantially in the
form filed with the Commission, (ii) the form of the Pooling and Servicing
Agreement and Indenture, each
<PAGE> 2
NationsBanc Asset Securities, Inc. -2- August 31, 1998
substantially in the form filed with the Commission and (iii) such other
documents, records and instruments as we have deemed necessary for the
purposes of this opinion.
As counsel to the Company, we have advised the Company with respect to
certain federal income tax aspects of the proposed issuance of the Securities.
Such advice has formed the basis for the description of material federal income
tax consequences for holders of the Securities that appears under the headings
"Summary of Prospectus--Tax Status of Securities" and "Federal Income Tax
Consequences" in the Prospectus and under the headings "Summary--Federal Income
Tax Consequences" and "Federal Income Tax Consequences" in the form of
Prospectus Supplement. Such description do not purport to discuss all possible
federal income tax ramifications of the proposed issuance of the Securities,
but, with respect to those federal income tax consequences that are discussed,
in our opinion, the descriptions is accurate in all material respects.
This opinion is based on the facts and circumstances set forth in the
Prospectus and Prospectus Supplement and in the other documents reviewed by
us. Our opinion as to the matters set forth herein could change with respect to
a particular Series of Securities as a result of changes in facts or
circumstances, changes in the terms of the documents reviewed by us, or changes
in the law subsequent to the date hereof. Because the Registration Statement
contemplates Series of Securities with numerous different characteristics, the
particular characteristics of each Series of Securities must be considered in
determining the applicability of this opinion to a particular Series of
Securities. The opinion contained in each Prospectus Supplement and Prospectus
prepared pursuant to the Registration Statement is, accordingly, deemed to be
incorporated herein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to this firm under
the caption "Federal Income Tax Consequences" in the Prospectus forming a part
of the Registration Statement. In giving this consent, we do not admit that we
are in the category of persons whose consent is required to be filed with the
Registration Statement under the provisions of the Act.
No opinion has been sought and none has been given concerning the tax
treatment of the issuance and sale of the Securities under the laws of any
state.
Very truly yours,
/s/ Cadwalader, Wickersham & Taft
<PAGE> 1
EXHIBIT 8.2
August 31, 1998
NationsBanc Asset Securities, Inc.
NationsBank Corporate Center
Charlotte, N.C. 28255
Ladies and Gentlemen:
We have acted as your special tax counsel in connection with the
registration statement filed with the Securities and Exchange Commission (the
"Commission") on the date hereof, pursuant to the Securities Act of 1933, as
amended (the "Act") (as amended, the "Registration Statement"). The
Registration Statement covers Asset Backed Certificates ("Certificates") and
Asset Backed Notes ("Notes" and, together with the Certificates, the
"Securities") to be sold by NationsBanc Asset Securities, Inc. (the "Company")
in one or more series (each, a "Series") of Securities. Each Series of
Certificates will be issued under a separate pooling and servicing agreement
(each, a "Pooling and Servicing Agreement") among the Company, a trustee to be
identified in the Prospectus Supplement for such Series of Certificates and a
servicer or a master servicer to be identified in the Prospectus Supplement for
such Series of Certificates. Each Series of Notes will be issued under a
separate indenture (each, an "Indenture") between the Company and an indenture
trustee to be identified in the Prospectus Supplement for such Series of Notes.
A form of Pooling and Servicing Agreement and a form of Indenture are included
as Exhibits to the Registration Statement. Capitalized terms used and not
otherwise defined herein have the respective meanings ascribed to such terms in
the Registration Statement.
In rendering the opinion set forth below, we have examined and relied
upon the following: (i) the Registration Statement, the Prospectus and the form
of Prospectus Supplement constituting a part thereof, each substantially in the
form filed with the Commission, (ii) the form of the Pooling and Servicing
Agreement and Indenture, each substantially in the form filed with the
Commission and (iii) such other documents, records and instruments as we have
deemed necessary for the purposes of this opinion.
In arriving at the opinion expressed below, we have assumed that each
Pooling and Servicing Agreement and Indenture will be duly authorized by all
necessary corporate action on the part of the parties thereto for such Series of
Securities and will be duly executed and delivered by such parties substantially
in the applicable form filed or incorporated by reference as an exhibit to the
Registration Statement, that each Series of Securities will be duly executed and
delivered in substantially the forms set forth in the related Pooling and
Servicing Agreement or
<PAGE> 2
NationsBanc Asset Securities, Inc.
August 31, 1998
Indenture filed or incorporated by reference as an exhibit to the Registration
Statement, and that Securities will be sold as described in the Registration
Statement.
As counsel to the Company, we have advised the Company with respect to
certain federal income tax aspects of the proposed issuance of the Securities.
Such advice has formed the basis for the description of material federal income
tax consequences for holders of the Securities that appears under the headings
"Summary of Prospectus--Tax Status of Securities" and "Federal Income Tax
Consequences" in the Prospectus and under the headings "Summary--Federal Income
Tax Consequences" and "Federal Income Tax Consequences" in the form of
Prospectus Supplement. Such descriptions do not purport to discuss all possible
federal income tax ramifications of the proposed issuance of the Securities,
but, with respect to those federal income tax consequences that are discussed,
in our opinion, the descriptions are accurate in all material respects.
This opinion is based on the facts and circumstances set forth in the
Prospectus and Prospectus Supplement and in the other documents reviewed by us.
Our opinion as to the matters set forth herein could change with respect to a
particular Series of Securities as a result of changes in facts or
circumstances, changes in the terms of the documents reviewed by us, or changes
in the law subsequent to the date hereof. Because the Registration Statement
contemplates Series of Securities with numerous different characteristics, the
particular characteristics of each Series of Securities must be considered in
determining the applicability of this opinion to a particular Series of
Securities.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to this firm under the
caption "Federal Income Tax Consequences" in the Prospectus forming a part of
the Registration Statement. In giving this consent, we do not admit that we are
in the category of persons whose consent is required to be filed with the
Registration Statement under the provisions of the Act.
No opinion has been sought and none has been given concerning the tax
treatment of the issuance and sale of the Securities under the laws of any
state.
Very truly yours,
/s/ Hunton & Williams
2
