AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1997
REGISTRATION STATEMENT NO. 333-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------
DIRECTORS ASSET CONDUIT CORPORATION
(Exact name of registrant as specified in governing instruments)
DELAWARE APPLICATION PENDING
(State or other jurisdiction (IRS Employee
of incorporation or organization) Identification Number)
7485 NEW HORIZON WAY
FREDERICK, MARYLAND 21703
(301) 846-8101
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
--------------------------------------
LAWRENCE D. RUBENSTEIN, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
DIRECTORS ASSET CONDUIT CORPORATION
C/O NORWEST MORTGAGE, INC.
343 THORNALL STREET, 5TH FLOOR
EDISON, NEW JERSEY 08837
(908) 906-3909
(Name and Address of agent for service)
--------------------------------------
COPY TO:
JERRY R. MARLATT, ESQ.
STROOCK & STROOCK & LAVAN LLP
180 MAIDEN LANE
NEW YORK, NEW YORK 10038
(212) 806-5400
--------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED
SALE TO THE PUBLIC: From time to time after the
effective date of this Registration Statement.
--------------------------------------
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, 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. |_|
--------------------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
============================================================================================================
PROPOSED PROPOSED
TITLE MAXIMUM MAXIMUM
EACH CLASS OF AMOUNT OFFERING AGGREGATE
SECURITIES BEING TO BE PRICE PER OFFERING AMOUNT OF
REGISTERED REGISTERED UNIT(1) PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through
Certificates $1,000,000(1) 100% $1,000,000 $303.04
============================================================================================================
(1) Estimated solely for purposes of calculating the registration fee.
</TABLE>
--------------------------------------
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.
<PAGE>
DIRECTORS ASSET CONDUIT CORPORATION
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM AND CAPTION IN FORM S-3 LOCATION IN PROSPECTUS
<S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus.................. Forepart of Registration
Statement and Outside Front
Cover
2. Inside Front Cover and Outside Back Cover Pages of
Prospectus...................................... Inside Front and Outside Back
Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges....................... Summary of Prospectus; Risk
Factors and Special
Considerations; Prepayment
and Yield Considerations;
Description of the
Certificates
4. Use of Proceeds................................. Use of Proceeds
5. Determination of Offering Price................. *
6. Dilution........................................ *
7. Selling Security Holders........................ *
8. Plan of Distribution............................ Cover Page; Plan of
Distribution
9. Description of Securities to be Registered...... Description of the
Certificates
10. Interests of Named Experts and counsel *
11. Material Changes *
12. Incorporation of Certain Information by Reference Incorporation of Certain
Information by Reference
13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.................. *
- ----------------------
* Omitted since answer is negative or item is not applicable.
</TABLE>
<PAGE>
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.
<PAGE>
PROSPECTUS SUPPLEMENT SUBJECT TO COMPLETION DATED JULY __, 1997
(TO PROSPECTUS DATED JULY __, 1997)
DIRECTORS ASSET CONDUIT CORPORATION
DEPOSITOR
$-----------
ASSET- BACKED CERTIFICATES, SERIES 199_-_
DISTRIBUTIONS PAYABLE ON THE 25TH DAY OF EACH MONTH, COMMENCING IN
________ 199_
[LOGO]
SELLER AND NORWEST MORTGAGE, INC.
SELLER
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
MASTER SERVICER
The Asset-Backed Certificates, Series 199_-_, will consist of the Class A-1
Certificates (the "Class A-1 Certificates"), the Class A-2 Certificates (the
"Class A-2 Certificates"), the Class A-3 Certificates (the "Class A-3
Certificates"), the Class A-4 Certificates (the "Class A-4 Certificates"), the
Class A-5 Certificates (the "Class A-5 Certificates") and the Class R
Certificates (the "Residual Certificates"). Only the Class A-1 Certificates, the
Class A-2 Certificates, the Class A-3 Certificates, the Class A-4 Certificates
and the Class A-5 Certificates (together, the "Offered Certificates") are
offered hereby. See "Index of Defined Terms" beginning on page S-[] of this
Prospectus Supplement and on page [__] of the Prospectus for the location of the
definitions of certain capitalized terms. (cover continued on next page)
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" BEGINNING ON PAGE S-[] HEREIN AND ON PAGE __ IN THE ACCOMPANYING
PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Offered Certificates will be unconditionally and irrevocably guaranteed as
to the payment of the Insured Payments (as defined herein) on each Distribution
Date pursuant to the terms of an irrevocable financial guaranty insurance policy
(the "Certificate Insurance Policy") to be issued by
[Logo]
<TABLE>
<CAPTION>
===========================================================================================================================
Initial Class
Certificate
CLASS Principal Pass-Through Price to Underwriting Proceeds to
DESIGNATION Balance (1) Rate Public (2) Discount Depositor(2)(3)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A-1............... $___________ ______ ___________ ________ ____________
- ---------------------------------------------------------------------------------------------------------------------------
Class A-2............... $___________ ______ ___________ ________ ____________
- ---------------------------------------------------------------------------------------------------------------------------
Class A-3............... $___________ ______ ___________ ________ ____________
- ---------------------------------------------------------------------------------------------------------------------------
Class A-4............... $___________ ______ ___________ ________ ____________
- ---------------------------------------------------------------------------------------------------------------------------
Class A-5............... $___________ ______ ___________ ________ ____________
- ---------------------------------------------------------------------------------------------------------------------------
Total................... $___________ ______ ___________ ________ ____________
===========================================================================================================================
(1) Subject to the permitted variance described herein.
(2) Plus accrued interest, if any, at the applicable Pass-Through Rate from
__________, 199_.
(3) Before deduction of expenses payable by the Depositor estimated to be
$_______.
</TABLE>
The Offered Certificates are offered subject to prior sale and subject to the
Underwriters"' right to reject orders in whole or in part. It is expected that
delivery of the Offered Certificates will be made in book-entry form only though
the facilities of The Depository Trust Company, CEDEL Bank, societe anonyme and
the Euroclear System on or about __________, 199_ the "Closing Date"). The
Offered Certificates will be offered in Europe and the United States of America.
The date of this Prospectus Supplement is ________, 199_.
<PAGE>
(cover page continued)
The Offered Certificates and the Residual Certificates (collectively, the
"Certificates") will represent the entire beneficial ownership interest in a
trust fund (the "Trust Fund") to be created pursuant to a Pooling and Servicing
Agreement, dated as of ___________, 199_, among the Depositor, Norwest Mortgage,
Inc., as seller (referred to herein as "Norwest Mortgage" or the "Seller"),
Norwest Bank Minnesota, National Association, as master servicer (referred to
herein as "Norwest Bank" or the "Master Servicer"), and _______________, as
trustee (the "Trustee"). The Trust Fund will consist of a pool (the "Mortgage
Pool") of conventional, subprime [and prime] mortgage loans (the "Mortgage
Loans") secured by first or subordinate liens on one- to four-family residential
properties and certain other assets described herein. [Substantially all of the
Mortgage Loans will be subject to semi-annual mortgage rate adjustments based
upon changes in the average of the London interbank offered rates for six-month
U.S. dollar deposits in the London market (the "Mortgage Index"), as described
herein.] [The Mortgage Loans will consist of fixed rate Mortgage Loans (the "
Mortgage Loans") secured by first or subordinate liens on one- to four-family
residential propertieLoans.] See "The Mortgage Pool" herein.
THE YIELD TO INVESTORS ON THE OFFERED COFFERED CERTIFICATES WILL BE
SENSITIVE IN VARYING DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF, AND LOSSES ON, THE MORTGAGE
LOANS. [THE YIELD TO INVESTORS ON THE CLASS ___ CERTIFICATES WILL ALSO BE
SENSITIVE TO THE LEVEL OF THE LONDON INTERBANK OFFERED RATE FOR ONE-MONTH UNITED
STATES DOLLAR DEPOSITS ("ONE-MONTH LIBOR"). IN ADDITION, THE YIELD TO INVESTORS
ON THE CLASS ___ CERTIFICATES WILL BE SENSITIVE TO THE LEVEL OF THE MORTGAGE
INDEX AND THE ADDITIONAL LIMITATIONS ON THE PASS- THROUGH RATE FOR THE CLASS ___
CERTIFICATES, AS DESCRIBED HEREIN.] [ALTHOUGH ALL OF THE MORTGAGE LOANS BEAR
INTEREST AT ADJUSTABLE RATES (ARMS), THE INTEREST RATES ON THE MAJORITY OF THE
ARMS WILL NOT ADJUST FOR TWO YEARS FOLLOWING ORIGINATION.] IN ADDITION, THE
YIELD TO MATURITY OF THE OFFERED CERTIFICATES PURCHASED AT A DISCOUNT OR PREMIUM
WILL BE MORE SENSITIVE TO THE RATE AND TIMING OF PAYMENTS THEREON.
CERTIFICATEHOLDERS (EACH, A "HOLDER") SHOULD CONSIDER, IN THE CASE OF ANY
OFFERED CERTIFICATE PURCHASED AT A DISCOUNT, THE RISK THAT A LOWER THAN
ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS
LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY OFFERED COFFERED
CERTIFICATE PURCHASED AT A PREMIUM, THE RISK THAT A FASTER THAN ANTICIPATED RATE
OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE
ANTICIPATED YIELD. [BECAUSE CERTAIN OF THE MORTGAGE LOANS CONTAIN PREPAYMENT
PENALTIES, THE RATE OF PRINCIPAL PAYMENTS MAY BE LESS THAN THE RATE OF PRINCIPAL
PAYMENTS FOR MORTGAGE LOANS WHICH DO NOT CONTAIN PREPAYMENT PENALTIES.] NO
REPRESENTATION IS MADE AS TO THE ANTICIPATED RATE OF PREPAYMENTS ON THE MORTGAGE
LOANS, THE AMOUNT AND TIMING OF LOSSES THEREON, [THE LEVEL OF ONE-MONTH LIBOR OR
THE MORTGAGE INDEX] OR THE RESULTING YIELD TO MATURITY OF ANY CLASS OOF
CERTIFICATES.
The Trust Fund is subject to optional termination under the limited
circumstances described herein. Any such optional termination will result in an
early retirement of the Certificates. Distributions to Certificateholders will
be made on the [25th] day of each month or, if such [25th] day is not a Business
Day, on the first Business Day thereafter (each, a "Distribution Date"),
commencing in ________, 199_.
Norwest Bank's obligations with respect to the Certificates are limited to
its contractual servicing obligations. The Offered Certificates evidence
interests in the Trust Fund only and are payable solely from amounts received
with respect thereto, including amounts payable pursuant to the Certificate
Insurance Policy.
--------------------
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE SELLER, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE CERTIFICATES NOR THE MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY, THE DEPOSITOR, THE SELLER, THE
MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES OR ANY OTHER
PERSON EXCEPT AS DESCRIBED HEREIN. DISTRIBUTIONS ON THE CERTIFICATES WILL BE
PAYABLE SOLELY FROM THE ASSETS TRANSFERRED TO THE TRUST FUND FOR THE BENEFIT OF
CERTIFICATEHOLDERS.
[An election will be made to treat the Trust Fund as a real estate mortgage
investment conduit (the "REMIC") for federal income tax purposes.]
The Offered Certificates will be entitled to the benefit of an irrevocable
financial guaranty insurance policy (collectively, the "Certificate Insurance
Policy") to be issued by ______________ (the "Certificate Insurer") pursuant to
which the Certificate Insurer will unconditionally and irrevocably guarantee the
payment of the Insured Payments (as defined herein) on the Offered Certificates.
See "Description of the Certificates--The Certificate Guaranty Insurance Policy"
herein.
_______________________ and ______________________ (each, an "Underwriter")
intend to make a secondary market in the Offered Certificates but have no
obligation to do so. There is currently no secondary market for the Offered
Certificates and there can be no assurance that such a market will develop or,
if it does develop, that it will continue or that such market will provide
sufficient liquidity to Certificateholders.
--------------------
This Prospectus Supplement does not contain complete information about the
offering of the Offered Certificates. Additional information is contained in the
Prospectus dated [July __, 1997] (the "Prospectus") which accompanies this
Prospectus Supplement and prospective purchasers are urged to read both this
Prospectus Supplement and the Prospectus in full. Sales of the Offered
Certificates may not be consummated unless the prospective purchaser has
received both this Prospectus Supplement and the Prospectus.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
UNTIL THE EXPIRATION OF NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS
SUPPLEMENT, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under "Incorporation of Certain
Documents by Reference" in the Prospectus, the consolidated financial statements
of the Certificate Insurer, a wholly-owned subsidiary of _________, and its
subsidiaries as of ___________, 199_ and ___________, 199_ and for the three
years ended ___________, 199_, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of _________
for the year ended ____________, 199_ and the consolidated financial statements
of the Certificate Insurer and its and its subsidiaries for the nine months
ended ____________, 199_ and for the periods ending ____________, 199_ and
____________, 199_, included in the Quarterly Report on Form 10-Q of _________
for the period ending ____________, 199_, are hereby incorporated by reference
into this Prospectus Supplement and shall be deemed to be a part hereof. Any
statement contained in a document incorporated 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 and its subsidiaries
included in documents filed by _________ pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Offered Certificates shall be deemed to be incorporated by reference into
this Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The Depositor hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, as amended, each filing of the
financial statements of the Certificate Insurer included in or as an exhibit to
the documents of _________ referred to above and filed pursuant to Section 13(a)
or Section 15(d) of the 1934 Act that is incorporated by reference in the
Registration Statements of which this Prospectus Supplement and the accompanying
Prospectus is a part shall be deemed to be a new registration statement relating
to the Offered Certificates offered hereby, and the offering of such Offered
Certificates at that time shall be deemed to be the initial bona fide offering
thereof.
THE TRUSTEE ON BEHALF OF THE TRUST FUND WILL PROVIDE WITHOUT CHARGE TO EACH
PERSON TO WHOM THIS PROSPECTUS SUPPLEMENT IS DELIVERED, ON THE WRITTEN OR ORAL
REQUEST OF SUCH PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS REFERRED TO ABOVE
AND IN THE PROSPECTUS UNDER "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE"
THAT HAVE BEEN OR MAY BE INCORPORATED BY REFERENCE IN THE PROSPECTUS (NOT
INCLUDING EXHIBITS TO THE INFORMATION THAT IS INCORPORATED BY REFERENCE UNLESS
SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THE INFORMATION
THAT THE PROSPECTUS INCORPORATES). SUCH REQUESTS SHOULD BE DIRECTED TO THE
CORPORATE TRUST OFFICE OF THE TRUSTEE AT __________________,
________________________, TELEPHONE: (__) _________, FACSIMILE: (___) ________,
ATTENTION: --------------------------.
<PAGE>
SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary of
Terms are defined elsewhere in this Prospectus Supplement or in the Prospectus.
See "Index of Defined Terms" beginning on page S-[] of this Prospectus
Supplement and on page __ of the Prospectus for the location of the definitions
of certain capitalized terms.
Title of Certificates................. Asset- Backed Certificates, Series
199_-_ (the "Certificates"), consisting
of (i) the Class A-1 Certificates (the
"Class A-1 Certificates"), (ii) the
Class A-2 Certificates (the "Class A-2
Certificates"), (iii) the Class A-3
Certificates (the "Class A-3
Certificates"), (iv) the Class A-4
Certificates (the "Class A-4
Certificates"), (v) the Class A-5
Certificates (the "Class A-5
Certificates") and (vi) the Class R
Certificates (the "Residual
Certificates"). Only the Class A-1
Certificates, the Class A-2
Certificates, the Class A-3
Certificates, the Class A-4 Certificates
and the Class A-5 Certificates
(together, the "Offered Certificates")
are offered hereby.
The OriginInitial Class Certificate
Principal Balance of the Offered
Certificates will be subject to a
permitted variance of plus or minus 10%.
Designations
Variable Rate Certificates....... Class A-1 Certificates and Class A-2
Certificates.
Fixed Rate Certificates.......... Class A-3 Certificates, Class A-4
Certificates and Class A-5 Certificates.
The Depositor......................... Directors Asset Conduit Corporation (the
"Depositor"), a Delaware corporation
that is a direct, wholly owned, limited
purpose finance subsidiary of Norwest
Mortgage, Inc. and an affiliate of the
Master Servicer. See "The Depositor" in
the Prospectus.
Seller................................ Norwest Mortgage, Inc. ("Norwest
Mortgage" or the "Seller"). The Mortgage
Loans were originated or acquired by the
Seller in the normal course of its
business.
Master Servicer....................... Norwest Bank Minnesota, National
Association ("Norwest Bank" or the
"Master Servicer"). See "Servicing of
the Mortgage Loans--the Master Servicer"
herein.
Trustee............................... ____________________, a ________ banking
corporation, not in its individual
capacity but solely as trustee on behalf
of the Certificateholders and the
Certificate Insurer (the "Trustee").
Certificate Insurer................... ______________________ (the "Certificate
Insurer"). See "Description of the
Certificates--The Certificate Guaranty
Insurance Policy" herein.
Cut-off Date.......................... _________, 199_.
Closing Date.......................... On or about ___________, 199_.
Description of Certificates
A. General........................... The Certificates will be issued pursuant
to a Pooling and Servicing Agreement,
dated as of ________ __, 1997 (the
"Pooling and Servicing Agreement"),
among the Depositor, the Master
Servicer, the Seller and the Trustee.
The Offered Certificates and the
Residual Certificates will, in the
aggregate, represent the entire
beneficial ownership interest in a trust
fund (the "Trust Fund"), which will
consist of a pool (the "Mortgage Pool")
of subprime mortgage loans secured by
first liens (the "Mortgage Loans") on
one- to four- family residential
properties (the "Mortgaged Properties")
and certain other assets described
herein. [Substantially all of the
Mortgage Loans will be subject to
semi-annual mortgage rate adjustments
based upon changes in the average of the
London interbank offered rates for
six-month U.S. dollar deposits in the
London market (the "Mortgage Index"), as
described herein.] [Substantially all of
the Mortgage Loans will consist of
fixed-rate Mortgage Loans.] The
aggregate unpaid principal balance of
the Mortgage Loans as of the Cut-off
Date is referred to herein as the
"Cut-off Date Principal Balance". See
"The Mortgage Pool" herein.
B. Form of Certificates............... The Offered Certificates will initially
be issued in book-entry form. Persons
acquiring beneficial ownership interests
in the Offered Certificates
("Certificate Owners") may elect to hold
their Offered Certificate interests
through The Depository Trust Company
("DTC"), in the United States, or Cedel
Bank, societe anonyme ("CEDEL") or the
Euroclear System ("Euroclear"), in
Europe. Transfers within DTC, CEDEL or
Euroclear, as the case may be, will be
in accordance with the usual rules and
operating procedures of the relevant
system. So long as the Offered
Certificates are Book-Entry Certificates
(as defined herein), each class of such
Certificates will be evidenced by one or
more Certificates registered in the name
of Cede & Co. ("Cede"), as the nominee
of DTC or one of the relevant
depositaries (collectively, the
"European Depositaries"). Cross-market
transfers between persons holding
directly or indirectly through DTC, on
the one hand, and counterparties holding
directly or indirectly through CEDEL or
Euroclear, on the other, will be
effected in DTC through Citibank N.A.
("Citibank") or The Chase Manhattan Bank
("Chase"), the relevant depositaries of
CEDEL or Euroclear, respectively, and
each a participating member of DTC. The
interests of the Offered Holders of
Offered Certificates will be represented
by book entries on the records of DTC
and participating members thereof. No
Certificate Owner will be entitled to
receive a definitive certificate
representing such person's interest,
except in the event that Definitive
Certificates (as defined herein) are
issued under the limited circumstances
described under "Description of the
Certificates Book--Entry Certificates"
herein. All references in this
Prospectus Supplement to any Offered
Certificates reflect the rights of
Certificate Owners only as such rights
may be exercised through DTC and its
participating organizations for so long
as such Offered Certificates are held by
DTC. See "Risk Factors--Book-Entry
Certificates, Description of the
Certificates--Book-Entry Certificates"
herein and "Annex I" hereto.
C. Distributions...................... Distributions on the Offered
Certificates will be made on the [25th]
day of each month or, if such day is not
a Business Day, on the first Business
Day thereafter, commencing in ________,
199_ (each, a "Distribution Date").
Distributions on each Distribution Date
will be made to Certificateholders of
record as of the close of business on
the last day of the month preceding the
month of such Distribution Date (each, a
"Record Date"), except that the final
distribution on the Offered Certificates
will be made only upon presentation and
surrender of the Offered Certificates at
the office or agency of the Trustee in
__________, _________. Distributions on
the Offered Certificates on each
Distribution Date will be based on the
Available Funds and will be made in
accordance with the priorities described
below. The rights of the Residual
Certificateholders to receive
distributions with respect to the
Mortgage Loans are subordinate to the
rights of the Holders of Offered
Certificates, to the extent described
herein.
1. Interest....................... On each Distribution Date, to the extent
funds (including Insured Payments) are
available therefor, interest will be
paid on each Class of Offered
Certificates in an amount (the "Interest
Distribution Amount") equal to the sum
of (i) interest accrued during the
related Accrual Period (as defined
herein) at the applicable Pass-Through
Rate (as defined herein) on the related
Class Certificate Principal Balance (as
defined herein), subject to reduction in
the event of Prepayment Interest
Shortfalls (as defined herein) on the
Mortgage Loans, to the extent not
covered by the Servicing Fee as
described herein, and Relief Act
Shortfalls (as defined herein) on the
Mortgage Loans and (ii) that portion of
the related Carry- Forward Amount (as
defined herein) relating to certain
shortfalls in interest. See "Description
of the Certificates--Allocation of
Available Funds" herein.
With respect to each Distribution Date,
the "Accrual Period" for the [Class A-1
Certificates and the Class A-2
Certificates] will be the period from
and including the preceding Distribution
Date (or, in the case of the first
Distribution Date, from the Closing
Date) to and including the day prior to
such next Distribution Date [and the
Accrual Period for the Class A-3
Certificates, the Class A-4 Certificates
and] [the Class A-5 Certificates] will
be the calendar month preceding the
month of such Distribution Date.]
Interest on the [Class A-1 Certificates
and the Class A-2 Certificates will be
calculated on the basis of a 360-day
year and the actual number of days
elapsed in the applicable Accrual
Period.] Interest on the [Class A-3
Certificates, the Class A-4 Certificates
and the Class A-5 Certificates will be
calculated on the basis of a 360-day
year consisting of twelve 30-day
months.]
2. Principal...................... On each Distribution Date, to the extent
funds (including Insured Payments) are
available therefor after distributions
of interest, Holders of the related
Offered Certificates will be entitled to
receive, as payment of principal, the
difference between (a) the sum (without
duplication) of (i) all scheduled
installments of principal on the
Mortgage Loans due during the related
Due Period and received by the Master
Servicer on or before the [16th] day of
the month in which such Distribution
Date occurs (the "Determination Date"),
and all unscheduled collections of
principal on, and recoveries of
principal and certain other amounts with
respect to, the Mortgage Loans, as
described in more detail herein, during
the related Prepayment Period (excluding
certain amounts received in respect of
scheduled principal on the Mortgage
Loans due after the related Due Date),
together with all Advances (as defined
herein) in respect of principal on such
Mortgage Loans made by the Master
Servicer, (ii) any Subordination Deficit
(as defined herein) for such
Distribution Date, (iii) that portion of
any Carry- Forward Amount that relates
to a shortfall in a distribution of a
Subordination Deficit, and (iv) an
amount necessary to increase the
Subordinated Amount (as defined herein)
the Required Subordinated Amount (as
defined herein), if any, and (b) the
Subordination Reduction Amount (as
defined herein) for such Distribution
Date (such difference, the "Principal
Distribution Amount"). See "Description
of the Certificates--Allocation of
Available Funds" herein.
Pass-Through Rate..................... The Pass-Through Rate for the Class A-1
Certificates and a particular
Distribution Date will be equal to [the
lesser of (i) the sum of (a) One-Month
LIBOR and (b) the applicable Class A-1
Pass-Through Margin and (ii) the Class
A-1 Available Funds Cap. The "Class A-1
Pass-Through Margin" will equal ____%
(___ basis points) per annum until the
first Accrual Period after the Optional
Termination Date (as defined herein), at
which time the Class A-1 Pass-Through
Margin will equal ____% (___ basis
points) per annum. As to any
Distribution Date, the "Class A-1
Available Funds Cap" is a per annum rate
equal to a fraction, expressed as a
percentage, the numerator of which
equals the excess of (i) the sum of (a)
the aggregate amount of interest due on
the Mortgage Loans on the related Due
Date (to the extent received or
advanced) and (b) the Subordination
Reduction Amount, if any, andfor such
Distribution Date over (ii) the sum of
(a) the Servicing Fee (as defined
herein) as described herein under
"Servicing of the Mortgage
Loans--Servicing Compensation and
Payment of Expenses," (b) the Premium
Amount payable to the Certificate
Insurer and (c) the Available Funds Rate
Adjustment for such Distribution Date,
and the denominator of which is equal to
(1) the Class Certificate Principal
Balance of the Class A-1 Certificates
for such Distribution Date multiplied by
(2) the actual number of days elapsed in
the related Accrual Period divided by
360. The "Available Funds Rate
Adjustment" for any Distribution Date
(a) prior to the [thirteenth]
Distribution Date will equal zero and
(b) beginning on the [thirteenth]
Distribution Date will be equal to the
product of (x) one-twelfth of _____%
(___ basis points) and (y) the Stated
Principal Balance of the Mortgage Loans
on such date. The initial Pass-Through
Rate for the Class A-1 Certificates will
not be established until ___________,
199_, the date on which One-Month LIBOR
for such Distribution Date will be
determined. See "Description of the
Certificates--Calculation of One-Month
LIBOR" herein for an explanation of how
One-Month LIBOR is determined. The
One-Month LIBOR value on ___________,
199_ was approximately ____% per annum.
If on any Distribution Date, the
Pass-Through Rate for the Class A-1
Certificates is based on the Class A-1
Available Funds Cap, holders of the
Class A-1 Certificates will be entitled
to receive the Class A-1 Basis Risk
Carryover Amount (as defined herein) to
the extent of funds available therefor
as described herein. The Certificate
Insurance Policy will not cover the
payment of, and the ratings assigned to
the Class A-1 Certificates do not
address the likelihood of the payment
of, any Class A-1 Basis Risk Carryover
Amount.]
The Pass-Through Rate for the Class A-2
Certificates and a particular
Distribution Date will be equal to [the
lesser of (i) the sum of (a) One-Month
LIBOR and (b) the Class A-2 Pass-Through
Margin and (ii) the Class A-2 Net Funds
Cap. The "Class A-2 Pass-Through Margin"
will equal 0.08% (8___% (__ basis
points) per annum. As to any
Distribution Date, the "Class A-2 Net
Funds Cap" is a per annum rate equal to
the weighted average of the Mortgage
Rates of the Mortgage Loans as of such
Distribution Date minus the sum of (i)
the Servicing Fee Rate as described
herein under "Servicing of the Mortgage
Loans--Servicing Compensation and
Payment of Expenses" and (ii) the
Premium Percentage.]
[The Pass-Through Rate for each of the
Class A-3 Certificates, the Class A-4
Certificates and the Class A-5
Certificates for any Distribution Date
will be as set forth on the cover page
hereof.]
Credit Enhancement.................... The credit enhancement provided for the
benefit of the Offered
CertificateholderHolders of Offered
Certificates consists solely of (a) any
overcollateralization and (b) the
Certificate Insurance Policy (as defined
below), in each case as described below.
Overcollateralization. The allocation
provisions of the Trust Fund result in a
limited acceleration of principal of the
Certificates relative to the
amortization of the Mortgage Loans. The
acceleration of principal achieved by
the application of certain excess
interest amounts to reduce the Class
Certificate Principal Balance of the
Certificates results in
overcollateralization to the extent the
Stated Principal Balance (as defined
herein) of the Mortgage Loans exceeds
the Class Certificate Principal Balance
of such Certificates. Once the required
level of overcollateralization is
reached, and subject to the provisions
described in the next paragraph, further
application of 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
may increase or decrease over time. An
increase would result in a temporary
period of accelerated amortization of
the Certificates to increase the actual
level of overcollateralization to its
required level; a decrease would result
in a temporary period of decelerated
amortization of the Certificates to
reduce the actual level of
overcollateralization to its required
level. As a result of the "sequential
pay" feature of the Certificates, any
such accelerated principal distributions
will be paid to the Class of
Certificates then entitled to receive
distributions of principal. See
"Description of the
Certificates--Overcollateralization
Provisions" herein.
The Certificate Guaranty Insurance
Policy. The Offered Certificates will
have the benefit of a financial guaranty
insurance policy (the "Certificate
Insurance Policy") to be issued by the
Certificate Insurer. Under the
Certificate Insurance Policy, the
Certificate Insurer will, subject to the
terms of the Certificate Insurance
Policy, pay the Trustee, for the benefit
of the Holders of the Offered
Certificates, as further described
herein, an amount that will insure the
payment of the sum of (i) on each
Distribution Date, the Interest
Distribution Amount, (ii) on each
Distribution Date, any Subordination
Deficit (as defined herein) and (iii)
any Preference Amounts (as defined below
under "Description of the Certificates--
The Certificate Guaranty Insurance
Policy" herein)(such sum, the "Insured
Distribution Amount"). No payments in
respect of principal will be made under
the Certificate Insurance Policy unless
a Subordination Deficit occurs. The
effect of the Certificate Insurance
Policy is to guaranty the timely payment
of interest on, and ultimate payment of
the principal amount of, the Offered
Certificates. See "Description of the
Certificates--The Certificate Guaranty
Insurance Policy" herein.
Mortgage Rate........................ As described herein under "The Mortgage
Pool--General," the Mortgage Rate for
substantially all of the Mortgage Loans
[will be subject to adjustment semi-
annually to equal the sum, rounded to
the nearest _____%, of the applicable
Mortgage Index value and the Gross
Margin for such Mortgage Loan, subject
to the effects of any applicable
Periodic Rate Cap, Maximum Mortgage Rate
and Minimum Mortgage Rate (each as
defined herein)] [will bear interest at
fixed rates].
Mortgage Index........................ [The Mortgage Index value applicable to
any semi-annual Adjustment Date (as
defined herein) for substantially all of
the Mortgage Loans will be the average
of the London interbank offered rates
for six-month U.S. dollar deposits in
the London market, [as set forth in The
Wall Street Journal,] or, if the
Mortgage Index ceases to be published in
[The Wall Street Journal]or becomes
unavailable for any reason, then the
Mortgage Index shall be a new index
selected by the Trustee, as holder of
the related Mortgage Note, with the
consent of the Certificate Insurer,
based on comparable information, in each
case as most recently announced as of a
date 45 days prior to such Adjustment
Date. The Mortgage Index value published
on _________, 199_ was _.____%.]
Servicing............................. Norwest Bank will serve as the Master
Servicer of the Mortgage Loans under the
Pooling and Servicing Agreement. The
Master Servicer will be responsible for
securities administration and servicing
of the Mortgage Loans and will receive
from interest collected on the Mortgage
Loans a monthly servicing fee on each
Mortgage Loan equal to the Stated
Principal Balance thereof multiplied by
one-twelfth of the Servicing Fee Rate
(such product, the "Servicing Fee"). See
"Servicing of Mortgage Loans--Servicing
Compensation and Payment of Expenses"
herein.
The Master Servicer is obligated to make
cash advances ("Advances") with respect
to delinquent payments of principal of
and interest on any Mortgage Loan to the
extent described herein. The Trustee
will be obligated to make any such
Advance if the Master Servicer fails in
its obligation to do so, to the extent
provided in the Pooling and Servicing
Agreement. See "Servicing of Mortgage
Loans--Advances" herein.
Optional Termination.................. On any Distribution Date on which the
Pool Stated Principal Balance (as
defined herein) is less than or equal to
[5%]10%] of the Cut-off Date Pool
Principal Balance (as defined herein)
(the "Optional Termination Date"), [the
Master Servicer or the Certificate
InsureSeller, Depositor and Master
Servicer] will have the option (but not
the obligation) to purchase, in whole,
the Mortgage Loans and the REO Property
(as defined herein), if any, remaining
in the Trust Fund and thereby effect the
early retirement of all Certificates.
See "Description of the
Certificates--Optional Termination"
herein.
Federal Income Tax Considerations..... [An election will be made to treat the
Trust Fund as a "real estate mortgage
investment conduit" ("REMIC") for
federal income tax purposes. The Offered
Certificates will constitute "regular
interests" in the REMIC and the Residual
Certificates will constitute the sole
class of "residual interests" in the
REMIC. The Offered Certificates may be
issued with original issue discount for
federal income tax purposes. For
purposes of determining the amount and
rate of accrual of original issue
discount and market discount, the
Depositor intends to assume that there
will be Principal Prepayments on the
Mortgage Loans at a rate equal to
[____%] of the Prepayment Model (as
defined herein). No representation is
made as to whether the Mortgage Loans
will prepay at that rate or any other
rate.] See "Federal Income Tax
Consequences" herein and in the
Prospectus.
ERISA Considerations.................. The acquisition of an Offered
Certificate by an employee benefit plan
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or a plan or arrangement
subject to Section 4975 of the Code
(each of the foregoing, a "Plan") could,
in some instances, result in a
"prohibited transaction" or other
violation of the fiduciary
responsibility provisions of ERISA and
Code Section 4975. Certain exemptions
from the prohibited transaction rules
could be applicable to the acquisition
of such Certificates. Subject to the
considerations and conditions described
under "ERISA Considerations" herein, it
is expected that the Offered
Certificates may be purchased by a Plan.
Any Plan fiduciary considering whether
to purchase any Offered Certificates on
behalf of a Plan should consult with its
counsel regarding the applicability of
the provisions of ERISA and the Code.
See "ERISA Considerations" herein and in
the Prospectus.
Legal Investment...................... The Offered Certificates will [not]
constitute "mortgage related securities"
for purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA"). Accordingly, many
institutions with legal authority to
invest in comparably rated securities
may [not] be legally authorized to
invest in the Offered Certificates.
Institutions whose investment activities
are subject to review by federal or
state regulatory authorities should
consult with their counsel or the
applicable authorities to determine
whether an investment in the Offered
Certificates complies with applicable
guidelines, policy statements or
restrictions. See "Legal Investment" in
the Prospectus.
Ratings............................... It is a condition of the issuance of the
Offered Certificates that they be rated
___ by -----------------------------,
and ("____") by ______________________
("_____" and, together with _____, the
"Rating Agencies"). The security ratings
of the Offered Certificates should be
evaluated independently from similar
ratings on other types of securities. A
security rating is not a recommendation
to buy, sell or hold securities and may
be subject to revision or withdrawal at
any time by the Rating Agencies. The
Depositor has not requested a rating of
the Offered Certificates by any rating
agency other than the Rating Agencies;
there can be no assurance, however, as
to whether any other rating agency will
rate the Offered Certificates or, if it
does, what rating would be assigned by
such other rating agency. The rating
assigned by such other rating agency to
the Offered Certificates could be lower
than the respective ratings assigned by
the Rating Agencies. See "Ratings"
herein.
<PAGE>
RISK FACTORS
Investors should consider the following risks in connection with the
purchase of the Offered Certificates.
Consequences of Owning Book-Entry Certificates. Issuance of the Offered
Certificates in book-entry form may reduce the liquidity of such Offered
Certificates in the secondary trading market since investors may be unwilling to
purchase Offered Certificates for which they cannot obtain physical
certificates. See "Description of the Certificates--Book-Entry Certificates"
herein and "Risk Factors--Book-Entry Registration" in the Prospectus.
Since transactions in the Offered Certificates can be effected only through
DTC, CEDEL, Euroclear, participating organizations, indirect participants and
certain banks, the ability of a Certificate Owner to pledge a Offered
Certificate to persons or entities that do not participate in the DTC, CEDEL or
Euroclear system may be limited due to lack of a physical certificate
representing the Offered Certificates. See "Description of the
Certificates--Book-Entry Certificates" herein and "Risk Factors--Book-Entry
Registration" in the Prospectus.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Offered Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. Certificate Owners will not be
recognized as Offered Certificateholders as such term is used in the Pooling and
Servicing Agreement, and Certificate Owners will be permitted to exercise the
rights of Offered Certificateholders only indirectly through DTC and its
Participants. See "Description of the Certificates--Book-Entry Certificates"
herein and "Risk Factors--Book-Entry Registration" in the
Prospectus.Overcollateralization Provisions. The operation of the
overcollateralization provisions of the Pooling and Servicing Agreement will
affect the weighted average lives of the Offered Certificates and consequently
the yields to maturity of Certificates purchased at a discount or premium.
Unless and until the Subordinated Amount equals the Required Subordinated
Amount, Net Monthly Excess Cashflow will be applied as distributions of
principal of the Offered Certificates, thereby reducing the weighted average
lives thereof. The actual Subordinated Amount may change from Distribution Date
to Distribution Date producing uneven distributions of Net Monthly Excess Cash
Flow. There can be no assurance as to when or whether the Subordinated Amount
will equal the related Required Subordinated Amount.
Net Monthly Excess Cashflow generally is a function of the excess of
interest collected or advanced on the Mortgage Loans over the interest required
to pay interest on the Offered Certificates, the premium for the Certificate
Insurance Policy and certain Trust Fund expenses. Mortgage Loans with higher Net
Mortgage Rates will contribute more interest to the Net Monthly Excess Cashflow.
Mortgage Loans with higher Net Mortgage Rates may prepay faster than Mortgage
Loans with relatively lower Net Mortgage Rates in response to a given change in
market interest rates. Any such disproportionate prepayments of Mortgage Loans
with higher Net Mortgage Rates may adversely affect the amount of Net Monthly
Excess Cashflow available to make accelerated payments of principal of the
Offered Certificates.
The effect of the overcollateralization provisions on the weighted
average lives of the Offered Certificates may vary significantly over time and
from class to class. See "Yield, Prepayment and Maturity Considerations" herein
and "Yield and Prepayment Considerations" herein and in the Prospectus.
Prepayment Considerations and Risks. The Trust Fund's prepayment
experience may be affected by a wide variety of factors, including general
economic conditions, interest rates, the availability of alternative financing
and homeowner mobility. [In addition, substantially all of the Mortgage Loans
contain due-on-sale provisions and the Master Servicer intends to enforce such
provisions unless (i) such enforcement is not permitted by applicable law, (ii)
such enforcement would materially increase the risk of default or delinquency
on, or materially decrease the security for, the Mortgage Loan or (iii) the
Master Servicer, in a manner consistent with reasonable commercial practice,
permits the purchaser of the related Mortgaged Property to assume the Mortgage
Loan.] To the extent permitted by applicable law, such assumption will not
release the original borrower from its obligation under any such Mortgage Loan.
See "Yield, Maturity and Prepayment and Maturity Considerations--Prepayment
Considerations and Risks" herein and "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses" in the Prospectus for a description of certain
provisions of the Mortgage Loans that may affect the prepayment experience
thereof. The yield to maturity and weighted average life of the Offered
Certificates will be affected primarily by the rate and timing of principal
payments (including prepayments) of, and losses on, the Mortgage Loans. [The
yield to investors on the Class A-1 Certificates and the Class A-2 Certificates
will also be sensitive to the level of One-Month LIBOR. In addition, the yield
to investors on the Class A-1 Certificates will be sensitive to the level of the
Mortgage Index and the additional limitations on the Pass-Through Rate for the
Class A-1 Certificates, as described herein.] [The Pass-Through Rate on the
Class A-2 Certificates is also subject to certain limitations, as described
herein.] [Although all of the Mortgage Loans bear interest at adjustable rates
("ARMs"), the interest rates on a majority of the ARMs will not adjust for two
years following origination.] In addition, the yield to maturity of the Offered
Certificates purchased at a discount or premium will be more sensitive to the
rate and timing of payments thereon. Certificateholders should consider, in the
case of any Offered Certificate purchased at a discount, the risk that a lower
than anticipated rate of principal payments could result in an actual yield that
is lower than the anticipated yield and, in the case of any Offered Certificate
purchased at a premium, the risk that a faster than anticipated rate of
principal payments could result in an actual yield that is lower than the
anticipated yield. [Because certain of the Mortgage Loans contain prepayment
penalties, the rate of principal payments may be less than the rate of principal
payments for mortgage loans which do not contain prepayment penalties.] No
representation is made as to the anticipated rate of prepayments on the Mortgage
Loans, the amount and timing of losses thereon, [the level of One-Month LIBOR or
the Mortgage Index] or the resulting yield to maturity of any Class of Offered
Certificates. Any reinvestment risks resulting from a faster or slower incidence
of payments on the Mortgage Loans will be borne entirely by the related Offered
Certificateholders. See "Yield, Prepayment and Maturity Considerations" herein
and "YieldHolders of Offered Certificates. See "Yield, Maturity and Prepayment
Considerations" herein and in the Prospectus.
Limited Origination and Servicing Experience. The Seller has been
originating subprime mortgage loans since it acquired Directors Acceptance
Corporation ("Directors Acceptance") in March, 1995, and Directors Acceptance
had been in the business of originating subprime mortgage loans since June,
1994. Although the Master Servicer acts as the master servicer for over $___
billion of various types of residential mortgage loans, the Master Servicer has
no experience in acting as a master servicer for subprime mortgage loans.
Similarly, Norwest Mortgage, the subservicer for the Mortgage Loans, is
currently the largest servicer of residential mortgage loans in the nation.
However, Norwest Mortgage has only recently expanded its business to include the
servicing of subprime mortgage loans. Accordingly, the Seller, the Master
Servicer and Norwest Mortgage, as subservicer, currently have insufficient
historical delinquency, bankruptcy, foreclosure or default experience to provide
meaningful information relating to the origination or servicing quality or
performance of such subprime mortgage loans.
Underwriting Standards. Because the Mortgage Loans are underwritten in
accordance with standards less stringent than those generally acceptable to FNMA
and FHLMC with regard to a borrower's credit standing and repayment ability, the
risk of delinquencies with respect to, and losses on, the Loans will be greater
than that of mortgage loans underwritten in accordance with FNMA and FHLMC
standards. For example, such Mortgage Loans may be made to a borrower who may
have a record of major derogatory credit items such as defaults on prior
mortgage loans or other debt obligations, credit write-offs, outstanding
judgments or prior bankruptcies.
Certificate Rating. The rating of the Offered Certificates will depend
primarily on an assessment by the Rating Agencies of the Mortgage Loans and upon
the claims-paying ability of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
rating initially given to the Offered Certificates may result in a reduction in
the rating of the Offered Certificates. The rating by the Rating Agencies of the
Offered Certificates is not a recommendation to purchase, hold or sell the
Offered Certificates, inasmuch as such rating does not comment as to the market
price or suitability for a particular investor. There is no assurance that the
ratings will remain in place for any given period of time or that the ratings
will not be lowered or withdrawn by the Rating Agencies. In general, the ratings
address credit risk and do not address the likelihood of prepayments. The
ratings of the Certificates do not address the possibility of the imposition of
United States withholding tax with respect to non-U.S. persons.
[Legal Considerations--Lien Priority. The Mortgage Loans are secured
predominantly by second mortgages. Mortgage Loans secured by second mortgages
are entitled to proceeds that remain from the sale of the related Mortgaged
Property after any related senior mortgage loan and prior statutory liens have
been satisfied. 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 Holders of
Certificates will bear (i) the risk of delay in distributions while a deficiency
judgment, if any, against the borrower is sought and (ii) the risk of loss if
the deficiency judgment cannot be obtained or is not realized upon. See "Certain
Legal Aspects of the Loans" in the Prospectus.]
Bankruptcy and Insolvency Risks. The sale of the Mortgage Loans from the
Seller to the Depositor will be treated as a sale of the Mortgage Loans.
However, in the event of an insolvency of the Seller, the trustee in bankruptcy
of the Seller may attempt to recharacterize the sale of the Mortgage Loans as a
borrowing by the Seller, secured by a pledge of the applicable Mortgage Loans.
If the trustee in bankruptcy decided to challenge such transfer, delays in
payments of the Offered Certificates and reductions in the amounts thereof could
occur. The Depositor will warrant in the Pooling and Servicing Agreement that
the transfer of the Mortgage Loans by it to the Trust Fund is either a valid
transfer and assignment of such Mortgage Loans to the Trust Fund or the grant to
the Trust Fund of a security interest in such Mortgage Loans.
In the event of a bankruptcy or insolvency of the Master Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee or the
Offered CertificateholderHolders of Offered Certificates from appointing a
successor Master Servicer.
Geographic Concentration. As of the Cut-off Date, not more than
approximately ___% (by Cut-off Date Principal Balance) of the Mortgaged
Properties are expected to be located in the State of _____________. An overall
decline in the _____________ residential real estate market could adversely
affect the values of the Mortgaged Properties securing such Mortgage Loans such
that the Principal Balances of the related Mortgage Loans could equal or exceed
the value of such Mortgaged Properties. As the residential real estate market is
influenced by many factors, including the general condition of the economy and
interest rates, no assurances may be given that the _____________ residential
real estate market will not weaken. If the _____________ residential real estate
market should experience an overall decline in property values after the dates
of origination of such Mortgage Loans, the rates of losses on such Mortgage
Loans would be expected to increase, and could increase substantially.
[Delinquent Mortgage Loans. The Trust Fund will include Mortgage Loans
which are 59 or fewer days delinquent as of the Cut-off Date. It is expected
that the Cut-off Date Principal Balance of the Mortgage Loans which are between
30 days and 59 days delinquent as of the Cut-off Date will not exceed ___%,
respectively. If there are not sufficient funds from Available Funds for or
overcollateralization, and the Certificate Insurer fails to perform its
obligations under the Certificate Insurance Policy, the aggregate amount of
principal returned to the related Certificateholders may be less than the
respective Class Certificate Principal Balances on the day the Certificates were
issued.]
[Mortgage Loans with Balloon Payments. Approximately __% (by Cut-off Date
Principal Balances) of the Mortgage Loans are expected to be "balloon loans"
that provide for the payment of the unamortized loan balance of such Mortgage
Loan in a single payment at maturity ("Balloon Loans"). Such Balloon Loans
provide for equal monthly payments, consisting of principal and interest,
generally based on a 30-year amortization schedule, and a single payment of the
remaining balance of the Balloon Loan [15] years after origination. Amortization
of a Balloon Loan based on a scheduled period that is longer than the term of
the loan results in a remaining principal balance at maturity that is
substantially larger than the regular scheduled payments. The Depositor does not
have any information regarding the default history or prepayment history of
payments on Balloon Loans. Because borrowers of Balloon Loans are required to
make substantial single payments upon maturity, it is possible that the default
risk associated with the Balloon Loans will be greater than that associated with
fully-amortizing Mortgage Loans.]
Consequences of Owning Book-Entry Certificates. Issuance of the Offered
Certificates in book-entry form may reduce the liquidity of such Offered
Certificates in the secondary trading market since investors may be unwilling to
purchase Offered Certificates for which they cannot obtain physical
certificates. See "Description of the Certificates-- Book-Entry Certificates"
herein and "Risk Factors--Book-Entry Registration" in the Prospectus.
Since transactions in the Offered Certificates can be effected only through
DTC, CEDEL, Euroclear, participating organizations, indirect participants and
certain banks, the ability of a Certificate Owner to pledge an Offered
Certificate to persons or entities that do not participate in the DTC, CEDEL or
Euroclear system may be limited due to lack of a physical certificate
representing the Offered Certificates. See "Description of the
Certificates--Book-Entry Certificates" herein and "Risk Factors--Book-Entry
Registration" in the Prospectus.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Offered Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. Certificate Owners will not be
recognized as Holders of Offered Certificates as such term is used in the
Pooling and Servicing Agreement, and Certificate Owners will be permitted to
exercise the rights of Holders of Offered Certificates only indirectly through
DTC and its Participants. See "Description of the Certificates--Book-Entry
Certificates" herein and "Risk Factors--Book-Entry Registration" in the
Prospectus.
Individual Investors. The Offered Certificates may not be an appropriate
investment for individual investors who do not have sufficient resources or
expertise to evaluate the particular characteristics of the applicable Class of
Offered Certificates, among other reasons because:
* The yield to maturity of Offered Certificates purchased at a price
other than par will be sensitive to the uncertain rate and timing of
principal prepayments on the Mortgage Loans;
* The rate of principal distributions on, and the weighted
average life of, the Offered Certificates will be
sensitive to the uncertain rate and timing of principal
prepayments on the Mortgage Loans and, as such, the
Offered Certificates may be inappropriate investments for
an investor requiring a distribution of a particular
amount of principal on a specific date or an otherwise
predictable stream of distributions;
* There can be no assurance that an investor will be able to reinvest
amounts distributed in respect of principal on an Offered Certificate
(which, in general, are expected to be greater during periods of
relatively low interest rates) at a rate at least as high as the
Pass-Through Rate applicable thereto; and
* As discussed above, there can be no assurance that a secondary market
for the Offered Certificates will develop or provide Holders of the
Offered Certificate with liquidity of investment.
For a discussion of additional risks pertaining to the Offered
Certificates, see "Risk Factors" in the Prospectus.
<PAGE>
THE MORTGAGE POOL
GENERAL
The following discussion applies to the origination, sales and servicing
practices of Norwest Bank in effect at the time of the origination of the
Mortgage Loans.
Certain information with respect to the Mortgage Loans expected to be
included in the Mortgage Pool is set forth below. A detailed description of the
Mortgage Loans actually delivered (the "Detailed Description") will be available
to purchasers of the Certificates at or before, and will be filed on Form 8-K
with the Securities and Exchange Commission within fifteen days after, delivery
of the Certificates. The Detailed Description will specify the aggregate of the
Principal Balances of the Mortgage Loans included in the Mortgage Pool as of the
Cut-off Date (the "Cut-off Date Pool Principal Balance") and will also include,
among other things, the following information regarding such Mortgage Loans: the
outstanding Principal Balances of such Mortgage Loans as of the Cut-off Date,
the lien priorities of such Mortgage Loans, the Mortgage Rates borne by such
Mortgage Loans as of the Cut-off Date, the Combined Loan-to-Value Ratios of such
Mortgage Loans, the remaining term to scheduled maturity of such Mortgage Loans,
the type of properties securing such Mortgage Loans and the geographical
distribution of such Mortgage Loans by state, in each case as of the Cut-off
Date.
It is expected that the Mortgage Pool will consist of Mortgage Loans with a
Cut-off Date Pool Principal Balance of approximately $___________. [The Mortgage
Loans will provide for the amortization of the amount financed over a series of
monthly payments.] [The Mortgage Loans will provide for the amortization of the
amount financed over a series of substantially equal monthly payments.] All of
the Mortgage Loans will provide for payments due as of the first day of each
month. The Mortgage Loans to be included in the Mortgage Pool will have been
originated or purchased by Norwest Mortgage, Inc. ("Norwest Mortgage") and will
have been originated substantially in accordance with Norwest Mortgage's
underwriting criteria for subprime quality mortgage loans described herein under
"--Underwritingin the Prospectus under "Loan Standards--Subprime Quality
Mortgage Loans" or substantially in accordance with Norwest Mortgage's
underwriting criteria for closed end second mortgage loans described herein
under "Loan Program--Underwriting Standards" in the Prospectus.Programs--
Underwriting Standards--First Lien Subprime Mortgage Loans." Subprime mortgage
loans are generally mortgage loans made to borrowers with prior credit
difficulties.
At origination, it is expected that at least ____% of the Mortgage Loans
had a stated term to maturity of 30 years. Scheduled monthly payments made by
the Mortgagors on the Mortgage Loans ("Scheduled Payments") either earlier or
later than the scheduled due dates thereof will not affect the amortization
schedule or the relative application of such payments to principal and interest.
[Any Mortgage Loan may be prepaid in full or in part at any time; however, it is
expected that at least ____% of the Mortgage Loans provide for the payment by
the borrower of a prepayment charge in limited circumstances on full prepayments
made within [five] years from the date of execution of the related Mortgage
Note. In general, the Mortgage Note provides that a prepayment charge will apply
if, during the first [five] years from the date of origination of such Mortgage
Loan, the borrower prepays such Mortgage Loan in full. The amount of the
prepayment charge will generally be equal to six months" advance interest
calculated on the basis of the rate in effect at the time of such prepayment on
the amount prepaid in excess of __% of the original balance of such Mortgage
Loan.]
[It is expected that substantially all of the Mortgage Loans will have a
Mortgage Rate which is subject to semi- annual adjustment on the first day of
the months specified in the related Mortgage Note (each such date, an
"Adjustment Date") to equal the sum, rounded to the nearest 0._____ of (i) the
average of the London interbank offered rates for six- month U.S. dollar
deposits in the London market, [as set forth in The Wall Street Journal, or, if
such rate ceases to be published in The Wall Street Journal or becomes
unavailable for any reason,] then based upon a new index selected by the
Trustee, as holder of the related Mortgage Note, with the consent of the
Certificate Insurer, based on comparable information, in each case as most
recently announced as of a date 45 days prior to such Adjustment Date (the
"Mortgage Index"), and (ii) a fixed percentage amount specified in the related
Mortgage Note (the "Gross Margin"); provided, however, that the Mortgage Rate
will not increase or decrease by more than ____% on any Adjustment Date (the
"Periodic Rate Cap") for substantially all of the Mortgage Loans. It is expected
that substantially all of the Mortgage Loans will have been originated with
Mortgage Rates less than the sum of the then applicable Mortgage Index values
and the related Gross Margins, rounded as described herein. It is expected that
not more than _____% of the Mortgage Loans will have fixed Mortgage Rates for
[24] months (the "2/28 Mortgage Loans") after origination thereof before
becoming subject to the semi-annual adjustment described in the preceding
sentences. It is expected that substantially all of the Mortgage Loans will
provide that over the life of each such Mortgage Loan the Mortgage Rate will in
no event be more than the initial Mortgage Rate plus ____% (the "Maximum
Mortgage Rate"). It is expected that substantially all of the Mortgage Loans
will provide that in no event will the Mortgage Rate for each such Mortgage Loan
be less than the initial Mortgage Rate (such rate, the "Minimum Mortgage Rate").
Effective with the first payment due on a Mortgage Loan, after each related
Adjustment Date, the monthly payment will be adjusted to an amount which will
fully amortize the outstanding principal balance of the Mortgage Loan over its
remaining term.]
The "Loan-to-Value Ratio" of a Mortgage Loan is equal to (i) theat any
given time is the fraction, expressed as a percentage, the numerator of which is
the original principal balance of such Mortgage Loan at the date of origination,
divided by (ii)nd the denominator of which is the Collateral Value of the
related Mortgaged Property. The "Collateral Value" of a Mortgaged Property is
the lesser of (x) the appraised value based on an appraisal made for Norwest
Bank by an independent fee appraiser at the time of the, other than with respect
to certain Mortgage Loans origination of the related Mortgage Loan, and (y) the
sales price of such Mortgaged Property at such time of origination. With respect
to a Mortgage Loan the proceeds of which were used to refinance an existing
mortgage loan, the Collateral Value is the appraised value of the Mortgaged
Property based upon th (each, a "Refinance Loan"), is the lesser of (x) the
appraised value determined in an appraisal obtained by the originator at
origination of the related Mortgage Loan, and (y) the sales price for such
Mortgaged Property at such time of origination. In the case of Refinance Loans,
the "Collateral Value" of the related Mortgaged Property is the appraised value
thereof determined in an appraisal obtained at the time of refinancing. No
assurance can be given that the values of the Mortgaged Properties have remained
or will remain at their levels as of the dates of origination of the related
Mortgage Loans.
It is expected that not more than ___% of the Mortgage Loans will be
contractually delinquent for thirty or more days as of the Cut-off Date.
The following information sets forth in tabular format certain information,
as of the Cut-off Date, as to the Mortgage Loans expected to be included in the
Mortgage Pool.
MORTGAGE LOAN STATISTICS*
Number of Mortgage Loans................................................
Cut-off Date Pool Principal Balance.....................................
Cut-off Date Principal Balance:
Range...............................................................
Average.............................................................
Months Remaining to Scheduled Maturity:
Range...............................................................
Weighted Average....................................................
Mortgage Rate:
Range...............................................................
Weighted Average....................................................
Margins:
Range...............................................................
Weighted Average....................................................
Maximum Mortgage Rate:
Range...............................................................
Weighted Average....................................................
Weighted Average Loan-to-Value Ratio....................................
Loan-to-Value Ratio over 80.........................................
Loan-to-Value Ratio over 90%........................................
Next Adjustment Date (other than 2/28 Mortgage Loans)
Range...............................................................
Weighted Average....................................................
Next Adjustment Date for 2/28 Mortgage Loans
Range...............................................................
Weighted Average....................................................
Purpose
Purchase............................................................
Refinance...........................................................
State Distribution of Mortgaged Properties:
Located in California...............................................
Located in Michigan.................................................
Located in Colorado.................................................
Number of other States and District of Columbia
(concentrations of
5.0% or less per State)...........................................
Types of Mortgaged Properties:
Single Family.......................................................
Condominiums........................................................
[Planned Unit Developments (PUD)....................................
]...................................................................
Two- to Four-Family.................................................
Lien Priorities:
First Lien..........................................................
Second LienTwo- to Four-Family......................................
-------------
* Approximate. Actual amounts and percentages may vary
depending on the actual Mortgage Loans included in the
Mortgage Pool.
ASSIGNMENT OF THE MORTGAGE LOANS
Pursuant to the Pooling and Servicing Agreement, the Depositor on the
Closing Date will sell, transfer, assign, set over and otherwise convey without
recourse to the Trustee in trust for the benefit of the Certificateholders and
the Certificate Insurer all right, title and interest of the Depositor in and to
each Mortgage Loan and all right, title and interest in and to all other assets
included in the Trust Fund, including all principal and interest received on or
with respect to the Mortgage Loans on and after the Cut-off Date exclusive of
principal due prior to the Cut-off Date.
In connection with such transfer and assignment, the Depositor will deliver
on the Closing Date the following documentsdocuments described in the Prospectus
under "The Agreements - Assignment of the Trust Fund Assets - Assignment of the
Loans" (collectively constituting the "Trustee's Mortgage File") with respect to
each Mortgage Loan:
* the original Mortgage Note, endorsed by Norwest Bank or the
originator of the Mortgage Loan, without recourse in the following
form: "Pay to the order of without recourse," with all intervening
endorsements that show a complete chain of endorsement from the
originator to Norwest Bank;
* the original recorded Mortgage;
* a duly executed assignment of the Mortgage to
____________________, a __________ banking corporation, as trustee
under the Pooling and Servicing Agreement dated as of ___________,
199_, [New Corporation], Asset-Backed Certificates, Series 199_-_,
without recourse"; in recordable form, as described in the Pooling and
Servicing Agreement;
* the original recorded assignment or assignments of
the Mortgage together with all interim recorded assignments
of such Mortgage;
* the original or copies of each assumption,
modification, written assurance or substitution agreement,
if any; and
* the original or duplicate original lender's title policy and
all riders thereto or, in the event such original title policy has not
been received from the insurer, any one of an original title binder, an
original preliminary title report or an original title commitment, or a
copy thereof certified by the title company, with the original policy
of title insurance to be delivered within one year of the Closing Date.
Assignments of the Mortgage Loans to the Trustee (or its nominee) will be
recorded in the appropriate public office for real property records, except in
states (such as California) as to which an opinion of counsel is delivered to
the effect that such recording is not required to protect the Trustee's
interests in the Mortgage Loan against the claim of any subsequent transferee or
any successor to or creditor of the Depositor or the Seller. As to any Mortgage
Loan, the recording requirement exception described in the preceding sentence is
applicable only so long as the related Mortgage File is maintained in the
possession of the Trustee in one of the states to which such exception applies.
In the event any such assignment is delivered to the Trustee in blank and the
related Mortgage File is released by the Trustee pursuant to applicable
provisions of the Pooling and Servicing Agreement, the Trustee shall complete
such assignment as provided in subparagraph (iii) above prior to any such
release. In the event such recording is required to protect the interest of the
Trustee in the Mortgage Loans, the Master Servicer is required to cause each
previously unrecorded assignment to be submitted for recording.
The Trustee will review the Mortgage Loan documents on or prior to the
Closing Date and will hold such documents in trust for the benefit of the
Holders of the Certificates and the Certificate Insurer. After the Closing Date,
if any document is found to be missing or defective in any material respect, the
Trustee is required to notify the Master Servicer, the Seller and the
Certificate Insurer in writing. If the Seller cannot or does not cure such
omission or defect within 960 days of its receipt of notice from the Trustee,
the Seller is required to repurchase the related Mortgage Loan from the Trust
Fund at a price (the "Purchase Price") equal to 100% of the Stated Principal
Balance thereof plus accrued and unpaid interest thereon, at a rate equal to the
applicable Mortgage Rate to the first day of the month in which the Purchase
Price is to be distributed to holders of Certificates. Rather than repurchase
the Mortgage Loan as provided above, the Seller may remove such Mortgage Loan (a
"Deleted Mortgage Loan") from the Trust Fund and substitute in its place another
Mortgage Loan of like kind (a "Replacement Mortgage Loan"); [however, such
substitution is only permitted within two years after the Closing Date, and may
not be made unless an opinion of counsel is provided to the effect that such
substitution would not disqualify the Trust Fund as a REMIC or result in a
prohibited transaction tax under the Code]. Any Replacement Mortgage Loan
generally will, on the date of substitution, among other characteristics set
forth in the Pooling and Servicing Agreement, (i) have a Stated Principal
Balance, after deduction of the principal portion of the scheduled payment due
in the month of substitution, not in excess of, and not less than 90% of, the
Stated Principal Balance of the Deleted Mortgage Loan (the amount of any
shortfall to be deposited by the Seller in the Certificate Account not later
than the succeeding Determination Date and held for distribution to the holders
of Certificates on the related Distribution Date), (ii) [(1) have a Maximum
Mortgage Rate not more than 1% per annum higher or lower than the Maximum
Mortgage Rate of the Deleted Mortgage Loan, (2) have a Minimum Mortgage Rate not
more than 1% per annum higher or lower than the Minimum Mortgage Rate of the
Deleted Mortgage Loan, (3) have the same Mortgage Index and Periodic Rate Cap as
the Deleted Mortgage Loan and a Gross Margin not more than 1% per annum higher
or lower than that of the Deleted Mortgage Loan and (4) have the same or higher
credit quality characteristics than that of the Deleted Mortgage Loan,] [(1)
have a Mortgage Rate not more than 1% higher or lower than the Mortgage Rate of
the Deleted Mortgage Loan and (2) not be a Balloon Loan unless the Deleted
Mortgage Loan was a Balloon Loan, (iii) be accruing interest at a rate not more
than 1% per annum higher or lower than that of the Deleted Mortgage Loan, (iv)
have a Loan-to-Value Ratio no higher than that of the Deleted Mortgage Loan, (v)
have a remaining term to maturity not greater than (and not more than one year
less than) that of the Deleted Mortgage Loan,] (vi) [not permit conversion of
the related Mortgage Rate to a fixed Mortgage Rate] [not permit conversion of
the related Mortgage Rate to an adjustable Mortgage Rate], (vii) have the same
lien priority as the Deleted Mortgage Loan, (viii) provide for a prepayment
charge on terms substantially similar to those of the prepayment charge, if any,
of the Deleted Mortgage Loan, (ix) constitute the same occupancy type as the
Deleted Mortgage Loan, and (x) comply with all of the representations and
warranties set forth in the Pooling and Servicing Agreement as of the date of
substitution. This cure, repurchase or substitution obligation constitutes the
sole remedy available to the Certificateholders, the Trustee or the Depositor
for omission of, or a material defect in, a Mortgage Loan document.
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Master Servicer will be responsible for securities administration and
the servicing of the Mortgage Loans in accordance with the terms set forth in
the Pooling and Servicing Agreement. The Master Servicer may perform any of its
obligations under the Pooling and Servicing Agreement through one or more
subservicers. Notwithstanding any such subservicing arrangement, the Master
Servicer will remain liable for its servicing duties and obligations under the
Pooling and Servicing Agreement as if the Master Servicer alone were servicing
the Mortgage Loans. It is expected that the Master ServicerNorwest Mortgage will
subservice each of the Mortgage Loans withoutunder a subservicing agreement to
be in effect as of the Closing Dates.
THE MASTER SERVICER
Norwest Bank Minnesota, National Association ("Norwest Bank"), a national
banking association originally chartered in 1872, will act as the Master
Servicer of the Mortgage Loans pursuant to the Pooling and Servicing Agreement.
Norwest Bank is engaged in a wide variety of activities typical of a national
bank.
As of ___________, 199_, Norwest Bank provided master servicing for prime
quality mortgage loans of all types with an aggregate principal balance of
approximately $___ billion. No specific delinquency or foreclosure data relating
to the Master Servicer's master servicing portfolio is provided because the
Master Servicer has no master servicing experience with respect to subprime
mortgage loans.
Norwest bBank's principal office is located at Norwest Center, Sixth and
Marquette, Minneapolis, Minnesota 55479. Norwest Bank conducts its master
servicing and securities administrative services at its offices in Columbia,
Maryland. Its address there is 11000 Broken Land Parkway, Columbia, Maryland
21044-3662 and its telephone number is (410) 884-2000. --------- * Delinquencies
are reported on a contractual basis.]
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be paid a monthly fee from interest collected with
respect to each Mortgage Loan (as well as from any liquidation proceeds from a
Liquidated Mortgage Loan that are applied to accrued and unpaid interest) equal
to one-twelfth of the Stated Principal Balance thereof multiplied by the
Servicing Fee Rate (such product, the "Servicing Fee"). The "Servicing Fee Rate"
for each Mortgage Loan will equal [0.50%] per annum. The amount of the monthly
Servicing Fee is subject to adjustment with respect to prepaid Mortgage Loans,
as described herein under "-- Adjustment to Servicing Fee in Connection with
Certain Prepaid Mortgage Loans." The Master Servicer is also entitled to
receive, as additional servicing compensation, amounts in respect of interest
paid on Principal Prepayments (as defined below) received from the 2nd day
through the [16th] day of a month ("Prepayment Interest Excess"), all late
payment fees, assumption fees, prepayment penalties and other similar charges
and all reinvestment income earned on amounts on deposit in the Certificate
Account and Distribution Account. The Master Servicer is obligated to pay
certain ongoing expenses associated with the Mortgage Loans and incurred by the
Trustee in connection with its responsibilities under the Pooling and Servicing
Agreement.
[When a borrower prepays all or a portion of a Mortgage Loan between
scheduled monthly payment dates ("Due Dates"), the borrower pays interest on the
amount prepaid only to the date of prepayment. Principal Prepayments (as defined
below) received from the 2nd day through the [16th] day of a month are included
in the related distribution on the [25th] day of the same month, and accordingly
no shortfall in interest otherwise distributable to Holders of Certificates
results. Conversely, Principal Prepayments received from the [17th] day of a
month to the first day of the following month are not distributed until the
[25th] day of such following month, and accordingly an interest shortfall (a
"Prepayment Interest Shortfall") would result. In order to mitigate the effect
of any such shortfall in interest distributions to Holders of Certificates on
any Distribution Date, an amount not in excess of the Servicing Fee otherwise
payable to the Master Servicer in respect the Mortgage Loan for such month
shall, to the extent of such shortfall, be deposited by the Master Servicer in
the Certificate Account for distribution to Holders of Certificates on such
Distribution Date. However, any such reduction in the Servicing Fee will be made
only to the extent of the Servicing Fee otherwise payable to the Master Servicer
with respect to Scheduled Payments on Mortgage Loans having the Due Date to
which such Distribution Date relates. Any such deposit by the Master Servicer
will be reflected in the distributions to Holders of Certificates made on the
Distribution Date on which the Principal Prepayment received would be
distributed.]
ADVANCES
Subject to the following limitations, on the Business Day prior to each
Distribution Date, the Master Servicer will be required to advance its own
funds, or funds in the Certificate Account that do not constitute Available
Funds (as defined herein) for such Distribution Date, in an amount equal to the
aggregate of payments of principal and interest on the Mortgage Loans (net of
the applicable Servicing Fee) that were due during the related Due Period and
delinquent on the related Determination Date, together with an amount equivalent
to interest (adjusted to the applicable Net Mortgage Rate) deemed due on each
Mortgage Loan as to which the related Mortgaged Property has been acquired by
the Master Servicer through foreclosure or deed-in-lieu of foreclosure in
connection with a defaulted Mortgage Loan ("REO Property"), such latter amount
to be calculated after taking into account any rental income from such Mortgaged
Property (any such advance, an "Advance", and the date of any such Advance, as
described herein, a "Master Servicer Advance Date").
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Offered Certificates rather than to guarantee or
insure against losses. The Master Servicer is obligated to make Advances through
liquidation of each Mortgage Loan with respect to delinquent payments of
principal of or interest on such Mortgage Loan (net of the applicable Servicing
Fee) to the extent that such Advances are, in its judgment, reasonably
recoverable from future payments and collections or insurance payments or
proceeds of liquidation of the related Mortgage Loan. If the Master Servicer
determines on any Determination Date to make an Advance, such Advance will be
included with the distribution to Holders of Certificates on the related
Distribution Date. Any failure by the Master 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 master servicer, or
such other entity as may be appointed as successor master servicer, will be
obligated to make any such Advance in accordance with the terms of the Pooling
and Servicing Agreement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Offered Certificates will be issued pursuant to a Pooling and Servicing
Agreement, dated as of __________, 199_ (the "Pooling and Servicing Agreement"),
among the Depositor, the Master Servicer, the Seller and the Trustee. Set forth
below are summaries of the material terms and provisions pursuant to which the
Offered Certificates will be issued. The following summaries are subject to, and
are qualified in their entirety by reference to, the provisions of the Pooling
and Servicing Agreement. When particular provisions or terms used in the Pooling
and Servicing Agreement are referred to, the actual provisions (including
definitions of terms) are incorporated by reference.
The Directors Asset Conduit Corporation Asset- Backed Certificates, Series
199_-_ will consist of (i) the Class A-1 Certificates (the "Class A-1
Certificates"), (ii) the Class A-2 Certificates (the "Class A-2 Certificates"),
(iii) the Class A-3 Certificates (the "Class A-3 Certificates"), (iv) the Class
A-4 Certificates (the "Class A-4 Certificates"), (v) the Class A-5 Certificates
(the "Class A-5 Certificates" and, together with the Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates and the Class A-4 Certificates,
the "Offered Certificates") and (vi) the Class R Certificates (the "Residual
Certificates"). The Offered Certificates and the Residual Certificates are
collectively referred to herein as the "Certificates." Only the Offered
Certificates are offered hereby.
The Offered Certificates are expected to have an initial Certificate
Principal Balance of approximately $___________ and will evidence a senior
beneficial ownership interest in the Trust Fund. The remaining beneficial
ownership interest in the Trust Fund will be evidenced by the Residual
Certificates, which do not have a principal balance and will evidence a residual
interest in the Trust Fund. The rights of the Residual Certificateholders to
receive distributions with respect to the Mortgage Loans will be subordinate to
the rights of the Offered CertificateholderHolders of Offered Certificates, to
the extent described herein.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $______ and integral multiples of $_____ in excess thereof. The assumed final
maturity date of the Class A-1 Certificates is the Distribution Date occurring
in _______ 20__, which is the Distribution Date immediately following the latest
scheduled maturity date of any Mortgage Loan. [The assumed final maturity date
of the Class A-5 Certificates is the Distribution Date occurring in ________
20__, which is the Distribution Date immediately following the latest scheduled
maturity date of any Mortgage Loan.] The assumed final maturity date of the
Class A-2 Certificates, the Class A-3 Certificates and the Class A-4
Certificates is the Distribution Date occurring in ________ 20__, ________ 20__
and _______ 20__, respectively, and has been calculated on the basis of the
"Assumed Mortgage Loan Characteristics" set forth under "Yield, Maturity and
Prepayment and Maturity Considerations--Weighted Average Lives of the Offered
Certificates", the assumption that there are no prepayments on the Mortgage
Loans, no Net Excess Cashflow is used, and the Master Servicer does not exercise
its right of optional termination as described herein is not exercised.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the Offered
Certificates ("Certificate Owners") may elect to hold their Offered Certificates
through the Depository Trust Company ("DTC") in the United States, or CEDEL or
Euroclear (in Europe) if they are participants of such systems, or indirectly
through organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate principal balance of the Offered Certificates and will initially be
registered in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear
will hold omnibus positions on behalf of their participants through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank
will act as depositary for CEDEL and Chase will act as depositary for Euroclear
(in such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations representing Class Certificate
Principal Balances of $______ and integral multiples of $_____ in excess
thereof. Except as described below, no person acquiring a Book-Entry Certificate
(each, a "beneficial owner") will be entitled to receive a physical certificate
representing such Offered Certificate (a "Definitive Certificate"). Unless and
until Definitive Certificates are issued, it is anticipated that the only
Certificateholder of the Offered Certificates will be Cede & Co., as nominee of
DTC. Certificate Owners will not be Certificateholders as that term is used in
the Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through the participating organizations that utilize the services of
DTC, including securities brokers and dealers, banks and trust companies and
clearing corporations and certain other organizations ("Participants") and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of CEDEL or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Offered Certificates from the Trustee through DTC and DTC
participants. While the Offered Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and organizations which have indirect access to the DTC system,
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"), with whom Certificate Owners have accounts
with respect to Offered Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will not
possess certificates, the Rules provide a mechanism by which Certificate Owners
will receive distributions and will be able to transfer their interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Offered Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificate Owners who are not Participants may
transfer ownership of Offered Certificates only through Participants and
Indirect Participants by instructing such Participants and Indirect Participants
to transfer Offered Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Offered Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Offered Certificates
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and Indirect
Participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificate Owners.
Because of time zone differences, credits of securities received in CEDEL,
or Euroclear as a result of a transaction with a Participant will be made
during, subsequent securities settlement processing and dated the business day
following, the DTC settlement date. Such credits or any transactions in such
securities, settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear, as a result of sales of securities by or through a CEDEL Participant
(as defined, below) or Euroclear Participant (as defined below) to a DTC
Participant, will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures, relating to the Offered Certificates, see "Federal
Income Tax Consequences--Foreign Investors" and "--Backup Withholding" herein
and "Global, Clearance, Settlement And Tax Documentation Procedures-- Certain
U.S. Federal Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterpart in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book- Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Offered
Certificates held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Federal Income Tax
Consequences--Foreign Investors" and "--Backup Withholding" herein. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the depository system, or otherwise take actions in respect of
such Book- Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Offered Certificates in the secondary market since certain potential investors
may be unwilling to purchase Offered Certificates for which they cannot obtain
physical certificates.
Monthly and annual reports on the Trust Fund provided by the Master
Servicer to CEDE, as nominee of DTC, may be made available to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting DTC or the Relevant Depositary, and to the Financial
Intermediaries to whose DTC accounts the Book-Entry Certificates of such
beneficial owners are credited.
DTC has advised the Depositor and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Certificates under the Agreement only at
the direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Holder of an Offered Certificate under
the Pooling and Servicing Agreement on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Offered Certificates which conflict with
actions taken with respect to other Offered Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depositary with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor at its sole
option, elects to terminate a book-entry system through DTC or (c) after the
occurrence of an Event of Default (as defined herein), beneficial owners having
not less than 51% of the Voting Rights (as defined herein) evidenced by the
Offered Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Holders of Offered Certificates under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DISTRIBUTIONS
General. Distributions on the Certificates will be made by the Trustee on
the [25th] day of each month, or if such day is not a Business Day, on the first
Business Day thereafter, commencing in __________ 199_ (each, a "Distribution
Date"), to the persons in whose names such Certificates are registered at the
close of business on the last Business Day of the month preceding the month of
such Distribution Date (the "Record Date").
Distributions on each Distribution Date will be made by check mailed to the
address of the person entitled thereto as it appears on the Certificate Register
or, in the case of any Certificateholder that holds 100% of a Class of
Certificates or who holds a Class of Certificates with an aggregate initial
Class Certificate Principal Balance of [$1,000,000] or more and that has so
notified the Trustee in writing in accordance with the Pooling and Servicing
Agreement, by wire transfer in immediately available funds to the account of
such Certificateholder at a bank or other depository institution having
appropriate wire transfer facilities; provided, however, that the final
distribution in retirement of the Certificates will be made only upon
presentation and surrender of such Certificates at the Corporate Trust Office of
the Trustee. On each Distribution Date, a Holder of a Certificate will receive
such Holder's Percentage Interest of the amounts required to be distributed with
respect to the applicable Class of Certificates. The "Percentage Interest"
evidenced by a Certificate will equal the percentage derived by dividing the
denomination of such Certificate by the aggregate denominations of all
Certificates of the applicable Class.
DEPOSITS TO THE CERTIFICATE ACCOUNT
The Trustee shall establish and, initially, maintain an account (the
"Certificate Account") on behalf of the Certificateholders and the Certificate
Insurer. Within two[TWO] Business Days after receipt, the Master Servicer shall
remit to the Trustee (or, in the event the Certificate Account is maintained
with another institution pursuant to the Pooling and Servicing Agreement, to
such institution) for deposit into the Certificate Account the following
payments and collections received or made by it on or subsequent to the Cut-off
Date (to the extent not applied in computing the Cut-off Date Pool Principal
Balance):
(i) all payments on account of principal, including Principal
Prepayments, on the Mortgage Loans;
(ii) all payments on account of interest (other than interest
accruing on the Mortgage Loans prior to the Cutoff Date) on the
Mortgage Loans, net of the related Servicing Fee;
(iii) all proceeds of any insurance policies (to the extent such
proceeds are not applied to the restoration of the property or
released to the mortgagor in accordance with the Master Servicer's
normal servicing procedures), other than proceeds that represent
reimbursement of the Master Servicer's costs and expenses incurred in
connection with presenting claims under the related insurance policies
("Insurance Proceeds"), all other net proceeds received in connection
with the partial or complete liquidation of Mortgage Loans (whether
through trustee's sale, foreclosure sale or otherwise) or in
connection with any condemnation or partial release of a Mortgaged
Property, together with the net proceeds received with respect to any
Mortgage Properties acquired by the Master Servicer by foreclosure or
deed in lieu of foreclosure in connection with defaulted Mortgage
Loans (other than the amount of such net proceeds representing any
profit realized by the Master Servicer in connection with the
disposition of any such properties) (together with Insurance Proceeds,
"Liquidation Proceeds");
(iv) all payments made by the Master Servicer in respect of
Prepayment Interest Shortfalls;
(v) any amount required to be deposited by the Master Servicer in
connection with any losses on investment of funds in the Certificate
Account;
(vi) any amounts required to be deposited by the Master Servicer
with respect to any deductible clause in any blanket hazard insurance
policy maintained by the Master Servicer in lieu of requiring each
mortgagor to maintain a primary hazard insurance policy;
(vii) all amounts required to be deposited in connection with
shortfalls in the principal amount of Replacement Mortgage Loans; and
(viii) all Advances.
WITHDRAWALS FROM THE CERTIFICATE ACCOUNT
The Master Servicer (or the Depositor or the Seller, as applicable) may
from time to time direct the Trustee to withdraw funds from the Certificate
Account prior to the close of business on the related Determination Date for the
following purposes:
(i) to pay to the Master Servicer the Servicing Fee to the extent
not previously paid to or withheld by the Master Servicer (subject to
reduction as described above under "Servicing of the Mortgage
Loans--Adjustment to Servicing Fee in Connection with Prepaid Mortgage
Loans") and, as additional servicing compensation, prepayment
penalties, assumption fees, late payment charges, net earnings on or
investment income with respect to funds in or credited to the
Certificate Account, the amount of Prepayment Interest Excess for the
related Prepayment Period and any Excess Proceeds;
(ii) to reimburse the Master Servicer for Advances, such right of
reimbursement with respect to any Mortgage Loan pursuant to this
clause (ii) being limited to amounts received that represent late
recoveries of payments of principal and/or interest on the related
Mortgage Loan (or Insurance Proceeds or Liquidation Proceeds with
respect thereto) with respect to which such Advance was made;
(iii) to reimburse the Master Servicer for any Advances
previously made that the Master Servicer has determined to be
nonrecoverable, such right of reimbursement with respect to any
Mortgage Loan pursuant to this clause (iii) being limited to amounts
received in respect of Mortgage Loans with respect to which such
Advance was made;
(iv) to reimburse the Master Servicer from Insurance Proceeds for
expenses incurred by the Master Servicer and covered by the related
insurance policies;
(v) to pay the Master Servicer any unpaid Servicing Fees and to
reimburse it for any unreimbursed ordinary and necessary out-of-pocket
costs and expenses incurred by the Master Servicer in the performance
of its master servicing obligations, such right of reimbursement
pursuant to this clause (v) being limited to amounts received
representing late recoveries of the payments of such costs and
expenses (or Liquidation Proceeds, purchase proceeds or repurchase
proceeds with respect thereto);
(vi) to pay to the Depositor, the Seller or the Master Servicer,
as applicable, with respect to each Mortgage Loan or mortgaged
property acquired in respect thereof that has been purchased by the
Depositor, the Seller or the Master Servicer from the Trust Fund
pursuant to the Pooling and Servicing Agreement, all amounts received
thereon and not taken into account in determining the related Stated
Principal Balance of such repurchased Mortgage Loan;
(vii) to reimburse the Seller, the Master Servicer or the
Depositor for expenses incurred and reimbursable pursuant to the
Pooling and Servicing Agreement, such right of reimbursement pursuant
to this clause (vii) being limited to amounts received;
(viii) to withdraw any amount deposited in the Certificate
Account and not required to be deposited therein; and
(ix) to clear and terminate the Certificate Account upon
termination of the Pooling and Servicing Agreement.
In addition, not later than [1:00 P.M.] on each Master Servicer Advance
Date, the Trustee shall withdraw from the Certificate Account the amount of
Available Funds, to the extent on deposit, and the Trustee shall deposit such
amount in the Distribution Account, as described below.
DEPOSITS TO THE DISTRIBUTION ACCOUNT
The Trustee shall establish and maintain a distribution account (the
"Distribution Account") on behalf of the Certificateholders and the Certificate
Insurer. The Trustee shall, promptly upon receipt, deposit in the Distribution
Account and retain therein (i) the aggregate amount withdrawn by it from the
Certificate Account; (ii) any amount required to be deposited by the Master
Servicer in connection with any losses on investment of funds in the
Distribution Account; and (iii) any Insured Payment made by the Certificate
Insurer.
WITHDRAWALS FROM THE DISTRIBUTION ACCOUNT
The Trustee shall withdraw funds from the Distribution Account for
distribution to the Certificate Insurer and the Certificateholders as described
below under "--Allocation of Available Funds" and may from time to time make
withdrawals from the Distribution Account (i) to pay to the Master Servicer, as
additional servicing compensation, earnings on or investment income with respect
to funds in or credited to the Distribution Account; (ii) to withdraw any amount
deposited in the Distribution Account and not required to be deposited therein;
and (iii) to clear and terminate the Distribution Account upon the termination
of the Pooling and Servicing Agreement.
ALLOCATION OF AVAILABLE FUNDS
Distributions to Holders of Certificates will be made on each Distribution
Date. "Available Funds" as of any Distribution Date, is the sum of the following
amounts (without duplication):
(i) the aggregate amount on deposit in the Certificate Account as
of the close of business on the immediately preceding Determination
Date;
(ii) Advances for such Distribution Date; and
(iii) any amounts deposited by the Master Servicer in the
Certificate Account in respect of Prepayment Interest Shortfalls
during the related Prepayment Period,
less the sum of:
(x) the portion thereof representing (A) Principal Prepayments
and Liquidation Proceeds received after the last day of the
related Prepayment Period and (B) all Scheduled Payments or
portions thereof received in respect of scheduled principal and
interest on the Mortgage Loans due after the preceding Due Date;
and
(y) amounts permitted to be withdrawn from the Certificate
Account pursuant to clauses (i)-(viii), inclusive, under
"--Withdrawals from the Certificate Account" above.
On each Distribution Date, the Trustee will withdraw from the Distribution
Account (a) the amount of any Insured Payment and (b) all Available Funds then
on deposit and will distribute the same as follows:
A. Certificates. With respect to the Certificates, the Available Funds and
Insured Payment relating to such Certificate Group in the following order of
priority:
(i) to the Certificate Insurer, the Premium Amount (except during
the continuation of a payment default under the Certificate Insurance
Policy);
(ii) to the Certificateholders, an amount equal to the Interest
Distribution Amount for the Certificates;
(iii) sequentially, to the Holders of the Class A-1 Certificates,
the Class A-2 Certificates, the Class A-3 Certificates, the Class A-4
Certificates and the Class A-5 Certificates, in that order, an amount
equal to the related Group Principal Distribution Amount (excluding
any Subordination Increase Amount included therein), until the
respective Class Certificate Principal Balances thereof are reduced to
zero; and
(iv) to the Certificate Insurer, the portion of the Reimbursement
Amount.
B. Overcollateralization. On any Distribution Date, to the extent that
there are Available Funds remaining after making distributions required to be
made pursuant to A. (i)-(iv) above, such amount shall be applied to the Class
Certificate Principal Balance of the applicable Class as specified in A. (iii)
above until the Subordinated Amount on such Distribution Date is equal to the
Required Subordinated Amount on such Distribution Date.
C. Basis Risk Carryover Amount. After making distributions referred to in
subclauses A and B above, the Trustee shall make distributions to the extent of
the Available Funds, to the Class A-1 Certificateholders, the aggregate Class
A-1 Basis Risk Carryover Amount.
D. Residual Payment. As more fully described in the Pooling and Servicing
Agreement, the remaining Available Funds, if any, for such Distribution Date
will be distributed to the Holders of the Residual Certificates.
OVERCOLLATERALIZATION PROVISIONS
Overcollateralization Resulting from Cash Flow Structure. The Pooling and
Servicing Agreement requires that, on each Distribution Date, the Net Monthly
Excess Cashflow, if any, is to be applied to accelerate payment of principal on
the Offered Certificates until the Subordinated Amount is equal to the Required
Subordinated Amount andfor such Distribution Date. This application of the Net
Monthly Excess Cashflow has the effect of accelerating the amortization of the
Offered Certificates relative to the amortization of the Mortgage Loans, and of
increasing the Subordinated Amount.
The Pooling and Servicing Agreement provides that in the event of a
permitted reduction in the Required Subordinated Amount, a portion of the amount
that would otherwise be distributed as principal to Holders of the Offered
Certificates on such date shall instead be distributed to the Holders of the
Residual Certificates. This application of principal has the effect of
decelerating the amortization of such Offered Certificates relative to the
amortization of the Mortgage Loans, and of reducing the Subordinated Amount.
The Pooling and Servicing Agreement provides that, on any Distribution
Date, all unscheduled collections on account of principal during the period
beginning on the opening of business on the [17th] day of the month preceding
the month in which the related Distribution Date occurs and ending on the close
of business on the [16th] day of the month in which such Distribution Date
occurs (the "Prepayment Period") are to be distributed to the Holders of the
Offered Certificates on such Distribution Date. If any Mortgage Loan became a
Liquidated Loan during such Prepayment Period, a Realized Loss could result. The
Pooling and Servicing Agreement does not contain any provision that requires the
amount of any Realized Loss to be distributed to the Holders of the Offered
Certificates on the Distribution Date immediately following the event of loss;
i.e., the Pooling and Servicing Agreement does not require the current recovery
of losses. However, the occurrence of a Realized Loss would reduce the
Subordinated Amount, which, to the extent that such reduction caused the
Subordinated Amount to be less than the Required Subordinated Amount andfor such
Distribution Date, would require the payment of a Subordination Increase Amount
on such Distribution Date (or, in the event of insufficient Available Funds on
such Distribution Date, on subsequent Distribution Dates, until such
Subordinated Amount equaled the Required Subordinated Amount). The effect of the
foregoing is to allocate losses to the Holders of the Residual Certificates by
reducing, or eliminating entirely, payments of Net Monthly Excess Cashflow and
of Subordination Reduction Amounts that such Holders would otherwise receive.
Investors in the Offered Certificates should realize that, under extreme loss or
delinquency scenarios, they may temporarily receive no distributions of
principal.
Overcollateralization and the Certificate Insurance Policy. The Pooling and
Servicing Agreement requires the Trustee to make a claim for an Insured Payment
for a Certificate Group under the Certificate Insurance Policy not later than
the second Business Day prior to any Distribution Date as to which the Trustee
has determined that an Available Funds Shortfall with respect to the related
Loan Group is likely to occur, for the purpose of applying the proceeds of such
Insured Payment as a payment of Insured Distribution Amount for such Certificate
Group on such Distribution Date.
DEFINITIONS
The "Accrual Period" for a Distribution Date is [(a) in the case of the
[Class A-1 Certificates and the Class A-2 Certificates,] the period commencing
on the Distribution Date occurring in the month immediately preceding the month
in which such Distribution Date occurs (or, in the case of the initial Accrual
Period, commencing on the Closing Date) and ending on the day immediately
preceding such Distribution Date], and [(b) in the case of the [Class A-3
Certificates, the Class A-4 Certificates and the Class A-5 Certificates,] the
calendar month preceding the month of such Distribution Date].
The "Available Funds Shortfall" as of any Distribution Date is an amount
equal to the excess of (i) the sum of (a) the Interest Distribution Amount for
such Distribution Date and (b) the Subordination Deficit over (ii) Available
Funds (Premium Amount) for such Distribution Date (but not less than zero).
The "Carry-Forward Amount" as of any Distribution Date equals the sum of
(i) the amount, if any, by which (a) the Insured Distribution Amount for the
immediately preceding Distribution Date exceeded (b) the amount actually
distributed to the Holders of each class of Certificates on such Distribution
Date in respect of such Insured Distribution Amount (including, without
limitation, any related Insured Payments (as defined herein)) and (ii) 30 days'
interest on the interest portion of the amount in clause (i) at [(a) in the case
of the Class A-1 Certificates, the applicable Pass-Through Rate for such
Distribution Date] and [(b) in the case of the Class A-2 Certificates, the Class
A-3 Certificates, the Class A-4 and the Class A-5 Certificates, at the weighted
average of the Pass-Through Rates for the Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates and the Class A-5 Certificates].
The "Class A-1 Available Funds Cap" as of any Distribution Date is a per
annum rate equal to a fraction, expressed as a percentage, the numerator of
which is equal to the excess of (i) the sum of (a) the aggregate amount of
interest due on the Mortgage Loans on the related Due Date (to the extent
received or advanced) and (b) the Subordination Reduction Amount, if any, for
such Distribution Date, over (ii) the sum of (a) the Servicing Fee, (b) the
Premium Amount payable to the Certificate Insurer and (c) the Available Funds
Rate Adjustment for such Distribution Date, and the denominator of which is
equal to (1) the Class Certificate Principal Balance of the Class A-1
Certificates for such Distribution Date multiplied by (2) the actual number of
days elapsed in the related Accrual Period divided by 360.
The "Class A-1 Basis Risk Carryover Amount" as of any Distribution Date is
equal to the sum of (A) if on such Distribution Date the Pass-Through Rate for
the Class A-1 Certificates is based upon the Class A-1 Available Funds Cap, the
excess of (i) the amount of interest the Class A-1 Certificates would otherwise
be entitled to receive on such Distribution Date had such rate been calculated
as the sum of One-Month LIBOR and the applicable Class A-1 Pass- Through Margin
for such Distribution Date, up to the Class A-1 Weighted Maximum Rate Cap for
such Distribution Date over (ii) the amount of interest payable on the Class A-1
Certificates at the Class A-1 Available Funds Cap for such Distribution Date and
(B) the Class A-1 Basis Risk Carryover Amount for all previous Distribution
Dates not previously paid pursuant to the "--Allocation of Available Funds"
above together with interest thereon at a rate equal to the sum of One-Month
LIBOR and the applicable Class A-1 Pass-Through Margin for such Distribution
Date. The Certificate Insurance Policy does not cover the payment, nor do the
ratings assigned to the Class A-1 Certificates address the likelihood of the
payment, of any Class A-1 Basis Risk Carryover Amount.
The "Class A-1 Pass-Through Margin" will equal ____% (__ basis points) per
annum until the first Accrual Period after the Optional Termination Date, at
which time the Class A-1 Pass-Through Margin will equal ____% (__ basis points)
per annum.
The "Class A-1 Weighted Maximum Rate Cap" as of any Distribution Date is
equal to (i) the weighted average of the Maximum Mortgage Rates on the Mortgage
Loans on such Distribution Date minus (ii) the sum of (a) the Servicing Fee Rate
and (b) the Premium Percentage.
The "Class A-2 Net Funds Cap" as of any Distribution Date is equal to (i)
the weighted average of the Mortgage Rates on the Mortgage Loans on such
Distribution Date minus (ii) the sum of (a) the Servicing Fee Rate and (b)
Premium Percentage.
The "Class A-2 Pass-Through Margin" will equal ____% (__ basis points) per
annum.
The "Class Certificate Principal Balance" of any class of Offered
Certificates, as of any Distribution Date, will be equal to the Class
Certificate Principal Balance thereof on the Closing Date (the "OriginInitial
Class Certificate Principal Balance") minus all distributions in respect of
principal allocated thereto on previous Distribution Dates.
A "Deficiency Amount" for a Distribution Date is the Available Funds
Shortfall for such Distribution Date.
A "Due Period" with respect to any Distribution Date is the period
beginning on the second day of the calendar month preceding the calendar month
in which such Distribution Date occurs and ending on the Due Date in the month
in which such Distribution Date occurs.
"Excess Proceeds" with respect to any Liquidated Loan, is the amount by
which Liquidation Proceeds (as defined herein) in respect of such Liquidated
Loan exceeds the sum of (i) the Stated Principal Balance of such Liquidated Loan
as of the date of such liquidation and (ii) interest at the related Mortgage
Rate from the Due Date as to which interest was last paid or advanced to
Certificateholders up to the Due Date in the month in which such Liquidation
Proceeds are required to be distributed on the Stated Principal Balance of such
Liquidated Loan outstanding during each Due Period as to which such interest was
not paid or advanced.
The "Excess Subordinated Amount" for a Distribution Date is the amount, if
any, by which (i) the Subordinated Amount that would apply on such Distribution
Date after taking into account all distributions to be made on such Distribution
Date (without giving effect to any reductions in such Subordination Amount
attributable to Subordination Reduction Amounts on such Distribution Date)
exceeds (ii) the Required Subordinated Amount for such Distribution Date.
The "Available Funds Rate Adjustment" as of any Distribution Date (a) prior
to the [thirteenth] Distribution Date will equal zero and (b) beginning on the
[thirteenth] Distribution Date will be equal to the product of (i) the Stated
Principal Balance on such date and (ii) one-twelfth of [____% (___ basis
points)].
The "Principal Distribution Amount" for any Distribution Date equals the
lesser of (a) the excess of (i) the sum, as of such Distribution Date, of (A)
the Available Funds less the Premium Amount for such Distribution Date and (B)
any Insured Payment over (ii) the related Interest Distribution Amount for such
Distribution Date and (b) the sum, without duplication, of (i) the portion of
any Carry-Forward Amount that relates to a shortfall in a distribution of a
Subordination Deficit, (ii) all scheduled installments of principal of the
Mortgage Loans due during the related Due Period that were received by the
Master Servicer on or before the related Determination Date or as to which the
Master Servicer made an Advance on the related Master Servicer Advance Date,
together with all unscheduled recoveries of principal on the Mortgage Loans
received by the Master Servicer during the related Prepayment Period (excluding
certain amounts received in respect of scheduled principal on the Mortgage Loans
due after the related Due Date), (iii) the Stated Principal Balance of each
Mortgage Loan that either was purchased or repurchased, as the case may be, by
the Seller, the Depositor or the Master Servicer during the related Prepayment
Period, (iv) any Substitution Adjustment Amounts delivered by the Seller during
the related Prepayment Period in connection with the substitution of Mortgage
Loans, (v) all Liquidation Proceeds collected by the Master Servicer during the
related Prepayment Period (to the extent such Liquidation Proceeds are related
to principal), (vi) the amount of any Subordination Deficit for such
Distribution Date, (vii) such Certificate Group's share of the proceeds received
by the Trustee of any termination of the Trust Fund (to the extent such proceeds
are related to principal) and (viii) the amount of any Subordination Increase
Amount for such Distribution Date (to the extent of any Net Excess Monthly Cash
Flow available for such purpose); minus (ix) the amount of any Subordination
Reduction Amount for such Distribution Date. In no event will the Group
Principal Distribution Amount with respect to any Distribution Date be less than
zero or greater than the then outstanding aggregate Class Certificate Principal
Balance of the Certificates.
The "Insured Distribution Amount" for a Distribution Date is the sum of (i)
on each Distribution Date, the Interest Distribution Amount, (ii) on each
Distribution Date, the amount of the Subordination Deficit, if any, and (iii)
any Preference Amounts, in each case with respect to such Distribution Date.
The "Interest Distribution Amount" for any Distribution Date equals the sum
of (i) interest accrued for the related Accrual Period on the Class Certificate
Principal Balance of each class of Certificates at the applicable Pass-Through
Rate, as reduced by the sum of (a) Prepayment Interest Shortfalls, if any, for
such Distribution Date to the extent not covered by one-half of the applicable
portion of the Servicing Fee as described above under "Servicing of the Mortgage
Loans-- Adjustment to Servicing Fee in Connection with Certain Prepaid Mortgage
Loans" and (b) shortfalls resulting from the Soldiers" and Sailors"' and
Sailors' Civil Relief Act of 1940 ("Relief Act Shortfalls") and (ii) that
portion of the Carry-Forward Amount relating to a shortfall (other than a
Prepayment Interest Shortfall or Relief Act Shortfall) in a distribution of an
Interest Distribution Amount. The Interest Distribution Amount is calculated on
the basis of [(a) in the case of the Class A-1 Certificates and the Class A-2
Certificates, a 360-day year and the actual number of days elapsed during the
related Accrual Period] and [(b) in the case of the Class A-3 Certificates, the
Class A-4 Certificates and the Class A-5 Certificates, a 360-day year consisting
of twelve 30-day months].
The "Net Monthly Excess Cashflow" for any Distribution Date equals the
amount, if any, by which (i) the Available Funds for such Distribution Date
(less the Premium Amount for such Distribution Date) exceeds (ii) the sum of (a)
the aggregate Interest Distribution Amount for such Distribution Date plus the
amount described in clause (b) of the definition of Principal Distribution
Amount (calculated for this purpose without regard to any Subordination Increase
Amount or portion thereof included therein) and (b) any Reimbursement Amount
owed to the Certificate Insurer.
The "Pass-Through Rate" as to the [Class A-1 Certificates for any
Distribution Date shall be the per annum rate equal to the lesser of (i) the sum
of (a) One-Month LIBOR (as defined in "--Calculation of One-Month LIBOR" below)
and (b) the applicable Class A-1 Pass-Through Margin and (ii) the Class A-1
Available Funds Cap for such Distribution Date]. The Pass-Through Rate for the
[Class A-2 Certificates and a particular Distribution Date will be equal to the
lesser of (i) the sum of (a) One-Month LIBOR and (b) the Class A-2 Pass- Through
Margin and (ii) the Class A-2 Net Funds Cap]. The Pass-Through Rate for the
[Class A-3 Certificates, the Class A-4 Certificates and the Class A-5
Certificates for any Distribution Date will be as set forth on the cover page
hereof].
The "Premium Amount" and payable to the Certificate Insurer on any
Distribution Date (commencing with the second Distribution Date) equals
one-twelfth of the product of a per annum rate (the "Premium Percentage") set
forth in the Insurance Agreement and the aggregate Class Certificate Principal
Balance of the Offered Certificates for such Distribution Date; provided,
however, that for any Distribution Date on which a Certificate Insurer Default
has occurred and is continuing, the Premium Amount will be equal to zero.
A "Principal Prepayment" with respect to any Distribution Date is any
mortgagor payment or other recovery of principal on a Mortgage Loan (including
all proceeds allocable to principal of any Mortgage Loan or property acquired in
respect thereof that has been repurchased by the Depositor or the Seller or
purchased by the Master Servicer) that is received in advance of its scheduled
Due Date and is not accompanied by an amount representing scheduled interest due
on any date or dates in any month or months subsequent to the month of
prepayment.
The "Pool Stated Principal Balance" as of any date is the aggregate Stated
Principal Balance of the Mortgage Loans as of such date.
A "Realized Loss" (i) with respect to any defaulted Mortgage Loan that is
finally liquidated (a "Liquidated Loan") is the amount of loss realized equal to
the portion of the Stated Principal Balance remaining unpaid after application
of all amounts recovered (net of amounts reimbursable to the Master Servicer for
related Advances, expenses and Servicing Fees) towards interest and principal
owing on such Liquidated Loan and (ii) with respect to certain Mortgage Loans
the principal balances or the scheduled payments of principal and interest of
which have been reduced in connection with bankruptcy proceedings, the amount of
such reduction.
The "Reimbursement Amount" as of any Distribution Date is the amount of all
Insured Payments made by the Certificate Insurer pursuant to the Certificate
Insurance Policy and certain other amounts owed to the Certificate Insurer
pursuant to the Insurance Agreement (together with interest thereon at the Late
Payment Rate (as defined in the Insurance Agreement) that have not been
previously repaid as of such Distribution Date.
The "Required Subordinated Amount" as of any Distribution Date will
initially equal a percentage, calculable in accordance with the Pooling and
Servicing Agreement and the Insurance Agreement dated as of __________, 199_
(the "Insurance Agreement") among the Certificate Insurer, the Depositor, the
Master Servicer and the Trustee, of the Cut-off Date Principal Balance of the
Mortgage Loans. The Pooling and Servicing Agreement and Insurance Agreement
generally provide that the Required Subordinated Amount may, over time, decrease
or increase, subject to certain floors, caps and triggers.
The "Stated Principal Balance" of any Mortgage Loan or related REO Property
equals (i) as of the Cut-off Date and each day thereafter to and including the
first Distribution Date, the Cut-off Date Principal Balance thereof, and (ii) as
of any Distribution Date after the first Distribution Date, such Cut-off Date
Principal Balance minus the sum of (a) the principal portion of the Scheduled
Payments due with respect to such Mortgage Loan or REO Property during each Due
Period ending prior to the immediately preceding Distribution Date which were
received by the Master Servicer as of the close of business on the Determination
Date related to such preceding Distribution Date or with respect to which
Advances were made on the Master Servicer Advance Date prior to such preceding
Distribution Date, (b) all Principal Prepayments with respect to such Mortgage
Loan or REO Property, and all Liquidation Proceeds to the extent applied by the
Master Servicer as recoveries of principal with respect to such Mortgage Loan or
REO Property, which were received by the Master Servicer as of the close of
business on the Determination Date related to such preceding Distribution Date,
and (c) any Realized Loss with respect thereto applied prior to the close of
business on the Determination Date relating to such preceding Distribution Date;
provided, however, that the Stated Principal Balance of any Mortgage Loan that
becomes a Liquidated Loan will be zero immediately following the Distribution
Date that follows the Prepayment Period in which such Mortgage Loan becomes a
Liquidated Loan.
The "Subordinated Amount" with respect to any Distribution Date is the
amount (not less than zero), if any, by which (i) Pool Stated Principal Balance
immediately following such Distribution Date exceeds (ii) the aggregate Class
Certificate Principal Balance of the Certificates as of such Distribution Date
after giving effect to the payment of the Principal Distribution Amount on such
Distribution Date.
A "Subordination Deficiency Amount" with respect to any Distribution Date
is the amount, if any, by which the Required Subordinated Amount as of such
Distribution Date exceeds the Subordinated Amount as of such Distribution Date
before taking into account the payment of any related Subordination Increase
Amounts on such Distribution Date.
A "Subordination Deficit" with respect to any Distribution Date is the
amount, if any, by which (i) the aggregate Class Certificate Principal Balance
of the Certificates as of such Distribution Date, after giving effect to the
payment of the Principal Distribution Amount on such Distribution Date (except
for any payment to be made as to principal constituting a related Insured
Payment), exceeds (ii) the Pool Stated Principal Balance immediately following
such Distribution Date.
A "Subordination Increase Amount" with respect to any Distribution Date is
the lesser of (a) the Subordination Deficiency Amount as of such Distribution
Date (after taking into account the payment of the Principal Distribution Amount
on such Distribution Date (other than any Subordination Increase Amount)) and
(b) the amount of Net Monthly Excess Cashflow on such Distribution Date.
The "Subordination Reduction Amount" with respect to any Distribution Date
equals the lesser of (i) the Excess Subordinated Amount for such Distribution
Date and (ii) the sum, without duplication, of the amounts specified in clauses
(b)(ii) through (v) and (vii) of the definition of "Principal Distribution
Amount" above.
The "Substitution Adjustment Amount" as of the date of substitution by the
Seller of one or more Replacement Mortgage Loans for one or more Mortgage Loans
that are removed from the Mortgage Pool equals the amount (if any) by which the
aggregate principal balance of such Replacement Mortgage Loans is less than the
aggregate Stated Principal Balance (after application of the scheduled principal
portion of the monthly payments due in the month of substitution) of all such
removed Mortgage Loans.
[CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period for the Variable Rate Certificates (each
such date, an "LIBOR Determination Date"), the Trustee will determine the London
interbank offered rate for one-month United States dollar deposits ("One-Month
LIBOR") for such Accrual Period for the Variable Rate Certificates on the basis
of the offered rates of the Reference Banks for one-month United States dollar
deposits, as such rates appear on [the Reuters Screen LIBO Page,] as of 11:00
a.m. (London time) on such LIBOR Determination Date. As used in this section,
"LIBOR Business Day" means a day on which banks are open for dealing in foreign
currency and exchange in London and New York City; ["Reuters Screen LIBO Page"]
means the display designated as page "LIBO" on the [Reuters Monitor Money Rates
Service] (or such other page as may replace the LIBO page on that service for
the purpose of displaying London interbank offered rates of major banks); and
"Reference Banks" means four leading banks engaged in transactions in Eurodollar
deposits in the international Eurocurrency market (i) with an established place
of business in London, (ii) whose quotations appear on the Reuters Screen LIBO
Page on the LIBOR Determination Date in question, (iii) which have been
designated as such by the Trustee and (iv) not controlling, controlled by, or
under common control with, the Depositor, Norwest Bank or any successor Master
Servicer.
On each Interest Determination Date, One-Month LIBOR for the related
Accrual Period for the Variable Rate Certificates will be established by the
Trustee as described in the Prospectus under "Description of the
Securities--Indices Applicable to Floating Rate and Inverse Floating Rate
Classes--LIBOR."
The establishment of One-Month LIBOR on each Interest Determination Date by
the Trustee and the Trustee's calculation of the rates of interest applicable to
the Variable Rate Certificates for the related Accrual Period shall (in the
absence of manifest error) be final and binding.]
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will forward to each
Certificateholder, the Master Servicer, the Depositor and the Certificate
Insurer a statement generally setting forth, among other information:
(i) the amount of the related distribution to Holders of each
Class of Offered Certificates allocable to principal, separately
identifying (A) the aggregate amount of any Principal Prepayments
included therein, and (B) the aggregate of all scheduled payments of
principal included therein;
(ii) the amount of such distribution to Holders of each Class of
Offered Certificates allocable to interest;
(iii) the amount of any Insured Payment included in the amounts
distributed to each Class of Offered CertificateholderHolders of
Offered Certificates on such Distribution Date;
(iv) the Carry-Forward Amount;
(v) the Class Certificate Principal Balance of each Class of
Offered Certificates after giving effect to the distribution of
principal on such Distribution Date;
(vi) the Pool Stated Principal Balance for the following
Distribution Date;
(vii) the Required Subordinated Amount and the Subordinated
Amount as of such Distribution Date;
(viii) the amount of the Servicing Fee paid to or retained by the
Master Servicer;
(ix) the Pass-Through Rate for the [Class A-1 Certificates and
the Class A-2 Certificates] for such Distribution Date;
(x) the amount of Advances included in the distribution to the
Certificates on such Distribution Date;
(xi) the number and aggregate principal amounts of Mortgage Loans
(A) delinquent (exclusive of Mortgage Loans in foreclosure) (1) 30
days, (2) 31 to 60 days, (3) 61 to 90 days and (4) 91 or more days,
and (B) in foreclosure and delinquent (1) 30 days, (2) 31 to 60 days,
(3) 61 to 90 days and (4) 91 or more days, in each case as of the
close of business on the last day of the calendar month preceding such
Distribution Date;
(xii) with respect to any Mortgage Loan that became an REO
Property during the preceding calendar month, the loan number, Stated
Principal Balance of such Mortgage Loan as of the close of business on
the Determination Date preceding such Distribution Date and the date
of acquisition thereof;
(xiii) the total number and principal balance of any REO
Properties as of the close of business on the Determination Date
preceding such Distribution Date;
(xiv) the aggregate Stated Principal Balance of all Liquidated
Loans and the aggregate of all Realized Losses relating thereto;
(xv) with respect to any Liquidated Loan, the loan number, Stated
Principal Balance and Realized Losses relating thereto; and
(xvi) the amount of any Subordination Deficiency Amount after
giving effect to the distribution of principal on such Distribution
Date.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each Certificateholder of
record during the previous calendar year a statement containing information
necessary to enable Certificateholders to prepare their tax returns. Such
statements will not have been examined and reported upon by an independent
public accountant.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Depositor, the
Master Servicer, the Seller and the Trustee, without the consent of
Certificateholders but only with the consent of the Certificate Insurer, for any
of the purposes set forth under "The Agreements--Amendment" in the Prospectus.
In addition, the Pooling and Servicing Agreement may be amended by the
Depositor, the Master Servicer, the Seller and the Trustee with the consent of
the Certificate Insurer and the Holders of a Majority in Interest of each Class
of Certificates affected thereby for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Pooling and
Servicing Agreement or of modifying in any manner the rights of the
Certificateholders; provided, however, that no such amendment may (i) reduce in
any manner the amount of, or delay the timing of, payments required to be
distributed on any Certificate without the consent of the Holder of such
Certificate; (ii) adversely affect in any material respect the interests of the
Holders of any Class of Certificates in a manner other than as described in
clause (i) above, without the consent of the Holders of Certificates of such
Class evidencing, as to such Class, Percentage Interests aggregating 66%; or
(iii) reduce the aforesaid percentage of aggregate outstanding principal amounts
of Certificates of each Class, the Holders of which are required to consent to
any such amendment, without the consent of the Holders of all Certificates of
such Class.
OPTIONAL TERMINATION
[The Seller, the MasterDepositor and the Master Servicer] will have the
right to repurchase all remaining Mortgage Loans and REO Properties in the Trust
Fund and thereby effect early retirement of all the Certificates, subject to the
Pool Stated Principal Balance of the Mortgage Loans and REO Properties at the
time of repurchase being less than or equal to [510%] of Cut-off Date Pool
Principal Balance (the "Optional Termination Date"). Any such purchase of
Mortgage Loans requires the consent of the Certificate Insurer if it would
result in a draw on the Certificate Insurance Policy. In the event that the
Master Servicer does not exercise this option and the Certificate Insurer did
not refuse consenting to such option, the Certificate Insurer will have the
option to purchase, in whole, the Mortgage Loans and REO Properties, if any,
remaining in the Trust Fund on any such Distribution Date. In the event such
option is exercised by the Master Servicer or the Certificate Insurer, the
repurchase will be made at a price equal to the sum of (i) 100% of the Stated
Principal Balance of each Mortgage Loan (other than in respect of REO Property)
plus accrued interest thereon at the applicable Mortgage Rate (or, if such
option is exercised by the Master Servicer, at the applicable Net Mortgage
Rate)Rate, (ii) the appraised value of any REO Property (up to the Stated
Principal Balance of the related Mortgage Loan), (iii) any unreimbursed
out-of-pocket costs and expenses and the principal portion of Advances, in each
case previously incurred by the Master Servicer in the performance of its
servicing obligations and (iv) all amounts owed to the Certificate Insurer.
Proceeds from such repurchase will be included in Available Funds and will be
distributed to the Certificateholders. Any repurchase of the Mortgage Loans and
REO Properties will result in an early retirement of the Certificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Mortgage Loan which is delinquent in payment by 91 days or more,
the Master Servicer may, at its option, purchase such Mortgage Loan from the
Trust Fund at a price equal to 100% of the Stated Principal Balance thereof plus
accrued interest thereon at the applicable Mortgage Rate net of the Servicing
Fee for such Mortgage Loan from the date through which interest was last paid by
the related mortgagor or advanced to the first day of the month in which such
amount is to be distributed.
EVENTS OF DEFAULT; MASTER SERVICER TERMINATION TRIGGER EVENT
Events of Default will consist of: (i) any failure by the Master Servicer
to deposit in the Certificate Account or the Distribution Account the required
amounts or remit to the Trustee any payment (including an Advance required to be
made under the terms of the Pooling and Servicing Agreement) which continues
unremedied for five Business Days after written notice of such failure shall
have been given to the Master Servicer by the Trustee, the Certificate Insurer
or the Depositor, or to the Master Servicer and the Trustee by the Holders of
Certificates evidencing not less than 25% of the Voting Rights evidenced by the
Certificates; (ii) any failure by the Master Servicer to observe or perform in
any material respect any other of its covenants or agreements, or any breach of
a representation or warranty made by the Master Servicer, in the Pooling and
Servicing Agreement, which continues unremedied for 60 days after the giving of
written notice of such failure to the Master Servicer by the Trustee, the
Certificate Insurer or the Depositor, or to the Master Servicer and the Trustee
by the Holders of Certificates evidencing not less than 25% of the Voting Rights
evidenced by the Certificates; or (iii) insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, and certain
actions by or on behalf of the Master Servicer indicating its insolvency or
inability to pay its obligations. A "Master Servicer Termination Trigger Event"
will occur if certain loss or delinquency levels are exceeded with respect to
the Mortgage Loans, as described in the Insurance Agreement. As of any date of
determination, (i) Holders of the Offered Certificates will be allocated a
percentage of all of the Voting Rights equal to 100% minus the fraction
(expressed as a percentage) whose numerator is the sum of the Required
Subordinated Amounts for each Certificate Group on such date and whose
denominator is the Pool Stated Principal Balance on such date and (ii) Holders
of the Residual Certificates will in the aggregate be allocated all of the
remaining Voting Rights. Voting Rights will be allocated among the Certificates
of each such class in accordance with their respective Percentage Interests.
RIGHTS UPON EVENT OF DEFAULT OR MASTER SERVICER TERMINATION
TRIGGER EVENT
So long as an Event of Default under the Pooling and Servicing Agreement
remains unremedied, the Trustee shall, but only upon the receipt of instructions
from the Certificate Insurer or the Holders of Certificates having not less than
25% of the Voting Rights evidenced by the Certificates (with the prior written
consent of the Certificate Insurer), terminate all of the rights and obligations
of the Master Servicer under the Pooling and Servicing Agreement and in and to
the Mortgage Loans, whereupon the Trustee will succeed to all of the
responsibilities and duties of the Master Servicer under the Pooling and
Servicing Agreement, including the obligation to make Advances. If a Master
Servicer Termination Trigger Event occurs, the Trustee shall, but only upon
receipt of written instructions from the Certificate Insurer, terminate all of
the rights and obligations of the Master Servicer under the Pooling and
Servicing Agreement and in and to the Mortgage Loans as described in the
preceding sentence. No assurance can be given that termination of the rights and
obligations of the Master Servicer under the Pooling and Servicing Agreement
would not adversely affect the servicing of the Mortgage Loans, including the
delinquency experience of the Mortgage Loans.
No Certificateholder, solely by virtue of such Holder's status as a
Certificateholder, will have any right under the Pooling and Servicing Agreement
to institute any proceeding with respect thereto, unless such Holder previously
has given to the Trustee written notice of the continuation of an Event of
Default and unless the Holders of Certificates having not less than 25% of the
Voting Rights evidenced by the Certificates have made written request to the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, the Certificate Insurer shall
have consented thereto and the Trustee for 60 days has neglected or refused to
institute any such proceeding.
THE TRUSTEE
____________________ will be the Trustee under the Pooling and Servicing
Agreement. The Depositor and the Master Servicer may maintain other banking
relationships in the ordinary course of business with the Trustee. Offered
Certificates may be surrendered at the Corporate Trust Office of the Trustee
located at _________________________, ________________________, Attention:
______________________ or at such other addresses as the Trustee may designate
from time to time.
THE CERTIFICATE GUARANTY INSURANCE POLICY
The following information and the information under "--The Certificate
Insurer" herein have been supplied by __________________________ (the
"Certificate Insurer") for inclusion in this Prospectus Supplement. No
representation is made by the Underwriters, the Seller, the Master Servicer, the
Depositor or any of their affiliates as to the accuracy or completeness of such
information. Terms defined herein are exclusive to this section and "--The
Certificate Insurer" herein. 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, on behalf of the Owners from the 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 Offered Certificates, unless such
acceleration is at the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the Trust,
the REMIC or the Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
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 Fiscal
Agent (as described below) 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 related Offered 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 related Offered
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, New York City time, on
the later of the Distribution Date on which the related Deficiency Amount (as
defined below) is due or the second Business Day following receipt in New York,
New York on a Business Day by ___________, as Fiscal Agent for the Certificate
Insurer or any successor fiscal agent appointed by the Certificate Insurer (the
"Fiscal Agent") of a Notice (as described below); provided that if such Notice
is received after 12:00 noon, New York City time, on such Business Day, it will
be deemed to be received on the following Business Day. If any such Notice
received by the 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 Fiscal Agent for purposes of
this paragraph, and the Certificate Insurer or the 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 Policy, unless otherwise stated therein,
will be disbursed by the 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 payment of such Insured Payment and legally
available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the 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:
"Agreement" means the Pooling and Servicing Agreement, dated as
of ___________, 199_ among Directors Acceptance Corporation, as
DepositoDirectors Asset Conduit Corporation, as Depositor, Norwest
Mortgage, Inc., as Seller, Norwest Bank Minnesota, National
Association, as Master Servicer, and ____________________, as Trustee,
without regard to any amendment or supplement thereto, unless such
amendment or supplement has been approved in writing by the
Certificate Insurer.
"Business Day" means any day other than a Saturday, a Sunday or a
day on which the Certificate Insurer or 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 or the Certificate
Insurer is located are authorized or obligated by law or executive
order to close.
"Deficiency Amount" means, as of any Distribution Date, the
Available Funds Shortfall for the related Loan Group.
"Insured Payment" means (i) as of any Distribution Date, any
Deficiency Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit
A attached to the 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 Holder (as defined in the Pooling and
Servicing Agreement) of any Offered Certificate who, on the applicable
Distribution Date, is entitled under the terms of the Offered
Certificates to payment thereunder.
"Preference Amount" means any amount previously distributed to an
Owner on the related Offered 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 Agreement as of the date of execution of the
Certificate Insurance Policy, without giving effect to any subsequent amendment
or modification to the 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 Fiscal Agent may be made at the address listed below for the Fiscal Agent or
such other address as the Certificate Insurer shall specify in writing to the
Trustee.
The notice address of the Fiscal Agent is ____________________________
_____________________, Attention: __________________________, or such other
address as the Fiscal Agent shall specify in writing to the Trustee.
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 Policy is not covered
by the Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premium on the Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to maturity of the
Offered Certificates.
THE CERTIFICATE INSURER
The Certificate Insurer [______________________________________]. New York
has laws prescribing minimum capital requirements, limited classes and
concentrations of investments and requiring the approval of policy rates and
forms. State laws also regulate the amount of both the aggregate and individual
risks that may be insured, the payment of dividends by the Certificate Insurer,
changes in control and transactions among affiliates. Additionally, the
Certificate Insurer is required to maintain contingency reserves on its
liabilities in certain amounts and for certain periods of time.
The consolidated financial statements of the Certificate Insurer, a wholly
owned subsidiary of _________, and its subsidiaries as of December 31, 199_ and
December 31, 199_ and for the three years 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_ and the
consolidated financial statements of the Certificate Insurer and its
subsidiaries for the nine months ended September 30, 199_ and for the periods
ending September 30, 199_ and September 30, 199_ included in the Quarterly
Report on Form 10-Q of _________ for the period ending September 30, 199_, are
hereby incorporated by reference into this Prospectus Supplement and shall be
deemed to be a part hereof. Any statement contained in a document incorporated
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 and its subsidiaries
included in documents filed by _________ pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Offered Certificates shall be deemed to be incorporated by reference into
this Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP").
SAP
-----------------------------------------
DECEMBER SEPTEMBER
31, 199_ 30, 199_
-----------------------------------------
(AUDITED) (UNAUDITED)
(IN MILLION)
Admitted Assets........................
Liabilities............................
Capital and Surplus....................
----------------------------------------
GAAP
----------------------------------------
DECEMBER SEPTEMBER
31, 199_ 30, 199_
----------------------------------------
(AUDITED) (UNAUDITED)
(IN MILLION)
Assets.................................
Liabilities............................
Capital and Surplus....................
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 199_ year-end
audited financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Certificate Insurer. The
address of the Certificate Insurer is ________________, ____________________.
The telephone number of the Certificate Insurer is (___) ___-____.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Certificate Insurance Policy and the
Certificate Insurer set forth under the heading "Description of the
Certificates--The Certificate Guaranty Insurance Policy" herein. Additionally,
the Certificate Insurer makes no representation regarding the Offered
Certificates or the advisability of investing in the Offered Certificates.
_______________________________ rates the claims paying ability of the
Insurer "___."
_______________________________ rates the claims paying ability of the
Certificate Insurer "___."
_______________________________ rates the claims paying ability of the
Certificate Insurer "___."
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating aRating Agency's current assessment of
the creditworthiness of the Certificate Insurer and its ability to pay claims on
its policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating aRating Agency.
The above ratings are not recommendations to buy, sell or hold the Offered
Certificates, and such ratings may be subject to revision or withdrawal at any
time by the rating aRating Agencies. Any downward revision or withdrawal of any
of the above ratings may have an adverse effect on the market price of the
Offered Certificates. The Insurer does not guaranty the market price of the
Offered Certificates nor does it guaranty that the ratings on the Offered
Certificates will not be revised or withdrawn.
RIGHTS OF THE CERTIFICATE INSURER
The Pooling and Servicing Agreement provides that the Trustee is permitted
to distribute Insured Payments only for purposes of paying the Holders of the
Offered Certificates any Insured Distribution Amount for which a claim was made
to the Certificate Insurer.
In the event an Insured Payment is made, the Certificate Insurer, until all
such Insured Payments have been fully reimbursed, will be entitled to receive
the Reimbursement Amount.
Provided no Certificate Insurer Default has occurred and is continuing, the
Certificate Insurer shall have the right to direct certain actions of the Master
Servicer and Trustee and shall control all Certificateholder consents, approvals
and directions under the Pooling and Servicing Agreement.
The Certificate Insurance Policy does not guarantee to the Holders of the
Offered Certificates any specified rate of Principal Prepayments.
YIELD, MATURITY AND PREPAYMENT AND MATURITY CONSIDERATIONS
GENERAL
[The effective yields to the holders of the [Class A-3 Certificates, Class
A-4 Certificates and Class A-5 Certificates] will be lower than the yields
otherwise produced by the applicable rate at which interest is passed through to
such holders and the purchase price of such Certificates because monthly
distributions will not be payable to such holders until the [25th] day (or, if
such day is not a Business Day, the following Business Day) of the month
following the month in which interest accrues on the Mortgage Loans (without any
additional distribution of interest or earnings thereon in respect of such
delay).]
[Each Accrual Period for the [Class A-1 Certificates and the Class A-2
Certificates] will consist of the actual number of days elapsed from the [25th]
day of the month preceding the month of the applicable Distribution Date (or, in
the case of the first Accrual Period, from the Closing Date) through the [24th]
day of the month of such Distribution Date.]
INTEREST RATE FLUCTUATIONS
[The yield to investors on the Class A-1 Certificates will be sensitive to,
among other things, the level of One- Month LIBOR, the level of the Mortgage
Index on each Interest Determination Date and to the additional limitations
specified herein affecting the Pass-Through Rate for the Class A-1 Certificates.
As described herein, the Pass-Through Rate for the Class A-1 Certificates may in
no event exceed the applicable Class A-1 Available Funds Cap, which depends, in
large part, on the Net Mortgage Rates of the Mortgage Loans in effect during the
preceding calendar month. Disproportionate principal payments (whether resulting
from full or partial prepayments) on Mortgage Loans having Net Mortgage Rates
higher or lower than the Pass-Through Rate for the Class A-1 Certificates (as
calculated solely pursuant to clauses (i) and (ii) of the definition of
"Pass-Through Rate" for the Class A-1 Certificates herein) could therefore
affect the yield on such Certificates. In particular, the yield to maturity of
the Class A-1 Certificates could be lower than that otherwise produced if
disproportionate principal payments (including prepayments) are made on Mortgage
Loans having Net Mortgage Rates that exceed the related Pass-Through Rate.
Although each of the Mortgage Loans bears interest at an adjustable rate, the
interest rate on a majority of such Mortgage Loans will not adjust for two
years, and thereafter, adjustments to such rate is subject to a Periodic Rate
Cap and a Maximum Mortgage Rate. If the Mortgage Index changes substantially
between Adjustment Dates, the adjusted Mortgage Rate on a related Mortgage Loan
may not equal the Mortgage Index plus the related Gross Margin due to the
constraint of such caps. In such event, the related Net Mortgage Rate will be
less than would have been the case in the absence of such caps.]
[The yield to investors on the Class A-2 Certificates will be sensitive to,
among other things, the level of One- Month LIBOR, and to the additional
limitations specified herein affecting the Pass-Through Rate for the Class A-2
Certificates. As described herein, the Pass-Through Rate for the Class A-2
Certificates may in no event exceed the applicable Class A-2 Net Funds Cap,
which depends, in large part, on the Net Mortgage Rates of the Mortgage Loans in
effect during the preceding calendar month. Disproportionate principal payments
(whether resulting from full or partial prepayments) on Mortgage Loans having
Net Mortgage Rates higher or lower than the Pass-Through Rate for the Class A-2
Certificates (as calculated solely pursuant to clauses (i) and (ii) of the
definition of "Pass-Through Rate" for the Class A-2 Certificates herein) could
therefore affect the yield on such Certificates. In particular, the yield to
maturity of the Class A-2 Certificates could be lower than that otherwise
produced if disproportionate principal payments (including prepayments) are made
on Mortgage Loans having Net Mortgage Rates that exceed the related Pass-Through
Rate.]
[Although the Mortgage Rates on the Mortgage Loans also are subject to
adjustment, the Mortgage Rates adjust less frequently than the Class A-1
Pass-Through Rate and adjust by reference to the Mortgage Index. Changes in One-
Month LIBOR may not correlate with changes in the Mortgage Index and also may
not correlate with prevailing interest rates. It is possible that an increased
level of One-Month LIBOR could occur simultaneously with a lower level of
prevailing interest rates which would be expected to result in faster
prepayments, thereby reducing the weighted average life of the Class A-1
Certificates. In addition, the Mortgage Rate applicable to the Mortgage Loans
and any Adjustment Date will be based on the Mortgage Index value most recently
announced generally as of a date 45 days prior to such Adjustment Date. Thus, if
the Mortgage Index value with respect to a Mortgage Loan rises, the lag in time
before the corresponding Mortgage Rate increases will, all other things being
equal, slow the upward adjustment of the Class A-1 Available Funds Cap. See "The
Mortgage Pool" herein.]
[Although the Pooling and Servicing Agreement provides a mechanism to pay
any Class A-1 Basis Risk Carryover Amount, there is no assurance that funds will
be available to pay such amount. In addition, the Certificate Insurance Policy
will not cover the payment of, and the ratings assigned to the Class A-1
Certificates do not address the likelihood of the payment of, any such amount.]
The extent to which the yield to maturity of an Offered Certificate may
vary from the anticipated yield will depend upon the degree to which it is
purchased at a discount or premium and, correspondingly, the degree to which the
timing of payments thereon is sensitive to prepayments, liquidations and
purchases of the Mortgage Loans. In particular, in the case of an Offered
Certificate purchased at a discount, an investor should consider the risk that a
slower than anticipated rate of principal payments, liquidations and purchases
of the Mortgage Loans could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any Offered Certificate
purchased at a premium, the risk that a faster than anticipated rate of
principal payments, liquidations and purchases of such Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield.
DEFAULTS AND DELINQUENT PAYMENTS
The yield to maturity of the Offered Certificates will be sensitive to
defaults and delinquent payments on the Mortgage Loans. If a purchaser of an
Offered Certificate calculates its anticipated yield based on an assumed rate of
default and amount of losses that is lower than the default rate and amount of
losses actually incurred and not covered by the Certificate Insurance Policy,
its actual yield to maturity will be lower than that so calculated and could, in
the event of substantial losses, be negative. The timing of Realized Losses that
are not covered by payments under the Certificate Insurance Policy will also
affect an investor's actual yield to maturity even if the rate of defaults and
severity of such losses are consistent with an investor's expectations. Realized
Losses will reduce the Available Funds which will slow the amortization of the
related Offered Certificates. A draw on the Certificate Insurance Policy in
respect of principal will not be made unless a Subordination Deficit exists.
Thus, Holders of the Offered Certificates may not receive reimbursement for
Realized Losses in the month following the occurrence of such losses. However,
such Holders are entitled to receive ultimate reimbursement for Realized Losses
under the Certificate Insurance Policy. In general, the earlier a loss occurs,
the greater is the effect on an investor's yield to maturity. There can be no
assurance as to the delinquency, foreclosure or loss experience with respect to
the Mortgage Loans. Because the Mortgage Loans are underwritten in accordance
with standards less stringent than those generally acceptable to FNMA and FHLMC
with regard to a borrower's credit standing and repayment ability, the risk of
delinquencies with respect to, and losses on, the Mortgage Loans will be greater
than that of mortgage loans underwritten in accordance with FNMA and FHLMC
standards.
PREPAYMENT CONSIDERATIONS AND RISKS
The rates of principal payments on the Offered Certificates, the aggregate
amount of distributions on the Offered Certificates and the yield to maturity of
the Offered Certificates will be related to, among other things, the rate and
timing of payments of principal on the Mortgage Loans. The rate of principal
payments on the Mortgage Loans will in turn be affected by the amortization
schedules of the Mortgage Loans [(which, will change periodically to accommodate
adjustments to the Mortgage Rates)] and by the rate of Principal Prepayments
thereon (including for this purpose, prepayments resulting from (i) refinancing,
(ii) liquidations of the Mortgage Loans due to defaults, casualties and
condemnations and (iii) repurchases by the Depositor or the Seller or purchases
by the Master Servicer). The Mortgage Loans may be prepaid by the mortgagors at
any time; [however, it is expected that no more than ____% of the Mortgage Loans
(by Pool Stated Principal Balance as of the Cut-off Date), will have a
prepayment charge which may be applied to full prepayments by borrowers during
the first [five] years after origination under the limited circumstances
described above under "The Mortgage Pool--General"]. Increases in the required
monthly payments on the Mortgage Loans in excess of those assumed in
underwriting such Mortgage Loans may result in a default rate higher than that
which may have been experienced had the Mortgage Loans borne fixed interest
rates. The Mortgage Loans are subject to the "due-on-sale" provisions included
therein.
Prepayments, liquidations and purchases of the Mortgage Loans (including
any optional purchase by the Master Servicer of a defaulted Mortgage Loan or any
purchase by the Master Servicer or the Certificate Insurer of the remaining
Mortgage Loans and REO Property in connection with the optional termination of
the Trust Fund) will, subject to certain conditions, result in distributions to
the Offered CertificateholderHolders of Offered Certificates of principal
amounts that would otherwise be distributed over the remaining terms of the
Mortgage Loans. Since the rate of payment of principal on the Mortgage Loans
will depend on future events and a variety of factors, no assurance can be given
as to such rate or the rate of Principal Prepayments.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in
mortgagors"' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. No assurances can be given
as to the rate of prepayments on the Mortgage Loans in stable or changing
interest rate environments. [In general, if prevailing interest rates were to
fall significantly below the Mortgage Rates on the Mortgage Loans or the
Mortgage Rates on the 2/28 Mortgage Loans prior to their first Adjustment Dates,
such Mortgage Loans could be subject to higher prepayment rates than if
prevailing interest rates were to remain at or above the Mortgage Rates on such
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on the Mortgage Loans would generally be
expected to decrease.]
[All of the Mortgage Loans are adjustable rate mortgage loans ("ARMs"). The
rate of principal prepayments with respect to ARMs has fluctuated in recent
years. As is the case with conventional fixed-rate mortgage loans, ARMs may be
subject to a greater rate of principal prepayments in a declining interest rate
environment. For example, if prevailing interest rates were to fall
significantly, ARMs could be subject to higher prepayment rates than if
prevailing interest rates were to remain constant because the availability of
fixed-rate mortgage loans at competitive interest rates may encourage mortgagors
to refinance their ARMs to "lock in" lower fixed interest rates. The existence
of the applicable Periodic Rate Cap and Maximum Mortgage Rate also may affect
the likelihood of prepayments resulting from refinancings. In addition, the 2/28
Mortgage Loans may experience prepayments at rates which differ from the other
ARMs. Finally, the delinquency and loss experience of the ARMs may differ from
that on the fixed rate Mortgage Loans because the amount of the monthly payments
on the ARMs are subject to adjustment on each Adjustment Date. If such different
experience were to occur, the prepayment experience on the Class A-1
Certificates may differ from that on the other classes of Offered Certificates.]
The timing of changes in the rate of prepayments on the Mortgage Loans may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the Mortgage Loans, the
greater the effect on an 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 the period immediately
following the issuance of the Offered Certificates may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
OVERCOLLATERALIZATION PROVISIONS
The operation of the overcollateralization provisions of the Pooling and
Servicing Agreement will affect the weighted average lives of the Offered
Certificates and consequently the yields to maturity of such
CertificatesCertificates purchased at a discount or premium. Unless and until
the Subordinated Amount equals the Required Subordinated Amount, Net Monthly
Excess Cashflow will be applied as distributions of principal of the Offered
Certificates, thereby reducing the weighted average lives thereof. The actual
Subordinated Amount may change from Distribution Date to Distribution Date
producing uneven distributions of Net Monthly Excess Cash Flow. There can be no
assurance as to when or whether any Subordinated Amount will equal the Required
Subordinated Amount.
Net Monthly Excess Cashflow generally is a function of the excess of
interest collected or advanced on the Mortgage Loans over the interest required
to pay interest on the Offered Certificates, the premium for the Certificate
Insurance Policy and certain Trust Fund expenses. Mortgage Loans with higher Net
Mortgage Rates will contribute more interest to the Net Monthly Excess Cashflow.
Mortgage Loans with higher Net Mortgage Rates may prepay faster than Mortgage
Loans with relatively lower Net Mortgage Rates in response to a given change in
market interest rates. Any such disproportionate prepayments of Mortgage Loans
with higher Net Mortgage Rates may adversely affect the amount of Net Monthly
Excess Cashflow available to make accelerated payments of principal of the
Offered Certificates.
As a result of the interaction of the foregoing factors, the effect of the
overcollateralization provisions on the weighted average lives of the Offered
Certificates may vary significantly over time and, from class to class.
[LIMITATION ON ADJUSTMENTS
Although each of the Mortgage Loans bears interest at an adjustable
Mortgage Rate, a majority of the Mortgage Rates will not adjust for two years.
In addition, the adjustments of the Mortgage Rate for any such Mortgage Loan
will not exceed the Periodic Rate Cap, and the Mortgage Rate will in no event
exceed the Maximum Mortgage Rate for such Mortgage Loan, regardless of the level
of interest rates generally or the rate otherwise produced by adding the Index
and the Gross Margin. In addition, such adjustments will be subject to rounding
to the nearest [one-eighth] of 1%. Substantially all of the ARMs were originated
at rates that were lower than the sum of the then-applicable Mortgage Index and
the related Gross Margin. Such Mortgage Loans are more likely to be subject to
the applicable Periodic Rate Cap on their first, and possibly subsequent,
Adjustment Dates.]
ADDITIONAL INFORMATION
The Depositor intends to file certain additional yield tables and other
computational materials with respect to one or more Classes of Offered
Certificates with the Securities and Exchange Commission in a report on Form 8-K
to be dated ___________, 199_. Such tables and materials were prepared by the
Underwriters at the request of certain prospective investors, based on
assumptions provided by, and satisfying the special requirements of, such
prospective investors. Such tables and assumptions may be based on assumptions
that differ from the Structuring Assumptions. Accordingly, such tables and other
materials may not be relevant to or appropriate for investors other than those
specifically requesting them.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments on the Mortgage Loans on the weighted average lives of the
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Mortgage Loans.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Offered Certificates
will be affected primarily by the rate at which principal on the Mortgage Loans
is paid. Principal payments on the Mortgage Loans may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes repayments and liquidations due to default or other dispositions of the
Mortgage Loans). Prepayments on contractmortgage loans may be measured by a
prepayment standard or model. The model used in this Prospectus Supplement
("Prepayment Model") is based on an assumed rate of prepayment each month of the
then unpaid principal balance of a pool of mortgage loans similar to the
Mortgage Loans. 100% of the Prepayment Model assumes a conditional prepayment
rate ("CPR") of 2.5% per annum of the then unpaid principal balance of such
mortgage loans in the first month of the life of the mortgage loans and an
additional 2.5% per annum in each month thereafter until the 10th month.
Beginning in the 10th month and in each month thereafter during the life of the
mortgage loans, 100% of the Prepayment Model for the Mortgage Loans assumes a
CPR of 25%. As used in the following tables "0% of the Prepayment Model" assumes
no prepayments on the Mortgage Loans; "100% of the Prepayment Model" assumes the
Mortgage Loans will prepay at rates equal to 100% of the Prepayment Model
assumed prepayment rates; "175% of the Prepayment Model" assumes the Mortgage
Loans will prepay at rates equal to 175% of the Prepayment Model assumed
prepayment rates; "250% of the Prepayment Model" assumes the Mortgage Loans will
prepay at rates equal to 250% of the Prepayment Model assumed prepayment rates;
and "350% of the Prepayment Model" assumes the Mortgage Loans will prepay at
rates equal to 350% of the Prepayment Model assumed prepayment rates.
There is no assurance, however, that prepayments on the Mortgage Loans will
conform to any level of the Prepayment Model, and no representation is made that
the Mortgage Loans will prepay at the prepayment rates shown or any other
prepayment rate. The rate of principal payments on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors,
including the level of interest rates. Other factors affecting prepayment of
mortgage loans include changes in obligors' housing needs, job transfers and
unemployment. In the case of mortgage loans in general, if prevailing interest
rates fall significantly below the interest rates on such mortgage loans, the
mortgage loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above the rates borne by such mortgage
loans. Conversely, if prevailing interest rates rise above the interest on such
mortgage loans, the rate of prepayment would be expected to decrease.
The tables set forth below assume that there are no delinquencies on the
Mortgage Loans and that there will be sufficient Available Funds to distribute
interest on the Certificates and the Principal Distribution Amount to the
Certificateholders then entitled thereto.
The percentages and weighted average lives in the following tables were
determined assuming that (i) scheduled interest and principal payments on the
Mortgage Loans are received in a timely manner and prepayments are made at the
indicated percentages of the Prepayment Model set forth in the tables (except
that with respect to the _________ 199_ Distribution Date no prepayments were
received); (ii) the Master ServicDepositor or the Seller does exercise its right
of optional termination described above; (iii) the Mortgage Loans will, as of
the Cut-off Date, have the characteristics set forth below under "Assumed
Mortgage Loan Characteristics"; (iii) a servicing fee of [0.50%] per annum will
be paid to the Master Servicer; (iv) the closing date of the sale of the Offered
Certificates is as set forth in "Summary of Terms" herein; and (v) [the Mortgage
Index is ______% per annum]. No representation is made that the Mortgage Loans
will experience delinquencies or losses at the respective rates assumed above or
at any other rates.
<TABLE>
<CAPTION>
[ASSUMED MORTGAGE LOAN CHARACTERISTICS
INITIAL ORIGINAL REMAINING
CURRENT GROSS TERM TO TERM TO NET RATE RATE
AMORTIZATION PRINCIPAL MORTGAGE MATURITY MATURITY GROSS MAXIMUM PERIODIC ADJUSTMENT ADJUSTMENT
METHODOLOGY BALANCE RATE (MONTHS) (MONTHS) MARGIN RATE CAP RATE CAP DATE FREQUENCY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Level Pay............. $___________ _____% _____% _____% _____%
Level Pay............. $___________ _____% _____% _____% _____%
Level Pay............. $___________ _____% _____% _____% _____%
Level Pay............. $___________ _____% _____% _____% _____%
Level Pay............. $___________ _____% _____% _____% _____%
Level Pay............. $___________ _____% _____% _____% _____%
</TABLE>
<TABLE>
<CAPTION>
[ASSUMED MORTGAGE LOAN CHARACTERISTICS
ORIGINAL REMAINING ORIGINAL
CURRENT GROSS TERM TO TERM TO AMORTIZATION
AMORTIZATION PRINCIPAL MORTGAGE MATURITY MATURITY TERM
METHODOLOGY BALANCE RATE (MONTHS) (MONTHS) (MONTHS)
<S> <C> <C> <C> <C> <C>
Level Pay............................. $____________ ____%
Level Pay............................. $____________ ____%
Balloon............................... $____________ ____%
Level Pay............................. $____________ ____%
</TABLE>
Since the tables were prepared on the basis of the assumptions in the
preceding paragraph, there are discrepancies between the characteristics of the
actual Mortgage Loans and the characteristics of the mortgage loans assumed in
preparing the tables. Any such discrepancy may have an effect upon the
percentages of the OriginInitial Class Certificate Principal Balance for the
Offered Certificates outstanding and weighted average lives of such Classes of
Certificates set forth in the tables. In addition, since the actual Mortgage
Loans and the Trust Fund have characteristics which differ from those assumed in
preparing the tables set forth below, the distributions of principal on the
Offered Certificates may be made earlier or later than as indicated in the
tables.
It is not likely that the Mortgage Loans will prepay at any constant
percentage of the Prepayment Model to maturity or that all the Mortgage Loans
will prepay at the same rate. In addition, the diverse remaining terms to
maturity of the Mortgage Loans (which include recently originated Mortgage
Loans) could produce slower distributions of principal than as indicated in the
tables at the various percentages of the Prepayment Model specified even if the
weighted average remaining term to maturity of the Mortgage Loans is the same as
the weighted average remaining term to maturity of the Assumed Mortgage Loan
Characteristics.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
Based on the foregoing assumptions, the following tables indicate the
percentage of the OriginInitial Class Certificate Principal Balance of the
Offered Certificates that would be outstanding after each of the dates shown at
the indicated percentages of the Prepayment Model and the corresponding weighted
average lives of such Classes of Certificates.
<PAGE>
PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE OF
THE [CLASS A-1]
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT MODEL SET FORTH BELOW:
<TABLE>
<CAPTION>
PREPAYMENTS (% OF PREPAYMENT MODEL)
DISTRIBUTION DATE 0% [100%] [175%] [250%] [300%]
- ----------------- -- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Initial Percentage....................................................... 100 100 100 100 100
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
Weighted Average Life (years)(1)
- -------------
(1) The weighted average life of the [Class A-1] Certificates is determined by
(i) multiplying the amount of each principal distribution by the number of
years from the initial date of issuance of the [Class A-1] Certificates to
the related Distribution Date, (ii) summing the results and (iii) dividing
the sum by the initial Class Certificate Principal Balance of the [Class
A-1] Certificates.
</TABLE>
<PAGE>
PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE OF
THE [CLASS A-2]
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT MODEL SET FORTH BELOW:
<TABLE>
<CAPTION>
PREPAYMENTS (% OF PREPAYMENT MODEL)
DISTRIBUTION DATE 0% [100%] [175%] [250%] [300%]
- ----------------- -- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Initial Percentage....................................................... 100 100 100 100 100
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
Weighted Average Life (years)(1)
- -------------
(1) The weighted average life of the [Class A-12] Certificates is determined by
(i) multiplying the amount of each principal distribution by the number of
years from the initial date of issuance of the [Class A-12] Certificates to
the related Distribution Date, (ii) summing the results and (iii) dividing
the sum by the initial Class Certificate Principal Balance of the [Class
A-12] Certificates.
</TABLE>
<PAGE>
PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE OF
THE [CLASS A-3]
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT MODEL SET FORTH BELOW:
<TABLE>
<CAPTION>
PREPAYMENTS (% OF PREPAYMENT MODEL)
DISTRIBUTION DATE 0% [100%] [175%] [250%] [300%]
- ----------------- -- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Initial Percentage....................................................... 100 100 100 100 100
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
Weighted Average Life (years)(1)
- -------------
(1) The weighted average life of the [Class A-13] Certificates is determined by
(i) multiplying the amount of each principal distribution by the number of
years from the initial date of issuance of the [Class A-13] Certificates to
the related Distribution Date, (ii) summing the results and (iii) dividing
the sum by the initial Class Certificate Principal Balance of the [Class
A-13] Certificates.
</TABLE>
<PAGE>
PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE OF
THE [CLASS A-4]
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT MODEL SET FORTH BELOW:
<TABLE>
<CAPTION>
PREPAYMENTS (% OF PREPAYMENT MODEL)
DISTRIBUTION DATE 0% [100%] [175%] [250%] [300%]
- ----------------- -- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Initial Percentage....................................................... 100 100 100 100 100
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
Weighted Average Life (years)(1)
- -------------
(1) The weighted average life of the [Class A-14] Certificates is determined by
(i) multiplying the amount of each principal distribution by the number of
years from the initial date of issuance of the [Class A-14] Certificates to
the related Distribution Date, (ii) summing the results and (iii) dividing
the sum by the initial Class Certificate Principal Balance of the [Class
A-14] Certificates.
</TABLE>
<PAGE>
PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE OF
THE [CLASS A-5]
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF THE
PREPAYMENT MODEL SET FORTH BELOW:
<TABLE>
<CAPTION>
PREPAYMENTS (% OF PREPAYMENT MODEL)
DISTRIBUTION DATE 0% [100%] [175%] [250%] [300%]
- ----------------- -- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Initial Percentage....................................................... 100 100 100 100 100
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
[Month] [year]...........................................................
Weighted Average Life (years)(1)
- -------------
(1) The weighted average life of the [Class A-15] Certificates is determined by
(i) multiplying the amount of each principal distribution by the number of
years from the initial date of issuance of the [Class A-15] Certificates to
the related Distribution Date, (ii) summing the results and (iii) dividing
the sum by the initial Class Certificate Principal Balance of the [Class
A-15] Certificates.
</TABLE>
<PAGE>
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans.
FEDERAL INCOME TAX CONSEQUENCES
[An election will be made to treat the Trust Fund as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. The
Offered Certificates will constitute "regular interests" in the REMICs and the
Residual Certificates will constitute the sole class of "residual interests" in
the REMIC.]
ORIGINAL ISSUE DISCOUNT
[The Offered Certificates may be issued with original issue discount for
federal income tax purposes. For purposes of determining the amount and rate of
accrual of original issue discount and market discount, the Depositor intends to
assume that there will be prepayments on the Mortgage Loans at a rate equal to
[100%] of the Prepayment Model. No representation is made as to whether the
Mortgage Loans will prepay at that rate or any other rate. See "Yield, Maturity
and Prepayment and Maturity Considerations" herein and "Federal Income Tax
Consequences" in the Prospectus.]
[The Offered Certificates may be treated as being issued at a premium. In
such case, the Offered CertificateholderHolders of Offered Certificates may
elect under Section 171 of the Code to amortize such premium under the constant
yield method and to treat such amortizable premium as an offset to interest
income on the Certificates. Such election, however, applies to all the
Certificateholder's debt instruments acquired on or after the first taxable year
in which the election is first made, and should only be made after consulting
with a tax adviser.]
[If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder, such Certificateholder will be permitted to offset such
amounts only against the respective future income, if any, from such
Certificate. Although the tax treatment is uncertain, a Certificateholder may be
permitted to deduct a loss to the extent that such Holder's respective remaining
basis in such Certificate exceeds the maximum amount of future payments to which
such Holder is entitled, assuming no further Principal Prepayments of the
Mortgage Loans are received. Although the matter is not free from doubt, any
such loss might be treated as a capital loss.]
SPECIAL TAX ATTRIBUTES OF THE OFFERED CERTIFICATES
[As is described more fully under "Federal Income Tax Consequences" in the
Prospectus, the Offered Certificates will represent qualifying assets under
Sections 856(c)(5)(A) and 7701(a)(19)(C)(v) of the Code, and net interest income
attributable to the Offered Certificates will be "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code, to the extent the assets of the Trust Fund are assets
described in such sections. The Offered Certificates will represent qualifying
assets under Section 860G(a)(3) if acquired by a REMIC within the prescribed
time periods of the Code.]
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES
[The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund will
engage in any prohibited transactions in which it would recognize a material
amount of net income.]
In addition, certain contributions to a trust fund that elects to be
treated as a REMIC made after the day on which such trust fund issues all of its
interests could result in the imposition of a tax on the trust fund equal to
100% of the value of the contributed property (the "Contributions Tax"). The
Trust Fund will not accept contributions that would subject it to such tax. In
addition, a trust fund that elects to be treated as a REMIC may also be subject
to federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. "Net income from foreclosure property" generally means
gain from the sale of a foreclosure property other than qualifying rents and
other qualifying income for a real estate investment trust. It is not
anticipated that the Trust Fund will recognize net income from foreclosure
property subject to federal income tax.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net income
from foreclosure property or state or local income or franchise tax that may be
imposed on the REMIC arises out of a breach of the Master Servicer's or the
Trustee's obligations, as the case may be, under the Pooling and Servicing
Agreement or then applicable law, such tax will be borne by the Master Servicer
or Trustee in either case out of its own funds. In the event that either the
Master Servicer or the Trustee, as the case may be, fails to pay or is not
required to pay any such tax as provided above, such tax will be paid by the
Trust Fund with amounts otherwise distributable to the Holders of Certificates
in the manner provided in the Pooling and Servicing Agreement. It is not
anticipated that any material state or local income or franchise tax will be
imposed on the Trust Fund.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax
Consequences--REMIC Certificates" in the Prospectus.]
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Offered Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA and/or a plan or other arrangement subject to the
excise tax provisions set forth under Section 4975 of the Code (each of the
foregoing, a "Plan") from engaging in certain transactions involving such Plan
and its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes on prohibited
transactions involving plans described under that Section; ERISA authorizes the
imposition of civil penalties for prohibited transactions involving plans not
covered under Section 4975 of the Code. Any Plan fiduciary which proposes to
cause a Plan to acquire any of the Offered Certificates should consult with its
counsel with respect to the potential consequences under ERISA and the Code of
the Plan's acquisition and ownership of such Certificates. See "ERISA
Considerations" in the Prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Offered Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the Mortgage Loans.
[The U.S. Department of Labor has granted to _____________________ an
administrative exemption (Prohibited Transaction Exemption _____; Exemption
Application No. D-____, __ Fed. Reg. _____ (____)) (the "Exemption") from
certain of the prohibited transaction rules of ERISA and the related excise tax
provisions of Section 4975 of the Code with respect to the initial purchase, the
holding and the subsequent resale by Plans of certificates in pass- through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemption. The Exemption applies to
mortgage loans such as the Mortgage Loans in the Trust Fund.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction
with an unrelated party;
(2) the rights and interest evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust fund;
(3) the certificates acquired by the Plan have received a rating
at the time of such acquisition that is one of the three highest
generic rating categories from Standard & Poor"'s, a division of the
McGraw-Hill Companies ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Rating Co. ("DCR") or Fitch
Investors Service, L.P. ("Fitch");
(4) the trustee must not be an affiliate of any other member of
the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
seller pursuant to the assignment of the loans to the trust fund
represents not more than the fair market value of such loans; the sum
of all payments made to and retained by the servicer and any other
servicer represents not more than reasonable compensation for such
person's services under the agreement pursuant to which the loans are
pooled and reimbursements of such person's reasonable expenses in
connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of
1933.The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of
assets of the type that have been included in other investment
pools;
(ii) certificates in such other investment pools must have
been rated in one of the three highest rating categories of S&P,
Moody's, Fitch or DCR for at least one year prior to the Plan's
acquisition of certificates; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than
Plans for at least one year prior to any Plan's acquisition of
certificates.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust as to which the fiduciary (or
its affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements, (i) in the case of an acquisition in connection with
the initial issuance of certificates, at least fifty percent (50%) of each class
of certificates in which Plans have invested is acquired by persons independent
of the Restricted Group; (ii) such fiduciary (or its affiliate) is an obligor
with respect to five percent (5%) or less of the fair market value of the
obligations contained in the trust; (iii) the Plan's investment in certificates
of any class does not exceed twenty-five percent (25%) of all of the
certificates of that class outstanding at the time of the acquisition; and (iv)
immediately after the acquisition, no more than twenty-five percent (25%) of the
assets of the Plan with respect to which such person is a fiduciary are invested
in certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Exemption does not apply to Plans
sponsored by either Underwriter, the Trustee, the Master Servicer, any obligor
with respect to Mortgage Loans included in the Trust Fund constituting more than
five percent of the aggregate unamortized principal balance of the assets in the
Trust Fund, or any affiliate of such parties (the "Restricted Group").
It is expected that the Exemption will apply to the acquisition and holding
of the Offered Certificates by Plans and that all conditions of the Exemption
other than those within the control of the investors will be met. In addition,
as of the date hereof, there is no single Mortgagor that is the obligor on five
percent (5%) of the Mortgage Loans included in the Trust Fund by aggregate
unamortized principal balance of the assets of the Trust Fund. Prospective Plan
investors should consult with their legal advisors concerning the impact of
ERISA and the Code, the applicability of PTCE 83-1 described in the Prospectus
and the Exemption, and the potential consequences in their specific
circumstances, prior to making an investment in the Offered Certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment prudence and diversification, an investment in
the Offered Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.]
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor, _______________ and _____________________, (collectively,
the "Underwriters"), the Depositor has agreed to sell the Offered Certificates
to the Underwriters, and the Underwriters agreed to purchase from the Depositor
the respective initial Class Certificate Principal Balance of Offered
Certificates from the Depositor set forth below.
<TABLE>
<CAPTION>
CLASS CLASS CLASS CLASS CLASS
CERTIFICATE CERTIFICATE CERTIFICATE CERTIFICATE CERTIFICATE
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
BALANCE BALANCE BALANCE BALANCE BALANCE
OF CLASS OF CLASS OF CLASS OF CLASS OF CLASS
A-1 A-2 A-3 A-4 A-5
UNDERWRITERS CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
<S> <C> <C> <C> <C> <C>
.................. $----------- $----------- $----------- $----------- $-----------
................ $----------- $----------- $----------- $----------- $-----------
Total........ $___________ $___________ $___________ $___________ $___________
</TABLE>
The Depositor has been advised that the Underwriters propose initially to
offer the Certificates to certain dealers at such price less a selling
concession not to exceed the percentage of the Certificate denomination set
forth below, and that the Underwriters may allow and such dealers may reallow a
reallowance discount not to exceed the percentage of the Certificate
denomination set forth below:
<TABLE>
<CAPTION>
SELLING REALLOWANCE
CLASS OF CERTIFICATE CONCESSION DISCOUNT
<S> <C> <C>
Class A-1 Certificates........................................ _____% _____%
Class A-2 Certificates........................................ _____% _____%
Class A-3 Certificates........................................ _____% _____%
Class A-4 Certificates........................................ _____% _____%
Class A-5 Certificates........................................ _____% _____%
</TABLE>
After the initial public offering, the public offering price, such
concessions and such discounts may be changed.
The Depositor has been advised by each Underwriter that it intends to make
a market in the Offered Certificates, but neither Underwriter has any obligation
to do so. There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue or that
such market will provide sufficient liquidity to Certificateholders.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Depositor by
Stroock & Stroock & Lavan LLP, New York, New York. ________________________,
will pass upon certain legal matters on behalf of the Underwriters.
RATINGS
It is a condition of the issuance of the Offered Certificates that they be
rated ___ and ___ by ___ and _______, respectively (______, together with ___,
the "Rating Agencies").
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the Rating Agencies. The
ratings on the Offered Certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the Mortgage Loans, [the
payment of the Class A-1 Basis Risk Carryover Amount] or the anticipated yields
in light of prepayments.
[The ratings assigned by ____ to mortgage pass-through certificates address
the likelihood of the receipt of all distributions on the mortgage loans by the
related certificateholders under the agreements pursuant to which such
certificates are issued. _____'s ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on such mortgage pool is adequate to make payments
required by such certificates. _________ ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans.]
[The ratings assigned by _______ to mortgage pass-through certificates
address the likelihood of the receipt by certificateholders of all distributions
to which such certificateholders are entitled. _______ ratings on mortgage 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 as a result of
prepayments.]
The Depositor has not requested a rating of the Offered Certificates by any
rating agency other than ___ and ________. However, there can be no assurance as
to whether any other rating agency will rate the Offered Certificates or, if it
does, what ratings would be assigned by such other rating agency. The ratings
assigned by such other rating agency to the Offered Certificates could be lower
than the respective ratings assigned by the Rating Agencies.
EXPERTS
The consolidated financial statements of _______________________ and its
subsidiaries as of December 31, 199_ and December 31, 199_and for the three
years in the period ended December 31, 199_, incorporated by reference in this
Prospectus Supplement, have been audited by ___________________, independent
accountants, as set forth in their report thereon and are incorporated by
reference herein in reliance on the authority of that firm as experts in
accounting and auditing.
<PAGE>
INDEX OF DEFINED TERMS
2/28 Mortgage Loans................................15
Accrual Period.....................................27
Adjustment Date....................................15
Advance............................................19
Advances...........................................10
ARMs...........................................12, 39
Available Funds....................................25
Available Funds Rate Adjustment.................8, 28
Available Funds Shortfall..........................27
Balloon Loans......................................13
beneficial owner...................................20
Book-Entry Certificates............................20
Carry-Forward Amount...............................27
Cede................................................6
CEDEL...............................................6
CEDEL Participants.................................22
Certificate Account................................24
Certificate Insurance Policy..................1, 2, 9
Certificate Insurer..........................2, 5, 33
Certificate Owners..............................6, 20
Certificates........................................2
Chase...............................................6
Citibank............................................6
Class A-1 Available Funds Cap...................8, 27
Class A-1 Basis Risk Carryover Amount..............27
Class A-1 Certificates..........................1, 20
Class A-1 Pass-Through Margin...................7, 28
Class A-1 Weighted Maximum Rate Cap................28
Class A-2 Certificates..........................1, 20
Class A-2 Net Funds Cap.........................8, 28
Class A-2 Pass-Through Margin...................8, 28
Class A-3 Certificates..........................1, 20
Class A-4 Certificates..........................1, 20
Class A-5 Certificates..........................1, 20
Class Certificate Principal Balance................28
Closing Date........................................1
Collateral Value...................................16
Contributions Tax..................................48
Cooperative........................................22
CPR................................................40
Cut-off Date Pool Principal Balance................15
Cut-off Date Principal Balance...................5, 6
DCR................................................50
Deficiency Amount..................................28
Definitive Certificate.............................20
Deleted Mortgage Loan..............................17
Depositor...........................................5
Detailed Description...............................15
Determination Date..................................7
Distribution Account...............................25
Distribution Date.........................2, 6, 7, 23
DTC..........................................6, 20, 1
Due Dates..........................................19
Due Period.........................................28
ERISA..........................................10, 49
Euroclear...........................................6
Euroclear Operator.................................22
Euroclear Participants.............................22
European Depositaries...........................6, 20
Excess Proceeds....................................28
Excess Subordinated Amount.........................28
Exemption..........................................49
Financial Intermediary.............................20
Fiscal Agent.......................................34
Fitch..............................................50
GAAP...............................................36
Global Securities...................................1
Gross Margin.......................................15
Principal Distribution Amount......................28
Holder..............................................2
Indirect Participants..............................21
Insurance Agreement................................30
Insurance Proceeds.................................24
Insured Distribution Amount.....................9, 29
Interest Determination Date........................30
Interest Distribution Amount....................7, 29
LIBOR Business Day.................................31
Liquidated Loan....................................29
Liquidation Proceeds...............................24
Loan-to-Value Ratio................................16
Master Servicer..................................2, 5
Master Servicer Advance Date.......................19
Master Servicer Termination Trigger Event..........33
Maximum Mortgage Rate..............................15
Minimum Mortgage Rate..............................15
Moody's............................................50
Mortgage Index............................2, 5, 6, 15
Mortgage Loans................................2, 5, 6
Mortgage Pool....................................2, 5
Mortgaged Properties.............................5, 6
Net Monthly Excess Cashflow........................29
Norwest Bank.....................................2, 5
Norwest Mortgage.............................2, 5, 15
Offered Certificates.........................1, 5, 20
One-Month LIBOR.................................2, 31
Optional Termination Date......................10, 32
Initial Class Certificate Principal Balance.......28
Participants.......................................20
Pass-Through Rate..................................29
Percentage Interest................................23
Periodic Rate Cap..................................15
Plan...........................................10, 49
Pool Stated Principal Balance......................29
Pooling and Servicing Agreement.................5, 19
Premium Amount.....................................29
Prepayment Interest Excess.........................19
Prepayment Interest Shortfall......................19
Prepayment Model...................................40
Prepayment Period..................................26
Principal Distribution Amount.......................7
Principal Prepayment...............................29
Prohibited Transactions Tax........................48
Prospectus..........................................3
Purchase Price.....................................17
Rating Agencies................................11, 51
Realized Loss......................................29
Record Date..................................6, 7, 23
Reference Banks....................................31
Refinance Loan.....................................16
Reimbursement Amount...............................29
Relevant Depositary................................20
Relief Act Shortfalls..............................29
REMIC.......................................2, 10, 48
REO Property.......................................19
Replacement Mortgage Loan..........................17
Required Subordinated Amount.......................30
Residual Certificates........................1, 5, 20
Restricted Group...................................50
Reuters Screen LIBO Page...........................31
Rules..............................................21
S&P................................................50
SAP................................................36
Scheduled Payments.................................15
Seller...........................................2, 5
Servicing Fee..................................10, 18
SMMEA..............................................10
Stated Principal Balance...........................30
Subordinated Amount................................30
Subordination Deficiency Amount....................30
Subordination Deficit..............................30
Subordination Increase Amount......................30
Subordination Reduction Amount.....................30
Substitution Adjustment Amount.....................30
Terms and Conditions...............................22
Trust Fund.......................................2, 5
Trustee..........................................2, 5
Trustee's Mortgage File............................17
U.S. Person.........................................3
Underwriter.........................................2
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Directors
Acceptance Corporation Asset-Asset Backed Certificates, Series 199_-_ (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of The Depository
Trust Company ("DTC"), CEDEL or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage pass-through certificate
issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities Will Be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors" interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior mortgage pass-through certificate
issues. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional Eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds
SECONDARY MARKET TRADING
Since the Purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
pass-through certificate issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional Eurobonds in same-day funds.
Trading between DTC Seller and CEDEL or Euroclear Purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days or 365 days, as
applicable. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the respective Depositary of the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the CEDEL Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the CEDEL or Euroclear cash debt will be valued instead as of the
actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days
or 365 days, as applicable. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the CEDEL
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the CEDEL Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the CEDEL Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day period.
If settlement is not completed on the intended value date (i.e., the trade
fails), receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem: (a) borrowing through
CEDEL or Euroclear for one day (until the purchase side of the day trade is
reflected in their CEDEL or Euroclear accounts) in accordance with the clearing
system's customary procedures; (b) borrowing the Global Securities in the U.S.
from a DTC Participant no later than one day prior to settlement, which would
give the Global Securities sufficient time to be reflected in their CEDEL or
Euroclear account in order to settle the sale side of the trade; or (c)
staggering the value dates for the buy and sell sides of the trade so that the
value date for the purchase from the DTC Participant is at least one day prior
to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers" securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate: Exemption for non-U.S. Persons (Form W-8).
Beneficial owners of Global Securities that are non-U.S. Persons can obtain a
complete exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8 changes, a
new Form W-8 must be filed within 30 days of such change.
Exemption for non-U.S. Persons with Effectively Connected Income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or Reduced Rate for non-U.S. Persons Resident in Treaty Countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source or a trust if a court within the United States is able
to exercise primary supervision of the administration of the trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust. This summary does not deal with all aspects of U.S.
Federal income tax withholding that may be relevant to foreign holders of the
Global Securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION, DATED JULY ____, 1997
DIRECTORS ASSET CONDUIT CORPORATION
Depositor
Asset Backed Securities
(Issuable in Series)
----------------------
This Prospectus relates to the issuance of Asset Backed Certificates (the
"Certificates") and Asset Backed Notes (the "Notes" and, together with the
Certificates, the "Securities"), which may be sold from time to time in one or
more series (each, a "Series") on terms determined at the time of sale and
described in this Prospectus and the related Prospectus Supplement. The
Securities of a Series will consist of Certificates which evidence beneficial
ownership of a trust (each, a "Trust Fund") established by Directors Asset
Conduit Corporation, (the "Depositor"), a direct, wholly owned subsidiary of
Norwest Mortgage, Inc. ("Norwest Mortgage"), and/or Notes secured by the assets
of a Trust Fund. The Trust Fund for a Series of Securities will include certain
assets (the "Trust Fund Assets") which will consist of (i) mortgage loans
secured by first or subordinate liens primarily on one- to four-family
residential or mixed use properties (the "Loans") and/or (ii) Norwest ABS
(defined herein). The Trust Fund Assets will be acquired by the Depositor from
Norwest Mortgage (in such capacity, the "Seller"), and will be conveyed by the
Depositor to the related Trust Fund. A Trust Fund also may include (a) funds on
deposit in one or more pre-funding accounts and/or capitalized interest accounts
and (b) insurance policies, surety bonds, cash accounts, reinvestment income,
guaranties, letters of credit, interest rate swaps, caps, floors and other
derivative instruments to the extent described herein and in the related
Prospectus Supplement. Norwest Bank Minnesota, National Association ("Norwest
Bank"), an affiliate of Norwest Mortgage, will act as master servicer with
respect to each Series (in such capacity, the "Master Servicer"). See "Index of
Defined Terms" beginning on Page [103] of this Prospectus for the location of
the definitions of certain capitalized terms.
Each Series of Securities will be issued in one or more classes or
subclasses. A Series of Securities may include one or more classes that are
senior in right of payment to one or more other classes of Securities of such
Series. One or more classes of Securities of a Series may be entitled to receive
distributions of principal, interest or any combination thereof prior to one or
more other classes of Securities of such Series or after the occurrence of
specified events, in each case as specified in the related Prospectus
Supplement. Each class of Certificates of a Series will evidence beneficial
ownership of a specified percentage (which may be 0%) or portion of future
interest payments and a specified percentage (which may be 0%) or portion of
future principal payments on the related Trust Fund Assets. Each class of Notes
of a Series will be secured by all or a portion of the related Trust Fund
Assets.
(continued on next page)
----------------------
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES,
SEE THE INFORMATION UNDER "RISK FACTORS" BEGINNING ON PAGE [13].
----------------------
THE CERTIFICATES OF A GIVEN SERIES WILL REPRESENT BENEFICIAL INTERESTS IN,
AND THE NOTES OF A GIVEN SERIES WILL REPRESENT OBLIGATIONS OF, THE RELATED TRUST
FUND ONLY AND WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR,
THE MASTER SERVICER, THE SELLER OR ANY AFFILIATES THEREOF, EXCEPT TO THE EXTENT
DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT. THE SECURITIES AND THE TRUST
FUND ASSETS WILL NOT BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR OR ANY OTHER PERSON OR ENTITY, EXCEPT IN
EACH CASE TO THE EXTENT DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------
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 Securities
will develop, or if it does develop, that it will continue or provide holders of
the Securities ("Securityholders") with a sufficient level of liquidity of
investment. This Prospectus may not be used to consummate sales of Securities of
any Series unless accompanied by a Prospectus Supplement. Offers of the
Securities may be made through one or more different methods, including
offerings through underwriters, as more fully described under "Method of
Distribution" herein and in the related Prospectus Supplement.
July __, 1997
<PAGE>
(continued from cover page)
Distributions to Securityholders will be made monthly, quarterly,
semi-annually or at such other intervals and on the dates specified in the
related Prospectus Supplement. Distributions on the Securities of a Series will
be made from the related Trust Fund Assets or portions thereof pledged for the
benefit of the Securityholders as specified in the related Prospectus
Supplement.
The only obligations of the Depositor with respect to a Series of
Securities will be to obtain certain representations and warranties from the
Seller and to assign to the Trustee for the related Series of Securities the
Depositor's rights with respect to such representations and warranties. The
principal obligations of the Master Servicer with respect to the related Series
of Securities will be limited to obligations pursuant to certain representations
and warranties and to its contractual servicing obligations, including any
obligation it may have to advance delinquent payments on the related Trust Fund
Assets.
The yield on each class of Securities of a Series will be affected by,
among other things, the rate of payments of principal (including prepayments) on
the related Trust Fund Assets and the timing of receipt of such payments as
described under "Risk Factors - Yield, Weighted Average Life and Reinvestment
Risk Considerations" and "Yield, Maturity and Prepayment Considerations" herein
and in the related Prospectus Supplement. A Trust Fund may be subject to early
termination under the circumstances described under "The Agreements --
Termination; Optional Termination" herein and under "Description of the
Certificates - Optional Termination" in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, one or more elections
may be made to treat a Trust Fund or specified portions thereof as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax purposes.
See "Federal Income Tax Consequences."
<PAGE>
PRIOR TO THE EXPIRATION OF 90 DAYS AFTER THE DATE OF EACH PROSPECTUS
SUPPLEMENT, ALL DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES COVERED BY SUCH
PROSPECTUS SUPPLEMENT, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF,
MAY BE REQUIRED TO DELIVER SUCH PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AND
PROSPECTUS SUPPLEMENT WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Securities of each Series to be
offered hereunder will, among other things, set forth with respect to such
Securities, as appropriate: (i) the aggregate principal amount, interest rate
and authorized denominations of each class of such Series of Securities; (ii)
information as to the assets comprising the Trust Fund, including the general
characteristics of the related Trust Fund Assets included therein and, if
applicable, the insurance policies, surety bonds, guaranties, letters of credit
or other instruments or agreements included in the Trust Fund, and the amount
and source of any reserve account or other cash account; (iii) the
circumstances, if any, under which the Trust Fund may be subject to early
termination; (iv) the circumstances, if any, under which the Notes of such
Series are subject to redemption; (v) the method used to calculate the amount of
principal to be distributed or paid with respect to each class of Securities;
(vi) the order of application of distributions or payments to each of the
classes within such Series, whether sequential, pro rata, preferential or
otherwise; (vii) the Distribution Dates with respect to such Series; (viii)
additional information with respect to the method of distribution of such
Securities; (ix) whether one or more REMIC elections will be made with respect
to the Trust Fund and, if so, the designation of the regular interests and the
residual interests; (x) the aggregate original percentage ownership interest in
the Trust Fund to be evidenced by each class of Certificates; (xi) the stated
maturity of each class of Notes of such Series; (xii) information as to the
nature and extent of subordination with respect to any class of Securities that
is subordinate in right of payment to any other class; and (xiii) information as
to the Trustee.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Securities. This Prospectus,
which forms a part of the Registration Statement, and the Prospectus Supplement
relating to each Series of Securities contain descriptions of the material terms
of the documents referred to herein and therein, but do not contain all of the
information set forth in the Registration Statement pursuant to the Rules and
Regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and Northeast Regional Office, Seven World
Trade Center, Suite 1300, New York, New York 10048. In addition, the Commission
maintains a Web site at http://www.sec.gov that contains 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
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
ADDITIONAL DETAILED INFORMATION
The Seller intends to offer by subscription detailed mortgage loan
information in machine readable format updated on a monthly basis (the "Detailed
Information") with respect to each outstanding Series of Certificates. The
Detailed Information will reflect payments made on the individual mortgage
loans, including prepayments in full and in part made on such mortgage loans, as
well as the liquidation of such mortgage loans, and will identify various
characteristics of the mortgage loans. Subscribers of the Detailed Information
are expected to include a number of major investment brokerage firms as well as
financial information service firms. Some of such firms, including certain
investment brokerage firms as well as Bloomberg L.P. through the "The
Bloomberg(R)" service and Merrill Lynch Mortgage Capital Inc. through the "CMO
Passport(R)" service, may, in accordance with their individual business
practices and fee schedules, if any, make portions of, or summaries of portions
of, the Detailed Information available to their customers and subscribers. The
Depositor, the Seller, the Master Servicer and their respective affiliates have
no control over and take no responsibility for the actions of such firms in
processing, analyzing or disseminating such information. For further information
regarding the Detailed Information and subscriptions thereto, please contact
Directors Asset Conduit Corporation, 7485 New Horizon Way, Frederick, Maryland
21703, telephone number (301) 846-8101.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), after the date of this Prospectus and prior to the
termination of any offering of the Securities issued by such Trust Fund shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all purposes of this
Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus. Neither the Depositor nor the Master Servicer intends to file with
the Commission periodic reports with respect to the related Trust Fund following
completion of the reporting period required by Rule 15d-1 or Regulation 15D
under the Exchange Act.
The Depositor or such other entity specified in the related Prospectus
Supplement on behalf of any Trust Fund will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to Directors
Asset Conduit Corporation, 7485 New Horizon Way, Frederick, Maryland 21703,
(301) 846-8101 or the address of such other entity specified in the accompanying
Prospectus Supplement.
REPORTS TO SECURITYHOLDERS
The Master Servicer will prepare, and the Trustee or other paying agent
appointed for each Series by the Master Servicer will forward to the
Securityholders of each Series statements containing information with respect to
principal and interest payments and the related Trust Fund, as described herein
and in the applicable Prospectus Supplement for such Series. No information
contained in such reports will have been examined or reported upon by an
independent public accountant. See "Description of the Securities -- Reports to
Securityholders." In addition, a firm of independent public accountants will
furnish to the Trustee a statement with respect to the examination of certain
documents and records relating to a random sample of mortgage loans serviced by
or on behalf of the Master Servicer pursuant to pooling and servicing agreements
substantially similar to the related Agreement. See "The Agreements -- Evidence
as to Compliance." Copies of the statements provided to the Trustee will be
furnished to Securityholders of each Series upon request addressed to the
Trustee for the applicable Series or to the Master Servicer c/o Norwest Bank
Minnesota, National Association, 11000 Broken Land Parkway, Columbia, Maryland
21044-3562, Attention: Securities Administration Services Manager.
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement with respect to the Series of Securities offered thereby and to the
related Agreement (as such term is defined below) which will be prepared in
connection with each Series of Securities. Unless otherwise specified,
capitalized terms used and not defined in this Summary of Terms have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement. See "Index of Defined Terms" beginning on page [103] of this
Prospectus for the location of the definitions of certain capitalized terms.
Title of Securities......................... Asset Backed Certificates (the
"Certificates") and Asset Backed
Notes (the "Notes" and, together
with the Certificates, the
"Securities"), which are issuable
in Series.
Depositor................................... Directors Asset Conduit
Corporation, a Delaware
corporation, and a direct,
wholly-owned subsidiary of Norwest
Mortgage. See "The Depositor."
Trustee..................................... The trustee(s) (the "Trustee") for
each Series of Securities will be
specified in the related Prospectus
Supplement. See "The Agreements"
herein for a description of the
Trustee's rights and obligations.
Master Servicer............................. Norwest Bank Minnesota, National
Association ("Norwest Bank" and, in
such capacity, the "Master
Servicer"), an affiliate of the
Depositor, will serve as the master
servicer for each Series of
Securities. See "The Agreements -
Certain Matters Regarding the
Master Servicer and the Depositor."
Trust Fund Assets........................... Assets of the Trust Fund for a
Series of Securities will include
certain assets (the "Trust Fund
Assets") which will consist of (i)
the Loans (other than Retained
Interests, if any) and/or (ii)
asset backed certificates or asset
backed notes of one or more other
trust funds of other series of
securities previously established
by the Depositor or any affiliate
of the Depositor (each, a "Norwest
ABS"), together with payments in
respect of such Trust Fund Assets,
as specified in the related
Prospectus Supplement. At the time
of issuance of the Securities of
the Series, the Depositor will
cause the Trust Fund Assets
comprising the related Trust Fund
to be assigned to the Trustee,
without recourse, or if a Series of
Securities includes Notes, pledged
to the trustee under the Indenture
(the "Indenture Trustee") for the
benefit of holders of Notes
("Noteholders"). The Trust Fund
Assets will be collected in one or
more pools (each, a "Pool") as of
the first day of the month of the
issuance of the related Series of
Securities or such other date
specified in the related Prospectus
Supplement (the "Cut-off Date").
Trust Fund Assets also may have the
benefit of various types of credit
enhancement which may include
insurance policies, surety bonds,
cash accounts, reinvestment income,
guaranties, letters of credit,
interest rate swaps, caps, floors
and other derivative instruments to
the extent described in the related
Prospectus Supplement. See "Credit
Enhancement". In addition, if the
related Prospectus Supplement so
provides, the related Trust Fund
Assets will include the funds on
deposit in an account (a
"Pre-Funding Account") which will
be used to purchase additional
Loans during the period specified
in such Prospectus Supplement. See
"The Trust Fund - Pre-Funding
Account."
A. Loans.................................... The Loans to be included in a Trust
Fund will consist of mortgage loans
secured by mortgages, deeds of
trust or other similar security
instruments creating first or
subordinate liens on properties
(the "Properties"). Such Loans may
consist of first lien, subprime
mortgage loans ("Subprime Loans");
closed end, second lien mortgage
loans (the "Closed End Second
Loans"); and first, second or more
junior lien home improvement loans
insured under the Title I Program
(the "Title I Loans"). The
Properties may include one- to
four-family residential properties
(including manufactured housing
units), cooperative apartment loans
("Cooperative Loans") secured by
security interests in shares issued
by private, non-profit, cooperative
housing corporations
("Cooperatives") and in the related
proprietary leases or occupancy
agreements, or mixed use properties
which are primarily residential
properties located in any of the 50
states or the District of Columbia,
Guam, Puerto Rico or any territory
of the United States. All Loans
will have been purchased by the
Depositor from the Seller.
B. Norwest ABS............................. Norwest ABS may include (a) asset
backed pass-through certificates
representing beneficial interests
in mortgage loans or (b) asset
backed notes secured by mortgage
loans and in each case issued by
trust funds of other Series
established by the Depositor or an
affiliate of the Depositor. Norwest
ABS may include stripped asset
backed securities representing an
undivided interest in all or a part
of any of the principal
distributions (but not the interest
distributions) or the interest
distributions (but not the
principal distributions) or in some
specified portion of the principal
and interest distributions (but not
all of such distributions) on
mortgage loans. Although individual
mortgage loans underlying a Norwest
ABS may be insured or guaranteed by
the United States or an agency or
instrumentality thereof, they need
not be, and the Norwest ABS
themselves will not be so insured
or guaranteed. Payments on the
Norwest ABS will be distributed
directly to the Trustee as
registered owner of such Norwest
ABS. See "The Trust Fund - The
Loans -- Norwest ABS" herein.
The related Prospectus Supplement
for a Series will specify, among
other things, (i) the approximate
aggregate principal amount and type
of any Norwest ABS to be included
in the Trust Fund for such Series;
(ii) certain characteristics of the
mortgage loans including (A) the
payment features of such mortgage
loans, (B) the approximate
aggregate principal amount, if
known, of the mortgage loans that
are insured or guaranteed by a
government entity, (C) the
servicing fee or range of servicing
fees with respect to the mortgage
loans and (D) the minimum and
maximum stated maturities of the
mortgage loans at origination;
(iii) the maximum original term to
stated maturity of the Norwest ABS;
(iv) the weighted average
term-to-stated maturity of the
Norwest ABS; (v) the pass-through
or certificate rate or ranges
thereof for the Norwest ABS; (vi)
the weighted average pass- through
or certificate rate of the Norwest
ABS; (vii) the issuer of the
Norwest ABS if other than the
Depositor (the "Norwest ABS
Issuer"), the servicer of the
Norwest ABS (the "Norwest ABS
Servicer") and the trustee of the
Norwest ABS (the "Norwest ABS
Trustee"); (viii) certain
characteristics of credit support,
if any, such as reserve funds,
insurance policies, surety bonds,
letters of credit or guaranties,
relating to the mortgage loans or
to such Norwest ABS themselves;
(ix) the terms on which any
material portion of the Pool of
mortgage loans of the Trust Funds
for such Norwest ABS may, or is
required to, be repurchased prior
to stated maturity; and (x) the
terms on which any substitute
mortgage loans may be delivered to
replace those initially deposited
with the Norwest ABS Trustee. See
"The Trust Fund" herein.
Description of the Securities............... Each Security will represent a
beneficial ownership interest in,
or be secured by, all or a portion
of the assets of a Trust Fund
created by the Depositor pursuant
to an Agreement among the
Depositor, the Master Servicer and
the Trustee for the related Series.
The Securities of any Series may be
issued in one or more classes as
specified in the related Prospectus
Supplement. A Series of Securities
may include one or more classes of
senior Securities (collectively,
the "Senior Securities") and one or
more classes of subordinate
Securities (collectively, the
"Subordinated Securities"). Certain
Series or classes of Securities may
be covered by insurance policies or
other forms of credit enhancement,
in each case as described under
"Credit Enhancement" herein and in
the related Prospectus Supplement.
One or more classes of Securities
of each Series (i) may be entitled
to receive distributions allocable
only to principal, only to interest
or to any combination thereof; (ii)
may be entitled to receive
distributions only of prepayments
of principal throughout the lives
of the Securities or during
specified periods; (iii) may be
subordinated in the right to
receive distributions of scheduled
payments of principal, prepayments
of principal, interest or any
combination thereof to one or more
other classes of Securities of such
Series throughout the lives of the
Securities or during specified
periods; (iv) may be entitled to
receive such distributions only
after the occurrence of events
specified in the related Prospectus
Supplement; (v) may be entitled to
receive distributions in accordance
with a schedule or formula or on
the basis of collections from
designated portions of the related
Trust Fund Assets; (vi) as to
Securities entitled to
distributions allocable to
interest, may be entitled to
receive interest at a fixed rate or
a rate that is subject to change
from time to time; and (vii) as to
Securities entitled to
distributions allocable to
interest, may be entitled to
distributions allocable to interest
only after the occurrence of events
specified in the related Prospectus
Supplement and may accrue interest
until such events occur, in each
case as specified in the related
Prospectus Supplement. The timing
and amounts of such distributions
may vary among classes or over
time, as specified in the related
Prospectus Supplement.
Description of the Securities............... Distributions on the Securities
entitled thereto will be made
monthly, quarterly, semi-annually
or at such other intervals and on
the dates specified in the related
Prospectus Supplement (each, a
"Distribution Date") out of the
payments received in respect of the
assets of the related Trust Fund or
Funds or one or more Pools thereof
and other assets, if any, pledged
for the benefit of the
Securityholders as described under
"Credit Enhancement" herein to the
extent specified in the related
Prospectus Supplement. The amount
allocable to payments of principal
and interest on any Distribution
Date will be determined as
specified in the related Prospectus
Supplement. The Prospectus
Supplement for a Series of
Securities will describe the method
for allocating distributions among
Securities of different classes as
well as the method for allocating
distributions among Securities of
any particular class.
Credit Enhancement.......................... The assets in a Trust Fund or the
Securities of one or more classes
in the related Series may have the
benefit of one or more types of
credit enhancement as described
herein and in the related
Prospectus Supplement. The
protection against losses afforded
by any such credit support may be
limited. The credit enhancement may
also be used to cover shortfalls in
interest resulting from the timing
of receipt of prepayments of Loans
("Prepayment Interest Shortfalls")
or for other purposes specified in
the related Prospectus Supplement,
in which cases the availability of
such credit enhancement to cover
losses on the Loans will be further
limited. The type, characteristics
and amount of credit enhancement
will be determined based on the
characteristics of the Loans or
Norwest ABS comprising the Trust
Fund Assets and other factors and
will be established on the basis of
requirements of each Rating Agency
rating the Securities of such
Series. See "Credit Enhancement."
A. Subordination........................... A Series of Securities may consist
of one or more classes of Senior
Securities and one or more classes
of Subordinated Securities. The
rights of the holders of the
Subordinated Securities of a Series
to receive distributions with
respect to the assets in the
related Trust Fund will be
subordinated to such rights of the
holders of the Senior Securities of
the same Series to the extent
described in the related Prospectus
Supplement. This subordination is
intended to enhance the likelihood
of regular receipt by holders of
Senior Securities of the full
amount of payments of principal and
interest due them. The protection
afforded to the holders of Senior
Securities of a Series by means of
the subordination feature will be
accomplished by (i) the
preferential right of such holders
to receive, prior to any
distribution being made in respect
of the related Subordinated
Securities, the amounts of interest
and/or principal due them on each
Distribution Date out of the funds
available for distribution on such
date in the related Security
Account and, to the extent
described in the related Prospectus
Supplement, by the right of such
holders to receive future
distributions on the assets in the
related Trust Fund that would
otherwise have been payable to the
holders of Subordinated Securities;
(ii) reducing the ownership
interest (if applicable) of the
related Subordinated Securities; or
(iii) a combination of clauses (i)
and (ii) above. If so specified in
the related Prospectus Supplement,
subordination may apply only in the
event of certain types of losses
not covered by other forms of
credit enhancement, such as hazard
losses not covered by standard
hazard insurance policies or losses
due to the bankruptcy or fraud of
the borrower. The related
Prospectus Supplement will set
forth information concerning, among
other things, the amount of
subordination of a class or classes
of Subordinated Securities in a
Series, the circumstances in which
such subordination will be
applicable, and the manner, if any,
in which the amount of
subordination will decrease over
time.
B. Reserve Account......................... One or more reserve accounts or
other cash accounts (each, a
"Reserve Account") may be
established and maintained for each
Series of Securities or for certain
classes of such Series to the
extent specified in the related
Prospectus Supplement. The related
Prospectus Supplement will specify
the manner of funding such Reserve
Accounts and the conditions under
which the amounts in any such
Reserve Accounts will be used to
make distributions to holders of
Securities of a particular class or
released from such Reserve
Accounts.
C. Letters of Credit....................... If so specified in the related
Prospectus Supplement, credit
support may be provided by one or
more letters of credit. A letter of
credit may provide limited
protection against certain losses
in addition to or in lieu of other
credit support, such as losses
resulting from delinquent payments
on the Loans in the related Trust
Fund, losses from risks not covered
by standard hazard insurance
policies, losses due to bankruptcy
of a borrower and application of
certain provisions of the United
States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq. (the
"Bankruptcy Code"), and losses due
to denial of insurance coverage due
to misrepresentations made in
connection with the origination or
sale of a Loan. The issuer of the
letter of credit (the "L/C Bank")
will be obligated to honor demands
with respect to such letter of
credit, to the extent of the amount
available thereunder to provide
funds under the circumstances and
subject to such conditions as are
specified in the related Prospectus
Supplement. The maximum amount
available at any time to be paid
under a letter of credit will be
determined in the manner specified
therein and in the related
Prospectus Supplement.
D. Insurance Policies;
Surety Bonds and Guarantees.............. If so specified in the related
Prospectus Supplement, credit
support for a Series or one or more
classes of Securities in such
Series may be provided by an
insurance policy and/or a surety
bond issued by one or more
insurance companies or sureties.
Such insurance policy or surety
bond will guarantee distributions
of interest and/or principal on the
basis set forth in or determined in
the manner specified in the related
Prospectus Supplement. If specified
in the related Prospectus
Supplement, one or more bankruptcy
bonds, special hazard insurance
policies, other insurance or
third-party guarantees may be used
to provide coverage for the risks
of default or types of losses set
forth in such Prospectus
Supplement.
E. Over-Collateralization................... If so provided in the Prospectus
Supplement for a Series of
Securities, the excess of the
aggregate principal balance of the
Loans (together with the amount[s]
on deposit in the Pre-Funding
Account, if any) over the aggregate
principal balance of the Securities
may provide overcollateralization.
Over- collateralization in this
form may result from the initial or
subsequent deposit of Loans to
create such excess or may build
over time from the application of
certain excess cash amounts
generated by the Loans to
accelerate the amortization of the
applicable class or classes of
Securities. Also, a portion of the
interest payment on each Loan may
be applied as an additional
distribution in respect of
principal to reduce the principal
balance of a certain class or
classes of Securities and, thus,
accelerate the rate of payment of
principal on such class or classes
of Securities.
F. Loan Pool Insurance Policy............... A mortgage pool insurance policy or
policies may be obtained and
maintained for Loans relating to
any Series of Securities, which
will be limited in scope, covering
defaults on the related Loans in an
initial amount equal to a specified
percentage of the aggregate
principal balance of all Loans
included in the related Pool as of
the related Cut-off Date.
G/ FHA Insurance............................ If specified in the related
Prospectus Supplement, all or a
portion of the Loans in a Pool may
be insured by the Federal Housing
Administration (the "FHA"). See
"Certain Legal Aspects of the Loans
-- The Title I Program"
H. Cross-Collateralization.................. If specified in the related
Prospectus Supplement, separate
classes of a Series of Securities
may evidence the beneficial
ownership of, or be secured by,
separate groups of assets included
in a Trust Fund. In such case,
credit support may be provided by a
cross- collateralization feature
which requires that distributions
be made with respect to Securities
evidencing a beneficial ownership
interest in, or secured by, one or
more Pools prior to distributions
to Subordinated Securities
evidencing a beneficial ownership
interest in, or secured by, other
Pools within the same Trust Fund.
See "Credit Enhancement -
Cross-Collateralization." If
specified in the related Prospectus
Supplement, the coverage provided
by one or more of the forms of
credit enhancement described in
this Prospectus may apply
concurrently to two or more
separate Pools. If applicable, the
related Prospectus Supplement will
identify the Pools to which such
credit enhancement relates and the
manner of determining the amount of
coverage provided to such Pools
thereby and of the application of
such coverage to the identified
Pools. See "Credit Enhancement -
Cross- Collateralization."
Advances.................................... The Master Servicer may be
obligated to advance amounts (each,
an "Advance") corresponding to
delinquent interest and/or
principal payments on such Loan
until the date specified in the
related Prospectus Supplement. Any
obligation to make Advances may be
subject to limitations as specified
in the related Prospectus
Supplement. Advances may be drawn
from a cash account available for
such purpose as described in the
related Prospectus Supplement.
Advances will be reimbursable to
the extent described under
"Description of the Securities --
Advances" herein and in the related
Prospectus Supplement. In the event
the Master Servicer fails to make a
required Advance, the Trustee may
be obligated to advance such
amounts otherwise required to be
advanced by the Master Servicer.
See "Description of the Securities
- Advances."
Optional Purchase of Defaulted
Loans....................................... The Seller, the Master Servicer or
the Depositor may, subject to the
terms of the applicable Agreement,
purchase from the related Trust
Fund any defaulted Loan or any Loan
as to which default is reasonably
foreseeable. See "Agreements -
Optional Purchases."
Optional Termination........................ The Seller, the Depositor and/or
the Master Servicer may have the
option to effect early retirement
of a Series of Securities through
the purchase of the Trust Fund
Assets at the price specified in
the related Prospectus Supplement.
The proceeds of any such purchase
will be deposited in the Security
Account for each Trust Fund as
described under "The Agreements -
Payments on Loans; Deposits to
Security Account." The exercise of
such right will effect early
retirement of the Securities of
that Series, but such optional
termination is subject to the
requirement that the principal
balance of the related Trust Fund
Assets be less than the percentage
specified in the related Prospectus
Supplement of the aggregate
principal balance of the Trust Fund
Assets at the Cut-off Date for the
Series. The foregoing is subject to
the provision that if a REMIC
election is made with respect to a
Trust Fund, any such purchase above
will be made only in connection
with a "qualified liquidation" of
the REMIC within the meaning of
Section 860F(g)(4) of the Code.
Federal Income Tax Consequences
A. REMIC Securities...................... If so specified in the related
Prospectus Supplement one or more
elections will be made to treat all
or portions of the Trust Fund
Assets of a Series as a "real
estate mortgage investment conduit"
("REMIC"). The classes of
Securities of such Series will be
designated as "regular interests"
or "residual interests" in a REMIC.
See "Federal Income Tax
Consequences."
B. Non-REMIC Pass-Through Securities...... If so specified in the related
Prospectus Supplement, the Trust
Fund (or the related Pool) of a
Series will be treated as a grantor
trust and will not be classified as
an association taxable as a
corporation for federal income tax
purposes and Securityholders of
Securities of such Series
("Pass-Through Securities") will be
treated as owning directly rights
to receive certain payments of
interest or principal, or both, on
the Trust Fund Assets (or the
related Pool) of such Series. See
"Federal Income Tax Consequences."
C. Owner Trust Securities................ If so specified in the related
Prospectus Supplement, the Trust
Fund for a Series will be treated
as a partnership for federal income
tax purposes. Each Noteholder, by
the acceptance of a Note of such
Series, will agree to treat such
Note as indebtedness, and each
Certificateholder, by the
acceptance of a Certificate of such
Series, will agree to treat the
related Issuer as a partnership in
which such Certificateholder is a
partner for federal income and
state tax purposes. See "Federal
Income Tax Consequences."
D. Securities Treated as Debt............ If so specified in the Prospectus
Supplement relating to a Series of
Securities, a Trust Fund may issue
Securities that will be
characterized as indebtedness for
federal income tax purposes secured
by the related Loans. Each investor
in the Securities of the related
Series, by acceptance of such
Securities, will agree to treat
such Securities as debt for
federal, state and local income and
franchise tax purposes. See
"Federal Income Tax Consequences."
ERISA Considerations........................ Subject to the considerations
discussed under "ERISA
Considerations" herein and in the
related Prospectus Supplement, the
Securities may or may not be
eligible for purchase by employee
benefit plans. The related
Prospectus Supplement will provide
further information with respect to
the eligibility of a class of
Securities for purchase by employee
benefit plans.
A fiduciary of any employee benefit
plan subject to the Employee
Retirement Income Security Act of
1974, as amended ("ERISA"), or the
Code should carefully review with
its own legal advisors whether the
purchase or holding of Securities
could give rise to a transaction
prohibited or otherwise
impermissible under ERISA or the
Code. See "ERISA Considerations"
herein and in the related
Prospectus Supplement.
Legal Investment............................ The Prospectus Supplement for each
Series of Securities will specify
which, if any, of the classes of
Securities offered thereby
constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA").
Classes of Securities that qualify
as "mortgage related securities"
will be legal investments for
certain types of institutional
investors to the extent provided in
SMMEA, subject, in any case, to any
other regulations which may govern
investments by such institutional
investors. Institutions whose
investment activities are subject
to review by federal or state
authorities should consult with
their counsel or the applicable
authorities to determine whether an
investment in a particular class of
Securities (whether or not such
class constitutes a "mortgage
related security") complies with
applicable guidelines, policy
statements or restrictions. See
"Legal Investment."
Rating...................................... It is a condition to the issuance
of the Securities of any Series
offered pursuant to this Prospectus
and a Prospectus Supplement that
each class or subclass be rated in
one of the four highest rating
categories by at least one
nationally recognized statistical
rating organization (a "Rating
Agency"). A security rating is not
a recommendation to buy, sell or
hold the Securities of any Series
and is subject to revision or
withdrawal at any time by the
assigning rating agency. Further,
such ratings do not address the
effect of prepayments on the yield
anticipated by an investor.
Risk Factors................................ For a discussion of certain risks
associated with an investment in
the Securities, see "Risk Factors"
beginning on page [13] herein and
in the related Prospectus
Supplement.
<PAGE>
RISK FACTORS
Investors should consider the following factors in connection with the
purchase of the Securities.
LIMITED LIQUIDITY
Lack of a Secondary Market. There will be no market for the Securities of
any Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
Securityholders with liquidity of investment or will continue for the life of
the Securities of such Series.
Limited Nature of Ongoing Information. The primary source of ongoing
information regarding Securities of any Series, including information regarding
the status of the related Trust Fund Assets and any credit enhancement for such
Securities, will be the periodic reports to Securityholders to be delivered
pursuant to the related Agreement as described herein under the heading
"Description of the Securities--Reports to Securityholders" and any Detailed
Information made available by the Depositor by subscription. See "Additional
Detailed Information." There can be no assurance that any additional ongoing
information regarding the Securities of any Series will be available through any
other source. The limited nature of such information in respect of a Series of
Securities may adversely affect the liquidity thereof, even if a secondary
market for such Securities does develop.
Sensitivity to Fluctuations in Prevailing Interest Rates. Insofar as a
secondary market does develop with respect to any Series of Securities or class
thereof, the market value of such Securities or class will be affected by
several factors, including the perceived liquidity thereof, the anticipated cash
flow thereon (which may vary widely depending upon the prepayment and default
assumptions applied in respect of the underlying Trust Fund Assets) and
prevailing interest rates. The price payable at any given time in respect of
certain classes of Securities (in particular, a class with a relatively long
average life, or a class of Interest Only Securities or Principal Only
Securities) may be extremely sensitive to small fluctuations in prevailing
interest rates; and the relative change in price for a Security in response to
an upward or downward movement in prevailing interest rates may not necessarily
equal the relative change in price for such Security in response to an equal but
opposite movement in such rates. Accordingly, the sale of Securities by a
Securityholder in any secondary market that may develop may be at a discount
from the price paid by such Securityholder. The Depositor is not aware of any
source through which price information about the Securities will be generally
available on an ongoing basis.
Delisting. The Depositor intends to cause each Trust Fund to suspend filing
reports with the Commission if and when such reports are no longer required
under the Exchange Act. See "Available Information."
LIMITED SOURCE OF PAYMENTS
Limited Assets. Unless otherwise specified in the related Prospectus
Supplement, the Securities of a Series will be payable solely from the Trust
Fund Assets (or the related Pool) for such Securities and will not have any
claim against or security interest in the Trust Fund Assets for any other
Series. Further, at the times set forth in the related Prospectus Supplement,
certain Trust Fund Assets and/or any balance remaining in the Security Account
immediately after making all payments due on the Securities of such Series,
after making adequate provision for future payments on certain classes of
Securities and after making any other payments specified in the related
Prospectus Supplement, may be promptly released or remitted to the Depositor,
the Master Servicer, any credit enhancement provider or any other person
entitled thereto and will no longer be available for making payments to
Securityholders. Consequently, holders of Securities of each Series must rely
solely upon payments with respect to the Trust Fund Assets for a Series of
Securities, including, if applicable, any amounts available pursuant to any
credit enhancement for such Series, for the payment of principal of and interest
on the Securities of such Series.
No Recourse to the Depositor, Trustee, Master Servicer or Seller. The
Securities will not represent an interest in or obligation of the Depositor, the
Trustee, the Master Servicer, the Seller or any of their respective affiliates.
The only obligations, if any, of the Depositor with respect to the Trust Fund
Assets or the Securities of any Series will be to obtain certain representations
and warranties from the Seller and to assign to the Trust Fund for the related
Series of Securities the Depositor's rights with respect to such representations
and warranties. The Depositor does not have, and is not expected in the future
to have, any significant assets with which to meet any obligation to repurchase
Trust Fund Assets with respect to which there has been a breach of any
representation or warranty by the Depositor. If, for example, the Depositor were
required to repurchase a Loan, its only sources of funds to make such repurchase
would be from funds obtained (i) from the enforcement of a corresponding
obligation, if any, on the part of the Seller of such Loan, or (ii) to the
extent provided in the related Prospectus Supplement, from a Reserve Account or
similar credit enhancement established to provide funds for such repurchases.
The only obligations of the Master Servicer, other than its master
servicing obligations, with respect to the Trust Fund Assets or the Securities
of any Series will be pursuant to certain representations and warranties.
The only obligations of the Seller with respect to Trust Fund Assets or the
Securities of any Series will be pursuant to certain representations and
warranties and certain document delivery requirements. The Seller may be
required to repurchase or substitute for any Loan with respect to which such
representations and warranties or document delivery requirements are breached.
There is no assurance, however, that the Seller will have the financial ability
to effect such repurchase or substitution.
CERTAIN RISKS ASSOCIATED WITH MORTGAGE LENDING
Borrower Credit. An investment in the Securities may be affected by future
changes in the financial condition of the borrowers which could have a
significant adverse impact on the likelihood of repayment of the Loans. Future
changes in a borrower's economic circumstances may result from a variety of
unforeseeable personal factors, including loss of employment, reduction in
income, illness or divorce. General economic conditions, on a national and
regional basis as well as with regard to particular industries, may also affect
the timely payment by borrowers of scheduled payments of principal and interest
on the Loans. In addition, the Loans underlying certain Series of Securities may
be concentrated in certain regions and such concentration may present risk
considerations that are different from those generally present for similar asset
backed securities without such concentration.
Property Values. There are several factors that could adversely affect the
value of Properties such that the outstanding balance of the related Loans,
together with any senior financing on the Properties, if applicable, would equal
or exceed the value of the Properties, including an overall decline in the
residential real estate market in the areas in which the Properties are located,
a decline in the general condition of the Properties as a result of failure of
borrowers to maintain adequately the Properties or of natural disasters that are
not necessarily covered by insurance, such as earthquakes and floods. If such a
decline occurs, the actual rates of delinquencies, foreclosures and losses on
all Loans could be higher than those currently experienced in the mortgage
lending industry in general. Losses on such Loans that are not otherwise covered
by the credit enhancement described in the applicable Prospectus Supplement will
be borne by the holder of one or more classes of Securities of the related
Series.
No assurance can be given that values of the Properties have remained or
will remain at the levels which existed on the dates of appraisal (or, where
applicable, recertification of value) of the related Loans. The appraisal of any
Property reflects the individual appraiser's judgment as to value, based on the
market values of comparable homes sold within the recent past in comparable
nearby locations and on the estimated replacement cost. The appraisal relates
both to the land and to the structure; in fact, a significant portion of the
appraised value of a Property may be attributable to the value of the land
rather than to the residence. Because of the unique locations and special
features of certain Properties, identifying comparable properties in nearby
locations may be difficult. The appraised values of such Properties will be
based to a greater extent on adjustments made by the appraisers to the appraised
values of reasonably similar properties rather than on objectively verifiable
sales data. If residential real estate values generally or in particular
geographic areas decline such that the outstanding balances of the Loans and any
secondary financing on the Properties in a particular Trust Fund become equal to
or greater than the values of the related Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those that would be
experienced in the absence of such decline in real estate values.
Delays Due to Liquidation. Even assuming that the Properties provide
adequate security for the Loans, substantial delays could be encountered in
connection with the liquidation of defaulted Loans and corresponding delays in
the receipt of related proceeds by Securityholders could occur if the Master
Servicer is not obligated to make Advances. An action to foreclose on a Property
securing a Loan is regulated by state statutes and rules and is subject to many
of the delays and expenses of other legal proceedings if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a Property. In the event of a default
by a borrower, these restrictions, among other things, may impede the ability of
the Master Servicer to foreclose on or sell the Property or to obtain
liquidation proceeds sufficient to repay all amounts due on the related Loan. In
addition, except as specified in a Prospectus Supplement, the Master Servicer
will be entitled to deduct from the Security Account all Advances and all
expenses reasonably incurred in attempting to recover amounts due on defaulted
Loans and not yet repaid, including payments to senior lienholders, legal fees
and costs of legal action, real estate taxes and maintenance and preservation
expenses.
Disproportionate Effect of Liquidation Expenses. The Loans may have smaller
balances than other types of mortgage loans. Liquidation expenses with respect
to defaulted loans do not vary directly with the outstanding principal balance
of the loan at the time of default. Therefore, assuming that a servicer took the
same steps in realizing upon a defaulted loan having a small remaining principal
balance as it would in the case of a defaulted loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the outstanding principal balance of the small loan
than would be the case with the defaulted loan having a large remaining
principal balance.
Junior Liens. Since the mortgages and deeds of trust securing some of Loans
may be junior liens subordinate to the rights of the mortgagee under the related
senior mortgage(s) or deed(s) of trust, the proceeds from any liquidation,
insurance policy or condemnation will be available to satisfy the outstanding
balance of such junior lien only to the extent that the claims of such senior
mortgagees have been satisfied in full, including any related foreclosure costs.
In addition, a junior mortgagee may not foreclose on the property securing a
junior mortgage unless it forecloses subject to any senior mortgage, in which
case it must either pay the entire amount due on any senior mortgage at or prior
to the foreclosure sale or undertake the obligation to make payments on any such
senior mortgage in the event the borrower is in default thereunder. The Trust
Fund will not have any source of funds to satisfy any senior mortgages or make
payments due to any senior mortgagees and may therefore be prevented from
foreclosing on the related Property.
Environmental Risks. Real property pledged as security to a lender may be
subject to certain environmental risks. Under the laws of certain states,
contamination of a property may give rise to a lien on the property to assure
the costs of cleanup. In several states, such a lien has priority over the lien
of an existing mortgage against such property. In addition under the laws of
some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), a lender may be liable, as an
"owner" or "operator", for costs of addressing releases or threatened releases
of hazardous substances that require remedy at a property, if agents or
employees of the lender have become sufficiently involved in the operations of
the borrower, regardless of whether the environmental damage or threat was
caused by a prior owner. Such costs could result in a loss to the holders of one
or more classes of Securities of the related Series. A lender also risks such
liability on foreclosure of the related property. See "Certain Legal Aspects of
the Loans -- Environmental Considerations".
LIMITATIONS, REDUCTIONS AND SUBSTITUTIONS OF CREDIT ENHANCEMENT
Although credit enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof, the
amount of such credit enhancement will be limited, as set forth in the related
Prospectus Supplement, and may be subject to periodic reduction in accordance
with a schedule or formula or may otherwise decline, and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities. Moreover, such credit enhancement may not cover all potential losses
or risks. For example, credit enhancement may not cover fraud or negligence by a
loan originator or other parties. In the event losses exceed the amount of
coverage provided by any credit enhancement or losses of a type not covered by
any credit enhancement occur, such losses will be borne by one or more classes
of Securityholders of the related Series. In addition, the Depositor will
generally be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any Series of Securities, provided the applicable
Rating Agencies indicate that the then-current ratings of the Securities of such
Series will not be adversely affected. See "Credit Enhancement". None of the
Depositor, the Seller, the Trustee, or the Master Servicer will have any
obligations to replace, replenish or supplement any credit enhancement or take
any action to maintain the rating of any Security.
VALUE OF TRUST FUND ASSETS
With respect to a Series of Securities that includes Notes, there is no
assurance that the market value of the Trust Fund Assets or any other assets
relating to a Series of Securities described under "Credit Enhancement" herein
will at any time be equal to or greater than the principal amount of the
Securities of such Series then outstanding, plus accrued interest thereon.
Moreover, if a Series of Securities includes Notes, upon an event of default
under the Indenture, if any, for a Series of Securities and a sale of the
related Trust Fund Assets or upon a sale of the assets of a Trust Fund for a
Series of Securities, the Trustee, the Master Servicer, the credit enhancer, if
any, and any other service provider specified in the related Prospectus
Supplement generally will be entitled to receive the proceeds of any such sale
to the extent of unpaid fees and other amounts owing to such persons under the
related Agreement prior to distributions to Securityholders. Upon any such sale,
the proceeds thereof may be insufficient to pay in full the principal of and
interest on the Securities of such Series.
YIELD, WEIGHTED AVERAGE LIFE AND REINVESTMENT RISK CONSIDERATIONS
The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the extent of
prepayments (including for this purpose prepayments resulting from refinancing
or liquidations of the Loans due to defaults, casualties, condemnations and
repurchases by the Seller or the Depositor and purchases by the Master Servicer)
of the Loans comprising the Trust Fund Assets, which prepayments may be
influenced by a variety of factors including general economic conditions,
prevailing interest rate levels, the availability of alternative financing and
homeowner mobility; (ii) the manner of allocating principal payments among the
classes of Securities of a Series as specified in the related Prospectus
Supplement; (iii) the exercise by the party entitled thereto of any right of
optional termination; and (iv) the rate and timing of payment defaults and
losses incurred with respect to the Trust Fund Assets. The repurchase of Loans
may result from material breaches of the Seller's or the Depositor's
representations and warranties. A Loan may be purchased at the option of the
Seller, the Master Servicer or the Depositor if it is defaulted or if a default
with respect thereto is reasonably foreseeable. The yields to maturity and
weighted average lives of the Securities will be affected primarily by the rate
and timing of prepayment of the Loans comprising the Trust Fund Assets. In
addition, the yields to maturity and weighted average lives of the Securities
will be affected by the distribution of amounts remaining in any Pre-Funding
Account following the end of the related Funding Period. Any reinvestment risks
resulting from a faster or slower incidence of prepayment of Loans held by a
Trust Fund will be borne entirely by the holders of one or more classes of the
related Series of Securities. See "-- Pre-Funding Accounts," "Yield, Maturity
and Prepayment Considerations" and "The Trust Fund -- Pre-Funding Account."
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the Securities were to accrue through the day immediately preceding
each Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate. See "Description of the Securities --
Distributions on Securities -- Distributions of Interest." In addition, the
yield to investors may be adversely affected by interest shortfalls which may
result from the timing of the receipt of prepayments or liquidations to the
extent that such interest shortfalls are not covered by the mechanism(s), if
any, specified in the applicable Prospectus Supplement. The yield to investors
in Classes of Securities will be adversely affected to the extent that losses on
the Loans in the related Trust Fund are allocated to such Classes and may be
adversely affected to the extent of unadvanced delinquencies on the Loans in the
related Trust Fund. Classes of Securities identified in the applicable
Prospectus Supplement as Subordinated Securities are more likely to be affected
by delinquencies and losses than other Classes of Securities. See "Yield,
Maturity and Prepayment Considerations."
PRE-FUNDING ACCOUNTS
If so provided in the related Prospectus Supplement, on the related Closing
Date the Depositor will deposit cash in an amount (the "Pre-Funded Amount")
specified in such Prospectus Supplement into an account (the "Pre- Funding
Account"). In no event will the Pre-Funded Amount exceed 25% of the initial
aggregate principal amount of the related Series of Securities. The Pre-Funded
Amount will be used to purchase Loans ("Subsequent Loans") in a period from the
related Closing Date to a date not more than three months after such Closing
Date (such period, the "Funding Period") from the Depositor (which, in turn,
will acquire such Subsequent Loans from the Seller). The Pre-Funding Account
will be maintained with the Trustee for the related Series of Securities and is
designed solely to hold funds to be applied by the Trustee during the Funding
Period to pay to the Depositor the purchase price for Subsequent Loans. Amounts
on deposit in the Pre-Funding Account will not be available to cover losses on
or in respect of the related Loans. To the extent that the entire Pre-Funded
Amount has not been applied to the purchase of Subsequent Loans by the end of
the related Funding Period, any amounts remaining in the Pre-Funding Account
will be distributed as a prepayment of principal to Securityholders on the
Distribution Date immediately following the end of the Funding Period, in the
amounts and pursuant to the priorities set forth in the related Prospectus
Supplement. Any reinvestment risk resulting from such prepayment will be borne
entirely by the holders of one or more classes of the related Series of
Securities. The applicable Agreement will provide that each Pool, following the
conveyance of any Subsequent Loans to the applicable Pool, shall, in the
aggregate, conform to certain specified characteristics. See "The Trust Fund -
Pre-Funding Account."
CHARACTERISTICS OF A POOL MAY VARY
Over time, certain characteristics of a Pool may change. A Pool may pay off
in unpredictable ways which may cause the characteristics of a Pool to differ,
sometimes significantly, from its original characteristics.
BANKRUPTCY AND INSOLVENCY RISKS
Seller and Depositor. Each of the Seller and the Depositor will treat the
transfer of the Trust Fund Assets by the Seller to the Depositor as a sale or
contribution to capital for accounting purposes. The Depositor will in each case
transfer the Trust Fund Assets to a trust and the Depositor and the trust will
treat the transfer of Trust Fund Assets from the Depositor to the trust as a
sale or contribution to capital for accounting purposes. As sales or
contributions to capital of the Trust Fund Assets, the Trust Fund Assets would
not be part of the Seller's or the Depositor's bankruptcy estate and would not
be available to the Seller's creditors. However, in the event of the insolvency
of the Seller or the Depositor, it is possible that the bankruptcy trustee or a
creditor of the Seller may attempt to recharacterize the conveyance of the Trust
Fund Assets as a borrowing by the Seller or the Depositor, secured by a pledge
of the Trust Fund Assets. In either case, this position, if argued before or
accepted by a court, could prevent timely payments of amounts due on the
Securities and result in a reduction of payments due on the Securities.
Master Servicer. In the event of the insolvency of the Master Servicer, the
receiver may have the power to prevent the Trustee or the Securityholders from
appointing a successor master servicer. The time period during which cash
collections may be commingled with the Master Servicer's own funds prior to each
Distribution Date will be specified in the related Prospectus Supplement. In the
event of the insolvency of the Master Servicer and if such cash collections are
commingled with the Master Servicer's own funds for at least ten days, the Trust
Fund will likely not have a perfected security interest in such collections
since such collections would not have been deposited in a segregated account
within ten days after the collection thereof, and the inclusion thereof in the
bankruptcy estate of the Master Servicer may result in delays in payment and
failure to pay amounts due on the Securities of the related Series.
Borrowers. Federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon its
security. For example, in a proceeding under the federal Bankruptcy Code, a
lender may not foreclose on a Property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the
Property is not the debtor's principal residence and the court determines that
the value of the Property is less than the principal balance of the mortgage
loan, for the reduction of the secured indebtedness to the value of the Property
as of the date of the commencement of the bankruptcy, rendering the lender a
general unsecured creditor for the difference, and also may reduce the monthly
payments due under such mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. The effect of any such proceedings under the
federal Bankruptcy Code, including but not limited to any automatic stay, could
result in delays in receiving payments on the Loans underlying a Series of
Securities and possible reductions in the aggregate amount of such payments.
BALLOON PAYMENTS
Certain of the Loans as of the related Cut-off Date may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments (i.e., balloon payments) at their stated maturity. Loans with
balloon payments ("Balloon Loans") involve a greater degree of risk because the
ability of a borrower to make a balloon payment typically will depend upon such
borrower's ability either to refinance the Loan or to sell the related Property
prior to the stated maturity of the Loan. The ability of a borrower to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage rates at the time of sale or
refinancing, the borrower's equity in the related Property, the financial
condition of the borrower and tax laws.
CERTAIN OTHER RISKS RELATED TO LEGAL ASPECTS OF THE LOANS
Consumer Protection Laws. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing of
certain originators and servicers of Loans. In addition, most states have other
laws, public policy and general principles of equity relating to the protection
of consumers, unfair and deceptive practices and practices which may apply to
the origination, servicing and collection of the Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Master Servicer to damages
and administrative sanctions. See "Certain Legal Aspects of the Loans." The
Loans may also be subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the
use and reporting of information related to the borrower's
credit experience; and
(iv) for Loans that were originated or closed after November 7,
1989, the Home Equity Loan Consumer Protection Act of 1988, which
requires additional application disclosures, limits changes that may be
made to the loan documents without the borrower's consent and restricts
a lender's ability to declare a default or to suspend or reduce a
borrower's credit limit to certain enumerated events.
The Riegle Act. Certain mortgage loans may be subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Riegle Act")
which incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money mortgage loans with high interest rates or
high-up-front fees and charges. The provisions of the Riegle Act apply on a
mandatory basis to all mortgage loans originated on or after October 1, 1995.
These provisions can impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may affect the enforceability of the
related loans. In addition, any assignee of the creditor would generally be
subject to all claims and defenses that the consumer could assert against the
creditor, including, without limitation, the right to rescind the mortgage loan.
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans and in addition could subject the Trust Fund to damages
and administrative enforcement. Losses on such Loans that are not otherwise
covered by the credit enhancement described in the applicable Prospectus
Supplement will be borne by the holders of one or more classes of Securities of
the related Series. See "Certain Legal Aspects of the Loans".
RISKS RELATING TO INDEXED SECURITIES
An investment in Securities indexed, as to principal and/or interest, to
one or more values of currencies (including exchange rates and swap indices
between currencies), commodities, interest rates or other indices entails
significant risks that are not associated with similar investments in a
conventional fixed-rate debt security. If the interest rate of such a Security
is so indexed, it may result in an interest rate that is less than that payable
on a conventional fixed-rate debt security issued at the same time, including
the possibility that no interest will be paid, and, if the principal amount of
such a Security is so indexed, the principal amount payable at maturity may be
less than the original purchase price of such Security if allowed pursuant to
the terms of such Security, including the possibility that no principal will be
paid. The secondary market for such Securities will be affected by a number of
factors, independent of the characteristics of the Trust Fund Assets, structure
of the cash flows and the value of the applicable currency, commodity, interest
rate or other index, including the volatility of the applicable currency,
commodity, interest rate or other index, the time remaining to the maturity of
such Securities, the amount outstanding of such Securities and market interest
rates. The value of the applicable currency, commodity, interest rate or other
index depends on a number of interrelated factors, including economic, financial
and political events. Additionally, if the formula used to determine the
principal amount, premium, if any, or interest payable with respect to such
Securities contains a multiple or leverage factor, the effect of any change in
the applicable currency, commodity, interest rate or other index may be
increased. The historical experience of the relevant currencies, commodities,
interest rates or other indices should not be taken as an indication of future
performance of such currencies, commodities, interest rates or other indices
during the term of any Security. The credit ratings assigned to any Series or
class of Securities are not, in any way, reflective of the potential impact of
the factors discussed above, or any other factors, on the market value of the
Securities. Accordingly, prospective investors should consult their own
financial and legal advisors as to the risks involved in an investment in such
Securities and the suitability of such Securities in light of their particular
circumstances.
LIMITED NATURE OF THE RATING OF THE SECURITIES; RISKS OF A
DOWNGRADE
It will be a condition to the issuance of a class of Securities offered
hereby that such Securities be rated in one of the four highest rating
categories by the Rating Agencies identified in the related Prospectus
Supplement. Any such rating would be based on, among other things, the adequacy
of the value of the related Trust Fund Assets and any credit enhancement with
respect to such class and will represent each such Rating Agency's assessment
solely of the likelihood that holders of such class of Securities will receive
payments to which such Securityholders are entitled under the related Agreement
or Indenture. Such rating will not constitute an assessment of the likelihood
that principal prepayments on the related Trust Fund 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 of the Series of
Securities. Such rating will not constitute a recommendation to purchase, hold
or sell Securities, inasmuch as it does not address market price or suitability
for a particular investor. Such rating will not address the possibility that
prepayment at higher or lower rates than anticipated by an investor may cause
such investor to experience a lower than anticipated yield or that an investor
purchasing a Security at a significant premium might fail to recoup its initial
investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it will not be lowered or withdrawn entirely by
the related Rating Agency if, in its judgment, circumstances in the future so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series of Securities, such rating might also be lowered or
withdrawn because of, among other reasons, an adverse change in the financial or
other condition of a credit enhancement provider or a change in the rating of
such credit enhancement provider's long term debt.
Any withdrawal or reduction in the rating assigned to a class of Securities
will adversely affect the price potential purchasers are willing to pay for such
Securities and may adversely affect the liquidity of such Securities.
BOOK-ENTRY REGISTRATION
One or more classes of Securities of a Series may be issued in book-entry
form. The issuance of Securities in book-entry form may reduce the liquidity of
the Securities in the secondary trading market since certain investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates. Since transactions in book-entry Securities can be effected only
through the Depository Trust Company ("DTC"), participating organizations,
Financial Intermediaries and certain banks, the ability of a Securityholder
having a beneficial ownership interest in the Securities ("Security Owners") to
pledge a book-entry Security to persons or entities that do not participate in
the DTC system may be limited due to the lack of a physical certificate
representing such Securities. Security Owners will not be recognized as
Securityholders as such term is used in the related Agreement, and Security
Owners will be permitted to exercise the rights of Securityholders only
indirectly through DTC and its Participants.
In addition, Securityholders may experience some delay in their receipt of
distributions of interest and principal on book-entry Securities since
distributions are required to be forwarded by the Trustee to DTC and DTC will
then be required to credit such distributions to the accounts of Depository
participants which thereafter will be required to credit them to the accounts of
Securityholders either directly or indirectly through Financial Intermediaries.
See "Description of the Securities -- Book-Entry Registration of Securities".
THE TRUST FUND*
_________
* Whenever the terms "Pool," "Certificates," "Notes"
and "Securities" are used in this Prospectus, such terms will be deemed to
apply, unless the context indicates otherwise, to one specific Pool and the
Securities of one Series including the Certificates representing certain
undivided interests in, and/or Notes secured by the assets of, a single Trust
Fund consisting primarily of the Trust Fund Assets in such Pool. Similarly, the
term "Pass-Through Rate" will refer to the Pass-Through Rate borne by the
Certificates and the term "Interest Rate" will refer to the interest rate borne
by the Notes of one specific Series, as applicable, and the term "Trust Fund"
will refer to one specific Trust Fund.
GENERAL
The Securities of each Series will represent interests in all or a part of
the assets of the related Trust Fund, and the Notes of each Series will be
secured by the pledge of all or a portion of the assets of the related Trust
Fund. The Trust Fund for each Series will be held by the Trustee for the benefit
of the related Securityholders. The assets of each Trust Fund (the "Trust Fund
Assets") will consist of one or more pools (each, a "Pool") comprised of Loans
and/or Norwest ABS as specified in the related Prospectus Supplement, together
with payments in respect of such Loans or Norwest ABS, as specified in the
related Prospectus Supplement. Each Pool will be created on the first day of the
month of the issuance of the related Series of Securities or such other date
specified in the related Prospectus Supplement (the "Cut-off Date"). The
Securities will be entitled to payment from the assets of the related Trust Fund
or Funds or one or more Pools thereof and other assets, if any, assigned to the
Trustee and, if a Series of Securities consists of Notes, pledged to the
Indenture Trustee for the benefit of the Noteholders, as specified in the
related Prospectus Supplement and will not be entitled to payments in respect of
the assets of any other Trust Fund established by the Depositor.
The Trust Fund Assets will be acquired by the Depositor from Norwest
Mortgage, Inc. (the "Seller"), an affiliate of both the Depositor and the Master
Servicer, and conveyed without recourse by the Depositor to the related Trust
Fund. Loans acquired by the Depositor will have been originated in accordance
with the underwriting criteria specified below under "Loan Programs --
Underwriting Standards" or as otherwise described in the related Prospectus
Supplement.
The Depositor will cause the Trust Fund Assets to be assigned to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series and, if a Series consists of
Notes, will cause the Trust Fund Assets to be pledged to the Indenture Trustee
for the benefit of the Noteholders. The Master Servicer will service the Trust
Fund Assets, either directly or through other servicing institutions ("Sub-
Servicers"), pursuant to a Pooling and Servicing Agreement among the Depositor,
the Master Servicer and the Trustee with respect to a Series consisting of
Certificates, or sale and servicing agreement (each, a "Sale and Servicing
Agreement") among the Depositor, the Master Servicer and the Trustee with
respect to a Series consisting of Notes, and will receive a fee for such
services. See "Loan Programs" and "The Agreements". With respect to Loans
serviced by the Master Servicer through a Sub-Servicer, the Master Servicer will
remain liable for its servicing obligations under the related Agreement as if
the Master Servicer alone were servicing such Loans.
As used herein, "Agreement" means, with respect to a Series consisting of
Certificates, the Pooling and Servicing Agreement, and with respect to a Series
consisting of Notes, the Trust Agreement, the Indenture and the Sale and
Servicing Agreement, as the context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the trustee of
such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Trust Fund Assets and other assets contemplated
herein and specified in the related Prospectus Supplement and the proceeds
thereof, issuing Securities and making payments and distributions thereon and
certain related activities. No Trust Fund is expected to have any source of
capital other than its assets and any related credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Depositor with respect to a Series of Securities will be to
obtain certain representations and warranties from the Seller and to assign to
the Trustee for such Series of Securities the Depositor's rights with respect to
such representations and warranties. See "The Agreements -- Assignment of the
Trust Fund Assets". The obligations of the Master Servicer with respect to the
Loans will consist principally of its contractual servicing obligations under
the related Agreement (including its obligation to enforce the obligations of
the Seller as more fully described herein under "Loan Programs --
Representations by Seller; Repurchases") and its obligation, if any, to make
certain cash advances in the event of delinquencies in payments on or with
respect to the Loans in the amounts described herein under "Description of the
Securities -- Advances". The obligations of the Master Servicer to make advances
may be subject to limitations, to the extent provided herein and in the related
Prospectus Supplement.
The following is a brief description of the assets expected to be included
in the Trust Funds. If specific information respecting the Trust Fund Assets is
not known at the time the related Series of Securities initially is offered,
more general information of the nature described below will be provided in the
related Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Securities (the "Detailed
Description"). A copy of the Agreement with respect to each Series of Securities
will be available for inspection at the corporate trust office of the Trustee
specified in the related Prospectus Supplement. A schedule of the Loans relating
to such Series will be attached to the Agreement delivered to the Trustee upon
delivery of the Securities.
THE LOANS
General. The Loans to be included in a Trust Fund may consist of Subprime Loans,
Closed End Second Loans and Title I Loans. See "Loan Programs - Underwriting
Standards - First Lien Subprime Mortgage Loans," "--Closed End Second Mortgage
Loans," and "-Title I Loans."
The payment terms of the Loans to be included in a Trust Fund will be
described in the related Prospectus Supplement and may include any of the
following features (or combination thereof), all as described below or in the
related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate or from a fixed rate to an
adjustable rate. Changes to an adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal of
a Loan for such periods and under such circumstances as may be specified in
the related Prospectus Supplement. Loans may provide for the payment of
interest at a rate lower than the specified interest rate borne by such
Loan (the "Loan Rate") for a period of time or for the life of the Loan,
and the amount of any difference may be contributed from funds supplied by
the seller of the Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the Loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
Loan Rate or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal may be due
on maturity ("balloon payment"). Principal may include interest that has
been deferred and added to the principal balance of the Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Loan, may increase over a specified period of time or may
change from period to period. Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Loan or may decline over time, and may be
prohibited for the life of the Loan or for certain periods ("lockout
periods"). Certain Loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee
in connection with any such subsequent prepayment. Other Loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The Loans may include "due on sale" clauses which
permit the mortgagee to demand payment of the entire Loan in connection
with the sale or certain transfers of the related Property. Other Loans may
be assumable by persons meeting the then applicable underwriting standards
of the Seller.
A Trust Fund may contain certain Loans ("Buydown Loans") that include
provisions whereby a third party partially subsidizes the monthly payments of
the borrowers on such Loans during the early years of such Loans, the difference
to be made up from a fund (a "Buydown Fund") contributed by such third party at
the time of origination of the Loan. A Buydown Fund will be in an amount equal
either to the discounted value or full aggregate amount of future payment
subsidies. The underlying assumption of buydown plans is that the income of the
borrower will increase during the buydown period as a result of normal increases
in compensation and inflation, so that the borrower will be able to meet the
full loan payments at the end of the buydown period. To the extent that this
assumption as to increased income proves inaccurate, the possibility of defaults
on Buydown Loans is increased.
Loans will consist of mortgage loans or deeds of trust secured by first or
subordinated liens on one- to four-family residential properties. If so
specified, the Loans may include cooperative apartment loans ("Cooperative
Loans") secured by security interests in shares issued by private, non-profit,
cooperative housing corporations ("Cooperatives") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in such Cooperatives' buildings. The real property which secures
repayment of the Loans is referred to as the "Properties." The Loans will
secured by mortgages or deeds of trust or other similar security instruments
creating a lien on the Properties. Such liens may be subordinated to one or more
senior liens on the related Properties as described in the related Prospectus
Supplement. The Properties relating to Loans will consist of single family
residences, individual units in condominium apartment buildings, two- to
four-family dwelling units, manufactured housing units, or other improved real
property. Such Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the term
of the leasehold will exceed the scheduled maturity of the Loan by at least five
years, unless otherwise specified in the related Prospectus Supplement. The
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.
If specified in the applicable Prospectus Supplement, Loans with certain
loan-to-value ratios, combined loan-to-value ratios and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a "Primary Mortgage Insurance Policy"). The existence,
extent and duration of any such coverage will be described in the applicable
Prospectus Supplement.
Norwest ABS. Norwest ABS may consist of (a) asset backed pass-through
certificates representing beneficial interests in mortgage loans or (b) asset
backed notes secured by such mortgage loans, and in each case issued by trust
funds of other Series established by the Depositor or an affiliate of the
Depositor. Norwest ABS may include stripped mortgage-backed securities
representing an undivided interest in all or a part of any of the principal
distributions (but not the interest distributions) or the interest distributions
(but not the principal distributions) or in some specified portion of the
principal and interest distributions (but not all of such distributions) on
mortgage loans. Norwest ABS will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement (a "Norwest ABS
Agreement"). Norwest Bank, the master servicer of the underlying mortgage loans,
and either Norwest Mortgage or an affiliate thereof, acting as depositor, will
have entered into the Norwest ABS Agreement with the trustee under such Norwest
ABS Agreement (the "Norwest ABS Trustee"). The Norwest ABS Trustee or its agent,
or a custodian, will possess the mortgage loans underlying such Norwest ABS.
Mortgage loans underlying a Norwest ABS will be serviced by Norwest Mortgage,
Norwest Bank and/or other affiliated or unaffiliated servicers (each, a "Norwest
ABS Servicer"). Although individual mortgage loans underlying the Norwest ABS
may be insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and the Norwest ABS themselves will
not be so insured or guaranteed.
Distributions of principal and interest will be made on the Norwest ABS on
the dates and in the amounts specified in the related Prospectus Supplement. The
Norwest ABS Issuer or the Norwest ABS Servicer may have the right or may be
required to repurchase assets underlying the Norwest ABS after a certain date or
under other circumstances specified in the related Prospectus Supplement.
The mortgage loans underlying the Norwest ABS may consist of fixed rate,
level payment, fully amortizing loans or graduated payment mortgage loans,
Buydown Loans, adjustable rate mortgage loans or loans have balloon or other
special payment feature. Such mortgage loans may be secured by single family
property, or two- to four- family property or by an assignment of the
proprietary lease or accompanying agreement relating to a specific dwelling
within a Cooperative and the related shares issued by such Cooperative.
The Prospectus Supplement for a Series for which the Trust Fund includes
Norwest ABS will specify (i) the aggregate approximate principal amount and type
of the Norwest ABS to be included in the Trust Fund; (ii) certain
characteristics of the mortgage loans that comprise the underlying assets for
the Norwest ABS including (A) the payment features of such mortgage loans, (B)
the approximate aggregate principal balance, if known, of underlying mortgage
loans insured or guaranteed by a governmental entity, (C) the servicing fee or
range of servicing fees with respect to the mortgage loans and (D) the minimum
and maximum stated maturities of the underlying mortgage loans at origination;
(iii) the maximum original term-to-stated maturity of the Norwest ABS; (v) the
pass-through or certificate rate of the Norwest ABS; (vi) the weighted average
pass-through or certificate rate of the Norwest ABS; (vii) the Norwest ABS
Issuer, the Norwest ABS Servicer (if other than the Norwest ABS Issuer) and the
Norwest ABS Trustee for such Norwest ABS; (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, surety bonds,
letters of credit or guaranties related to the mortgage loans underlying the
Norwest ABS or to such Norwest ABS themselves; (ix) the terms on which the
underlying mortgage loans for such Norwest ABS may, or is required to, be
purchased prior to the stated maturity of the Norwest ABS; and (x) the terms on
which mortgage loans may be substituted for those originally underlying the
Norwest ABS.
Additional Information. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to the Depositor, with respect to the Loans contained in the
related Pool, including (i) the aggregate outstanding principal balance and the
average outstanding principal balance of the Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Loan (e.g., single family
residences, individual units in condominium apartment buildings, two- to
four-family dwelling units or other improved real property), (iii) the original
terms to maturity of the Loans, (iv) the largest principal balance and the
smallest principal balance of any of the Loans, (v) the earliest origination
date and latest maturity date of any of the Loans, (vi) the loan-to-value ratios
or combined loan-to-value ratios, as applicable, of the Loans, (vii) the Loan
Rates or annual percentage rates ("APR") or range of Loan Rates or APR's borne
by the Loans, (viii) the maximum and minimum per annum Loan Rates, and (ix) the
geographical location of the Properties securing the Loans. If specific
information respecting the Loans is not known to the Depositor at the time the
related Securities are initially offered, more general information of the nature
described above will be provided in the related Prospectus Supplement, and
specific information will be set forth in the Detailed Description.
SUBSTITUTION OF TRUST FUND ASSETS
Substitution of Trust Fund Assets will be permitted in the event of
breaches of representations and warranties with respect to any original Trust
Fund Asset or in the event the documentation with respect to any Trust Fund
Asset is determined by the Trustee to be incomplete. The period during which
such substitution will be permitted generally will be indicated in the related
Prospectus Supplement.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre- Funding Account, in the name of the related
Trustee on behalf of the related Securityholders, into which the Depositor will
deposit cash in an amount equal to the Pre-Funded Amount on the related Closing
Date. The Pre- Funding Account will be maintained with the Trustee for the
related Series of Securities and is designed solely to hold funds to be applied
by such Trustee during the Funding Period to pay to the Depositor the purchase
price for Subsequent Loans. Monies on deposit in the Pre-Funding Account will
not be available to cover losses on or in respect of the related Loans. The
Pre-Funded Amount will not exceed 25% of the initial aggregate principal amount
of the Certificates and Notes of the related Series. The Pre-Funded Amount will
be used by the related Trustee to purchase Subsequent Loans from the Depositor
from time to time during the Funding Period. The Funding Period, if any, for a
Trust Fund will begin on the related Closing Date and will end on the date
specified in the related Prospectus Supplement, which in no event will be later
than the date that is three months or ninety days after the related Closing
Date. Monies on deposit in the Pre-Funding Account may be invested in Permitted
Investments under the circumstances and in the manner described in the related
Agreement. Earnings on investment of funds in the Pre-Funding Account will be
deposited into the related Security Account or such other trust account as is
specified in the related Prospectus Supplement and losses will be charged
against the funds on deposit in the Pre- Funding Account. Any amounts remaining
in the Pre-Funding Account at the end of the Funding Period will be distributed
to the related Securityholders in the manner and priority specified in the
related Prospectus Supplement, as a prepayment of principal of the related
Securities.
Following the end of the Funding Period, a current report on Form 8-K
containing a description of the Loans acquired by the Trust Fund as of their
respective Cut-Off Dates will be filed with the Commission.
Any conveyance of Subsequent Loans will be subject to the following
conditions, among others specified in the related Prospectus Supplement: (i)
each such Subsequent Loan must satisfy the applicable underwriting criteria
specified below under "Loan Programs - Underwriting Standards" and such
additional criteria as may be specified in the related Prospectus Supplement;
(ii) if and to the extent specified in the related Prospectus Supplement, the
third-party credit enhancement provider, if any, shall have approved the
transfer of such Subsequent Loans to the Trust Fund; (iii) neither the Depositor
nor the Seller will have selected such Subsequent Loans in a manner that either
believes is adverse to the interests of the Securityholders; (iv) the Depositor
and the Seller will deliver certain opinions of counsel to the Trustee and the
Rating Agencies with respect to the validity of the conveyance of such
Subsequent Loans; and (v) the Rating Agencies shall confirm that the ratings on
the Securities of such series have not been withdrawn or reduced as a result of
the transfer of such Subsequent Loans to the Trustee.
CAPITALIZED INTEREST ACCOUNT
If so provided in the related Prospectus Supplement, on the related Closing
Date the Depositor will deposit in an account (the "Capitalized Interest
Account") cash in such amount as is necessary to cover shortfalls in interest on
the related Series of Securities that may arise as a result of utilization of
the Pre-Funding Account as described above. The Capitalized Interest Account
will be maintained with the Trustee for the related Series of Securities and is
designed solely to cover the above-mentioned interest shortfalls. Amounts on
deposit in the Capitalized Interest Account will not be available to cover
losses on or in respect of the related Loans. To the extent that the entire
amount on deposit in the Capitalized Interest Account has not been applied to
cover shortfalls in interest on the related Series of Securities by the end of
the Funding Period, any amounts remaining in the Capitalized Interest Account
will be paid to the Depositor.
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 Trust Fund Assets. The Depositor
expects to sell Securities in Series from time to time, but the timing and
amount of offerings of Securities will depend on a number of factors, including
the volume of Trust Fund Assets acquired by the Depositor, prevailing interest
rates, availability of funds and general market conditions.
THE DEPOSITOR
Directors Asset Conduit Corporation, a Delaware corporation (the
"Depositor"), was incorporated in July 1997 for the limited purpose of
acquiring, owning and transferring Trust Fund Assets and selling interests
therein or bonds secured thereby. The Depositor is a limited purpose finance
subsidiary of Norwest Mortgage, Inc., a California corporation. The Depositor
maintains its principal office at 7485 New Horizon Way, Frederick, Maryland
21703. Its telephone number is (301) 846-8101. Neither the Depositor nor any of
the Depositor's affiliates will insure or guarantee distributions on the
Securities of any Series.
NORWEST MORTGAGE
Norwest Mortgage, Inc. ("Norwest Mortgage") was originally incorporated as
a Minnesota corporation on July 1, 1983. On August 30, 1995, Norwest Mortgage
and Directors Mortgage Loan Corporation, a California corporation, completed a
statutory merger. As a result of the merger, Norwest Mortgage became a
California corporation as of September 1, 1995. Norwest Mortgage is engaged
principally in the business of (i) originating, purchasing and selling
residential mortgage loans in its own name and through its affiliates, Norwest
Funding, Inc. and Norwest Funding II, Inc. (such affiliates, collectively,
"Norwest Funding") and (ii) servicing residential mortgage loans for its own
account or for the account of others. Norwest Mortgage is a direct, wholly owned
subsidiary of Norwest Nova, Inc. and an indirect, wholly owned subsidiary of
Norwest Corporation. The executive offices of Norwest Mortgage are located at
405 Southwest 5th Street, Des Moines, Iowa 50309-4603, and its telephone number
is (515) 221-7300.
On May 7, 1996 Norwest Mortgage and Norwest Funding acquired all of the
mortgage origination, servicing and secondary marketing operations of The
Prudential Home Mortgage Company, Inc. ("PHMC"), an indirect, wholly-owned
subsidiary of The Prudential Insurance Company of America, and purchased certain
mortgage loans from PHMC and a substantial portion of PHMC's mortgage servicing
portfolio.
On January 7, 1997, a complaint was served on PHMC with respect to an
individual and purported class action filed by The Capitol Life Insurance
Company ("Capitol Life") in the Superior Court of New Jersey against PHMC, The
Prudential Home Mortgage Securities Company, Inc. ("PHMSC") and certain of their
affiliates and 100 unnamed "Doe defendants". On March 26, 1997, PHMC and others
filed a motion to dismiss the complaint for failure to state a claim on which
relief can be granted. On June 2, 1997, an amended complaint was filed and
American Investors Life Insurance Company joined Capitol Life as a named
plaintiff in the actions. As amended, the complaint asserts claims against PHMC,
PHMSC, certain of their present and former affiliates and certain former
employees as well as Merrill Lynch & Co., Kidder, Peabody & Co. Incorporated,
Lehman Brothers Inc. and Salomon Brothers Inc. As amended, the complaint
alleges, among other things, that the defendants made false and misleading
statements and/or omissions of material fact and fraudulently concealed material
facts in connection with the purchase by the plaintiffs of certain of PHMSC's
Subordinated Mortgage Securities, Series 1992-A. Certain of the named
defendants, who are former employees of PHMC or certain of its affiliates are
officers or employees of the Depositor or Norwest Mortgage. The Depositor has
been advised that PHMC, PHMSC and their affiliated defendants and such common
employees will vigorously defend the action. Based on the foregoing, the
Depositor does not believe that this litigation will have an adverse effect on
any Series of Securities.
NORWEST BANK
Norwest Bank Minnesota, National Association ("Norwest Bank") will act as
Master Servicer with respect to each Series. Norwest Bank is a direct, wholly
owned subsidiary of Norwest Corporation. Norwest Bank is a national banking
association originally chartered in 1872 and is engaged in a wide range of
activities typical of a national bank.
Norwest Bank's principal office is located at Norwest Center, Sixth and
Marquette, Minneapolis, Minnesota 55479. Norwest Bank conducts its master
servicing and securities administration services at its offices in Columbia,
Maryland. Its address there is 11000 Broken Land Parkway, Columbia, Maryland
21044-3662 and its telephone number is (410) 884-2000.
LOAN PROGRAMS
The Loans will have been purchased by the Depositor directly from the
Seller. Unless otherwise specified in the related Prospectus Supplement, the
Loans so acquired by the Depositor will have been originated in accordance with
the applicable underwriting criteria specified below under "Underwriting
Standards".
The Loans acquired by the Depositor from the Seller generally will have
been originated or acquired by the Seller through the following sources. The
Seller, through its subprime lending division, Directors Acceptance, originates
subprime first lien mortgage loans (the "Subprime Loans") through (i) more than
700 loan production offices located throughout all 50 states, (ii) centralized
production offices located in Frederick, Maryland and Minneapolis, Minnesota, at
which locations applications are received for loans after prospective borrowers
have called toll-free telephone numbers from anywhere in the United States and
(iii) referrals from mortgage brokers. In addition to its own Subprime Loan
originations through Directors Acceptance, the Seller may acquire Subprime Loans
from its affiliates or other unaffiliated originators. The Seller also may
directly originate or acquire from Norwest Bank or other affiliated or
unaffiliated originators closed end second lien mortgage loans (the "Closed End
Second Loans") and may acquire FHA Title I home improvement loans (the "Title I
Loans") from its affiliate, Statewide Mortgage Company.
UNDERWRITING STANDARDS
First Lien Subprime Mortgage Loans. The underwriting functions of Directors
Acceptance are centralized in its California and Minnesota offices. Directors
Acceptance does not delegate underwriting authority to any broker or
correspondent. Directors Acceptance employs loan credit underwriters to
scrutinize the applicant's credit profile and to evaluate whether an impaired
credit history is a result of adverse circumstances or a continuing inability or
unwillingness to meet credit obligations in a timely manner. Personal
circumstances including divorce, family illnesses or deaths and temporary job
loss due to layoffs and corporate downsizing will often impair an applicant's
credit record. The underwriting guidelines used by Directors Acceptance are
primarily intended to evaluate the prospective borrower's credit standing and
ability to repay the loan, as well as the value and adequacy of the proposed
Property as collateral. A prospective borrower applying for a mortgage loan is
required to complete a detailed application. The loan application elicits
pertinent information about the applicant, with particular emphasis on the
applicant's financial condition (assets, liabilities, income and expenses), the
property being financed and the type of loan desired. A self-employed applicant
may be required to submit his or her most recent signed federal income tax
returns. With respect to every applicant, a credit report summarizing the
applicant's credit history with merchants and lenders is obtained. Significant
unfavorable credit information reported by the applicant or by a credit
reporting agency must be explained by the applicant. Loan applications are
classified according to certain characteristics, including but not limited to:
condition and location of the collateral, credit history of the applicant,
ability to pay, loan-to-value ratio and general stability of the applicant in
terms of employment history and time in residence.
Directors Acceptance has established classifications with respect to the
credit profile of the applicant, and each loan is placed into one of five credit
levels denoted as "Gold and Level 1 through Level 4". Terms of Subprime Loans
made by Directors Acceptance, as well as maximum loan-to-value ratios and
debt-to-income ratios, vary depending on the classification of the applicant.
Generally, the loan-to-value ratio is the ratio, expressed as a percentage, of
the principal amount of the mortgage loan at origination to the lesser of (i)
the appraised value of the related Property, as established by an appraisal
obtained by the originator generally no more than four months prior to
origination (or, with respect to newly constructed properties, no more than six
months prior to origination), or (ii) the sale price for such property. In some
instances, the loan-to-value ratio may be based on an appraisal that was
obtained by the originator more than four months prior to origination, provided
that (i) a recertification of the original appraisal is obtained and (ii) the
original appraisal was obtained no more than six months prior to origination.
Loan applicants with less favorable credit ratings generally are restricted to
consideration for loans with higher interest rates and lower loan-to-value
ratios than applicants with more favorable credit ratings. Subject to the
consideration of certain compensating factors described below, the general
criteria used by Directors Acceptance's underwriting staff in classifying loan
applicants are as follow.
<PAGE>
<TABLE>
<CAPTION>
UNDERWRITING CRITERIA OF DIRECTORS ACCEPTANCE
FOR SUBPRIME MORTGAGE LOANS
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL
DEBT
SERVICE-TO- EXISTING BANKRUPTCY COLLECTIONS MAXIMUM
CREDIT INCOME MORTGAGE CONSUMER FILINGS/FORECLOSURE AND LOAN-TO-
LEVEL RATIO HISTORY CREDIT PROCEEDINGS JUDGMENTS RATIO*
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
GOLD 45% or Current at A maximum of two Discharged/completed No outstanding 90%
less. application 30-day late payments more than three years collections, charge-
time and a on installment debt prior to closing. offs, liens,
maximum of one and two 30-day late judgments or re-
30-day late pay- payments on revolving possessions at
ment in the last debt in the last 12 application time
12 months. months. (exceptions con-
considered on a
case-by-case
basis).
- -----------------------------------------------------------------------------------------------------------------------------------
LEVEL 1 50% or Current at Isolated 60-day late Discharged/completed Total outstanding 85%
less. application payments in the last more than two years collections, charge-
time and a 12 months considered on prior to closing. offs, liens or
maximum of two a case-by-case basis. judgments less than
30-day late $500 may remain
payments in the open if over 24
last 12 months. months old and do
not affect title.
All others must be
paid at closing.
- -----------------------------------------------------------------------------------------------------------------------------------
LEVEL 2 50% or Current at Isolated 90-day late Discharged/completed Total outstanding 80%
less. application payments in the last more than two years collections, charge-
time and a 12 months considered on prior to closing or one offs, liens or
maximum of four a case-by-case basis. year with good re- judgments less than
30-day late established/reaffirmed $1,000 may remain
payments or credit. open if over 24
two 30-day months old and do
late payments not affect title.
and one 60- All others must be
day late pay- paid at closing.
ment in the
last 12 months.
- -----------------------------------------------------------------------------------------------------------------------------------
LEVEL 3 55% or Up to 30 days Isolated 120-day late Discharged/completed Total outstanding 75%
less. delinquent at payments in the last more than one year collections, charge-
application time 12 months considered on prior to closing. offs, liens or
and a maximum of a case-by-case basis. judgments less than
two 60-day late $2,500 may remain
payments or one open if over 24
90-day late pay- months old and do
ment in the last not affect title.
12 months. All others must be
paid at closing.
- -----------------------------------------------------------------------------------------------------------------------------------
LEVEL 4 55% or No more than Signficant past or Discharged or ter- Outstanding collec- 65%
less. 120 days delin- present credit pro- minated/completed tions, charge-offs,
quent at blems. Disregard prior to application. liens or judgments
closing. No for timely payments. must be paid at
current default closing.
action may
exist.
- -----------------------------------------------------------------------------------------------------------------------------------
* The maximum loan-to-value ratios are subject to downward adjustment based upon
a number of factors including, without limitation, loan amount, the loan
program, the purpose of the loan, the type of property and whether or not the
property is owner-occupied.
</TABLE>
For the purpose of placing a prospective loan in any of credit level 1
through credit level 4, consecutive or "rolling" late payments having the same
delinquency characterization (e.g., 30-day late or 60-day late) are counted as a
single late payment of such delinquency characterization. Directors Acceptance
uses the foregoing categories and characteristics as guidelines only. On a
case-by-case basis, Directors Acceptance may determine that the prospective
borrower warrants a credit level upgrade based upon the presence of acceptable
compensating factors. Examples of such compensating factors include:
loan-to-value ratio, debt-to-income ratio, long-term stability of employment
and/or residence, statistical credit scores, payment history on past mortgages,
verified cash reserves or reduction in overall monthly expenses.
Except for Balloon Loans, the Subprime Loans originated or acquired by
Directors Acceptance have loan terms of 15 or 30 years and fully amortize over
such terms. The principal amounts of the loans originated or acquired by
Directors Acceptance generally range from a minimum of $20,000 to a maximum of
$500,000. Directors Acceptance generally does not originate or acquire any
mortgage loans where the combined loan-to-value ratio at origination exceeds 95%
in the event of concurrent secondary financing. The loans originated or acquired
by Directors Acceptance are generally secured by single-family detached
residences, condominium units or two- to four-family residences, and such
properties may or may not be occupied by the owner. It is Directors Acceptance
policy not to accept commercial properties or unimproved land as collateral for
Subprime Loans. Directors Acceptance will, however, accept mixed-use properties
such as a property where more than 50% is used for residential purposes and the
balance is used for commercial purposes.
Directors Acceptance's subprime mortgage loan programs include a full
documentation program and a "stated income" program. Under the full
documentation program, loans to borrowers who are salaried employees must be
supported by current employment information in the form of one current pay-stub
with year-to-date information and W-2 tax forms for the last two years (a
complete verification of employment may be substituted for W-2 forms). Directors
Acceptance also performs a telephone verification of employment for salaried
employees prior to funding. In some cases, employment histories may be obtained
through V.I.E., Inc., an affiliate of Norwest Mortgage that obtains employment
data from state unemployment insurance departments or other state agencies.
Under the full documentation program, borrowers who are self-employed must
provide signed individual federal tax returns and, if applicable, signed
year-to-date income statements and/or business federal tax returns. Evidence
must be provided that the business has been in existence for at least one year.
If the business has been in existence less than two years, evidence must be
provided that the applicant had previously been in the same line of work for at
least one year.
Under Directors Acceptance's stated income program, the applicant's
employment and income sources must be stated on the initial signed application.
The applicant's income as stated must be reasonable for the applicant's
occupation as determined in the discretion of the loan underwriter, however such
income is not independently verified. Verification of assets is performed to
support the stated income. Maximum loan-to-value ratios within each credit level
are lower under the stated income program than under the full documentation
program.
Directors Acceptance's underwriting of every mortgage loan submitted
consists of not only a thorough credit review, but also a separate appraisal
conducted by (i) Value Information Technology, Inc. ("Value I.T."), an affiliate
of Norwest Mortgage, (ii) an appraiser approved by Value I.T. or (iii) another
third-party appraiser. Appraisals generally conform to current FNMA/FHLMC
secondary market requirements for residential property appraisals. All
appraisals are subject to review in the discretion of the Directors Acceptance
underwriter regardless of loan-to-value ratio, the mortgage loan amount or the
identity of the appraiser. Generally, an appraisal review (desk or field) will
be conducted when an appraisal has been performed by an appraiser not approved
by Value I.T. and with respect to a mortgage loan for which the loan-to-value
ratio is within 5% of the maximum loan-to-value ratio allowed for the particular
loan program. Two full appraisals are required for (x) mortgage loans in
principal amounts in excess of a specified dollar amount and (y) Properties in
certain states with values in excess of specified dollar amounts.
Closed End Second Mortgage Loans. The underwriting process for Closed End
Second Loans is intended to assess both the prospective borrower's ability to
repay the loan and the adequacy of the real property as collateral for the loan.
The Seller may either originate the Closed End Second Loans directly, or
acquire them from certain affiliated and unaffiliated third party originators.
All Closed End Second Loans are underwritten by the Seller or an affiliated
originator. The Seller originates or acquires Closed End Second Loans with
original principal balances generally not in excess of $250,000 unless a higher
amount is specifically approved. Certain of the Closed End Second loans are
fully amortizing with original terms to maturity ranging from 120 to 360 months.
Other Closed End Second Loans amortize pursuant to a 360-month schedule but
mature with a balloon payment due at the end of 180 months.
The underwriting standards will generally permit the origination or
purchase of Closed End Second Loans with combined loan-to-value ratios at
origination of up to 100%, depending on the loan program, type and use of the
property, creditworthiness and debt-to-income ratio of the borrower. The
properties securing the Closed End Second Loans are owner occupied, one-to
four-family residences (which may be primary or second homes).
A primary objective of the underwriting standards is the origination or
acquisition of Closed End Second Loans to borrowers with satisfactory income and
credit histories deemed sufficient to demonstrate the ability to repay their
loans. The underwriting process is designed to assess the applicant's
creditworthiness by means of the examination of a number of factors including
the calculation of a debt-to-income ratio. The "debt-to-income ratio" is the
ratio of the borrower's total monthly debt payments to the borrower's gross
monthly income, and is used to assist in determining whether the borrower has
sufficient monthly income available to support the payments of principal and
interest on the mortgage loan in addition to other monthly credit obligations.
The maximum monthly debt-to-income ratio and the maximum loan amount will
vary depending upon a borrower's creditworthiness and the particular loan
characteristics, but generally will not exceed 45% and $250,000, respectively.
Variations in the monthly debt-to-income ratio limit and the maximum loan amount
may be permitted based on compensating factors. Compensating factors generally
may include, but are not limited to, sufficient equity in the related property,
a reduced loan amount or debt-to-income ratio, as applicable, stable employment,
favorable credit history and the nature of the underlying first mortgage loan,
if applicable.
A credit report obtained from an independent, nationally recognized credit
reporting agency will be utilized by the Seller or its affiliated originator to
ascertain the applicant's credit history. The credit report generally should
reflect all delinquencies of 30 days or more, repossessions, judgments,
foreclosures, garnishments, bankruptcies and similar instances of adverse credit
activity that can be discovered by a search of public records. Verification is
required of the first mortgage balance, if any, its status and whether local
taxes, insurance and assessments are included in the applicant's monthly
payment. Credit analysis is subjective and subject to interpretation in the
underwriting process. During the underwriting analysis, the Seller or its
affiliated originator may also consider the use of an applicable credit score
for the related mortgage loan (as determined based on a credit scoring model
used by the Seller or its affiliated originator).
Generally, borrowers are required to have two years of employment with
their current employer or two years of like experience. Applicants who are
employees must provide current employment information in addition to recent
employment history. Information for borrowers who are employees generally is
required to be verified by written confirmation based upon information supplied
by the applicant's employer, or verified by the applicant's most recent paycheck
stub. A self-employed applicant is generally required to provide copies of
complete federal income tax returns filed for the most recent two years.
The Seller or its affiliates may utilize alternative procedures to assess
the value of the related property proposed as security for a Closed End Second
Loan that generally are not as reliable as the type of appraisals that usually
are obtained in connection with the origination of first lien mortgage loans.
Such procedures may consist of, but are not limited to, drive-by appraisals, tax
assessments, or review of electronic property-level and/or local market data
sources, or review of real estate brokers' price opinions.
Certain Closed End Second Loans may have been originated under reduced
documentation programs which generally require less documentation and
verification with respect to income and employment than would otherwise be the
case. Under such a program, minimal investigation into the applicant's credit
history and income profile is undertaken by the loan originator and such
underwriting may consider loan characteristics, property value and borrower
creditworthiness (based on a credit scoring model).
A title search is ordered to verify title to the related property, along
with the existence of any mortgage, tax or other lien encumbering the related
property, to assure that the lien priority of the mortgage to secure the Closed
End Second Loan is as represented by the prospective borrower.
Title I Loans. Statewide Mortgage Company ("Statewide"), an affiliate of
the Seller, the Depositor and the Master Servicer, originates and acquires FHA
Title I home improvement mortgage loans secured by first or junior liens on one-
to four-family residential properties (the "Title I Loans"). Statewide is
headquartered in Birmingham, Alabama, and has branch offices in Atlanta, Dallas,
Austin, Phoenix, Kansas City, Denver and Seattle. Statewide's underwriting
guidelines for Title I Loans meet FHA's underwriting criteria.
The Title I Loans originated by Statewide, either directly or through home
improvement contractors approved by Statewide (each, a "Dealer") or purchased by
Statewide from a mortgage company, commercial bank, savings and loan institution
or other financial intermediary approved by Statewide (each a "Correspondent"),
are executed on forms meeting FHA requirements as well as Federal and state
regulations. All Title I Loans are individually underwritten by employees of
Statewide. All borrower loan applications and, in the case of Title I Loans
originated through Dealers, retail installment sale contracts, are submitted to
Statewide for credit and compliance verification. The information provided in
loan applications is first verified by, among other things, (i) confirmations of
the applicant's income and, if necessary, bank deposits, (ii) a credit bureau
report on the applicant from a credit reporting agency, (iii) a title report and
(iv) if necessary, evidence of flood insurance. Loan applications are also
reviewed to ascertain whether or not they satisfy Statewide's underwriting
criteria, including borrower debt-to-income qualifications, employment
stability, improvement eligibility and required insurance coverage.
The principal amounts of the Title I Loans sold by Statewide to the Seller
generally range from a minimum of $5,000 to a maximum of $25,000. The mortgaged
properties securing such Title I Loans generally are one- to four-family
residences, including condominiums and townhomes, and such properties may or may
not be occupied by the owner.
A credit report by an independent, nationally recognized credit reporting
agency reflecting the applicant's credit history is required. The credit report
typically contains information reflecting delinquencies, repossessions,
judgments, foreclosures, garnishments, bankruptcies and similar instances of
adverse credit activity that can be discovered by a search of public records. An
applicant's past credit performance weighs heavily in the evaluation of risk by
Statewide. Slow payments on the borrower's credit report must be satisfactorily
explained.
Statewide does not require title insurance on the mortgaged properties
securing the Title I Loans it originates or purchases but does obtain a title
report on the related mortgaged property prepared by a preapproved title
insurance company. The applicant is also required to secure flood insurance if
the mortgaged property is located in an area that has been identified by the
Federal Emergency Management Agency ("FEMA") as having special flood hazards, in
an amount sufficient to cover the Title I Loan, subject to the maximum amount
available under the National Flood Insurance Program.
In evaluating a borrower for creditworthiness a key factor for Statewide is
the borrower's debt-to- income ratio. The monthly payments for the first
mortgage loan and all junior mortgage loans plus escrow payments for real estate
taxes and insurance premiums are factored into the debt-to-income ratio which
generally may not exceed approximately 45% of the applicant's gross monthly
income. If the property is subject to any homeowner's association fees or common
elements, property charges for maintenance charges, such fees or charges are
included in the calculation of the debt-to-income ratio. In cases where
compensating factors exist, the 45% debt-to-income ratio may be exceeded.
Subject to underwriting approval of a loan application forwarded to
Statewide by a Dealer or by a Correspondent, Statewide issues a commitment to
purchase a Title I Loan from such Dealer or Correspondent, as the case may be,
upon Statewide's receipt of a fully completed loan package and, in the case of a
Title I Loan from a Dealer, funds such loan on the date of loan purchase only
upon receipt of notice from the borrower of satisfactory completion of
construction. Commitments indicate loan amounts, fees, funding conditions,
approval expiration dates and interest rates.
Statewide's underwriting personnel review completed loan applications to
verify compliance with Statewide's underwriting standards, FHA requirements and
Federal and state regulations. In the case of Title I Loans originated through
Dealers, Statewide conducts a prefunding telephonic interview with the borrower
to both confirm that the improvements have been completed in accordance with the
terms of the contract and to the borrower's satisfaction, and to obtain the
borrower's authorization to disburse the loan. Statewide also obtains a
certification with respect to the satisfactory completion of the improvements
signed by both the borrower and the Dealer. With respect to Title I Loans being
originated by Statewide directly or acquired from Correspondents, Statewide
obtains property improvement completion certificates on a post-closing basis in
accordance with applicable FHA requirements. Statewide utilizes a network of
independent inspectors to perform on-site inspections of improvements in
accordance with applicable FHA requirements.
TITLE INSURANCE
Except as described below, Loans generally will be covered by an
appropriate standard form American Land Title Association ("ALTA") title
insurance policy, or a substantially similar policy or form of insurance
acceptable to the Federal National Mortgage Association ("FNMA") or the Federal
Home Loan Mortgage Corporation ("FHLMC"). Certain Loans ("T.O.P. Loans")
originated in connection with the "Title Option Plus" program are not covered by
title insurance policies, although title searches are performed in connection
with the origination of T.O.P. Loans by American Land Title Company, Inc., an
affiliate of Norwest Mortgage. The Seller will represent and warrant to the
Trustee of any Trust Fund that the Property related to each Loan (including each
T.O.P. Loan) is free and clear of all encumbrances and liens having priority
over the lien of the related Mortgage, subject to certain limited exceptions as
set forth below under "--Representations by Seller; Repurchases". However in the
event that a lien senior to the lien of the Mortgage related to a T.O.P. Loan
that is contained in the Trust Fund for any Series is found to exist that is not
permitted pursuant to such limited exceptions, the sole recourse of the Trustee
will be against the Seller for breach of its representation and warranty. The
Trustee will not have recourse against any title insurance company or other
party in such event.
REPRESENTATIONS BY SELLER; REPURCHASES
The Seller will have made representations and warranties in respect of the
Loans sold by the Seller and included in the Trust Fund for a Series of
Securities. Such representations and warranties may include, among other things,
that: (i) title insurance (except with respect to a T.O.P. Loan as described
above under "--Title Insurance" and any Loan secured by a Property located in
Iowa, as to which an opinion of counsel of the type customarily rendered in such
State in lieu of title insurance is received instead) and any required hazard
insurance policy were effective at origination of each Loan, other than a
Cooperative Loan, and that each policy (or certificate of title as applicable)
remained in effect on the date of purchase of the Loan from the Seller by or on
behalf of the Depositor; (ii) the Seller had good title to each such Loan and
such Loan was subject to no offsets, defenses, counterclaims or rights of
rescission except to the extent that any buydown agreement may forgive certain
indebtedness of a borrower; (iii) each Mortgage constituted a valid lien on, or
a perfected security interest with respect to, the Property (subject only to
permissible liens disclosed, if applicable, title insurance exceptions, if
applicable, and certain other exceptions described in the Agreement) and that
the Property was free from damage and was in acceptable condition; (iv) there
were no delinquent tax or assessment liens against the Property; (v) no required
payment on a Loan was delinquent more than 59 days, and (vi) each Loan was made
in compliance with, and is enforceable under, all applicable local, state and
federal laws and regulations in all material respects. As to any Loan insured by
the FHA, the Seller will represent that it has complied with underwriting
policies of the FHA.
The Seller will also make representations and warranties in respect of
Norwest ABS sold by the Seller and included in the Trust Fund for a Series of
Securities. Such representations and warranties may include, among other things,
that: (i) the Seller had good title to each such Norwest ABS, (ii) each such
Norwest ABS was an enforceable obligation of the issuing trust, and (iii) that
each such Norwest ABS was transferred to the Trust free and clear of all liens.
If so specified in the related Prospectus Supplement, the representations
and warranties of the Seller in respect of a Loan or a Norwest ABS will be made
not as of the Cut-off Date but as of the date on which the Seller sold the Loan
or the Norwest ABS to the Depositor or one of its affiliates. Under such
circumstances, a substantial period of time may have elapsed between the sale
date and the date of initial issuance of the Series of Securities evidencing an
interest in such Loan or Norwest ABS. Since the representations and warranties
of the Seller do not address events that may occur following the sale of a Loan
by the Seller, its repurchase obligation described below will not arise if the
relevant event that would otherwise have given rise to such an obligation with
respect to a Loan or a Norwest ABS occurs after the date of sale of such Loan or
Norwest ABS by the Seller to the Depositor or its affiliates. However, the
Depositor will not include any Loan or any Norwest ABS in the Trust Fund for any
Series of Securities if anything has come to the Depositor's attention that
would cause it to believe that the representations and warranties of the Seller
will not be accurate and complete in all material respects in respect of such
Loan or Norwest ABS as of the date of initial issuance of the related Series of
Securities.
The Master Servicer will promptly notify the Seller of any breach of any
representation or warranty made by it in respect of a Loan or a Norwest ABS
which materially and adversely affects the interests of the Securityholders in
such Loan. Unless otherwise specified in the related Prospectus Supplement, if
the Seller cannot cure such breach within 90 days following notice from the
Master Servicer, then the Seller will be obligated either (i) to repurchase such
Loan or Norwest ABS from the Trust Fund at a price (the "Purchase Price") equal
to 100% of the unpaid principal balance thereof as of the date of the repurchase
plus accrued interest thereon to the first day of the month following the month
of repurchase at the Loan Rate or the interest rate on the Norwest ABS, as the
case may be, or (ii) within two years of issuance of the related Series of
Securities, substitute for such Loan or Norwest ABS a replacement loan or
Norwest ABS, as the case may be, that satisfies the criteria specified in the
related Prospectus Supplement. If a REMIC election is to be made with respect to
a Trust Fund, unless otherwise specified in the related Prospectus Supplement,
the holder of the related residual certificate generally will be obligated to
pay any prohibited transaction tax which may arise in connection with any such
repurchase or substitution. See "Description of the Securities -- General". The
Trustee will be required under the applicable Agreement to enforce this
obligation for the benefit of the holders of the Securities, following the
practices it would employ in its good faith business judgment were it the owner
of such Loan. This repurchase or substitution obligation will constitute the
sole remedy available to holders of Securities or the Trustee for a breach of
representation by the Seller.
Neither the Depositor nor the Master Servicer will be obligated to purchase
or substitute a Loan or Norwest ABS if the Seller defaults on its obligation to
do so, and no assurance can be given that the Seller will carry out its
repurchase or substitution obligations with respect to Loans or Norwest ABS.
DESCRIPTION OF THE SECURITIES
Each Series of Securities will be issued pursuant to separate agreements
(each, a "Pooling and Servicing Agreement" or a "Trust Agreement") among the
Depositor, the Master Servicer and the Trustee. A form of Pooling and Servicing
Agreement and Trust Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Each Series of Notes will be
issued pursuant to an indenture (the "Indenture") between the related Trust Fund
and the entity named in the related Prospectus Supplement as trustee (the
"Trustee") with respect to such Series, and the related Loans will be serviced
by the Master Servicer pursuant to a Sale and Servicing Agreement. A form of
Indenture and Sale and Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. A Series of
Securities may consist of both Notes and Certificates. The provisions of each
Agreement will vary depending upon the nature of the Securities to be issued
thereunder and the nature of the related Trust Fund. The following are
descriptions of the material provisions which may appear in each Agreement. The
descriptions are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Agreement for each Series of Securities and the
applicable Prospectus Supplement. The Depositor will provide a copy of the
Agreement (without exhibits) relating to any Series without charge upon written
request of a holder of record of a Security of such Series addressed to
Directors Asset Conduit Corporation, 7485 New Horizon Way, Frederick, Maryland
21703, Attention: [___________].
GENERAL
The Securities of each Series will be issued in book-entry or fully
registered form, in the authorized denominations specified in the related
Prospectus Supplement. Certificates will evidence specified beneficial ownership
interests in, and Notes will be secured by, the assets of the related Trust Fund
created pursuant to each Agreement and will not be entitled to payments in
respect of the assets included in any other Trust Fund established by the
Depositor (except to the extent that such Trust Fund includes Norwest ABS
previously issued by the Depositor). Unless otherwise specified in the related
Prospectus Supplement, the Securities will not represent obligations of the
Depositor or any affiliate of the Depositor. Certain of the Loans may be
guaranteed or insured as set forth in the related Prospectus Supplement. Each
Trust Fund will consist of, to the extent provided in the related Agreement: (i)
the Trust Fund Assets, as from time to time are subject to the related Agreement
(exclusive of any amounts specified in the related Prospectus Supplement as
having been retained by the Seller or an affiliate ("Retained Interest")),
including all payments of interest and principal received with respect to the
Loans after the Cut-off Date (to the extent not applied in computing the
principal balance of such Loans as of the Cut-off Date (the "Cut-off Date
Principal Balance")); (ii) such assets as from time to time are required to be
deposited in the related Security Account, as described below under "The
Agreements -- Payments on Loans; Deposits to Security Account"; (iii) property
which secured a Loan and which is acquired on behalf of the Securityholders by
foreclosure or deed in lieu of foreclosure; and (iv) any insurance policies or
other forms of credit enhancement required to be maintained pursuant to the
related Agreement. If so specified in the related Prospectus Supplement, a Trust
Fund may also include one or more of the following: reinvestment income on
payments received on the Trust Fund Assets, a Reserve Account, a Pre-Funding
Account, a Capitalized Interest Account, a mortgage pool insurance policy, a
special hazard insurance policy, a bankruptcy bond, one or more letters of
credit, a surety bond, guaranties or similar instruments.
Each Series of Securities will be issued in one or more classes. Each class
of Certificates of a Series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on, and each class of Notes of a Series will be secured by, the related Trust
Fund Assets. A Series of Securities may include one or more classes that are
senior in right to payment to one or more other classes of Securities of such
Series. Certain Series or classes of Securities may be covered by insurance
policies, surety bonds or other forms of credit enhancement, in each case as
described under "Credit Enhancement" herein and in the related Prospectus
Supplement. One or more classes of Securities of a Series may be entitled to
receive distributions of principal, interest or any combination thereof.
Distributions on one or more classes of a Series of Securities may be made prior
to one or more other classes, after the occurrence of specified events, in
accordance with a schedule or formula or on the basis of collections from
designated portions of the related Trust Fund Assets, in each case as specified
in the related Prospectus Supplement. The timing and amounts of such
distributions may vary among classes or over time as specified in the related
Prospectus Supplement.
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Securities will be made by the Trustee on
each Distribution Date (i.e., monthly, quarterly, semi-annually or at such other
intervals and on the dates as are specified in the related Prospectus
Supplement) in proportion to the percentages specified in the related Prospectus
Supplement. Distributions will be made to the persons in whose names the
securities are registered at the close of business on the dates specified in the
related Prospectus Supplement (each, a "Record Date"). Distributions will be
made in the manner specified in the related Prospectus Supplement to the persons
entitled thereto at the address appearing in the register maintained for holders
of Securities (the "Security Register"); provided, however, that the final
distribution in retirement of the Securities will be made only upon presentation
and surrender of the Securities at the office or agency of the Trustee or other
person specified in the notice to Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series, but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
As to each Series, an election may be made to treat the related Trust Fund
or designated portions thereof as a "real estate mortgage investment conduit" or
"REMIC" as defined in the Code. The related Prospectus Supplement will specify
whether a REMIC election is to be made. Alternatively, the Agreement for a
Series may provide that a REMIC election may be made at the discretion of the
Depositor or the Master Servicer and may only be made if certain conditions are
satisfied. As to any such Series, the terms and provisions applicable to the
making of a REMIC election will be set forth in the related Prospectus
Supplement. If such an election is made with respect to a Series, one of the
classes will be designated as evidencing the sole class of "residual interest"
in the related REMIC, as defined in the Code. All other classes of Securities in
such a Series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each Series with respect to which a REMIC election is
to be made, the Master Servicer or a holder of the related residual certificate
will be obligated to take all actions required in order to comply with
applicable laws and regulations and will be obligated to pay any prohibited
transaction taxes. The Master Servicer or the Depositor, unless otherwise
provided in the related Prospectus Supplement, will be entitled to reimbursement
for any such payment from the assets of the Trust Fund or from any holder of the
related residual certificate.
DISTRIBUTIONS ON SECURITIES
General. In general, the method of determining the amount of distributions
on a particular Series of Securities will depend on the type of credit
enhancement, if any, that is used with respect to such Series. See "Credit
Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the Securities of a particular
Series. The Prospectus Supplement for each Series of Securities will describe
the method to be used in determining the amount of distributions on the
Securities of such Series.
Distributions allocable to principal and interest on the Securities will be
made by the Trustee out of, and only to the extent of, funds in the related
Security Account, including any funds transferred from any Reserve Account (a
"Reserve Account"), the Pre-Funding Account and the Capitalized Interest
Account. As between Securities of different classes and as between distributions
of principal (and, if applicable, between distributions of Principal
Prepayments, as defined below, and scheduled payments of principal) and
interest, distributions made on any Distribution Date will be applied as
specified in the related Prospectus Supplement. The Prospectus Supplement will
also describe the method for allocating distributions among Securities of a
particular class.
Available Funds. All distributions on the Securities of each Series on each
Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. "Available Funds" for each Distribution Date will
generally equal the amount on deposit in the related Security Account on such
Distribution Date (net of related fees and expenses payable by the related Trust
Fund) other than amounts to be held therein for distribution on future
Distribution Dates.
Distributions of Interest. Interest will accrue on the aggregate principal
balance of the Securities (or, in the case of Securities entitled only to
distributions allocable to interest, the aggregate notional amount) of each
class of Securities (the "Class Security Balance") entitled to interest from the
date, at the Pass-Through Rate or interest rate, as applicable (which in either
case may be a fixed rate or adjustable rate as specified in such Prospectus
Supplement), and for the periods specified in such Prospectus Supplement. To the
extent funds are available therefor, interest accrued during each such specified
period on each class of Securities entitled to interest (other than a class of
Securities that provides for interest that accrues, but is not currently
payable, referred to hereafter as "Accrual Securities") will be distributable on
the Distribution Dates specified in the related Prospectus Supplement until the
aggregate Class Security Balance of the Securities of such class has been
distributed in full or, in the case of Securities entitled only to distributions
allocable to interest, until the aggregate notional amount of such Securities is
reduced to zero or for the period of time designated in the related Prospectus
Supplement. The original Class Security Balance of each Security will equal the
aggregate distributions allocable to principal to which such Security is
entitled. Distributions allocable to interest on each Security that is not
entitled to distributions allocable to principal will be calculated based on the
notional amount of such Security or such other basis as is set forth in the
related Prospectus Supplement. The notional amount of a Security will not
evidence an interest in or entitlement to distributions allocable to principal
but will be used solely for convenience in expressing the calculation of
interest and for certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the Security were to accrue through the day immediately preceding
such Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Class Security Balance
of such class of Securities on that Distribution Date. Distributions of interest
on any class of Accrual Securities will commence only after the occurrence of
the events specified in such Prospectus Supplement. Prior to such time, the
beneficial ownership interest in the Trust Fund or the principal balance, as
applicable, of such class of Accrual Securities, as reflected in the aggregate
Class Security Balance of such class of Accrual Securities, will increase on
each Distribution Date by the amount of interest that accrued on such class of
Accrual Securities during the preceding interest accrual period but that was not
required to be distributed to such class on such Distribution Date. Any such
class of Accrual Securities will thereafter accrue interest on its outstanding
Class Security Balance as so adjusted.
Distributions of Principal. The Prospectus Supplement will specify the
method by which the amount of principal to be distributed on the related
Securities on each Distribution Date will be calculated and the manner in which
such amount will be allocated among the classes of Securities entitled to
distributions of principal. The aggregate Class Security Balance of any class of
Securities entitled to distributions of principal generally will be the
aggregate original Class Security Balance of such class of Securities specified
in such Prospectus Supplement, reduced by all distributions reported to the
holders of such Securities as allocable to principal and, (i) in the case of
Accrual Securities, unless otherwise specified in the related Prospectus
Supplement, increased by all interest accrued but not then distributable on such
Accrual Securities and (ii) in the case of adjustable rate Securities, subject
to the effect of negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more classes of
Securities will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of such payments ("Principal Prepayments") in the
percentages and under the circumstances or for the periods specified in such
Prospectus Supplement. Any such allocation of Principal Prepayments to such
class or classes of Securities will have the effect of accelerating the
amortization of such Securities while increasing the interests evidenced by one
or more other classes of Securities in the Trust Fund. Increasing the interests
of the other classes of Securities relative to that of certain Securities is
intended to preserve the availability of the subordination provided by such
other Securities. See "Credit Enhancement - Subordination" and "Yield, Maturity
and Prepayment Considerations - Allocation of Principal among Classes."
Unscheduled Distributions. If specified in the related Prospectus
Supplement, the Securities will be subject to receipt of distributions before
the next scheduled Distribution Date under the circumstances and in the manner
described below and in such Prospectus Supplement. If applicable, the Trustee
will be required to make such unscheduled distributions on the day and in the
amount specified in the related Prospectus Supplement if, due to substantial
payments of principal (including Principal Prepayments) on the Trust Fund
Assets, the Trustee or the Master Servicer determines that the funds available
or anticipated to be available from the Security Account and, if applicable, any
Reserve Account, may be insufficient to make required distributions on the
Securities on such Distribution Date. Unless otherwise specified in the related
Prospectus Supplement, the amount of any such unscheduled distribution that is
allocable to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Securities on the next
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the unscheduled distributions will include interest at the
applicable Pass- Through Rate (if any) or interest rate (if any) on the amount
of the unscheduled distribution allocable to principal for the period and to the
date specified in such Prospectus Supplement.
ADVANCES
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date (from
its own funds or funds held in the Security Account for future distributions to
the holders of Securities of the related Series), an amount equal to the
aggregate of payments of interest and/or principal that were delinquent on the
related Determination Date (as such term is defined in the related Prospectus
Supplement), subject to the Master Servicer's determination that such advances
may be recoverable out of late payments by borrowers, Liquidation Proceeds,
Insurance Proceeds or otherwise.
In making Advances, the Master Servicer will endeavor to maintain a regular
flow of scheduled interest and/or principal payments to holders of the
Securities. Advances by the Master Servicer are not meant to guarantee or insure
against losses. If Advances are made by the Master Servicer from cash being held
for future distribution to Securityholders, the Master Servicer will replace
such funds on or before any future Distribution Date to the extent that funds in
the applicable Security Account on such Distribution Date would be less than the
amount required to be available for distributions to Securityholders on such
date. Any Master Servicer funds advanced will be reimbursable to the Master
Servicer out of recoveries on the specific Loans with respect to which such
Advances were made (e.g., late payments made by the related borrower, any
related Insurance Proceeds, Liquidation Proceeds or proceeds of any Loan
purchased by the Depositor or the Seller pursuant to the related Agreement).
Advances by the Master Servicer also will be reimbursable to the Master Servicer
from cash otherwise distributable to Securityholders (including the holders of
Senior Securities) to the extent that the Master Servicer determines that any
such Advances previously made are not ultimately recoverable as described above.
To the extent provided in the related Prospectus Supplement, the Master Servicer
also will be obligated to make Advances, to the extent recoverable out of
Insurance Proceeds, Liquidation Proceeds or otherwise, in respect of certain
taxes and insurance premiums not paid by borrowers on a timely basis. In the
case of Cooperative Loans, the Master Servicer also may be required to advance
any unpaid maintenance fees and other charges under the related proprietary
leases as specified in the related Prospectus Supplement. Funds so advanced are
reimbursable to the Master Servicer to the extent permitted by the related
Agreement.
Unless otherwise specified in the related Prospectus Supplement, in the
event the Master Servicer fails to make a required Advance, the Trustee will be
obligated to make such Advance in its capacity as successor servicer. If the
Trustee makes such an Advance, it will be entitled to be reimbursed for such
Advance to the same extent and degree as the Master Servicer is entitled to be
reimbursed for Advances. See "Description of the Securities -- Distributions on
Securities."
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date, the
Master Servicer or the Trustee will furnish to each Securityholder of record of
the related Series a statement setting forth, to the extent applicable to such
Series of Securities, among other things:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments, the
amount of such distribution allocable to interest and if so specified
in the related Prospectus Supplement, any applicable prepayment
penalties included therein;
(ii) the outstanding principal balance or notional amount of each
class of the related Series after giving effect to the distribution of
principal on such Distribution Date;
(iii) the related amount of the servicing compensation retained or
withdrawn from the Security Account by the Master Servicer, and the
amount of additional servicing compensation received by the Master
Servicer attributable to penalties, fees, excess Liquidation Proceeds
and other similar charges and items;
(iv) the amount, if any, by which the Master Servicing Fee has been
reduced by interest shortfalls due to prepayments;
(v) the amount of any Advance;
(vi) the aggregate amount (a) otherwise allocable to the Subordinated
Securityholders on such Distribution Date, and (b) withdrawn from the
Reserve Account, if any, that is included in the amounts distributed
to the Senior Securityholders;
(vii) if applicable, the amount remaining in any Reserve Account at
the close of business on such Distribution Date and any amounts
remaining under letters of credit, pool policies or other forms of
credit enhancement;
(viii) the Pass-Through Rate or interest rate, as applicable, on the
Securities as of the day prior to the immediately preceding
Distribution Date;
(ix) the book value of any real estate acquired through foreclosure or
grant of a deed-in-lieu of foreclosure;
(x) the unpaid principal balance of any Loan as to which the Master
Servicer has determined not to foreclose because it believes the
related Property may be contaminated with or affected by hazardous
wastes or hazardous substances;
(xi) the number and aggregate principal balances of Loans one month,
two months and three or more months delinquent;
(xii) the percentage of principal payments on the Trust Fund Assets
(excluding prepayments), if any, which each such class will be
entitled to receive on the following Distribution Date;
(xiii) the percentage of Principal Prepayments on the Trust Fund
Assets, if any, which each such class will be entitled to receive on
the following Distribution Date;
(xiv) the Pass-Through Rate or interest rate, as applicable, if
adjusted from the date of the last statement, of any such class
expected to be applicable to the next distribution to such class; and
(xv) during the Funding Period, the amount remaining on deposit in the
Pre-Funding Account at the end of the prior calendar month.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Security of the relevant class having the Percentage Interest
specified in the related Prospectus Supplement. The report to Securityholders
for any Series of Securities may include additional or other information of a
similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record during
a portion of such calendar year, for the applicable portion of such year and (b)
such other customary information as may be deemed necessary or desirable for
Securityholders to prepare their tax returns.
CATEGORIES OF CLASSES OF SECURITIES
The Securities of any Series may be comprised of one or more classes. Such
classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
Prospectus Supplement for a series of Securities may identify the classes which
comprise such Series by reference to the following categories or another
category specified in the Prospectus Supplement.
CATEGORIES OF CLASSES DEFINITION
PRINCIPAL TYPES
Accretion Directed................... A class that receives principal payments
from the accreted interest from
specified Accrual classes. An Accretion
Directed class also may receive
principal payments from principal paid
on the underlying Trust Fund Assets for
the related Series.
Component Securities................. A class consisting of "Components." The
Components of a class of Component
Securities may have different principal
and/or interest payment characteristics
but together constitute a single class
and do not represent severable
interests. Each Component of a class of
Component Securities may be identified
as falling into one or more of the
categories in this chart.
Notional Amount Securities........... A class having no Class Security Balance
and bearing interest on the related
notional amount. The notional amount is
used for purposes of the determination
of interest distributions.
Planned Amortization Class
(also sometimes referred
to as a "PAC")................... A class that is designed to receive
principal payments using a predetermined
principal balance schedule derived by
assuming two constant prepayment rates
for the underlying Trust Fund Assets.
These two rates are the endpoints for
the "structuring range" for the Planned
Amortization Class. The Planned
Amortization Classes in any Series of
Securities may be subdivided into
different categories (e.g., Planned
Amortization Class I, Planned
Amortization Class II and so forth)
derived using different structuring
ranges.
Scheduled Amortization Class........ A class that is designed to receive
principal payments using a predetermined
principal balance schedule but is not
designated as a Planned Amortization
Class or Targeted Amortization Class.
The schedule is derived by assuming
either two constant prepayment rates or
a single constant prepayment rate for
the underlying Trust Fund Assets. In the
former case, the two rates are the
endpoints for the "structuring range"
for the Scheduled Amortization Class and
such range generally is narrower than
that for a Planned Amortization Class.
In the latter case, the Support Class
for the applicable Series of Securities
generally will represent a smaller
percentage of the Scheduled Amortization
Class than a Support Class generally
would represent in relation to a
Targeted Amortization Class.
Sequential Pay Class................. Classes that are entitled to receive
principal payments in a prescribed
sequence, that do not have predetermined
principal balance schedules and that are
entitled to receive payments of
principal continuously from the first
Distribution Date on which they receive
principal until they are retired. A
single class is entitled to receive
principal payments before or after other
classes in the same Series of Securities
may be identified as a Sequential Pay
Class.
Strip Class.......................... A class that is entitled to receive a
constant proportion, or "strip," of the
principal payments on the underlying
Trust Fund Assets.
Support Class (also sometimes
referred to as a "Companion
Class")........................... A class that is entitled to receive
principal payments on any Distribution
Date only if scheduled payments have
been made on specified Planned
Amortization Classes, Targeted
Amortization Classes and/or Scheduled
Amortization Classes.
Targeted Amortization Class (also
sometimes referred to as a
"TAC")............................ A class that is designed to receive
principal payments using a predetermined
principal balance schedule derived by
assuming a single constant prepayment
rate for the underlying Trust Fund
Assets.
INTEREST TYPES
Fixed Rate Class..................... A class with an interest rate that is
fixed throughout the life of the class.
Floating Rate Class.................. A class with an interest rate that
resets periodically based upon a
designated index and that varies
directly with changes in such index.
Inverse Floating Rate Class.......... A class with an interest rate that
resets periodically based upon a
designated index and that varies
inversely with changes in such index and
with changes in the interest rate
payable on the related Floating Rate
Class.
Variable Rate Class.................. A class with an interest rate that
resets periodically and is calculated by
reference to the rate or rates of
interest applicable to specified assets
or instruments (e.g., the Loan Rates
borne by the Loans).
Interest Only Class.................. A class that is entitled to receive some
or all of the interest payments made on
the Trust Fund Assets and little or no
principal. Interest Only classes have
either a nominal principal balance or a
notional amount. A nominal principal
balance represents actual principal that
will be paid on the class. It is
referred to as nominal since it is
extremely small compared to other
classes. A notional amount is the amount
used as a reference to calculate the
amount of interest due on an Interest
Only class that is not entitled to any
distributions in respect of principal.
Principal Only Class................. A class that does not bear interest and
is entitled to receive only
distributions in respect of principal.
Accrual Class........................ A class that accretes the amount of
accrued interest otherwise distributable
on such class, which amount will be
added as principal to the Class Security
Balance of such class on each applicable
Distribution Date. Such accretion may
continue until some specified event has
occurred or until such Accrual Class is
retired.
INDICES APPLICABLE TO FLOATING RATE AND INVERSE FLOATING RATE CLASSES
LIBOR. Unless otherwise specified in the related Prospectus Supplement, on
the LIBOR Determination Date (as such term is defined in the related Prospectus
Supplement) for each class of Securities of a Series as to which the applicable
interest rate is determined by reference to an index denominated as LIBOR, the
person designated in the related Agreement (the "Calculation Agent") will
determine LIBOR for the succeeding Interest Accrual Period on the basis of the
offered LIBOR quotations of the Reference Banks, as such quotations are provided
to the Trustee as of 11:00 a.m. (London time) on such LIBOR Determination Date.
As used herein with respect to a LIBOR Determination Date, "business day" means
a day on which banks are open for dealing in foreign currency and exchange in
London and New York City; "Reference Banks" means four leading banks engaged in
transactions in Eurodollar deposits in the International Eurocurrency market (i)
with an established place of business in London, (ii) whose quotations appear on
the Reuters Screen LIBO Page on the Rate Determination Date in question and
(iii) which have been designated as such by the Calculation Agent and are able
and willing to provide such quotations to the Calculation Agent on each LIBOR
Determination Date; and "Reuters Screen LIBO Page" means the display designated
as page "LIBO" on the Reuters Monitor Money Rates Service (or such other page as
may replace the LIBO page on that service for the purpose of displaying London
interbank offered rate quotations of major banks). If any Reference Bank should
be removed from the Reuters Screen LIBO Page or in any other way fails to meet
the qualifications of a Reference Bank, the Calculation Agent may, in its sole
discretion, designate an alternative Reference Bank.
On each LIBOR Determination Date, LIBOR for the next succeeding Interest
Accrual Period will be established by the Calculation Agent as follows:
(i) If on any LIBOR Determination Date two or more of the Reference Banks
provide such offered quotations, LIBOR for the next Interest Accrual Period will
be the arithmetic mean of such offered quotations (rounding such arithmetic mean
upwards if necessary to the nearest whole multiple of 1/16%).
(ii) If on any LIBOR Determination Date only one or none of the Reference
Banks provides such offered quotations, LIBOR for the next Interest Accrual
Period will be the higher of (x) LIBOR as determined on the previous LIBOR
Determination Date or (y) the Reserve Interest Rate. The "Reserve Interest Rate"
will be the rate per annum which the Calculation Agent determines to be either
(A) the arithmetic mean (rounding such arithmetic mean upwards if necessary to
the nearest whole multiple of 1/16%) of the one-month Eurodollar lending rate
that New York City banks selected by the Calculation Agent are quoting on the
relevant LIBOR Determination Date, to the principal London offices of at least
two leading banks in the London interbank market or (B) in the event that the
Calculation Agent can determine no such arithmetic mean, the lowest one-month
Eurodollar lending rate that the New York City banks selected by the Calculation
Agent are quoting on such LIBOR Determination Date to leading European banks.
(iii) If on any LIBOR Determination Date the Calculation Agent is required
but is unable to determine the Reserve Interest Rate in the manner provided in
paragraph (ii) above, LIBOR for the next Interest Accrual Period will be LIBOR
as determined on the previous LIBOR Determination Date, or, in the case of the
first LIBOR Determination Date, LIBOR shall be deemed to be the per annum rate
specified in the related Prospectus Supplement.
The establishment of LIBOR by the Calculation Agent and the Calculation
Agent's subsequent calculation of the rates of interest applicable to the
Securities for the relevant Interest Accrual Period, in the absence of manifest
error, will be final and binding.
COFI. The Eleventh District Cost of Funds Index is designed to represent
the monthly weighted average cost of funds for savings institutions in Arizona,
California and Nevada that are member institutions of the Eleventh Federal Home
Loan Bank District (the "Eleventh District"). The Eleventh District Cost of
Funds Index for a particular month reflects the interest costs paid on all types
of funds held by Eleventh District member institutions and is calculated by
dividing the cost of funds by the average of the total amount of those funds
outstanding at the end of that month and of the prior month and annualizing and
adjusting the result to reflect the actual number of days in the particular
month. If necessary, before these calculations are made, the component figures
are adjusted by the Federal Home Loan Bank of San Francisco ("FHLBSF") to
neutralize the effect of events such as member institutions leaving the Eleventh
District or acquiring institutions outside the Eleventh District. The Eleventh
District Cost of Funds Index is weighted to reflect the relative amount of each
type of funds held at the end of the relevant month. The major components of
funds of Eleventh District member institutions are: (i) savings deposits, (ii)
time deposits, (iii) FHLBSF advances, (iv) repurchase agreements and (v) all
other borrowings. Because the component funds represent a variety of maturities
whose costs may react in different ways to changing conditions, the Eleventh
District Cost of Funds Index does not necessarily reflect current market rates.
A number of factors affect the performance of the Eleventh District Cost of
Funds Index, which may cause it to move in a manner different from indices tied
to specific interest rates, such as United States Treasury bills or LIBOR.
Because the liabilities upon which the Eleventh District Cost of Funds Index is
based were issued at various times under various market conditions and with
various maturities, the Eleventh District Cost of Funds Index may not
necessarily reflect the prevailing market interest rates on new liabilities of
similar maturities. Moreover, as stated above, the Eleventh District Cost of
Funds Index is designed to represent the average cost of funds for Eleventh
District savings institutions for the month prior to the month in which it its
due to be published. Additionally, the Eleventh District Cost of Funds Index may
not necessarily move in the same direction as market interest rates at all
times, since as longer term deposits or borrowings mature and are renewed at
prevailing market interest rates, the Eleventh District Cost of Funds Index is
influenced by the differential between the prior and the new rates on those
deposits or borrowings. In addition, movements of the Eleventh District Cost of
Funds Index, as compared to other indices tied to specific interest rates, may
be affected by changes instituted by the FHLBSF in the method used to calculate
the Eleventh District Cost of Funds Index.
The FHLBSF publishes the Eleventh District Cost of Funds Index in its
monthly Information Bulletin. Any individual may request regular receipt by mail
of Information Bulletins by writing the Federal Home Loan Bank of San Francisco,
P.O. Box 7948, 600 California Street, San Francisco, California 94120, or by
calling (415) 616-1000. The Eleventh District Cost of Funds Index may also be
obtained by calling the FHLBSF at (415) 616- 2600.
The FHLBSF has stated in its Information Bulletin that the Eleventh
District Cost of Funds Index for a month "will be announced on or near the last
working day" of the following month and also has stated that it "cannot
guarantee the announcement" of such index on an exact date. So long as such
index for a month is announced on or before the tenth day of the second
following month, the interest rate for each class of Securities of a Series as
to which the applicable interest rate is determined by reference to an index
denominated as COFI (each, a class of "COFI Securities") for the Interest
Accrual Period commencing in such second following month will be based on the
Eleventh District Cost of Funds Index for the second preceding month. If
publication is delayed beyond such tenth day, such interest rate will be based
on the Eleventh District Cost of Funds Index for the third preceding month.
Unless otherwise specified in the related Prospectus Supplement, if on the tenth
day of the month in which any Interest Accrual Period commences for a class of
COFI Securities the most recently published Eleventh District Cost of Funds
Index relates to a month prior to the third preceding month, the index for such
current Interest Accrual Period and for each succeeding Interest Accrual Period
will, except as described in the next to last sentence of this paragraph, be
based on the National Monthly Median Cost of Funds Ratio to SAIF-Insured
Institutions (the "National Cost of Funds Index") published by the Office of
Thrift Supervision (the "OTS") for the third preceding month (or the fourth
preceding month if the National Cost of Funds Index for the third preceding
month has not been published on such tenth day of an Interest Accrual Period).
Information on the National Cost of Funds Index may be obtained by writing the
OTS at 1700 G Street, N.W., Washington, D.C. 20552 or calling (202) 906-6677,
and the current National Cost of Funds Index may be obtained by calling (202)
906-6988. If on any such tenth day of the month in which an Interest Accrual
Period commences the most recently published National Cost of Funds Index
relates to a month prior to the fourth preceding month, the applicable index for
such Interest Accrual Period and each succeeding Interest Accrual Period will be
based on LIBOR, as determined by the Calculation Agent in accordance with the
Agreement relating to such Series of Securities. A change of index from the
Eleventh District Cost of Funds Index to an alternative index will result in a
change in the index level, and, particularly if LIBOR is the alternative index,
could increase its volatility.
The establishment of COFI by the Calculation Agent and its calculation of
the rates of interest for the applicable classes for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
Treasury Index. Unless otherwise specified in the related Prospectus
Supplement, on the Treasury Index Determination Date (as such term is defined in
the related Prospectus Supplement) for each class of Securities of a Series as
to which the applicable interest rate is determined by reference to an index
denominated as a Treasury Index, the Calculation Agent will ascertain the
Treasury Index for Treasury securities of the maturity and for the period (or,
if applicable, date) specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the Treasury Index for
any period means the average of the yield for each business day during the
period specified therein (and for any date means the yield for such date),
expressed as a per annum percentage rate, on (i) U.S. Treasury securities
adjusted to the "constant maturity" (as further described below) specified in
such Prospectus Supplement or (ii) if no "constant maturity" is so specified,
U.S. Treasury securities trading on the secondary market having the maturity
specified in such Prospectus Supplement, in each case as published by the
Federal Reserve Board in its Statistical Release No. H.15(519). Statistical
Release No. H.15(519) is published on Monday or Tuesday of each week and may be
obtained by writing or calling the Publications Department at the Board of
Governors of the Federal Reserve System, 21st and C Streets, Washington, D.C.
20551 (202) 452-3244. If the Calculation Agent has not yet received Statistical
Release No. H.15(519) for such week, then it will use such Statistical Release
from the immediately preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived from
the U.S. Treasury's daily yield curve. This curve, which relates the yield on a
security to its time to maturity, is based on the closing market bid yields on
actively traded Treasury securities in the over-the-counter market. These market
yields are calculated from composites of quotations reported by five leading
U.S. Government securities dealers to the Federal Reserve Bank of New York. This
method provides a yield for a given maturity even if no security with that exact
maturity is outstanding. In the event that the Treasury Index is no longer
published, a new index based upon comparable data and methodology will be
designated in accordance with the Agreement relating to the particular Series of
Securities. The Calculation Agent's determination of the Treasury Index, and its
calculation of the rates of interest for the applicable classes for the related
Interest Accrual Period shall (in the absence of manifest error) be final and
binding.
Prime Rate. Unless otherwise specified in the related Prospectus
Supplement, on the Prime Rate Determination Date (as such term is defined in the
related Prospectus Supplement) for each class of Securities of a Series as to
which the applicable interest rate is determined by reference to an index
denominated as the Prime Rate, the Calculation Agent will ascertain the Prime
Rate for the Related Interest Accrual Period. Unless otherwise specified in the
related Prospectus Supplement, the Prime Rate for an Interest Accrual Period
will be the "Prime Rate" as published in the "Money Rates" section of The Wall
Street Journal (or if not so published, the "Prime Rate" as published in a
newspaper of general circulation selected by the Calculation Agent in its sole
discretion) on the related Prime Rate Determination Date. If a prime rate range
is given, then the average of such range will be used. In the event that the
Prime Rate is no longer published, a new index based upon comparable data and
methodology will be designated in accordance with the Agreement relating to the
particular Series of Securities. The Calculation Agent's determination of the
Prime Rate and its calculation of the rates of interest for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the related Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "Book-Entry Securities"). Persons acquiring beneficial
ownership interests in the Securities ("Security Owners") will hold their
Securities through the Depository Trust Company ("DTC") in the United States, or
Cedel Bank, societe anonyme ("CEDEL") or the Euroclear System ("Euroclear") in
Europe if they are participants of such systems, or indirectly through
organizations which are participants in such systems ("Participants"). The
Book-Entry Securities will be issued in one or more certificates which equal the
aggregate principal balance of the Securities and will initially be registered
in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in CEDEL's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank, N.A., will
act as depositary for CEDEL and The Chase Manhattan Bank will act as depositary
for Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Except as described below, no person
acquiring a Book-Entry Security (each, a "beneficial owner") will be entitled to
receive a physical certificate representing such Security (a "Definitive
Security"). Unless and until Definitive Securities are issued, it is anticipated
that the only "Securityholders" of the Securities will be Cede & Co., as nominee
of DTC. Security Owners are only permitted to exercise their rights indirectly
through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant, and on
the records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and DTC participants.
While the Securities are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security Owners
have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will not
possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
herein) or Euroclear Participant (as defined herein) to a DTC Participant will
be received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counter party in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York ("Morgan" and in such capacity, the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Belgian Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Belgian Cooperative. The Belgian Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is a
member bank of the Federal Reserve System. As such, it is regulated and examined
by the Board of Governors of the Federal Reserve System and the New York State
Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear,
and receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Under a book-entry format, beneficial owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede & Co., as nominee of DTC. Distributions with
respect to Securities held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Consequences -Tax Treatment of Foreign Investors" and "-- Tax
Consequences to Holders of the Notes -- Backup Withholding" herein. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Securities to persons or entities that do not
participate in the Depository system may be limited due to the lack of physical
certificates for such Book-Entry Securities. In addition, issuance of the
Book-Entry Securities in book-entry form may reduce the liquidity of such
Securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Securities of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Securities under the applicable Agreement only at the direction of
one or more Financial Intermediaries to whose DTC accounts the Book-Entry
Securities are credited, to the extent that such actions are taken on behalf of
Financial Intermediaries whose holdings include such Book-Entry Securities.
CEDEL or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Securityholder under the Agreement on behalf of a
CEDEL Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Securities which
conflict with actions taken with respect to other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
None of the Master Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of a
Series of Securities or with respect to the related Trust Fund Assets. Credit
enhancement may be in the form of a limited financial guaranty policy issued by
an entity named in the related Prospectus Supplement, the subordination of one
or more classes of the Securities of such Series, the establishment of one or
more Reserve Accounts, the use of a cross-collateralization feature, use of a
mortgage pool insurance policy, bankruptcy bond, special hazard insurance
policy, surety bond, letter of credit, guaranteed investment contract,
overcollateralization, or another method of credit enhancement contemplated
herein and described in the related Prospectus Supplement, or any combination of
the foregoing. Unless otherwise specified in the related Prospectus Supplement,
credit enhancement will not provide protection against all risks of loss and
will not guarantee repayment of the entire principal balance of the Securities
and interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, Securityholders
will bear their allocable share of any deficiencies. If specified in the related
Prospectus Supplement, credit enhancement may cover shortfalls of interest
resulting from the timing of the receipt of prepayments of Loans or may be used
for other purposes. See "Yield, Maturity and Prepayment Considerations -
Prepayments." To the extent credit enhancement is so used, it will be
unavailable to cover losses on the Loans.
SUBORDINATION
If so specified in the related Prospectus Supplement, protection afforded
to holders of one or more classes of Securities of a Series by means of the
subordination feature may be accomplished by the preferential right of holders
of one or more other classes of such Series (the "Senior Securities") to receive
distributions in respect of scheduled principal, Principal Prepayments, interest
or any combination thereof that otherwise would have been payable to holders of
Subordinated Securities under the circumstances and to the extent specified in
the related Prospectus Supplement. Protection may also be afforded to the
holders of Senior Securities of a Series by: (i) reducing the ownership interest
(if applicable) of the related Subordinated Securities; (ii) a combination of
the immediately preceding sentence and clause (i) above; or (iii) as otherwise
described in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, delays in receipt of scheduled payments on the Loans and
losses on defaulted Loans or on Norwest ABS may be borne first by the various
classes of Subordinated Securities and thereafter by the various classes of
Senior Securities, in each case under the circumstances and subject to the
limitations specified in such Prospectus Supplement. The aggregate distributions
in respect of delinquent payments on the Loans over the lives of the Securities
or at any time, the aggregate losses in respect of defaulted Trust Fund Assets
which must be borne by the Subordinated Securities by virtue of subordination
and the amount of the distributions otherwise distributable to the Subordinated
Securityholders that will be distributable to Senior Securityholders on any
Distribution Date may be limited as specified in the related Prospectus
Supplement. If aggregate losses in respect of such Trust Fund Assets were to
exceed an amount specified in the related Prospectus Supplement, holders of
Senior Securities would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the related
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Securities on any Distribution Date may instead be
deposited into one or more Reserve Accounts established with the Trustee or
distributed to holders of Senior Securities. Such deposits may be made on each
Distribution Date, for specified periods or until the balance in the Reserve
Account has reached a specified amount and, following payments from the Reserve
Account to holders of Senior Securities or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Account to required levels, in
each case as specified in the related Prospectus Supplement. Amounts on deposit
in the Reserve Account may be released to the holders of certain classes of
Securities at the times and under the circumstances specified in such Prospectus
Supplement.
If specified in the related Prospectus Supplement, various classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-collateralization
mechanism or otherwise.
LETTER OF CREDIT
The letter of credit, if any, with respect to a Series of Securities will
be issued by the bank or financial institution specified in the related
Prospectus Supplement (the "L/C Bank"). Under the letter of credit, the L/C Bank
will be obligated to honor drawings thereunder in an aggregate fixed dollar
amount, net of unreimbursed payments thereunder, equal to the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of Trust Fund Assets on the related Cut-off Date or of one or more
Classes of Securities (the "L/C Percentage"). If so specified in the related
Prospectus Supplement, the letter of credit may permit drawings in the event of
losses not covered by insurance policies or other credit support, such as losses
arising from damage not covered by standard hazard insurance policies, losses
resulting from the bankruptcy of a borrower and the application of certain
provisions of the federal Bankruptcy Code, or losses resulting from denial of
insurance coverage due to misrepresentations in connection with the origination
of a Loan. The amount available under the letter of credit will, in all cases,
be reduced to the extent of the unreimbursed payments thereunder. The
obligations of the L/C Bank under the letter of credit for each Series of
Securities will expire at the earlier of the date specified in the related
Prospectus Supplement or the termination of the Trust Fund. See "The Agreements
Termination; Optional Termination." A copy of the letter of credit for a Series,
if any, will be filed with the Commission as an exhibit to a Current Report on
Form 8-K to be filed within 15 days of issuance of the Securities of the related
Series.
INSURANCE POLICIES, SURETY BONDS AND GUARANTIES
If so provided in the Prospectus Supplement for a Series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. In addition, if specified in the
related Prospectus Supplement, a Trust Fund may also include bankruptcy bonds,
special hazard insurance policies, other insurance or guaranties for the purpose
of (i) maintaining timely payments or providing additional protection against
losses on the assets included in such Trust Fund, (ii) paying administrative
expenses or (iii) establishing a minimum reinvestment rate on the payments made
in respect of such assets or principal payment rate on such assets. Such
arrangements may include agreements under which Securityholders are entitled to
receive amounts deposited in various accounts held by the Trustee upon the terms
specified in such Prospectus Supplement. A copy of any such instrument for a
series will be filed with the Commission as an exhibit to a Current Report on
Form 8-K to be filed with the Commission within 15 days of issuance of the
Securities of the related series.
OVER-COLLATERALIZATION
If so provided in the Prospectus Supplement for a Series of Securities, the
excess of the aggregate principal balance of the Trust Fund Assets over the
aggregate principal balance of the Securities may provide overcollateralization.
Overcollateralization in this form may be by the initial or subsequent deposit
of Trust Fund Assets to create such excess or may build over time from the
application of certain excess cash amounts generated by the Trust Fund Assets to
accelerate the amortization of the applicable class or classes of securities.
Also, a portion of the interest payment on each Loan may be applied as an
additional distribution in respect of principal to reduce the principal balance
of a certain class or classes of Securities and thus accelerated the
amortization of such class or classes of Securities.
RESERVE ACCOUNTS
If specified in the related Prospectus Supplement, credit support with
respect to a Series of Securities will be provided by the establishment and
maintenance with the Trustee for such Series of Securities, in trust, of one or
more Reserve Accounts for such Series. The related Prospectus Supplement will
specify whether or not any such Reserve Accounts will be included in the Trust
Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit therein
of cash, United States Treasury securities, instruments evidencing ownership of
principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in the related Prospectus Supplement, (ii) by the deposit therein from
time to time of certain amounts, as specified in the related Prospectus
Supplement to which the Subordinate Securityholders, if any, would otherwise be
entitled or (iii) in such other manner as may be specified in the related
Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in Permitted
Investments.
"Permitted Investments" may include (i) obligations of the United States or
any agency thereof, provided such obligations are backed by the full faith and
credit of the United States; (ii) general obligations of or obligations
guaranteed by any state of the United States or the District of Columbia
receiving the highest long-term debt rating of each Rating Agency rating the
related Series of Securities, or such lower rating as will not result in the
downgrading or withdrawal of the ratings then assigned to such Securities by
each such Rating Agency; (iii) commercial paper issued by Norwest Bank
Minnesota, National Association or any of its affiliates; PROVIDED that such
commercial paper is rated no lower than the rating specified in the related
Prospectus Supplement; (iv) commercial or finance company paper which is then
receiving the highest commercial or finance company paper rating of each such
Rating Agency, or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to such Securities by each such Rating
Agency; (v) certificates of deposit, demand or time deposits, or bankers"
acceptances issued by any depository institution or trust company incorporated
under the laws of the United States or of any state thereof and subject to
supervision and examination by federal and/or state banking authorities,
provided that the commercial paper and/or long term unsecured debt obligations
of such depository institution or trust company (or in the case of the principal
depository institution in a holding company system, the commercial paper or
long-term unsecured debt obligations of such holding company, but only if
Moody's Investors Service, Inc. ("Moody's") is not a Rating Agency) are then
rated one of the two highest long-term and the highest short-term ratings of
each such Rating Agency for such securities, or such lower ratings as will not
result in the downgrading or withdrawal of the rating then assigned to such
Securities by any such Rating Agency; (vi) demand or time deposits or
certificates of deposit issued by any bank or trust company or savings
institution to the extent that such deposits are fully insured by the FDIC;
(vii) guaranteed reinvestment agreements issued by any bank, insurance company
or other corporation containing, at the time of the issuance of such agreements,
such terms and conditions as will not result in the downgrading or withdrawal of
the rating then assigned to such Securities by any such Rating Agency; (viii)
repurchase obligations with respect to any security described in clauses (i) and
(ii) above, in either case entered into with a depository institution or trust
company (acting as principal) described in clause (v) above; (ix) securities
(other than stripped bonds, stripped coupons or instruments sold at a purchase
price in excess of 115% of the face amount thereof) bearing interest or sold at
a discount issued by any corporation incorporated under the laws of the United
States or any state thereof which, at the time of such investment, have one of
the two highest ratings of each Rating Agency (except if the Rating Agency is
Moody's, such rating shall be the highest commercial paper rating of Moody's for
any such securities), or such lower rating as will not result in the downgrading
or withdrawal of the rating then assigned to such Securities by any such Rating
Agency, as evidenced by a signed writing delivered by each such Rating Agency;
(x) interests in any money market fund which at the date of acquisition of the
interests in such fund and throughout the time such interests are held in such
fund has the highest applicable rating by each such Rating Agency or such lower
rating as will not result in the downgrading or withdrawal of the ratings then
assigned to such Securities by each such Rating Agency; (xi) short term
investment funds sponsored by any trust company or national banking association
incorporated under the laws of the United States or any state thereof which on
the date of acquisition has been rated by each such Rating Agency in their
respective highest applicable rating category or such lower rating as will not
result in the downgrading or withdrawal of the ratings then assigned to such
Securities by each such Rating Agency; and (xii) such other investments having a
specified stated maturity and bearing interest or sold at a discount acceptable
to each Rating Agency as will not result in the downgrading or withdrawal of the
rating then assigned to such Securities by any such Rating Agency, as evidenced
by a signed writing delivered by each such Rating Agency; PROVIDED that no such
instrument shall be a Permitted Investment if such instrument evidences the
right to receive interest only payments with respect to the obligations
underlying such instrument; and PROVIDED, FURTHER, that no investment specified
in clause (x) or clause (xi) above shall be a Permitted Investment for any
Pre-Funding Account or any related Capitalized Interest Account. If a letter of
credit is deposited with the Trustee, such letter of credit will be irrevocable.
Unless otherwise specified in the related Prospectus Supplement, any instrument
deposited therein will name the Trustee, in its capacity as trustee for the
holders of the Securities, as beneficiary and will be issued by an entity
acceptable to each Rating Agency that rates the Securities of the related
Series. Additional information with respect to such instruments deposited in the
Reserve Accounts will be set forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Securities of the related Series for the purposes, in the manner and
at the times specified in the related Prospectus Supplement.
POOL INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate pool
insurance policy ("Pool Insurance Policy") will be obtained for the Pool and
issued by the insurer (the "Pool Insurer") named in such Prospectus Supplement.
Each Pool Insurance Policy will, subject to the limitations described below,
cover loss by reason of default in payment on Loans in the Pool in an amount
equal to a percentage specified in such Prospectus Supplement of the aggregate
principal balance of such Loans on the Cut-off Date which are not covered as to
their entire outstanding principal balances by Primary Mortgage Insurance
Policies. As more fully described below, the Master Servicer will present claims
thereunder to the Pool Insurer on behalf of itself, the Trustee and the holders
of the Securities of the related Series. The Pool Insurance Policies, however,
are not blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Loans and only upon satisfaction of certain
conditions precedent described below. Unless otherwise specified in the related
Prospectus Supplement, the Pool Insurance Policies will not cover losses due to
a failure to pay or denial of a claim under a Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the Pool
Insurance Policy will provide that no claims may be validly presented unless (i)
any required Primary Mortgage Insurance Policy is in effect for the defaulted
Loan and a claim thereunder has been submitted and settled; (ii) hazard
insurance on the related Property has been kept in force and real estate taxes
and other protection and preservation expenses have been paid; (iii) if there
has been physical loss or damage to the Property, it has been restored to its
physical condition (reasonable wear and tear excepted) at the time of issuance
of the policy; and (iv) the insured has acquired good and merchantable title to
the Property free and clear of liens except certain permitted encumbrances. Upon
satisfaction of these conditions, the Pool Insurer will have the option either
(a) to purchase the property securing the defaulted Loan at a price equal to the
principal balance thereof plus accrued and unpaid interest at the Loan Rate to
the date of such purchase and certain expenses incurred by the Master Servicer
on behalf of the Trustee and Securityholders, or (b) to pay the amount by which
the sum of the principal balance of the defaulted Loan plus accrued and unpaid
interest at the Loan Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Property, in either case net of certain amounts paid or assumed to have been
paid under the related Primary Mortgage Insurance Policy. If any Property
securing a defaulted Loan is damaged and proceeds, if any, from the related
hazard insurance policy or the applicable special hazard insurance policy are
insufficient to restore the damaged Property to a condition sufficient to permit
recovery under the Pool Insurance Policy, the Master Servicer will not be
required to expend its own funds to restore the damaged Property unless it
determines that (i) such restoration will increase the proceeds to
Securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) such expenses will be recoverable by it
through proceeds of the sale of the Property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the Pool
Insurance Policy will not insure (and many Primary Mortgage Insurance Policies
do not insure) against loss sustained by reason of a default arising from, among
other things, fraud or negligence in the origination or servicing of a Loan,
including misrepresentation by the borrower, the originator or persons involved
in the origination thereof. No Pool Insurance Policy will cover (and many
Primary Mortgage Insurance Policies do not cover) a claim in respect of a
defaulted Loan occurring when the servicer of such Loan, at the time of default
or thereafter, was not approved by the applicable insurer. Failure of a Pool
Insurance Policy to cover a claim may result in Securityholders not receiving
all amounts due on the Securities.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of claims
paid less the aggregate of the net amounts realized by the Pool Insurer upon
disposition of all foreclosed properties. The amount of claims paid will include
certain expenses incurred by the Master Servicer as well as accrued interest on
delinquent Loans to the date of payment of the claim, unless otherwise specified
in the related Prospectus Supplement. Accordingly, if aggregate net claims paid
under any Pool Insurance Policy reach the original policy limit, coverage under
that Pool Insurance Policy will be exhausted and any further losses will be
borne by the related Securityholders.
CROSS-COLLATERALIZATION
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust Fund may be evidenced by
separate classes of the related Series of Securities. In such case, credit
support may be provided by a cross-collateralization feature which requires that
distributions be made with respect to Securities evidencing a beneficial
ownership interest in, or secured by, one or more Pools within the same Trust
Fund prior to distributions to Subordinated Securities evidencing a beneficial
ownership interest in, or secured by, one or more other asset groups within such
Trust Fund. Cross-collateralization may be provided by (i) the allocation of
certain excess amounts generated by one or more Pools to one or more other Pools
within the same Trust Fund or (ii) the allocation of losses with respect to one
or more Pools to one or more other asset groups within the same Trust Fund. Such
excess amounts will be applied and/or such losses will be allocated to the class
or classes of Subordinated Securities of the related Series then outstanding
having the lowest rating assigned by any Rating Agency or the lowest payment
priority, in each case to the extent and in the manner more specifically
described in the related Prospectus Supplement. The Prospectus Supplement for a
Series which includes a cross- collateralization feature will describe the
manner and conditions for applying such cross-collateralization feature.
If specified in the related Prospectus Supplement, the coverage provided by
one or any combination of the forms of credit enhancement described in this
Prospectus may apply concurrently to two or more separate Trust Funds. If
applicable, the related Prospectus Supplement will identify the Trust Funds to
which such credit enhancement relates and the manner of determining the amount
of coverage provided to such Trust Funds thereby and of the application of such
coverage to the identified Trust Funds.
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities will be
affected primarily by (i) the amount and timing of principal payments received
on or in respect of the Trust Fund Assets included in the related Trust Fund,
(ii) the manner of allocating principal and/or payments among the classes of
Securities of a Series, and (iii) the exercise by the party entitled thereto of
any right of optional termination. The original terms to maturity of the Loans
in a given Pool will vary depending upon the type of Loans included therein.
Each Prospectus Supplement will contain information with respect to the type and
maturities of the Loans in the related Pool. The related Prospectus Supplement
will specify the circumstances, if any, under which the related Loans will be
subject to prepayment penalties. The prepayment experience on the Loans in a
Pool will affect the weighted average life of the related Series of Securities.
Prepayments. The rate of prepayment on the Loans cannot be predicted. The
prepayment experience of the related Trust Fund may be affected by a wide
variety of factors, including general economic conditions, prevailing interest
rate levels, the availability of alternative financing, homeowner mobility and
the other factors set forth below. Other factors that might be expected to
affect the prepayment rate of a pool of mortgage loans include the amounts of,
and interest rates on, any senior mortgage loans, and the use of first mortgage
loans as long-term financing for home purchase and subordinate mortgage loans as
shorter-term financing for a variety of purposes, including home improvement,
education expenses and purchases of consumer durables such as automobiles. The
Loans included in a Trust Fund may experience a higher rate of prepayment than
traditional mortgage loans. In addition, any future limitations on the right of
borrowers to deduct interest payments on mortgage loans for federal income tax
purposes if the proceeds of the loan are not used for home purchase may further
increase the rate of prepayments of the Loans. Moreover, subprime borrowers
whose credit records improve may refinance even if prevailing interest rate
levels remain constant. The enforcement of a "due-on-sale" provision (as
described below) will have the same effect as a prepayment of the related Loan.
See "Certain Legal Aspects of the Loans - 'Due-on- Sale' Clauses." The yield to
an investor who purchases Securities in the secondary market at a price other
than par will vary from the anticipated yield if the rate of prepayment on the
Loans is actually different than the rate anticipated by such investor at the
time such Securities were purchased.
Unless otherwise specified in the related Prospectus Supplement, all
conventional Loans will contain due- on-sale provisions permitting the mortgagee
to accelerate the maturity of the loan upon sale or certain transfers by the
borrower of the related Property. Loans insured by the FHA are assumable with
the consent of the FHA. Thus, the rate of prepayments on such Loans may be lower
than that of conventional Loans bearing comparable interest rates. The Master
Servicer generally will enforce any due-on-sale or due-on-encumbrance clause, to
the extent it has knowledge of the conveyance or further encumbrance or the
proposed conveyance or proposed further encumbrance of the Property and
reasonably believes that it is entitled to do so under applicable law; provided,
however, that the Master Servicer will not take any enforcement action that
would impair or threaten to impair any recovery under any related insurance
policy. See "The Agreements -- Collection Procedures" and "Certain Legal Aspects
of the Loans" for a description of certain provisions of each Agreement and
certain legal developments that may affect the prepayment experience on the
Loans.
Prepayments on Loans are commonly measured relative to a prepayment
standard or model. The Prospectus Supplement for each Series of Securities may
describe one or more such prepayment standards or models and contain tables
setting forth the weighted average life of each Class and the percentage of the
original aggregate principal balance of each Class that would be outstanding on
specified Distribution Dates for such Series and the projected yields to
maturity on certain Classes thereof, in each case based on the assumption stated
in such Prospectus Supplement, including assumptions that prepayments on the
Loans are made at constant rates corresponding to various percentages of the
prepayment standard or model specified in such Prospectus Supplement.
There is no assurance that prepayment of the Loans underlying a Series of
Securities will conform to any level of the prepayment standard or model
specified in the applicable Prospectus Supplement. A number of factors may
affect prepayment experience, including but not limited to homeowner mobility,
economic conditions, natural disasters, changes in borrowers' housing needs, job
transfers, unemployment or, in the case of borrowers relying on commission
income and self-employed borrowers, significant fluctuations in income or
adverse economic conditions, borrowers' net equity in the properties securing
the mortgages, including the use of second or "home equity" mortgage loans by
borrowers or the use of the properties as second or vacation homes, servicing
decisions, enforceability of due-on sale clauses, mortgage market interest
rates, mortgage recording taxes, competition among mortgage loan originators
resulting in reduced refinancing costs, reduction in documentation requirements
and willingness to accept higher loan-to-value ratios, and the availability of
mortgage funds. In general, however, if prevailing interest rates fall below the
Loan Rates borne by the Loans underlying a Series of Securities, the prepayment
rates of such Loans are likely to be higher than if prevailing rates remain at
or above the rates borne by such Loans. Conversely, if prevailing interest rates
rise above the Loan Rates borne by the Loans, the Loans are likely to experience
a lower prepayment rate than if prevailing rates remain at or below such Loan
Rates. However, there can be no assurance that prepayments will rise or fall
according to such changes in interest rates. It should be noted that Securities
of a Series may evidence an interest in a Trust Fund with different Loan Rates.
Accordingly the prepayment experience of such Securities will to some extent be
a function of the mix of Loan Rates of the Loans. In addition, the terms of the
Agreements will require the Master Servicer to enforce any due-on-sale clause to
the extent it has knowledge of the conveyance or the proposed conveyance of the
underlying Property; provided, however, that any enforcement action that the
Master Servicer determines would jeopardize any recovery under any related
primary mortgage insurance policy will not be required and provided, further,
that the Master Servicer may permit the assumption of defaulted Loans. See "The
Agreements--Realization Upon Defaulted Mortgage Loans" and "Certain Legal
Aspects of the Loans--'Due-on-Sale' Clauses" for a description of certain
provisions of each Agreement and certain legal developments that may affect the
prepayment experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above such Loan Rates. Conversely, if prevailing interest
rates rise appreciably above the Loan Rates borne by the Loans, such Loans are
more likely to experience a lower prepayment rate than if prevailing rates
remain at or below such Loan Rates. However, there can be no assurance that such
will be the case. Subprime mortgage loans may experience more prepayments in a
rising interest rate environment as the borrowers' finances are stressed to the
point of default.
A borrower may refinance a Loan at any time through the same or a different
originator. Upon such refinancing, the new loan will not be included in the
Trust Fund. In this regard, Norwest Mortgage or an affiliate thereof may, from
time to time, implement programs designed to encourage refinancing through
Norwest Mortgage or such affiliate, including but not limited to general or
targeted solicitations, or the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. Norwest
Mortgage or an affiliate thereof may also encourage refinancing of defaulted
Loans, including Loans that would permit creditworthy borrowers to assume the
outstanding indebtedness. Any such refinancing will have the same effect as a
repayment in full of the related Loan.
When a full prepayment is made on a Loan, the borrower is charged interest
on the principal amount of the Loan so prepaid only for the number of days in
the month actually elapsed up to the date of the prepayment, rather than for a
full month. The effect of prepayments in full will be to reduce the amount of
interest passed through or paid in the following month to holders of Securities
because interest on the principal amount of any Loan so prepaid will generally
be paid only to the date of prepayment. Partial prepayments in a given month
maybe applied to the outstanding principal balances of the Loans so prepaid on
the first day of the month of receipt or the month following receipt. In the
latter case, partial prepayments will not reduce the amount of interest passed
through or paid in such month.
If the rate at which interest is passed through or paid to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis, disproportionate
principal prepayments among Loans with different Loan Rates will affect the
yield on such Securities. In most cases, the effective yield to Securityholders
will be lower than the yield otherwise produced by the applicable Pass-Through
Rate or interest rate and purchase price, because while interest will accrue on
each Loan from the first day of the month (unless otherwise specified in the
related Prospectus Supplement), the distribution of such interest will not be
made earlier than the month following the month of accrual.
Under certain circumstances, the person specified in the related Prospectus
Supplement may have the option to purchase the assets of a Trust Fund thereby
effecting earlier retirement of the related Series of Securities. See "The
Agreements -- Termination; Optional Termination."
The relative contribution of the various factors affecting prepayment may
vary from time to time. There can be no assurance as to the rate of payment of
principal of the Trust Fund Assets at any time or over the lives of the
Securities.
The Prospectus Supplement relating to a Series of Securities will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted average
lives and maturities of such Securities.
Allocation of Principal among Classes. A Series of Securities may include
one or more classes of Securities that are entitled to accelerated amortization
compared to other classes of Securities of the same Series of Securities or
compared to the pro rata share of such class of Securities of principal
collections. Such acceleration may result from overcollateralization,
subordination, Accrual Securities, priority distributions of prepayments to the
accelerated class, priority distributions to the accelerated classes of
principal recovered on defaulted loans or other priority distributions to the
accelerated class. Because such acceleration of amortization may depend upon the
rate of prepayment of principal or delinquency or defaults on the Loans, the
rate of acceleration cannot be predicted. However, to the extent there is
acceleration of amortization of a class of Securities, the weighted average life
of such class will be reduced. The effect on yield of such reduction on the
weighted average life of such class will depend on both the extent of the
acceleration and the timing of such acceleration in the life of the class.
Generally, the earlier in the life of a class the acceleration of amortization
occurs, the more effect such acceleration will have on the yield of the class.
Usually, if there is a class of Securities for which amortization is
accelerated, there is a Support Class of Securities for which the distribution
of principal is delayed and the amortization of such class is extended, thus
increasing its weighted average life. Thus, for example, the effect on a class
of Securities of a particular rate of prepayment of principal on the Loans may
be magnified on reduced by the allocation priorities chosen for the distribution
of principal collection for the Series of Securities.
THE AGREEMENTS
Set forth below is a description of the material provisions of each
Agreement which are not described elsewhere in this Prospectus. The description
is subject to, and qualified in its entirety by reference to, the provisions of
each Agreement. Where particular provisions or terms used in the Agreements are
referred to, such provisions or terms are as specified in the Agreements.
ASSIGNMENT OF THE TRUST FUND ASSETS
Assignment of the Loans. The Depositor will have acquired the Loans
included in each Trust Fund from the Seller pursuant to an agreement. In
connection with the conveyance of the Loans to the Depositor, the Seller will
(i) agree to deliver to the Depositor all of the documents which the Depositor
is required to deliver to the Trustee; (ii) make certain representations and
warranties to the Depositor which will be the basis of certain of the
Depositor's representations and warranties to the Trustee ; and (iii) agree to
repurchase or substitute for any Loan for which any document is not delivered or
is found to be defective in any material respect if the Seller cannot cure such
omission or defect within 60 days after notice thereof. Such agreement will
inure to the benefit of the Trustee and is intended to help ensure the
Depositor's performance of its limited obligation to repurchase or substitute
for Loans. See "Loan Programs - Representations by Seller; Repurchases" above.
At the time of issuance of the Securities of a Series, the Depositor will
cause the Loans comprising the related Trust Fund to be assigned to the Trustee,
without recourse, together with all principal and interest received by or on
behalf of the Depositor on or with respect to such Loans after the Cut-off Date,
other than principal and interest due on or before the Cut-off Date and other
than any Retained Interest specified in the related Prospectus Supplement. The
Trustee will, concurrently with such assignment, authenticate and deliver such
Securities to the Depositor in exchange for the Loans. Each Loan will be
identified in a schedule appearing as an exhibit to the related Agreement. Such
schedule will include, as applicable, among other things, the unpaid principal
balance of each Loan as of the close of business on the applicable Cut-off Date,
the Loan Rate, the maturity of the Loan and the combined loan-to-value ratios at
origination. Unless otherwise specified in the related Prospectus Supplement,
the Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Loan, among other things, (i) the
mortgage note or contract endorsed without recourse in blank or to the order of
the Trustee or a lost note affidavit executed by the Seller, (ii) the mortgage,
deed of trust or similar instrument (a "Mortgage") with evidence of recording
indicated thereon (except for any Mortgage not returned from the public
recording office, in which case the Depositor will deliver or cause to be
delivered a copy of such Mortgage together with a certificate that the original
of such Mortgage was delivered to such recording office), (iii) an assignment of
the Mortgage to the Trustee, which assignment will be in recordable form in the
case of a Mortgage assignment, (iv) any assumption, modification or amendment
agreements, and (v) such other documents as may be specified in the related
Prospectus Supplement or the related Agreement. Unless otherwise specified in
the related Prospectus Supplement, the Depositor will promptly cause the
assignments of the related Loans to be recorded in the appropriate public office
for real property records, except in states in which, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in such Loans against the claim of any subsequent transferee
or any successor to or creditor of the Depositor or the originator of such
Loans.
With respect to any Loans that are Cooperative Loans, the Depositor will
cause to be delivered to the Trustee the related original cooperative note
endorsed without recourse in blank or to the order of the Trustee, the original
security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate, related blank stock powers and any other document specified in the
related Prospectus Supplement. The Depositor will cause to be filed in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review such
Loan documents within 180 days of the date of applicable Agreement, and the
Trustee will hold such documents in trust for the benefit of the related
Securityholders. Unless otherwise specified in the related Prospectus
Supplement, if any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) will notify the Master
Servicer and the Depositor, and the Master Servicer will notify the Seller. If
the Seller cannot cure the omission or defect within 60 days after receipt of
such notice, the Seller will be obligated to either (i) purchase the related
Loan from the Trust Fund at the Purchase Price or (ii) if so specified in the
related Prospectus Supplement, remove such Loan from the Trust Fund and
substitute in its place one or more other Loans that meets certain requirements
set forth therein. There can be no assurance that the Seller will fulfill this
purchase or substitution obligation. Although the Master Servicer may be
obligated to enforce such obligation to the extent described above under "Loan
Programs -- Representations by Seller; Repurchases," neither the Master Servicer
nor the Depositor will be obligated to purchase or replace such Loan if the
Seller defaults on its obligation, unless such breach also constitutes a breach
of the representations or warranties of the Master Servicer or the Depositor, as
the case may be. Unless otherwise specified in the related Prospectus
Supplement, this obligation to cure, purchase or substitute constitutes the sole
remedy available to the Securityholders or the Trustee for omission of, or a
material defect in, a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Securityholders in a Loan, the Master Servicer will be obligated to cure the
breach in all material respects. Unless otherwise specified in the related
Prospectus Supplement, this obligation to cure constitutes the sole remedy
available to the Securityholders or the Trustee for such a breach of
representation by the Master Servicer.
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC election is to be made, no purchase or substitution of a Loan will
be made if such purchase or substitution would result in a prohibited
transaction tax under the Code.
No Recourse to Seller; Depositor or Master Servicer. As described above
under "-- Assignment of the Loans," the Depositor will cause the Loans
comprising the related Trust Fund to be assigned to the Trustee, without
recourse. However, the Seller will be obligated to repurchase or substitute for
any Loan as to which certain representations and warranties are breached or for
failure to deliver certain documents relating to the Loans as described herein
under "--Assignment of the Loans" and "Loan Programs -- Representations by
Seller; Repurchases." These obligations to purchase or substitute constitute the
sole remedy available to the Securityholders or the Trustee for a breach of any
such representation or failure to deliver a constituent document.
Assignment of Norwest ABS. The Depositor will cause the Norwest ABS to be
registered in the name of Trustee. The Trustee (or the custodian) will have
possession of any certificated Norwest ABS. Unless otherwise specified in the
related Prospectus Supplement, the Trustee will not be in possession of or be
assignee of record of any underlying assets for a Norwest ABS. See "The Trust
Fund -The Loans -- Norwest ABS" herein. Each Norwest ABS will be identified in a
schedule appearing as an exhibit to the related Agreement which will specify the
original principal amount, outstanding principal balance as of the Cut-off Date,
annual pass-through rate or interest rate and maturity date and certain other
pertinent information for each Norwest ABS conveyed to the Trustee.
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
The Master Servicer will establish and maintain or cause to be established
and maintained with respect to the related Trust Fund a separate account or
accounts for the collection of payments on the related Trust Fund Assets in the
Trust Fund (the "Security Account") which, unless otherwise specified in the
related Prospectus Supplement, must be either (i) maintained with a depository
institution the debt obligations of which (or in the case of a depository
institution that is the principal subsidiary of a holding company, the
obligations of which) are rated in one of the two highest rating categories by
the Rating Agency or Rating Agencies that rated one or more classes of the
related Series of Securities, or (ii) an account or accounts otherwise
acceptable to each Rating Agency and, if a REMIC election has been made, that
would not cause the related Trust Fund (or one or more segregated pools of
assets therein) to fail to qualify as a REMIC. To the extent that the portion of
funds deposited in the Security Account at any time exceed the limit of
insurance coverage established by the Federal Deposit Insurance Corporation (the
"FDIC"), such excess will be subject to loss in the event of the failure of the
depository institution. The collateral eligible to secure amounts in the
Security Account is limited to Permitted Investments. A Security Account may be
maintained as an interest bearing account or the funds held therein may be
invested pending each succeeding Distribution Date in Permitted Investments.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or its designee will be entitled to receive any such interest or other
income earned on funds in the Security Account as additional compensation and
will be obligated to deposit in the Security Account the amount of any loss
immediately as realized. The Security Account may be maintained with the Master
Servicer or with a depository institution that is an affiliate of the Master
Servicer, provided it meets the standards set forth above.
The Master Servicer will deposit or cause to be deposited in the Security
Account for each Trust Fund, to the extent applicable and unless otherwise
specified in the related Prospectus Supplement and provided in the Agreement,
the following payments and collections received or advances made by or on behalf
of it subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date and exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement,
any applicable prepayment penalties, on the Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property
taxes, insurance premiums and similar items ("Insured Expenses")
incurred, and unreimbursed Advances made, by the Master Servicer, if
any) of the hazard insurance policies and any Primary Mortgage
Insurance Policies, to the extent such proceeds are not applied to the
restoration of the property or released to the borrower in accordance
with servicing procedures (collectively, "Insurance Proceeds") and all
other cash amounts (net of unreimbursed expenses incurred in
connection with liquidation or foreclosure ("Liquidation Expenses")
and unreimbursed Advances made, by the Master Servicer, if any)
received and retained in connection with the liquidation of defaulted
Loans, by foreclosure or otherwise ("Liquidation Proceeds"), together
with any net proceeds received on a monthly basis with respect to any
properties acquired on behalf of the Securityholders by foreclosure or
deed in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Master Servicer, the Depositor or the Seller as
described under "Loan Program -- Representations by Seller;
Repurchases" or "-- Assignment of Trust Fund Assets" above and all
proceeds of any Loan repurchased as described under "-- Termination;
Optional Termination" below;
(v) all payments required to be deposited in the Security Account
with respect to any deductible clause in any blanket insurance policy
described under "-- Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer
in connection with losses realized on investments for the benefit of
the Master Servicer of funds held in the Security Account and, to the
extent specified in the related Prospectus Supplement, any payments
required to be made by the Master Servicer in connection with
prepayment interest shortfalls; and
(vii) all other amounts (including any buy-down or subsidy funds)
required to be deposited in the Security Account pursuant to the
Agreement.
The Seller will deposit or cause to be deposited in the Security Account
for each Trust Fund, to the extent applicable and unless otherwise specified in
the related Prospectus Supplement and provided in the Agreement, all payments
representing scheduled payments of principal and interest received by the Seller
before the Cut-Off Date but which are due after the Cut-Off Date.
The Master Servicer (or the Depositor, as applicable) may from time to time
direct the institution that maintains the Security Account to withdraw funds
from the Security Account for the following purposes:
(i) to pay to the Master Servicer the servicing fees described in
the related Prospectus Supplement, the master servicing fees and, as
additional servicing compensation, earnings on or investment income
with respect to funds in the amounts in the Security Account credited
thereto;
(ii) to reimburse the Master Servicer for Advances, such right of
reimbursement with respect to any Loan being limited to amounts
received that represent late recoveries of payments of principal
and/or interest on such Loan (or Insurance Proceeds or Liquidation
Proceeds with respect thereto) with respect to which such Advance was
made;
(iii) to reimburse the Master Servicer for any Advances
previously made which the Master Servicer has determined to be
nonrecoverable;
(iv) to reimburse the Master Servicer from Insurance Proceeds for
expenses incurred by the Master Servicer and covered by the related
insurance policies;
(v) to reimburse the Master Servicer for unpaid master servicing
fees and unreimbursed Advances;
(vi) to pay to the Master Servicer, with respect to each Loan or
property acquired in respect thereof that has been purchased by the
Master Servicer pursuant to the Agreement, all amounts received
thereon and not taken into account in determining the principal
balance of such repurchased Loan;
(vii) to reimburse the Master Servicer or the Depositor for
expenses incurred and reimbursable pursuant to the Agreement;
(viii) to withdraw any amount deposited in the Security Account
and not required to be deposited therein; and
(ix) to clear and terminate the Security Account upon termination
of the Agreement.
In addition, unless otherwise specified in the related Prospectus
Supplement, on or prior to the business day immediately preceding each
Distribution Date, the Master Servicer shall withdraw from the Security Account
the amount of Available Funds, to the extent on deposit, for deposit in an
account maintained by the Trustee for the related Series of Securities.
SUB-SERVICING
The Seller or any other servicing entity may act as the Sub-Servicer for
such Loan pursuant to an agreement (each, a "Sub-Servicing Agreement"), which
will not contain any terms inconsistent with the related Agreement. While each
Sub-Servicing Agreement will be a contract solely between the Master Servicer
and the Sub-Servicer, the Agreement pursuant to which a Series of Securities is
issued will provide that, if for any reason the Master Servicer for such Series
of Securities is no longer the Master Servicer of the related Loans, the Trustee
or any successor Master Servicer must recognize the Sub-Servicer's rights and
obligations under such Sub-Servicing Agreement. Notwithstanding any such
subservicing arrangement, unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will remain liable for its servicing duties and
obligations under the applicable Agreement as if the Master Servicer alone were
servicing the Loans.
A Sub-Servicer may enter into one or more agreements with other servicing
entities to perform the obligations of the Sub-Servicer under the related
Sub-Servicing Agreement. Such agreement will not contain any terms inconsistent
with the related Sub-Servicing Agreement and the Sub-Servicer will remain liable
to the Master Servicer for its servicing duties and obligations under the
related Sub-Servicing Agreement as if the Sub-Servicer alone were servicing the
Loans.
COLLECTION PROCEDURES
The Master Servicer will make reasonable efforts to collect all payments
called for under the Loans and will, consistent with each Agreement and any Pool
Insurance Policy, Primary Mortgage Insurance Policy, FHA Insurance, bankruptcy
bond or alternative arrangements, follow such collection procedures as are
customary with respect to loans that are comparable to the Loans. Consistent
with the above, the Master Servicer may, in its discretion, (i) waive any
assumption fee, late payment or other charge in connection with a Loan and (ii)
to the extent not inconsistent with the coverage of such Loan by a Pool
Insurance Policy, Primary Mortgage Insurance Policy, FHA Insurance, bankruptcy
bond or alternative arrangements, if applicable, waive, vary or modify any term
of any Loan or consent to the postponement of strict compliance with any such
term or in any matter grant indulgence to any borrower, subject to the
limitations set forth in the Agreement. In the event the Master Servicer
consents to the deferment of the due dates for payments due on a Loan, the
Master Servicer will nonetheless make payment of any required Advance with
respect to the payments so extended to the same extent as if such installment
were due, owing and delinquent and had not been deferred.
In any case in which property securing a Loan has been, or is about to be,
conveyed by the borrower or obligor, the Master Servicer will, to the extent it
has knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, unless (i) the exercise of such rights is
not permitted by applicable law, (ii) would impair or threaten to impair any
recovery under any Primary Mortgage Insurance Policy, (iii) would materially
increase the risk of default or delinquency on, or materially decrease the
security for, such Mortgage Loan or (iv) the Master Servicer, in a manner
consistent with reasonable commercial practice, permits the purchaser of the
related Property to assume the Loan. If these conditions are not met or if the
Master Servicer reasonably believes it is unable under applicable law to enforce
such due-on-sale clause or if such Loan is a mortgage loan insured by the FHA,
the Master Servicer will enter into or cause to be entered into an assumption
and modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable for repayment
of the Loan and, to the extent permitted by applicable law, the borrower remains
liable thereon. Any fee collected by or on behalf of the Master Servicer for
entering into an assumption agreement will be retained by or on behalf of the
Master Servicer as additional servicing compensation. See "Certain Legal Aspects
of the Loans - 'Due-on-Sale' Clauses." In connection with any such assumption,
the terms of the related Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Loans". This approval is usually based on the purchaser's income and net worth
and numerous other factors. Although the Cooperative's approval is unlikely to
be unreasonably withheld or delayed, the necessity of acquiring such approval
could limit the number of potential purchasers for those shares and otherwise
limit the Trust Fund's ability to sell and realize the value of those shares.
In general a "tenant-stockholder" (as defined in Code Section 216(b)(2) of
a corporation that qualifies as a "cooperative housing corporation" within the
meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders
(as defined in Code Section 216(b)(2)). By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1)must be determined
on a year-to-year basis. Consequently, there can be no assurance that
Cooperatives relating to the Cooperative Loans will qualify under such Section
for any particular year. In the event that such a Cooperative fails to qualify
for one or more years, the value of the collateral securing any related
Cooperative Loans could be significantly impaired because no deduction would be
allowable to tenant-stockholders under Code Section 216(a) with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
SERVICING OF SUBPRIME LOANS AND CLOSED END SECOND LOANS
Each Agreement will require the Master Servicer to make reasonable efforts
to collect all payments required under the Subprime Loans and the Closed End
Second Loans and, consistent with such Agreement and any applicable agreement
related to credit enhancement, to follow such collection procedures as it
follows with respect to mortgage loans serviced by it for others that are
comparable to such Loans. Consistent with the foregoing, the Master Servicer
will be permitted, in its discretion, to waive any prepayment charge, assumption
fee, late payment charge or any other charge with respect to such Loan.
Due to the credit histories of Subprime Loan borrowers, collection efforts
and borrower contacts generally are made earlier and more frequently in the
collection cycle with respect to Subprime Loans than is the case with respect to
other types of Loans. Each Agreement will permit the Master Servicer (consistent
with the requirements of the REMIC Regulations) to extend relief, on a case by
case basis, to Subprime and Closed End Second Loan borrowers whose payments
become delinquent. Such relief may include the temporary suspensions of
payments, repayment plans, extensions, modifications or short sales. Loss
mitigation efforts with respect to Subprime Loans generally begin very early in
the collection process and, with respect to both Subprime and Closed End Second
Loans, continue concurrently with the foreclosure process until the related Loan
is either reinstated or liquidated through the foreclosure process.
The course of action elected with respect to a delinquent Subprime or
Closed End Second Loan generally will be guided by a number of factors,
including the related borrower's payment history, ability and willingness to
pay, the condition and occupancy of the Property, the amount of borrower equity
in the Property and whether there are any junior liens. In the case of a Closed
End Second Loan, loss mitigation strategy and pre-foreclosure analysis will also
take into consideration the existence and status of the first mortgage lien, and
under certain circumstances may result in the charging off of all or a portion
of the outstanding balance of the Closed End Second Loan.
SERVICING OF TITLE I LOANS
Pursuant to a sub-servicing agreement (the "Title I Sub-Servicing
Agreement") to be entered into between the Master Servicer and Statewide, as
sub-servicer, Statewide will be responsible for servicing, managing and making
collections on the Title I Loans. Under the Title I Sub-Servicing Agreement,
Statewide will act as claims administrator, and as such will be responsible for
the administration of claims under Title I of the National Housing Act of 1934
(the "Title I Program") in respect of the Title I Loans.
The following is a description of the servicing policies and procedures
customarily and currently employed by Statewide with respect to its Title I Loan
portfolio. Statewide revises such policies and procedures from time to time in
connection with changing economic and market conditions and changing legal
requirements.
Statewide's loan servicing activities, which are facilitated under an
existing sub-servicing agreement by a direct link to the servicing system of
Statewide's sub-servicer, include responding to borrower inquiries, processing
and administering loan payments, reporting and remitting principal and interest
to the purchasers who own interests in the loans, attempting to collect
delinquent loan payments, processing Title I insurance claims and otherwise
administering the loans. Statewide's loan servicing functions are organized into
three areas of operation: routine loan servicing, purchaser reporting and
nonperforming loan management.
Statewide's sub-servicer is responsible for processing and administering
loan payments, attempting to collect loan payments that are less than 120 days
late and providing prompt and accurate responses to all customer inquiries and
complaints. With respect to loan payments that are less than 120 days late,
Statewide's sub-servicer utilizes a system of mailed notices and telephonic
conferences for reminding borrowers of late payments and encouraging borrowers
to bring their accounts current. Periodic telephone calls and letters are
utilized during the collection cycle. Statewide's sub-servicer's personnel are
responsible for collecting delinquent Title I Loan payments and seeking to
mitigate losses by providing various alternatives to Title I Program insurance
claims, including modifications, special refinancing and indulgence plans.
Statewide's personnel, operating from Statewide's headquarters in
Birmingham, Alabama, are responsible for making final collection efforts with
respect to loans over 120 days delinquent and/or filing Title I Program
insurance claims. Such Title I Program insurance claim personnel are responsible
for managing Title I Program insurance claims, utilizing a claim management
system designed to track insurance claims for Title I Loans so that all required
conditions precedent to claim perfection and the requirements of the Title I
Program are met. See "Certain Legal Aspects of the Loans - The Title I Program -
Claims Procedures Under Title I" for a description of the procedures followed by
Statewide following the default and acceleration of the maturity of a Title I
Loan.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the borrower or obligor on each Loan to maintain a
hazard insurance policy providing for no less than the coverage of the standard
form of fire insurance policy with extended coverage customary for the type of
Property in the state in which such Property is located. Such coverage will be
in an amount that is at least equal to the lesser of (i) the maximum insurable
value of the improvements securing such Loan or (ii) the greater of (y) the
outstanding principal balance of the Loan and (z) an amount such that the
proceeds of such policy shall be sufficient to prevent the borrower and/or the
mortgagee from becoming a co-insurer. All amounts collected by the Master
Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Property or released to the borrower or obligor in
accordance with servicing procedures) will be deposited in the related Security
Account. In the event that the Master Servicer maintains a blanket policy
insuring against hazard losses on all the Loans comprising part of a Trust Fund,
it will conclusively be deemed to have satisfied its obligation relating to the
maintenance of hazard insurance. Such blanket policy may contain a deductible
clause, in which case the Master Servicer will be required to deposit from its
own funds into the related Security Account the amounts which would have been
deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a Loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism. The foregoing list is merely indicative
of certain kinds of uninsured risks and is not intended to be all inclusive. If
the Property securing a Loan is located in a federally designated special flood
area at the time of origination, the Master Servicer will require the borrower
or obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which 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 insured property in order to recover the full amount of
any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of (i) the actual cash value (generally defined as replacement
cost at the time and place of loss, less physical depreciation) of the
improvements damaged or destroyed or (ii) such proportion of the loss as the
amount of insurance carried bears to the specified percentage of the full
replacement cost of such improvements. Since the amount of hazard insurance the
Master Servicer may cause to be maintained on the improvements securing the
Loans declines as the principal balances owing thereon decrease, and since
improved real estate generally has appreciated in value over time in the past,
the effect of this requirement in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damaged property.
If specified in the related Prospectus Supplement, a special hazard insurance
policy will be obtained to insure against certain of the uninsured risks
described above. See "Credit Enhancement."
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support. If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property, the Master Servicer is not required to expend its own funds to
restore the damaged Property unless it determines (i) that such restoration will
increase the proceeds to Securityholders on liquidation of the Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is not
available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer will
be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the defaulted
Loan are less than the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Trust Fund will realize a loss
in the amount of such difference plus the aggregate of expenses incurred by the
Master Servicer in connection with such proceedings and which are reimbursable
under the Agreement. In the unlikely event that any such proceedings result in a
total recovery which is, after reimbursement to the Master Servicer of its
expenses, in excess of the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Master Servicer will be entitled
to withdraw or retain from the Security Account amounts representing its normal
servicing compensation with respect to such Loan and, unless otherwise specified
in the related Prospectus Supplement, amounts representing the balance of such
excess, exclusive of any amount required by law to be forwarded to the related
borrower, as additional servicing compensation.
If the Master Servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Master Servicer, exceed the principal balance of
such Loan plus interest accrued thereon that is payable to Securityholders, the
Master Servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to such
Loan. In the event that the Master Servicer has expended its own funds to
restore the damaged Property and such funds have not been reimbursed under the
related hazard insurance policy, it will be entitled to withdraw from the
Security Account out of related Liquidation Proceeds or Insurance Proceeds an
amount equal to such expenses incurred by it, in which event the Trust Fund may
realize a loss up to the amount so charged. Since Insurance Proceeds cannot
exceed deficiency claims and certain expenses incurred by the Master Servicer,
no such payment or recovery will result in a recovery to the Trust Fund which
exceeds the principal balance of the defaulted Loan together with accrued
interest thereon. See "Credit Enhancement."
The proceeds from any liquidation of a Loan will be applied in the
following order of priority: first, to reimburse the Master Servicer for any
unreimbursed expenses incurred by it to restore the related Property and any
unreimbursed servicing compensation payable to the Master Servicer with respect
to such Loan; second, to reimburse the Master Servicer for any unreimbursed
Advances with respect to such Loan; third, to accrued and unpaid interest (to
the extent no Advance has been made for such amount) on such Loan; and fourth,
as a recovery of principal of such Loan.
REALIZATION UPON DEFAULTED LOANS
Primary Mortgage Insurance Policies. If so specified in the related
Prospectus Supplement, the Master Servicer will maintain or cause to be
maintained, as the case may be, in full force and effect, a Primary Mortgage
Insurance Policy with regard to each Loan for which such coverage is required.
Primary Mortgage Insurance Policies reimburse certain losses sustained by reason
of defaults in payments by borrowers. The Master Servicer will not cancel or
refuse to renew any such Primary Mortgage Insurance Policy in effect at the time
of the initial issuance of a Series of Securities that is required to be kept in
force under the applicable Agreement unless the replacement Primary Mortgage
Insurance Policy for such cancelled or nonrenewed policy is maintained with an
insurer whose claims-paying ability is sufficient to maintain the current rating
of the classes of Securities of such Series that have been rated.
FHA Insurance. Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. In addition to the Title I Program of
the FHA, see "Certain Legal Aspects of the Loans -- Title I Program", certain
Loans will be insured under various FHA programs including the standard FHA
203(b) program to finance the acquisition of one- to four-family housing units
and the FHA 245 graduated payment mortgage program. These programs generally
limit the principal amount and interest rates of the mortgage loans insured.
Loans insured by FHA generally require a minimum down payment of approximately
5% of the original principal amount of the loan. No FHA-insured Loans relating
to a Series may have an interest rate or original principal amount exceeding the
applicable FHA limits at the time of origination of such loan.
OPTIONAL PURCHASES
Subject to the provisions of the applicable Agreement, the Seller, the
Master Servicer or the Depositor may, at such party's option, purchase any
Mortgage Loan which is in default or as to which default is reasonably
foreseeable if, in the Seller's, the Master Servicer's or the Depositor'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.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each Series of Securities will be
equal to the percentage per annum described in the related Prospectus Supplement
(which may vary under certain circumstances) of the outstanding principal
balance of each Loan, and such compensation will be retained by it from
collections of interest on such Loan in the related Trust Fund (the "Master
Servicing Fee"). As compensation for its servicing duties, the Master Servicer
will be entitled to a monthly servicing fee as described in the related
Prospectus Supplement. In addition, the Master Servicer will retain all
prepayment charges, assumption fees and late payment charges, to the extent
collected from borrowers, and any benefit that may accrue as a result of the
investment of funds in the applicable Security Account (unless otherwise
specified in the related Prospectus Supplement).
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Trust Fund and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit enhancement
arrangements, payment of the fees and disbursements of the Trustee, any
custodian appointed by the Trustee, the certificate registrar and any paying
agent, and payment of expenses incurred in enforcing the obligations of
Sub-Servicers and the Seller. The Master Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of Sub-Servicers
and the Seller under certain limited circumstances.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers, the servicing by or on behalf of the Master
Servicer of mortgage loans, or under pooling and servicing agreements
substantially similar to the related Agreement was conducted in compliance with
such agreements except for any significant exceptions or errors in records that,
in the opinion of the firm, it is required to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of Loans by
Sub-Servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Audit Program for Mortgage
Bankers (rendered within one year of such statement) of firms of independent
public accountants with respect to the related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or before
a specified date in each year, of an annual statement signed by an officer of
the Master Servicer to the effect that the Master Servicer has fulfilled its
obligations under the Agreement throughout the preceding year or, if there has
been a default in the fulfillment of any such obligation, specifying each such
default known to such officers and the nature and status thereof.
Copies of the annual accountants' statement and the statement of officers
of the Master Servicer may be obtained by Securityholders of the related Series
without charge upon written request to the Master Servicer at the address set
forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
Each Agreement will provide that the Master Servicer may not resign from
its obligations and duties under the Agreement without the consent of the
Trustee except upon its determination that its duties thereunder are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature carried on by it.
The Master Servicer may, however, be removed from its obligations and duties as
set forth in the Agreement. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's obligations
and duties under the Agreement. Each Agreement will further provide that neither
the Master Servicer, the Depositor nor any director, officer, employee, or agent
of the Master Servicer or the Depositor will be under any liability to the
related Trust Fund or Securityholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Agreement, or for
errors in judgment; provided, however, that neither the Master Servicer, the
Depositor nor any such person will be protected against any liability which
would otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder.
Each Agreement will further provide that the Master Servicer, the Depositor
and any director, officer, employee or agent of the Master Servicer or the
Depositor will be entitled to indemnification by the related Trust Fund and will
be held harmless against any loss, liability or expense incurred in connection
with any legal action relating to the Agreement or the Securities, other than
any loss, liability or expense incurred by reason of willful misfeasance, bad
faith or gross negligence in the performance of duties thereunder or by reason
of reckless disregard of obligations and duties thereunder. In addition, each
Agreement will provide that neither the Master Servicer nor the Depositor will
be under any obligation to appear in, prosecute or defend any legal action which
is not incidental to its respective responsibilities under the Agreement and
which in its opinion may involve it in any expense or liability. The Master
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 Trust Fund and the Master Servicer or the Depositor, as the
case may be, will be entitled to be reimbursed therefor out of funds otherwise
distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master Servicer
is a party, or any person succeeding to the business of the Master Servicer,
will be the successor of the Master Servicer under each Agreement, provided that
such person has a net worth of not less than $10,000,000 and is qualified to
sell mortgage loans to, and service mortgage loans on behalf of, FNMA or FHLMC.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Sale and Servicing Agreement. Except as
otherwise specified in the related Prospectus Supplement, events of default
under each Agreement (each such event, an "Event of Default") will consist of
(i) any failure by the Master Servicer to distribute or cause to be distributed
to Securityholders of any class any required payment (other than an Advance)
which continues unremedied for five business days after the giving of written
notice of such failure to the Master Servicer by the Trustee or the Depositor,
or to the Master Servicer, the Depositor and the Trustee by the holders of
Securities of such class evidencing not less than 25% of the total distributions
allocated to such class ("Percentage Interests"); (ii) any failure by the Master
Servicer to make an Advance as required under the Agreement, unless cured as
specified therein; (iii) any failure by the Master Servicer duly to observe or
perform in any material respect any of its other covenants or agreements in the
Agreement which continues unremedied for thirty days after the giving of written
notice of such failure to the Master Servicer by the Trustee or the Depositor,
or to the Master Servicer, the Depositor and the Trustee by the holders of
Securities of any class evidencing not less than 25% of the aggregate Percentage
Interests constituting such class; and (iv) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities or similar proceeding
and certain actions by or on behalf of the Master Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund described under "Credit Enhancement" herein in the event that
payments in respect thereto are insufficient to make payments required in the
Agreement. The assets of the Trust Fund will be sold only under the
circumstances and in the manner specified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, so long as
an Event of Default under an Agreement remains unremedied, the Depositor or the
Trustee may, and at the direction of holders of Securities of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
such class and under such other circumstances as may be specified in such
Agreement, the Trustee shall terminate all of the rights and obligations of the
Master Servicer under the Agreement relating to such Trust Fund and in and to
the related Trust Fund Assets, whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement, including, if specified in the related Prospectus Supplement, the
obligation to make Advances, and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a mortgage loan servicing institution with a net worth of a least
$10,000,000 to act as successor to the Master 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
Master Servicer under the Agreement.
Unless otherwise provided in the related Prospectus Supplement, no
Securityholder, solely by virtue of such holder's status as a Securityholder,
will have any right under any Agreement to institute any proceeding with respect
to such Agreement, unless such holder previously has given to the Trustee
written notice of default and unless the holders of Securities of any class of
such Series evidencing not less than 25% of the aggregate Percentage Interests
constituting such class have made written request upon the Trustee to institute
such proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity, and the Trustee for 60 days has neglected or
refused to institute any such proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default in the payment of any principal of or interest on any
Note of such Series which continues unremedied for five days after the giving of
written notice of such default is given as specified in the related Prospectus
Supplement; (ii) failure to perform in any material respect any other covenant
of the Depositor or the Trust Fund in the Indenture which continues for a period
of thirty (30) days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) certain events
of bankruptcy, insolvency, receivership or liquidation of the Depositor or the
Trust Fund; or (iv) any other Event of Default provided with respect to Notes of
that Series including but not limited to certain defaults on the part of the
issuer, if any, of a credit enhancement instrument supporting such Notes.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series have an
interest rate of 0%, such portion of the principal amount as may be specified in
take terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the holders of
more than 50% of the Percentage Interests of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default, other than a default in the payment of
any principal or interest on any Note of such Series for five days or more,
unless (a) the holders of 100% of the Percentage Interests of the Notes of such
Series consent to such sale, (b) the proceeds of such sale or liquidation are
sufficient to pay in full the principal of and accrued interest, due and unpaid,
on the outstanding Notes of such Series at the date of such sale or (c) the
Trustee determines that such collateral would not be sufficient on an ongoing
basis to make all payments on such Notes as such payments would have become due
if such Notes had not been declared due and payable, and the Trustee obtains the
consent of the holders of 66 2/3% of the Percentage Interests of the Notes of
such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for five days or more in the payment of
principal of or interest on the Notes of a Series, the Indenture provides that
the Trustee will have a prior lien on the proceeds of any such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an Event of
Default, the amount available for distribution to the Noteholders would be less
than would otherwise be the case. However, the Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
Except as otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par
maybe entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee shall be under no obligation to exercise any
of the rights or powers under the Indenture at the request or direction of any
of the holders of Notes of such Series, unless such holders offered to the
Trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer and the Trustee,
without the consent of any of the Securityholders, (i) to cure any ambiguity or
mistake; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; (iii) to add to,
modify or eliminate any provisions therein respecting transfers of Residual
Interest Securities to certain disqualified organizations described below under
"Federal Income Tax Consequences - Taxation of Securityholders of Residual
Interest Securities - Restrictions on Ownership and Transfer of Residual
Interest Securities;" (iv) to make certain provisions with respect to the
denominations of, and the manner of payments on, certain classes or subclasses
of Securities initially retained by the Depositor or an affiliate; or (v) to
make any other revisions with respect to matters or questions arising under the
Agreement which are not inconsistent with the provisions thereof, provided that
such action will not adversely affect in any material respect the interests of
any Securityholder. An amendment will be deemed not to adversely affect in any
material respect the interests of the Securityholders if the person requesting
such amendment obtains a letter from each Rating Agency requested to rate the
class or classes of Securities of such Series stating that such amendment will
not result in the downgrading or withdrawal of the respective ratings then
assigned to such Securities. In addition, to the extent provided in the related
Agreement, an Agreement may be amended without the consent of any of the
Securityholders, to change the manner in which the Security Account is
maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Securities of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any of
its provisions to such extent as may be necessary to maintain the qualification
of the related Trust Fund as a REMIC, provided that the Trustee has received an
opinion of counsel to the effect that such action is necessary or helpful to
maintain such qualification. Except as otherwise specified in the related
Prospectus Supplement, each Agreement may also be amended by the Depositor, the
Master Servicer and the Trustee with consent of holders of Securities of such
Series evidencing not less than 66% of the aggregate Percentage Interests of
each class affected thereby for the purpose of adding any provisions to or
changing in an manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of the holders of the related Securities;
provided, however, that no such amendment may (i) reduce in any manner the
amount of or delay the timing of, payments received on Loans which are required
to be distributed on any Security without the consent of the holder of such
Security, or (ii) reduce the aforesaid percentage of Securities of any class the
holders of which are required to consent to any such amendment without the
consent of the holders of all Securities of such class covered by such Agreement
then outstanding. If a REMIC election is made with respect to a Trust Fund, the
Trustee will not be entitled to consent to an amendment to the related Agreement
without having first received an opinion of counsel to the effect that such
amendment will not cause such Trust Fund to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling and
Servicing Agreement and Trust Agreement for each Series of Securities will
terminate upon the payment to the related Securityholders of all amounts held in
the Security Account or by the Master Servicer and required to be paid to them
pursuant to such Agreement following the later of (i) the final payment of or
other liquidation of the last of the Trust Fund Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Trust Fund
Assets remaining in the Trust Fund and (ii) the purchase by the Seller, the
Master Servicer or the Depositor from the related Trust Fund of all of the
remaining Trust Fund Assets and all property acquired in respect of such Trust
Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any such
purchase of Trust Fund Assets and property acquired in respect of Trust Fund
Assets evidenced by a Series of Securities will be made at the option of the
Seller or the Depositor at a price specified in the related Prospectus
Supplement. The exercise of such right will effect early retirement of the
Securities of that Series, but the right of the Seller or the Depositor, to so
purchase is subject to the principal balance of the related Trust Fund Assets
being less than the percentage specified in the related Prospectus Supplement of
the aggregate principal balance of the Trust Fund Assets at the Cut-off Date for
the Series. The foregoing is subject to the provision that if a REMIC election
is made with respect to a Trust Fund, any repurchase pursuant to clause (ii)
above will be made only in connection with a "qualified liquidation" of the
REMIC within the meaning of Section 860F(g)(4) of the Code.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States 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 last scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor, the Master Servicer and any of
their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because such legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete or to reflect the laws of any particular
state, nor to encompass the laws of all states in which the security for the
Loans is situated. The summaries are qualified in their entirety by reference to
the applicable federal and state laws governing the Loans.
GENERAL
The Loans will, in general, be secured by either mortgages or deeds of
trust, depending upon the prevailing practice in the state in which the
underlying property is located. A mortgage creates a lien upon the real property
described in the mortgage. There are two parties to a mortgage: the borrower,
who is the borrower (or, in the case of a Loan secured by a property that has
been conveyed to an inter vivos revocable trust, the settlor of such trust); and
the mortgagee, who is the lender. In a mortgage instrument state, the borrower
delivers to the mortgagee a note or bond evidencing the loan and the mortgage.
Although a deed of trust is similar to a mortgage, a deed of trust has three
parties: a borrower called the trustor (similar to a borrower), a lender called
the beneficiary (similar to a mortgagee), and a third-party grantee called the
trustee. Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale, to the trustee
to secure payment of the loan. The trustee's authority under a deed of trust and
the mortgagee's authority under a mortgage are governed by the express
provisions of the deed of trust or mortgage, applicable law, and, in some cases,
with respect to the deed of trust, the directions of the beneficiary.
FORECLOSURE
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right of foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming. After the completion of a judicial foreclosure proceeding, the
court may issue a judgment of foreclosure and appoint a receiver or other
officer to conduct the sale of the property. In some states, mortgages may also
be foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed of trust is not reinstated within any applicable cure
period, 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. In addition,
some state laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the property.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
receiver for an amount equal to the unpaid principal amount of the note, accrued
and unpaid interest and the expenses of foreclosure. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender commonly will
obtain the services of a real estate broker and pay the broker a commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of mortgage
insurance proceeds, if any, or by judicial action against the borrower for the
deficiency, if such action is permitted by law. See "-Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
FORECLOSURE ON SHARES OF COOPERATIVES
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
in the proprietary lease or occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant- stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits 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 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 on its obligations
under the proprietary lease or occupancy agreement. 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 an opportunity to cure the default.
The recognition agreement typically provides that if the proprietary lease or
occupancy agreement is terminated, the cooperative will recognize the lender's
lien against proceeds from a sale of the cooperative apartment, subject,
however, to the cooperative's right to sums due under such proprietary lease or
occupancy agreement. 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 by the agreement in any rights it may have to dispossess the
tenant-stockholders.
Foreclosure on the cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code (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 cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "-Anti- Deficiency Legislation and
Other Limitations on Lenders" below.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust and/or foreclosure
of a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
most states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a right of redemption is to delay the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement and foreclosure on the
beneficial interest in a land trust. 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 Loan secured by shares of a
cooperative, would be such shares and the related proprietary lease or occupancy
agreement) was conducted in a commercially reasonable manner.
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 Depositor to obtain payment of a 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 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 Loan is secured by property not consisting solely of the debtor's
principal residence, the Bankruptcy Code also permits such 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 Loan. Some courts have
permitted such modifications when the Loan is secured both by the debtor's
principal residence and by personal property.
If a court relieves a borrower's obligation to repay amounts otherwise due
on a Loan, the Master Servicer will not be required to advance such amounts, and
any loss in respect thereof will be borne by the Certificateholders.
The Internal Revenue Code of 1986, as amended, provides priority to certain
tax liens over the lien of the mortgage or deed of trust. The laws of some
states provide priority to certain tax liens over the lien of the mortgage or
deed of trust. Numerous federal and some state consumer protection laws impose
substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of mortgage loans. 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 and regulations. These federal laws and state laws impose
specific statutory liabilities upon lenders who originate or service 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.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT AND SIMILAR LAWS
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Loan (including a borrower who is a
member of the National Guard or is in reserve status at the time of the
origination of the Loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of such borrower's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such action could have an effect, for an indeterminate period
of time, on the ability of the Master Servicer to collect full amounts of
interest on certain of the Loans. Any shortfall in interest collections
resulting from the application of the Relief Act could result in losses to the
Securityholders. Further, the Relief Act imposes limitations which would impair
the ability of the Master Servicer to foreclose on an affected Loan during the
borrower's period of active duty status. Thus, in the event that such a Loan
goes into default, there may be delays and losses occasioned by the inability to
realize upon the Property in a timely fashion. Certain states have enacted
comparable legislation which may interfere with or affect the ability of the
Master Servicer to timely collect payments of principal and interest on, or to
foreclose on, Loans of borrowers in such states who are active or reserve
members of the armed services.
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 a Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), and under state law in certain
states, a secured party which takes a deed in lieu of foreclosure, purchases a
Property at a foreclosure sale, operates a Property or undertakes certain types
of activities that may constitute management of the 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 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 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. 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 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. 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 Property prior to the origination of the mortgage loan or prior
to foreclosure or accepting a deed-in-lieu of foreclosure. Accordingly, neither
the Depositor nor the Seller has made such evaluations prior to the origination
of the Loans, nor does the Seller require that such evaluations be made by
originators who have sold the Loans to the Seller. The Seller is not required to
undertake any such evaluations prior to foreclosure or accepting a deed-in-lieu
of foreclosure. Neither the Seller nor the Master Servicer makes any
representations or warranties or assumes any liability with respect to: the
environmental condition of such Property; the absence, presence or effect of
hazardous wastes or hazardous substances on any Property; any casualty resulting
from the presence or effect of hazardous wastes or hazardous substances on, near
or emanating from such Property; the impact on Securityholders of any
environmental condition or presence of any substance on or near such Property;
or the compliance of any Property with any environmental laws, nor is any agent,
person or entity otherwise affiliated with the Seller authorized or able to make
any such representation, warranty or assumption of liability relative to any
such Property.
"DUE-ON-SALE" CLAUSES
The forms of note, mortgage and deed of trust relating to conventional
Loans may contain a "due-on-sale" clause permitting acceleration of the maturity
of a loan if the borrower transfers its interest in the property. In recent
years, court decisions and legislative actions placed substantial restrictions
on the right of lenders to enforce such clauses in many states. However,
effective October 15, 1982, Congress enacted the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn Act") which purports to preempt state laws
which prohibit the enforcement of "due-on-sale" clauses by providing among other
matters, that "due-on-sale" clauses in certain loans (which loans may include
the Loans) made after the effective date of the Garn Act are enforceable, within
certain limitations as set forth in the Garn Act and the regulations promulgated
thereunder. "Due-on-sale" clauses contained in mortgage loans originated by
federal savings and loan associations or federal savings banks are fully
enforceable pursuant to regulations of the Office of Thrift Supervision ("OTS"),
as successor to the Federal Home Loan Bank Board ("FHLBB"), 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 Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in certain mortgage loans ("Window
Period Loans") which were originated by non-federal lenders and made or assumed
in certain states ("Window Period States") during the period, prior to October
15, 1982, in which that state prohibited the enforcement of "due-on-sale"
clauses by constitutional provision, statute or statewide court decision (the
"Window Period"). Though neither the Garn Act nor the OTS regulations actually
names the Window Period States, the Federal Home Loan Mortgage Corporation has
taken the position, in prescribing mortgage loan servicing standards with
respect to mortgage loans which it has purchased, that the Window Period States
were: Arizona, Arkansas, California, Colorado, Georgia, Iowa, Michigan,
Minnesota, New Mexico, Utah and Washington. Under the Garn Act, unless a Window
Period State took action by October 15, 1985, the end of the Window Period, to
further regulate enforcement of "due-on-sale" clauses in Window Period Loans,
"due-on-sale" clauses would become enforceable even in Window Period Loans. Five
of the Window Period States (Arizona, Minnesota, Michigan, New Mexico and Utah)
have taken actions which restrict the enforceability of "due-on-sale" clauses in
Window Period Loans beyond October 15, 1985. The actions taken vary among such
states.
By virtue of the Garn Act, the Master Servicer may generally be permitted
to accelerate any conventional Loan which contains a "due-on-sale" clause upon
transfer of an interest in the property subject to the mortgage or deed of
trust. With respect to any Loan secured by a residence occupied or to be
occupied by the borrower, this ability to accelerate will not apply to certain
types of transfers, including (i) the granting of a leasehold interest which has
a term of three years or less and which does not contain an option to purchase,
(ii) a transfer to a relative resulting from the death of a borrower, or a
transfer where the spouse or children become an owner of the property in each
case where the transferee(s) will occupy the property, (iii) a transfer
resulting from a decree of dissolution of marriage, legal separation agreement
or from an incidental property settlement agreement by which the spouse becomes
an owner of the property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the property (provided that such lien or
encumbrance is not created pursuant to a contract for deed), (v) a transfer by
devise, descent or operation of law on the death of a joint tenant or tenant by
the entirety, (vi) a transfer into an inter vivos trust in which the borrower is
the beneficiary and which does not relate to a transfer of rights of occupancy;
and (vii) other transfers as set forth in the Garn Act and the regulations
thereunder. The extent of the effect of the Garn Act on the average lives and
delinquency rates of the Loans cannot be predicted. See "Yield, Maturity and
Prepayment Considerations."
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. The OTS as successor to the
FHLBB is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. The statute authorized any
state to reimpose interest rate limits by adopting before April 1, 1983, a law
or constitutional provision which expressly rejects application of the federal
law. Fifteen states have adopted laws reimposing or reserving the right to
reimpose interest rate limits. In addition, even where Title V is not so
rejected, any state is authorized to adopt a provision limiting certain other
loan charges.
ENFORCEABILITY OF CERTAIN PROVISIONS
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under an Agreement, late charges and prepayment fees (to the extent
permitted by law and not waived by the Master Servicer) will be retained by the
Master Servicer as additional servicing compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required lenders to reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from temporary financial disability. In
some cases, courts have limited the right of lenders to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second mortgage or
deed of trust affecting the property. In other cases, some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
the deeds of trust receive notices in addition to the statutorily- prescribed
minimum requirements. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust or under a mortgage having a power of sale does not involve
sufficient state action to afford constitutional protections to the borrower.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the Loans comprising the Trust Fund for a Series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the Trust Fund (and therefore the
Securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause the
property securing the Loan to be sold upon default of the borrower, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure a default
and bring the senior loan current, in either event adding the amounts expended
to the balance due on the junior loan. In most states, absent a provision in the
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under senior mortgages will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the senior mortgages. Proceeds in excess of the amount
of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the borrower to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the borrower to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the borrower agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the borrower. All sums so expended by the
mortgagee become part of the indebtedness secured by the mortgage.
THE TITLE I PROGRAM
General. Certain of the Loans contained in a Trust Fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the Title I Program. Under the Title I Program, the FHA
is authorized and empowered to insure qualified lending institutions against
losses on eligible loans. The Title I Program operates as a coinsurance program
in which the FHA insures up to 90% of certain losses incurred on an individual
insured loan, including the unpaid principal balance of the loan, but only to
the extent of the insurance coverage available in the lender's FHA insurance
coverage reserve account. The owner of the loan bears the uninsured loss on each
loan.
The types of loans which are eligible for insurance by the FHA under the
Title I Program include property improvement loans ("Property Improvement Loans"
or "Title I Loans"). A Property Improvement Loan or Title I Loan means a loan
made to finance actions or items that substantially protect or improve the basic
livability or utility of a property and includes single family improvement
loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from lender and the lender may distribute proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties. With
respect to a dealer Title I Loan, a dealer may include a seller, a contractor or
supplier of goods or services.
Loans insured under the Title I Program are required to have fixed interest
rates and, generally, provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually in order to correspond with the borrower's irregular flow of
income. The first or last payments (or both) may vary in amount but may not
exceed 150% of the regular installment payment, and the first payment may be due
no later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
may be established by the lender and must be fixed for the term of the loan and
recited in the note. Interest on an insured loan must accrue from the date of
the loan and be calculated according to the actuarial method. The lender must
assure that the note and all other documents evidencing the loan are in
compliance with applicable federal, state and local laws.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
Requirements for Title I Loans. The maximum principal amount for Title I
Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I Loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I Loans with respect to multiple properties, and a borrower may
obtain more than one Title I Loan with respect to a single property, in each
case as long as the total outstanding balance of all Title I Loans in the same
property does not exceed the maximum loan amount for the type of Title I Loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than six months after disbursement of the loan proceeds with one six month
extension if necessary, a completion certificate, signed by the borrower. The
lender is required to conduct an on-site inspection on any Title I Loan where
the principal obligation is $7,500 or more, and on any direct Title I Loan where
the borrower fails to submit a completion certificate. FHA Insurance Coverage.
Under the Title I Program the FHA establishes an insurance coverage reserve
account for each lender that has been granted a Title I insurance contract. The
amount of insurance coverage in this account is 10% of the amount disbursed,
advanced or expended by the lender in originating or purchasing eligible loans
registered with FHA for Title I insurance, with certain adjustments. The balance
in the insurance coverage reserve account is the maximum amount of insurance
claims the FHA is required to pay. Loans to be insured under the Title I Program
will be registered for insurance by the FHA and the insurance coverage
attributable to such loans will be included in the insurance coverage reserve
account for the originating or purchasing lender following receipt and
acknowledgment by the FHA of a loan report on the prescribed form pursuant to
the Title I regulations. The FHA charges a fee of 0.50% per annum of the net
proceeds (the original balance) of any eligible loan so reported and
acknowledged for insurance by the originating lender. The FHA bills the lender
for the insurance premium on each insured loan annually, on approximately the
anniversary date of the loan's origination. If an insured loan is prepaid during
the year, FHA will not refund or abate the insurance premium.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans and
(ii) the amount of insurance coverage attributable to insured loans sold by the
lender, and such insurance coverage may be reduced for any FHA insurance claims
rejected by the FHA. The balance of the lender's FHA insurance coverage reserve
account will be further adjusted as required under Title I or by the FHA, and
the insurance coverage therein may be earmarked with respect to each or any
eligible loans insured thereunder, if a determination is made by the Secretary
of HUD that it is in its interest to do so. Originations and acquisitions of new
eligible loans will continue to increase a lender's insurance coverage reserve
account balance by 10% of the amount disbursed, advanced or expended in
originating or acquiring such eligible loans registered with the FHA for
insurance under the Title I Program. The Secretary of HUD may transfer insurance
coverage between insurance coverage reserve accounts with earmarking with
respect to a particular insured loan or group of insured loans when a
determination is made that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide transaction)
insured loans and loans reported for insurance only to another qualified lender
under a valid Title I contract of insurance. Unless an insured loan is
transferred with recourse or with a guaranty or repurchase agreement, the FHA,
upon receipt of written notification of the transfer of such loan in accordance
with the Title I regulations, will transfer from the transferor's insurance
coverage reserve account to the transferee's insurance coverage reserve account
an amount, if available, equal to 10% of the actual purchase price or the net
unpaid principal balance of such loan (whichever is less). However, under the
Title I Program not more than $5,000 in insurance coverage shall be transferred
to or from a lender's insurance coverage reserve account during any October 1 to
September 30 period without the prior approval of the Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender may
accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the lender
may either (a) proceed against the property under any security instrument, or
(b) make a claim under the lender's contract of insurance. If the lender chooses
to proceed against the property under a security instrument (or if it accepts a
voluntary conveyance or surrender of the property), the lender may file an
insurance claim only with the prior approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be filed
with the FHA no later than nine months after the date of default of such loan.
Concurrently with filing the insurance claim, the lender shall assign to the
United States of America the lender's entire interest in the loan note (or a
judgment in lieu of the note), in any security held and in any claim filed in
any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid a
claim, the FHA may require the lender to repurchase the paid claim and to accept
a reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. The FHA may contest any
insurance claim and make a demand for repurchase of the loan at any time up to
two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the lender.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. For the purposes
hereof, the 'Claimable Amount' means an amount equal to 90% of the sum of: (a)
the unpaid loan obligation (net unpaid principal and the uncollected interest
earned to the date of default) with adjustments thereto if the lender has
proceeded against property securing such loan; (b) the interest on the unpaid
amount of the loan obligation from the date of default to the date of the
claim's initial submission for payment plus 15 calendar days (but not to exceed
9 months from the date of default), calculated at the rate of 7% per annum; (c)
the uncollected court costs; (d) the attorney's fees not to exceed $500; and (e)
the expenses for recording the assignment of the security to the United States.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination, servicing
and enforcement of loans secured by single family properties. These laws include
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, Real
Estate Settlement Procedures Act and Regulation B promulgated thereunder, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. In particular, Regulation Z, requires certain
disclosures to the borrowers regarding the terms of the Loans; the Equal Credit
Opportunity Act and Regulation B promulgated thereunder prohibit discrimination
on the basis of age, race, color, sex, religion, marital status, national
origin, receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; the Fair Credit
Reporting Act regulates the use and reporting of information related to the
borrower's credit experience. Certain provisions of these laws impose specific
statutory liabilities upon lenders who fail to comply therewith. In addition,
violations of such laws may limit the ability of the Seller to collect all or
part of the principal of or interest on the Loans and could subject the Seller
and in some cases its assignees to damages and administrative enforcement.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary is based on the opinion of Stroock & Stroock & Lavan
LLP, special counsel to the Depositor ("Federal Tax Counsel") as to the material
federal income tax consequences of the purchase, ownership and disposition of
Securities. The summary does not purport to deal with all aspects of federal
income taxation that may affect particular investors in light of their
individual circumstances, nor with certain types of investors subject to special
treatment under the federal income tax laws. This summary focuses primarily upon
investors who will hold Securities as "capital assets" (generally, property held
for investment) within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"), but much of the discussion is applicable to
other investors as well. Because tax consequences may vary based on the status
or tax attributes of the owner of a Security, prospective investors are advised
to consult their own tax advisers concerning the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
Securities. For purposes of this tax discussion (except with respect to
information reporting, or where the context indicates otherwise), any reference
to the "Securityholder" means the beneficial owner of a Security.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively. The
federal income tax consequences to Securityholders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness for
federal income tax purposes; (ii) an election is made to treat certain Classes
of a particular Series of Securities as regular interests in a real estate
mortgage investment conduit ("REMIC") under the Code; (iii) the Securities
represent an ownership interest for federal income tax purposes in some or all
of the assets owned by the Trust Fund for a Series; or (iv) for federal income
tax purposes the Trust Fund relating to a particular Series of Certificates is
classified as a partnership. The Prospectus Supplement for each Series of
Securities will specify how the Securities will be treated for federal income
tax purposes and will discuss whether a REMIC election, if any, will be made
with respect to such Series.
TAXATION OF DEBT SECURITIES (INCLUDING REGULAR INTEREST
SECURITIES)
Interest and Original Issue Discount. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
Securityholders in the same manner as evidences of indebtedness issued by the
REMIC. Stated interest on the Regular Interest Securities will be taxable as
ordinary income and taken into account using the accrual method of accounting,
regardless of the Securityholder's normal accounting method. Interest (other
than original issue discount) on Securities (other than Regular Interest
Securities) that are characterized as indebtedness for federal income tax
purposes will be includible in income by Securityholders thereof in accordance
with their usual methods of accounting. Securities characterized as debt for
federal income tax purposes and Regular Interest Securities will be referred to
hereinafter collectively as "Debt Securities." For Certificates treated as debt
for federal income tax purposes, see "Certain Certificates Treated as
Indebtedness."
Debt Securities that are Accrual Securities will, and certain of the other
Debt Securities may, be issued with "original issue discount" ("OID"). The
following discussion is based in part on the rules governing OID which are set
forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder (the "OID Regulations").
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price which
includes accrued interest, if any. A Securityholder of a Debt Security must
include such OID in gross income as ordinary interest income as it accrues under
a prescribed method which takes into account an economic accrual of the
discount. In general, OID must be included in income in advance of the receipt
of the cash representing that income. The amount of OID on a Debt Security will
be considered to be zero if it is less than a de minimis amount determined under
the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The stated redemption
price at maturity of a Debt Security includes the original principal amount of
the Debt Security, but generally will not include distributions of interest if
such distributions constitute "qualified stated interest."
Under the OID Regulations, interest payments will not be qualified stated
interest unless the interest payments are "unconditionally payable." The OID
Regulations state that interest is unconditionally payable if reasonable legal
remedies exist to compel timely payment, or the debt instrument otherwise
provides terms and conditions that make the likelihood of late payment (other
than late payment that occurs within a reasonable grace period) or nonpayment of
interest a remote contingency, as defined in the OID Regulations. It is unclear
whether the terms and conditions of the loans underlying the Debt Securities or
the terms and conditions of the Debt Securities are considered when determining
whether the likelihood of late payment or nonpayment is a remote contingency.
Certain Debt Securities will provide for distributions of interest based on
a period that is the same length as the interval between Distribution Dates but
ends prior to each Distribution Date. Any interest that accrues prior to the
Closing Date may be treated under the OID Regulations either (i) as part of the
issue price and the stated redemption price at maturity of the Debt Securities
or (ii) as not included in the issue price or stated redemption price. The OID
Regulations provide a special application of the de minimis rule for debt
instruments where the interest payable for the first period or periods is at a
rate which is effectively less than that which applies in all other periods. In
such cases, for the sole purpose of determining whether original issue discount
is de minimis, the OID Regulations provide that the stated redemption price is
equal to the instrument's issue price plus the greater of the amount of foregone
interest or the excess (if any) of the instrument's stated principal amount over
its issue price.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Securityholders generally must report de minimis OID pro rata as
principal payments are received. However, accrual method Securityholders may
elect to accrue all de minimis OID as well as market discount under a constant
interest method. See "--Election to Treat All Interest as Original Issue
Discount."
The Securityholder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount. The
amount of OID includible in income by a Securityholder will be computed by
allocating to each day during a taxable year a pro rata portion of the original
issue discount that accrued during the relevant accrual period. In the case of a
Debt Security that is not a Regular Interest Security and the principal payments
on which are not subject to acceleration resulting from prepayments on the
Loans, the amount of OID includible in income of a Securityholder for an accrual
period (generally the period over which interest accrues on the debt instrument)
will equal the product of the yield to maturity of the Debt Security and the
adjusted issue price of the Debt Security, reduced by any payments of qualified
stated interest. The adjusted issue price is the sum of its issue price plus
prior accruals of OID, reduced by the total payments made with respect to such
Debt Security in all prior periods, other than qualified stated interest
payments.
The amount of OID to be included in income by a Securityholder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a
Securityholder to take into account prepayments with respect to the Loans at a
rate that exceeds the Prepayment Assumption, and to decrease (but not below zero
for any period) the portions of OID required to be included in income by a
Securityholder of a Pay-Through Security to take into account prepayments with
respect to the Loans at a rate that is slower than the Prepayment Assumption.
Although OID will be reported to Securityholders of Pay-Through Securities based
on the Prepayment Assumption, no representation is made to Securityholders that
Loans will be prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the Internal Revenue
Service were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
Acquisition Premium. A subsequent Securityholder of a Debt Security will
also be required to include OID in gross income, but such a Securityholder who
purchases such Debt Security for an amount that exceeds its adjusted issue price
will be entitled (as will an initial Securityholder who pays more than a Debt
Security's issue price) to offset such OID by comparable economic accruals of
portions of such excess. Alternatively, such a purchaser (including an initial
Securityholder) may elect to treat all such acquisition premium under the
constant yield method. See "Election to Treat All Interest as Original Issue
Discount" below.
Effects of Defaults and Delinquencies. Securityholders will be required to
report income with respect to the related Regular Interest Securities under an
accrual method without giving effect to delays and reductions in distributions
attributable to a default or delinquency on the Loans, except possibly to the
extent that it can be established that such amounts are uncollectible. As a
result, the amount of income (including OID) reported by a Securityholder of
such a Security in any period could significantly exceed the amount of cash
distributed to such Securityholder in that period. The Securityholder will
eventually be allowed a loss (or will be allowed to report a lesser amount of
income) to the extent that the aggregate amount of distributions on the
Securities is reduced as a result of a Loan default. However, the timing and
character of such losses or reductions in income are uncertain and, accordingly,
Securityholders of Securities should consult their own tax advisors on this
point.
Interest-Only Debt Securities. The Trust Fund intends to report income from
interest-only classes of Debt Securities to the Internal Revenue Service and to
Securityholders of interest-only Debt Securities based on the assumption that
the stated redemption price at maturity is equal to the sum of all payments
determined under the applicable prepayment assumption. As a result, such
interest-only Debt Securities will be treated as having original issue discount.
Variable Rate Debt Securities. Under the OID Regulations, Debt Securities
paying interest at a variable rate (a "Variable Rate Debt Security") are subject
to special rules. A Variable Rate Debt Security will qualify as a "variable rate
debt instrument" if (i) its issue price does not exceed the total noncontingent
principal payments due under the Variable Rate Debt Security by more than a
specified amount; (ii) it provides for stated interest, paid or compounded at
least annually, at (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; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i) above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on Regular Interest
Securities should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Debt Security is denominated. A multiple of a qualified floating
rate will generally not itself constitute a qualified floating rate for purposes
of the OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Debt Security will be
treated as a single qualified floating rate (a "Presumed Single Qualified
Floating Rate"). Two or more qualified floating rates with values within 25
basis points of each other as determined on the Variable Rate Debt Security's
issue date will be conclusively presumed to be a Presumed Single Qualified
Floating Rate. Notwithstanding the foregoing, a variable rate that would
otherwise constitute a qualified floating rate but which is subject to one or
more restrictions such as a cap or floor, will not be a qualified floating rate
for purposes of the OID Regulations unless the restriction is fixed throughout
the term of the Variable Rate Debt Security or the restriction will not
significantly affect the yield of the Variable Rate Debt Security.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the Internal Revenue Service in the future. An interest rate on a REMIC regular
interest that is the weighted average of the interest rates on some or all of
the qualified mortgages held by the REMIC should constitute an objective rate.
Despite the foregoing, a variable rate of interest on a Variable Rate Debt
Security will not constitute an objective rate if it is reasonably expected that
the average value of such rate during the first half of the Variable Rate Debt
Security's term will be either significantly less than or significantly greater
than the average value of the rate during the final half of the Variable Rate
Debt Security's term. Further, an objective rate does not include a rate that is
based on information that is in the control of or unique to the circumstances of
the issuer or a party related to the issuer. An objective rate will qualify as a
"qualified inverse floating rate" if such rate is equal to a fixed rate minus a
qualified floating rate and variations in the rate can reasonably be expected to
inversely reflect contemporaneous variations in the qualified floating rate. The
OID Regulations also provide that if a Variable Rate Debt Security provides for
stated interest at a fixed rate for an initial period of less than one year
followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Rate Debt Security's
issue date is intended to approximate the fixed rate, then the fixed rate and
the variable rate together will constitute either a single qualified floating
rate or objective rate, as the case may be (a "Presumed Single Variable Rate").
If the value of the variable rate and the initial fixed rate are within 25 basis
points of each other as determined on the Variable Rate Debt Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate Debt Securities that qualify as a "variable rate debt
instrument" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Debt Security"), original issue discount is computed as
described above based on the following: (i) stated interest on the Single
Variable Rate Debt Security which is unconditionally payable in cash or property
(other than debt instruments of the issuer) at least annually will constitute
qualified stated interest; (ii) by assuming that the variable rate on the Single
Variable Debt Security is a fixed rate equal to: (a) in the case of a Single
Variable Rate Debt Security with a qualified floating rate or a qualified
inverse floating rate, the value of, as of the issue date, of the qualified
floating rate or the qualified inverse floating rate or (b) in the case of a
Single Variable Rate Debt Security with an objective rate (other than a
qualified inverse floating rate), a fixed rate which reflects the reasonably
expected yield for such Single Variable Debt Security; and (iii) the qualified
stated interest allocable to an accrual period is increased (or decreased) if
the interest actually paid during an accrual period exceeds (or is less than)
the interest assumed to be paid under the assumed fixed rate described in (ii)
above.
In general, any Variable Rate Debt Security other than a Single Variable
Rate Debt Security (a "Multiple Variable Rate Debt Security") that qualifies as
a "variable rate debt instrument" will be converted into an "equivalent" fixed
rate debt instrument for purposes of determining the amount and accrual of
original issue discount and qualified stated interest on the Multiple Variable
Rate Debt Security. The OID Regulations generally require that such a Multiple
Variable Rate Debt Security be converted into an "equivalent" fixed rate debt
instrument by substituting any qualified floating rate or qualified inverse
floating rate provided for under the terms of the Multiple Variable Rate Debt
Security with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Multiple Variable
Rate Debt Security's issue date. Any objective rate (other than a qualified
inverse floating rate) provided for under the terms of the Multiple Variable
Rate Debt Security is converted into a fixed rate that reflects the yield that
is reasonably expected for the Multiple Variable Rate Debt Security. In the case
of a Multiple Variable Rate Debt Security that qualifies as a "variable rate
debt instrument" and provides for stated interest at a fixed rate in addition to
either one or more qualified floating rates or a qualified inverse floating
rate, the fixed rate is initially converted into a qualified floating rate (or a
qualified inverse floating rate, if the Multiple Variable Rate Debt Security
provides for a qualified inverse floating rate). Under such circumstances, the
qualified floating rate or qualified inverse floating rate that replaces the
fixed rate must be such that the fair market value of the Multiple Variable Rate
Debt Security as of the Multiple Variable Rate Debt Security's issue date is
approximately the same as the fair market value of an otherwise identical debt
instrument that provides for either the qualified floating rate or qualified
inverse floating rate rather than the fixed rate. Subsequent to converting the
fixed rate into either a qualified floating rate or a qualified inverse floating
rate, the Multiple Variable Rate Debt Security is then converted into an
"equivalent" fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate Debt Security is converted into an
"equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the OID
rules to the "equivalent" fixed rate debt instrument in the manner described
above. A Securityholder of the Multiple Variable Rate Debt Security will account
for such OID and qualified stated interest as if the Securityholder held the
"equivalent" fixed rate debt instrument. Each accrual period, appropriate
adjustments will be made to the amount of qualified stated interest or original
issue discount assumed to have been accrued or paid with respect to the
"equivalent" fixed rate debt instrument in the event that such amounts differ
from the actual amount of interest accrued or paid on the Multiple Variable Rate
Debt Security during the accrual period.
If a Variable Rate Debt Security does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear under
current law how a Variable Rate Debt Security that is a Pay-Through Security
(including Regular Interest Securities) would be taxed if such Debt Security
were treated as a contingent payment debt obligation since the OID Regulations
relating to contingent payment debt instruments do not apply to Pay-Through
Securities.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Securityholder that acquires
a Debt Security with more than a prescribed de minimis amount of "market
discount" (generally, the excess of the principal amount of the Debt Security
over the purchaser's purchase price) will be required to include accrued market
discount in income as ordinary income in each month, but limited to an amount
not exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Debt Securities (or in the case of a Pass-Through Security, as set forth below,
the Loans underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Debt Securities (or, in the case of a Pass- Through Security, as described
below, the Loans underlying such Security) originally issued at a discount, OID
accruing in the relevant period to total remaining OID.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Debt Security (or,
in the case of a Pass-Through Security, as described below, the Loans) with
market discount over interest received on such Debt Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Debt Security (or in the case of a
Pass-Through Security, an underlying Loan). A Securityholder may elect to
include market discount in income currently as it accrues, on all market
discount obligations acquired by such Securityholder during the taxable year
such election is made and thereafter, in which case the interest deferral rule
will not apply.
Premium. A Securityholder who purchases a Debt Security at a cost greater
than its stated redemption price at maturity, generally will be considered to
have purchased the Security at a premium, which it may elect to amortize as an
offset to interest income on such Security (and not as a separate deduction
item) on a constant yield method. Although no regulations addressing the
computation of premium accrual on securities similar to the Securities have been
issued, the legislative history of the 1986 Act indicates that premium is to be
accrued in the same manner as market discount. Accordingly, it appears that the
accrual of premium on a Class of Pay-Through Securities will be calculated using
the prepayment assumption used in pricing such Class. If a Securityholder makes
an election to amortize premium on a Debt Security, such election will apply to
all taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the Securityholder at the beginning of the taxable
year in which the election is made, and to all taxable debt instruments acquired
thereafter by such Securityholder, and will be irrevocable without the consent
of the Internal Revenue Service. Purchasers who pay a premium for the Securities
should consult their tax advisers regarding the election to amortize premium and
the method to be employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Securityholder of a Debt Security to elect to accrue all
interest, discount (including de minimis market or original issue discount) and
premium in income as interest, based on a constant yield method for Debt
Securities acquired on or after April 4, 1994. If such an election were to be
made with respect to a Debt Security with market discount, the Securityholder of
the Debt Security would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Securityholder of the Debt Security acquires during
the year of the election or thereafter. Similarly, a Securityholder of a Debt
Security that makes this election for a Debt Security that is acquired at a
premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Securityholder owns or acquires. The election to accrue interest, discount and
premium on a constant yield method with respect to a Debt Security is
irrevocable.
Sale or Exchange. A Securityholder's tax basis in its Debt Security
generally is the price such Securityholder pays for a Debt Security, plus
amounts of OID or market discount included in income and reduced by any payments
received (other than qualified stated interest payments) and any amortized
premium. Gain or loss recognized on a sale, exchange, or redemption of a Debt
Security, measured by the difference between the amount realized and the Debt
Security's basis as so adjusted, will generally be capital gain or loss,
assuming that the Debt Security is held as a capital asset. In the case of a
Debt Security held by a bank, thrift, or similar institution described in
Section 582 of the Code, however, gain or loss realized on the sale or exchange
of a Debt Security will be taxable as ordinary income or loss. In addition, gain
from the disposition of a Regular Interest Security that might otherwise be
capital gain will be treated as ordinary income to the extent of the excess, if
any, of (i) the amount that would have been includible in the Securityholder's
income if the yield on such Regular Interest Security had equaled 110% of the
applicable federal rate as of the beginning of such Securityholder' s holding
period, over (ii) the amount of ordinary income actually recognized by the
Securityholder with respect to such Regular Interest Security. In addition, gain
on the sale of a Debt Security purchased at a market discount would be taxable
as ordinary income in an amount not exceeding the market discount that accrued
while the Security was held by the Seller, reduced by any market discount
includible in income under the rules described above under "Market Discount."
TAXATION OF THE REMIC AND ITS SECURITYHOLDERS
General. In the opinion of Federal Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Status of Regular Interest Securities. Regular Interest Securities and
Securities representing a residual interest in a REMIC (both types of securities
collectively referred to as "REMIC Securities") will be "real estate assets" for
purposes of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the REMIC's assets are qualifying assets. However, if at least 95 percent
of the REMIC's assets are qualifying assets, then 100 percent of the REMIC
Securities will be qualifying assets. Similarly, income on the REMIC Securities
will be treated as "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code, subject to the
limitations of the preceding two sentences. In addition to Trust Fund Assets,
the REMIC's assets will include payments on Trust Fund Assets held pending
distribution to Securityholders of REMIC Securities, amounts in reserve accounts
(if any), other credit enhancements (if any) and possibly buydown funds. The
Loans generally will be qualifying assets under both of the foregoing sections
of the Code. However, Loans that are not secured by residential real property or
real property used primarily for church purposes may not constitute qualifying
assets under Section 7701(a)(19)(C)(v) of the Code. In addition, to the extent
that the principal amount of a Loan exceeds the value of the property securing
the Loan, it is unclear and Federal Tax Counsel is unable to opine whether the
Loans will be qualifying assets. The regulations under Sections 860A through
860G of the Code (the "REMIC Regulations") treat credit enhancements as part of
the mortgage or pool of mortgages to which they relate, and therefore credit
enhancements generally should be qualifying assets. Regulations issued in
conjunction with the REMIC Regulations provide that amounts paid on Trust Fund
Assets and held pending distribution to Securityholders of Regular Interest
Securities ("cash flow investments") will be treated as qualifying assets. It is
unclear whether reserve funds or buydown funds would also constitute qualifying
assets under any of those provisions.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by Securityholders of the Residual Interest Securities. In the case of a
"single class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the Securityholders of the Regular Interest Securities and
the Securityholders of the Residual Interest Securities on a daily basis in
proportion to the relative amounts of income accruing to each Securityholder on
that day. In the case of a Securityholder who is an individual or a
"pass-through interest Securityholder" (including certain pass-through entities
but not including real estate investment trusts), such expenses will be
deductible only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the Securityholder, exceed 2% of such Securityholder's
adjusted gross income and such Securityholder may not be able to deduct such
fees and expenses to any extent in computing such Securityholder's alternative
minimum tax liability. In addition, the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount ($100,000 (or $50,000 in the case of a married
individual filing separately), adjusted for inflation since 1990) will be
reduced by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Security to such a
Securityholder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is similar
to such a trust and which is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise stated in the applicable
Prospectus Supplement, the expenses of the REMIC will be allocated to
Securityholders of the related Residual Interest Securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the
Securityholders of residual interests. As described above, the regular interests
are generally taxable as debt of the REMIC.
Tiered REMIC Structures. For certain Series of 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 Securities, Federal Tax Counsel will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Pooling and Servicing Agreement, the Tiered REMICs will each qualify
as a REMIC and the REMIC Certificates issued by the Tiered REMICs, respectively,
will be considered to evidence ownership of Regular Certificates or Residual
Certificates in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(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 Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any OID or market discount
on loans and other assets, and (ii) deductions, including stated interest and
OID accrued on Regular Interest Securities, amortization of any premium with
respect to Loans, and servicing fees and other expenses of the REMIC. A
Securityholder of a Residual Interest Security that is an individual or a
"pass-through interest Securityholder" (including certain pass-through entities,
but not including real estate investment trusts) will be unable to deduct
servicing fees payable on the Loans or other administrative expenses of the
REMIC for a given taxable year, to the extent that such expenses, when
aggregated with such Securityholder's other miscellaneous itemized deductions
for that year, do not exceed two percent of such Securityholder's adjusted gross
income and such Securityholder may not be able to deduct such fees and expenses
to any extent in computing such Securityholder's alternative minimum tax
liability.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). Such aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984. Subject to possible application of the de minimis rules,
the method of accrual by the REMIC of OID income on such loans will be
equivalent to the method under which Securityholders of Pay-Through Securities
accrue OID (i.e., under the constant yield method taking into account the
Prepayment Assumption). The REMIC will deduct OID on the Regular Interest
Securities in the same manner that the Securityholders of the Regular Interest
Securities include such discount in income, but without regard to the de minimis
rules. See "Taxation of Debt Securities (Including Regular Interest Securities)"
above. However, a REMIC that acquires loans at a market discount must include
such market discount in income currently, as it accrues, on a constant interest
basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (presumably taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding recovery
of premium attributable to loans originated on or before such date, it is
possible that such premium may be recovered in proportion to payments of loan
principal.
Prohibited Transactions; Contributions Tax; Tax on Net Income from
Foreclosure Property. The REMIC will be subject to a 100% tax on any net income
derived from a "prohibited transaction." For this purpose, net income will be
calculated without taking into account any losses from prohibited transactions
or any deductions attributable to any prohibited transaction that resulted in a
loss. In general, prohibited transactions include: (i) subject to limited
exceptions, the sale or other disposition of any qualified mortgage transferred
to the REMIC; (ii) subject to a limited exception, the sale or other disposition
of a cash flow investment; (iii) the receipt of any income from assets not
permitted to be held by the REMIC pursuant to the Code; or (iv) the receipt of
any fees or other compensation for services rendered by the REMIC. It is
anticipated that a REMIC will not engage in any prohibited transactions in which
it would recognize a material amount of net income. Subject to a number of
exceptions, a tax is imposed at the rate of 100% on amounts contributed to a
REMIC after the Startup Day. The Residual Interest Securities will generally
bear any such taxes imposed on the REMIC. In addition, a REMIC is subject to a
tax (deductible from its income) on any "net income from foreclosure property"
(determined in accordance with Section 857(b)(4)(B) of the Code as if the REMIC
were a REIT).
TAXATION OF SECURITYHOLDERS OF RESIDUAL INTEREST SECURITIES
The Securityholder of a Security representing a residual interest (a
"Residual Interest Security") will take into account the "daily portion" of the
taxable income or net loss of the REMIC for each day during the taxable year on
which such Securityholder held the Residual Interest Security. The daily portion
is determined by allocating to each day in any calendar quarter its ratable
portion of the taxable income or net loss of the REMIC for such quarter, and by
allocating that amount among the Securityholders (on such day) of the Residual
Interest Securities in proportion to their respective holdings on such day.
The Securityholder of a Residual Interest Security must report its
proportionate share of the taxable income of the REMIC whether or not it
receives cash distributions from the REMIC attributable to such income or loss.
The reporting of taxable income without corresponding distributions could occur,
for example, when the Loans held by the REMIC were issued or acquired at a
discount, since mortgage prepayments cause recognition of discount income, while
the corresponding portion of the prepayment could be used in whole or in part to
make principal payments on REMIC Regular Interests issued without any discount
or at an insubstantial discount. (If this occurs, it is likely that cash
distributions will exceed taxable income in later years.) Taxable income may
also be greater in earlier years of certain REMIC issues as a result of the fact
that interest expense deductions, as a percentage of outstanding principal on
REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the Securityholder of a residual interest is taxed on
the net income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield, if any, on the Residual Interest Security may be less than that of such a
bond or instrument.
Limitation on Losses. The amount of the REMIC's net loss that a
Securityholder may take into account currently is limited to the
Securityholder's adjusted basis at the end of the calendar quarter in which such
loss arises. A Securityholder's basis in a Residual Interest Security will
initially equal such Securityholder's purchase price, and will subsequently be
increased by the amount of the REMIC's taxable income allocated to the
Securityholder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
Securityholder. Any disallowed loss may be carried forward indefinitely, but may
be used only to offset income generated by the same REMIC. The ability of
Securityholders of Residual Interest Securities to deduct net losses may be
subject to additional limitations under the Code, as to which such
Securityholders should consult their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a Securityholder of a Residual
Interest Security. If the amount of such payment exceeds a Securityholder's
adjusted basis in the Residual Interest Security, however, the Securityholder
will recognize gain (treated as gain from the sale of the Residual Interest
Security) to the extent of such excess.
Sale or Exchange. A Securityholder of a Residual Interest Security will
recognize gain or loss on the sale or exchange of a Residual Interest Security
equal to the difference, if any, between the amount realized and such
Securityholder's adjusted basis in the Residual Interest Security at the time of
such sale or exchange. Except to the extent provided in regulations, which have
not yet been issued, any loss upon disposition of a Residual Interest Security
will be disallowed if the selling Securityholder acquires any residual interest
in a REMIC or similar mortgage pool within six months before or after such
disposition.
Excess Inclusions. The portion of the REMIC taxable income of a
Securityholder of a Residual Interest Security consisting of "excess inclusion"
income may not be offset by other deductions or losses, including net operating
losses, on such Securityholder's federal income tax return. Further, if the
Securityholder of a Residual Interest Security is an organization subject to the
tax on unrelated business income imposed by Code Section 511, such
Securityholder's excess inclusion income will be treated as unrelated business
taxable income of such Securityholder. In addition, under Treasury regulations
yet to be issued, if a real estate investment trust, a regulated investment
company, a common Trust Fund, or certain cooperatives were to own a Residual
Interest Security, a portion of dividends (or other distributions) paid by the
real estate investment trust (or other entity) would be treated as excess
inclusion income. If a Residual Security is owned by a foreign person, excess
inclusion income is subject to tax at a rate of 30% which may not be reduced by
treaty, is not eligible for treatment as "portfolio interest" and is subject to
certain additional limitations. See "-- Tax Treatment of Foreign Investors."
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long-term applicable federal rate on the Startup Date under
section 1274(d) multiplied by (ii) the adjusted issue price of such Residual
Interest Security at the beginning of such quarterly period. The adjusted issue
price of a Residual Interest Security at the beginning of each calendar quarter
will equal its issue price (calculated in a manner analogous to the
determination of the issue price of a Regular Interest Security), increased by
the aggregate of the daily accruals for prior calendar quarters, and decreased
(but not below zero) by the amount of loss allocated to a Securityholder and the
amount of distributions made on the Residual Interest Security before the
beginning of the quarter. The long-term applicable federal rate, which is
announced monthly by the Treasury Department, is an interest rate that is based
on the average market yield of outstanding marketable obligations of the United
States government having remaining maturities in excess of nine years.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) the alternative minimum taxable income
of a taxpayer is based on the taxpayer's regular taxable income computed without
regard to the rule that taxable income cannot be less than the amount of excess
inclusions, (ii) the alternative minimum taxable income of a taxpayer for a
taxable year cannot be less than the amount of excess inclusions for that year,
and (iii) the amount of any alternative minimum tax net operating loss is
computed without regard to any excess inclusions. While these provisions are
generally effective for tax years beginning after December 31, 1986, a taxpayer
may elect to apply them only with respect to tax years beginning after August
20, 1996.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded. See "--Restrictions on
Ownership and Transfer of Residual Interest Securities" and "Tax Treatment of
Foreign Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt generally from tax (other than certain farmers'
cooperatives), unless such entity is not subject to tax on its unrelated
business income. Accordingly, the applicable Pooling and Servicing Agreement
will prohibit Disqualified Organizations from owning a Residual Interest
Security. In addition, no transfer of a Residual Interest Security will be
permitted unless the proposed transferee shall have furnished to the Trustee an
affidavit representing and warranting that it is neither a Disqualified
Organization nor an agent or nominee acting on behalf of a Disqualified
Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of such Residual Interest Security at the
time of the transfer. In addition, if a Disqualified Organization holds an
interest in a pass-through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any person
holding as nominee an interest in a pass-through entity), that owns a Residual
Interest Security, the pass-through entity will be required to pay an annual tax
on its allocable share of the excess inclusion income of the REMIC.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35 percent, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on such excess inclusion accrue,
sufficient to pay the taxes thereon. 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 (had "improper knowledge") that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant evidence
to indicate that the transferee will not continue to pay its debts as they come
due in the future, and (ii) the transferee represents to the transferor that (A)
the transferee understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and (B) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. A different formulation of this rule applies to transfers of a
Residual Interest Security by or to foreign persons. See "-- Tax Treatment to
Foreign Investors".
Mark to Market Rules. Code Section 475 generally requires that securities
dealers include securities in inventory at their fair market value, recognizing
gain or loss as if the securities were sold at the end of each tax year.
Treasury regulations provide that for purposes of this mark to market
requirement, a REMIC residual certificate acquired on or after January 4, 1995
is not treated as a security and thus may not be marked to market.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As specified in the related Prospectus Supplement if a REMIC or
partnership election is not made and the Certificates are not treated as debt or
as equity interests in a partnership for federal income tax purposes, in the
opinion of Federal Tax Counsel, the Trust Fund relating to a Series of
Securities will be classified for federal income tax purposes as a grantor trust
under Subpart E, Part I of Subchapter J of the Code and not as an association
taxable as a corporation (the Securities of such Series, "Pass-Through
Securities"). Accordingly, each Securityholder of a Pass- Through Security is
treated for federal income tax purposes as the owner of an undivided interest in
the assets owned by the Trust Fund. As further described below, each
Securityholder of a Pass-Through Security therefore must report on its federal
income tax return the gross income from the portion of the assets that is
allocable to such Pass-Through Security and may deduct the portion of the
expenses incurred or accrued by the Trust Fund that is allocable to such
Pass-Through Security, at the same time and to the same extent as such items
would be reported by such Securityholder if it had purchased and held directly
such interest in such assets and received or accrued directly its share of the
payments with respect to such assets and incurred or accrued directly its share
of expenses incurred or accrued by the Trust Fund with respect to such assets
when those amounts are received, incurred or accrued by the Trust Fund.
A Securityholder of a Pass-Through Security that is an individual, estate,
or trust will be allowed deductions for such expenses only to the extent that
the sum of those expenses and the Securityholder's other miscellaneous itemized
deductions exceeds two percent of such Securityholder's adjusted gross income.
Moreover, a Pass-Through Security Holder that is not a corporation cannot deduct
such expenses for purposes of the alternative minimum tax (if applicable). An
individual's deductions may also be limited by Code Section 68 if the
individual's adjusted gross income exceeds certain limits. Such deductions will
include servicing, guarantee and administrative fees paid to the servicer of the
Loans. As a result, individuals, estates, or trusts holding Pass-Through
Securities may have taxable income in excess of the cash received.
Status of the Pass-Through Securities. The Pass-Through Securities will be
"real estate assets" for purposes of Section 856(c)(5)(A) of the Code and "loans
. . . secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the related assets of the Trust Fund of a Series are qualifying assets. The
Pass- Through Securities may not be qualifying assets under any of the foregoing
sections of the Code to the extent that the related assets of the Trust Fund of
a Series include buydown funds, reserve funds, or payments on mortgage loans
held pending distribution to Certificateholders. Further, the Pass-Through
Securities may not be "real estate assets" to the extent loans held by the trust
are not secured by real property, and may not be "loans . . . secured by an
interest in real property" to the extent loans held by the trust are not secured
by residential real property or real property used primarily for church
purposes. In addition, to the extent that the principal amount of a loan exceeds
the value of the property securing the loan, it is unclear and Federal Tax
Counsel is unable to opine whether the loans will be qualifying assets.
Taxation of Pass-Through Securities Under Stripped Bond Rules. The federal
income tax treatment of the Pass-Through Securities will depend on whether they
are subject to the rules of section 1286 of the Code (the "stripped bond
rules"). The Pass-Through Securities will be subject to those rules if stripped
interest-only Certificates are issued. In addition, whether or not stripped
interest-only Certificates are issued, the Internal Revenue Service may contend
that the stripped bond rules apply on the ground that the Servicer's servicing
fee, or other amounts, if any, paid to (or retained by) the Servicer or its
affiliates, as specified in the applicable Prospectus Supplement, represent
greater than an arm's length consideration for servicing the Loans and should be
characterized for federal income tax purposes as an ownership interest in the
Loans. The Internal Revenue Service has taken the position in Revenue Ruling
91-46 that a retained interest in excess of reasonable compensation for
servicing is treated as a "stripped coupon" under the rules of Code Section
1286.
If interest retained for the Servicer's servicing fee or other interest is
treated as a "stripped coupon," the Pass- Through Securities will either be
subject to the OID rules or the market discount rules. A Securityholder of a
Pass- Through Security representing an interest in Loans (unless, possibly, the
Loans are not fully secured by real estate) will account for any discount on the
Pass-Through Security as market discount rather than OID if either (i) the
amount of OID with respect to the Pass-Through Security was treated as zero
under the OID de minimis rule when the Pass- Through Security was stripped or
(ii) no more than 100 basis points (including any amount of servicing in excess
of reasonable servicing) is stripped off from the Loans. If neither of the above
exceptions applies, the OID rules will apply to the Pass-Through Securities.
If the OID rules apply, the Securityholder of a Pass-Through Security
(whether a cash or accrual method taxpayer) will be required to report interest
income from the Pass-Through Security in each taxable year equal to the income
that accrues on the Pass-Through Security in that year calculated under a
constant yield method based on the yield of the Pass-Through Security (or,
possibly, the yield of each Loan underlying such Pass-Through Security) to such
Securityholder. Such yield would be computed at the rate (assuming monthly
compounding) that, if used in discounting the Securityholder's share of the
payments on the Loans, would cause the present value of those payments to equal
the price at which the Securityholder purchased the Pass-Through Security. With
respect to certain categories of debt instruments, Section 1272(a)(6) of the
Code requires that OID be accrued based on a prepayment assumption determined in
a manner prescribed by forthcoming regulations. It is unclear whether such
regulations would apply this rule to the Pass-Through Securities, whether
Section 1272(a)(6) might apply to the Pass-Through Securities in the absence of
such regulations, or whether the Internal Revenue Service could require use of a
reasonable prepayment assumption based on other tax law principles and Federal
Tax Counsel is unable to opine with respect to this issue. If required to report
interest income on the Pass-Through Securities to the Internal Revenue Service
under the stripped bond rules, it is anticipated that the Trustee will calculate
the yield of the Pass-Through Securities based on a representative initial
offering price of the Pass-Through Securities and a reasonable assumed rate of
prepayment of the Loans (although such yield may differ from the yield to any
particular Securityholder that would be used in calculating the interest income
of such Securityholder). The Prospectus Supplement for each series of
Pass-Through Securities will describe the prepayment assumption that will be
used for this purpose, but no representation is made that the Loans will prepay
at that rate or at any other rate.
In the case of a Pass-Through Security acquired at a price equal to the
principal amount of the Loans allocable to the Pass-Through Security, the use of
a reasonable prepayment assumption generally would not have any significant
effect on the yield used in calculating accruals of interest income. In the
case, however, of a Pass-Through Security acquired at a discount or premium
(that is, at a price less than or greater than such principal amount,
respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate or decelerate the reporting of interest
income, respectively.
If a Loan is prepaid in full, the Securityholder of a Pass-Through Security
acquired at a discount or premium generally will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Loan that is allocable to the Pass-Through Security and the portion of
the adjusted basis of the Pass- Through Security (see "Sales of Pass-Through
Securities" below) that is allocable to the Loan. The method of allocating such
basis among the Loans may differ depending on whether a reasonable prepayment
assumption is used in calculating the yield of the Pass-Through Securities for
purposes of accruing OID. It is not clear whether any other adjustments would be
required to reflect differences between the prepayment rate that was assumed in
calculating yield and the actual rate of prepayments.
Pass-Through Securities of certain series ("Variable Rate Pass-Through
Securities") may provide for a Pass- Through Rate based on the weighted average
of the Loan Rates of the Loans held by the Trust Fund, which Loan Rates may be
fixed or variable. In the case of a Variable Rate Pass-Through Security that is
subject to the OID rules, the daily portions of OID generally will be calculated
under the principles discussed in "--Taxation of Debt Securities (Including
Regular Interest Securities)-Variable Rate Debt Securities."
Taxation of Pass-Through Securities If Stripped Bond Rules Do Not Apply. If
the stripped bond rules do not apply to a Pass-Through Security, then the
Securityholder will be required to include in income its share of the interest
payments on the Mortgages in accordance with its tax accounting method. In
addition, if the Securityholder purchased the Pass-Through Security at a
discount or premium, the Securityholder will be required to account for such
discount or premium in the manner described below. The treatment of any discount
will depend on whether the discount is OID as defined in the Code and whether
such other discount exceeds a de minimis amount. In the case of OID, the
Securityholder (whether a cash or accrual method taxpayer) will be required to
report as additional interest income in each month the portion of such discount
that accrues in that month, calculated based on a constant yield method. In
general it is not anticipated that the amount of OID to be accrued in each
month, if any, will be significant relative to the interest paid currently on
the Loans. However, OID could arise with respect to a Loan ("ARM") that provides
for interest at a rate equal to the sum of an index of market interest rates and
a fixed number. The OID for ARMs generally will be determined under the
principles discussed in "Taxation of Debt Securities (Including Regular Interest
Securities)-Variable Rate Debt Securities."
If discount other than OID exceeds a de minimis amount (described below),
the Securityholder will also generally be required to include in income in each
month the amount of such discount accrued through such month and not previously
included in income, but limited, with respect to the portion of such discount
allocable to any Loan, to the amount of principal on such Loan received by the
Trust Fund in that month. Because the Loans may provide for monthly principal
payments, such discount may be required to be included in income at a rate that
is not significantly slower than the rate at which such discount accrues (and
therefore at a rate not significantly slower than the rate at which such
discount would be included in income if it were OID). The Securityholder may
elect to accrue such discount under a constant yield method based on the yield
of the Pass-Through Security to such Securityholder (or possibly based on the
yields of each Loan). In the absence of such an election, it may be necessary to
accrue such discount under a more rapid straight-line method. Under the de
minimis rule, market discount with respect to a Pass- Through Security will be
considered to be zero if it is less than the product of (i) 0.25% of the
principal amount of the Loans allocable to the Pass-Through Security and (ii)
the weighted average life (in complete years) of the Loans remaining at the time
of purchase of the Pass-Through Security.
If a Securityholder purchases a Pass-Through Security at a premium, such
Securityholder may elect under Section 171 of the Code to amortize the portion
of such premium that is allocable to a Loan under a constant yield method based
on the yield of the Loan to such Securityholder, provided that such Loan was
originated after September 27, 1985. Premium allocable to a Loan originated on
or before that date should be allocated among the principal payments on the Loan
and allowed as an ordinary deduction as principal payments are made or, perhaps,
upon termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Loans or taking account of
a reasonable prepayment assumption, and Federal Tax Counsel is unable to opine
on this issue.
MISCELLANEOUS TAX ASPECTS
Backup Withholding A Securityholder, other than a Securityholder of a
Residual Interest Security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the Securityholder of a Security (i) fails to furnish the Trustee with its
taxpayer identification number ("TIN"); (ii) furnishes the Trustee an incorrect
TIN; (iii) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such Securityholder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the Securityholder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
Securityholders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). Securityholders
should consult their tax advisers as to their qualification for exemption from
backup withholding and the procedure for obtaining the exemption.
The Trustee will report to the Securityholders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds which are
treated as partnerships for federal income tax purposes and with respect to
Certificates treated as debt for federal income tax purposes, unless interest
(including OID) paid on a Security (other than a Residual Interest Security) is
considered to be "effectively connected" with a trade or business conducted in
the United States by a nonresident alien individual, foreign partnership,
foreign corporation, foreign estate, or foreign trust ("foreign investors"),
such interest will normally qualify as portfolio interest (except where (i) the
recipient is a Securityholder, directly or by attribution, of 10% or more of the
capital or profits interest in the issuer, or (ii) the recipient is a controlled
foreign corporation to which the issuer is a related person) and will be exempt
from federal income tax, provided that appropriate certifications are provided
on a timely basis by the Securityholder. See "--Tax Consequences to
Securityholders of the Certificates Issued by a Partnership-Tax Consequences to
Foreign Certificateholders" and "--Certain Certificates Treated as
Indebtedness-Foreign Investors". Upon receipt of appropriate ownership
statements, the issuer normally will be relieved of obligations to withhold tax
from such interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the issuer to
withhold at a 30% rate (unless such rate were reduced or eliminated by an
applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to nonresidents. Securityholders of
Pass-Through Securities however, may be subject to withholding to the extent
that the Loans were originated on or before July 18, 1984.
Interest and OID of Securityholders who are foreign persons are not subject
to withholding if the income is effectively connected with a United States
business conducted by the Securityholder and the Securityholder timely provides
an IRS Form 4224. They will, however, generally be subject to the regular United
States income tax.
Payments to Securityholders of Residual Interest Securities who are foreign
investors will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Securityholders should assume
that such income does not qualify for exemption from United States withholding
tax as "portfolio interest." It is clear that, to the extent that a payment
represents a portion of REMIC taxable income that constitutes excess inclusion
income, a Securityholder of a Residual Interest Security will not be entitled to
an exemption from or reduction of the 30% (or lower treaty rate) withholding tax
rule. If the payments are subject to United States withholding tax, they
generally will be taken into account for withholding tax purposes only when paid
or distributed (or when the Residual Interest Security is disposed of). The
Treasury has statutory authority, however, to promulgate regulations which would
require such amounts to be taken into account at an earlier time in order to
prevent the avoidance of tax. The Treasury has adopted regulations limiting the
ability to transfer the tax ownership of Residual Interest Securities to or by
foreign persons. See "Taxation of Securityholders of Residual Interest
Securities--Excess Inclusions."
Subject to the discussion in the previous paragraph, any capital gain
realized on the sale, redemption, retirement or other taxable disposition of a
Security by a foreign person will be exempt from United States federal income
and withholding tax, provided that (i) such gain is not effectively connected
with the conduct of a trade or business in the United States by the foreign
person and (ii) in the case of an individual foreign person, the foreign person
is not present in the United States for 183 days or more in the taxable year.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Federal Tax Counsel will deliver its opinion that a Trust Fund which is
intended to be a partnership for federal income tax purposes, as specified in
the related Prospectus Supplement, will not be 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 Trust
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
or that such rule is otherwise inapplicable to the Trust Fund, so that the Trust
Fund will not be characterized as a publicly traded partnership taxable as a
corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on any Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund. In additions, all distributions
to the Certificateholders would be taxable as dividends.
TAX CONSEQUENCES TO SECURITYHOLDERS OF THE NOTES ISSUED BY A
PARTNERSHIP
Treatment of the Notes as Indebtedness. Under the Agreements, the Trustee
and the Servicer will agree, and the Noteholders will agree by their purchase of
Notes, to treat the Notes as debt for federal income tax purposes. Except as
otherwise provided in the related Prospectus Supplement, Federal Tax Counsel
will advise the Depositor that the Notes will be classified as debt for federal
income tax purposes. Consequently, Securityholders of Notes will be subject to
taxation as described in "Taxation of Debt Securities (Including Regular
Interest Securities)" above for Debt Securities which are not Regular Interest
Securities.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of Federal Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust Fund. If so treated, the Trust Fund
might be taxable as a corporation with the adverse consequences described above
(and the taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Notes recharacterized as equity).
Alternatively, the Trust Fund might be treated as a publicly traded partnership
that would not be taxable as a corporation because it would meet certain
qualifying income tests. Nonetheless, treatment of the Notes as equity interests
in such a publicly traded partnership could have adverse tax consequences to
certain Securityholders. For example, income to foreign Securityholders could be
subject to U.S. federal income tax and U.S. federal income tax return filing and
withholding requirements, and individual Securityholders might be subject to
certain limitations on their ability to deduct their share of the Trust Fund's
expenses.
TAX CONSEQUENCES TO SECURITYHOLDERS OF THE CERTIFICATES ISSUED
BY A PARTNERSHIP
Treatment of the Trust Fund as a Partnership. In the case of a Trust Fund
intended to qualify as a partnership for federal income tax purposes, the Trust
Fund and the Depositor will agree, and the Certificateholders will agree by
their purchase of Certificates, to treat the Trust Fund as a partnership for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust Fund, the partners of the partnership being the
Certificateholders, and the Notes, if any, being debt of the partnership.
However, the proper characterization of the arrangement involving the Trust
Fund, the Certificates, the Notes, the Trust Fund and the Servicer is not clear
because there is no authority on transactions closely comparable to that
contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Generally, provided the
Certificates are issued at or close to face value, any such characterization
would not result in materially adverse tax consequences to Certificateholders as
compared to the consequences from treatment of the Certificates as equity in a
partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such Securityholder's allocated share of income,
gains, losses, deductions and credits of the Trust Fund. The Trust Fund's income
will consist primarily of interest and finance charges earned on the Loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Loans. The Trust Fund's
deductions will consist primarily of interest and OID accruing with respect to
the Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
Fund of premium on Loans that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Depositor. Based on the economic arrangement
of the parties, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis Securityholders will in effect be required to report income from the
Certificates on the accrual basis and Certificateholders may become liable for
taxes on Trust Fund income even if they have not received cash from the Trust
Fund to pay such taxes. In addition, because tax allocations and tax reporting
will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trustee.
If Notes are also issued, some or all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
Securityholder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such Securityholder being taxed on an amount of income
that exceeds the amount of cash actually distributed to such Securityholder over
the life of the Trust Fund.
The Servicer intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID and, therefore, the Trust Fund should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less than
the remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Servicer will make this calculation on an aggregate basis,
but might be required to recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust Fund are sold or exchanged within a
12-month period. Treasury regulations provide that if a termination occurs, the
partnership will be considered to transfer its assets and liabilities to a new
partnership in exchange for interests in that new partnership, which it would
then be treated as transferring to its partners. The Trust Fund will not comply
with certain technical requirements that might apply when such a constructive
termination occurs. As a result, the 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 Trust Fund might not be able to comply due
to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
Securityholder's cost increased by the Securityholder's share of Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the Certificates
and the amount realized on a sale of a Certificate would include the
Securityholder's share of the Notes and other liabilities of the Trust Fund. A
Securityholder acquiring Certificates at different prices may be required to
maintain a single aggregate adjusted tax basis in such Certificates, and, upon
sale or other disposition of some of the Certificates, allocate a portion of
such aggregate tax basis to the Certificates sold (rather than maintaining a
separate tax basis in each Certificate for purposes of computing gain or loss on
a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Securityholder's
share of unrecognized accrued market discount on the Loans would generally be
treated as ordinary income to the Securityholder and would give rise to special
tax reporting requirements. It is not expected that the Trust Fund will have any
other assets that would give rise to such special reporting requirements. Thus,
to avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Depositors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a Securityholder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund currently does not
intend to make such election. As a result, Certificateholders might be allocated
a greater or lesser amount of Trust Fund income than would be appropriate based
on their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to Securityholders and the IRS on Schedule K-1.
The Trust Fund will provide the Schedule K-1 information to nominees that fail
to provide the Trust Fund with the information statement described below and
such nominees will be required to forward such information to the beneficial
owners of the Certificates. Generally, Securityholders must file tax returns
that are consistent with the information return filed by the Trust Fund or be
subject to penalties unless the Securityholder notifies the IRS of all such
inconsistencies on a timely basis.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (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 the foregoing, and (z) certain information on Certificates
that were held, bought or sold on behalf of such person throughout the year. In
addition, brokers and financial institutions that hold Certificates through a
nominee are required to furnish directly to the Trust Fund information as to
themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Trust Fund. The information referred to above for
any calendar year must be furnished to the Trust Fund on or before the following
January 31. Nominees, brokers and financial institutions that fail to provide
the Trust Fund with the information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to 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 Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trustee will withhold as if it were so engaged in order
to protect the Trust Fund from possible adverse consequences of a failure to
withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders 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 foreign Securityholders that are taxable as
corporations and 39.6% for all other foreign Securityholders. Subsequent
adoption of Treasury regulations or the issuance of other administrative
pronouncements may require the Trust Fund to change its withholding procedures.
If the trust is engaged in a U.S. trade or business, each foreign
Securityholder might be required to file a U.S. individual or corporate income
tax return (including, in the case of a corporation, a return covering the
branch profits tax) on its share of the Trust Fund's income. A foreign
Securityholder generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the Trust Fund taking the position that
no taxes were due because the Trust Fund was not engaged in a U.S. trade or
business. However, interest payments made (or accrued) to a Certificateholder
who is a foreign person generally will be considered guaranteed payments to the
extent such payments are determined without regard to the income of the Trust
Fund, and for that reason or because of the nature of the assets of the Trust
Fund probably will not be considered "portfolio interest." As a result, even if
the Trust Fund was not considered to be engaged in a U.S. trade or business,
Certificateholders would be subject to United States federal income tax on the
Trust Fund's interest income which must be withheld at a rate of 30%, unless
reduced or eliminated pursuant to an applicable treaty. A foreign Securityholder
would be entitled to claim a refund for such withheld tax, taking the position
that the interest was portfolio interest and therefore not subject to U.S. tax.
However, the IRS may disagree and no assurance can be given as to the
appropriate amount of tax liability. As a result, each potential foreign
Certificateholder should consult its tax advisor as to whether an interest in a
Certificate is an unsuitable investment.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Securityholder is an exempt recipient
under applicable provisions of the Code.
CERTAIN CERTIFICATES TREATED AS INDEBTEDNESS
Upon the issuance of Certificates which are intended to be treated as
indebtedness for federal income tax purposes, Federal Tax Counsel will opine
that based upon its analysis of the factors discussed below, the Depositor
should be treated as the owner of the Loans for federal income tax purposes and,
accordingly, for federal income tax purposes the Certificates should be
characterized as indebtedness of the Depositor that is secured by the Loans.
Opinions of counsel are not binding on the Internal Revenue Service (the "IRS"),
however, and there can be no assurance that the IRS could not successfully
challenge this conclusion.
The Depositor will express in the Trust Agreement its intent that the
Certificates be indebtedness secured by the Loans for federal, state and local
income and franchise tax purposes. The Depositor, by entering into the Trust
Agreement, has agreed and each Certificateholder, by the acceptance of a
Certificate, will agree to treat the Certificates as indebtedness for federal,
state and local income and franchise tax purposes. However, because different
criteria are used to determine the non-tax characterization of the transactions
contemplated by the Trust Agreement, the Depositor expects to treat such
transaction, for regulatory and other non-tax purposes, as a transfer of an
ownership interest in the Loans and not as a debt obligation.
A basic premise of federal income tax law is that the economic substance of
a transaction generally determines the tax consequences. The form of a
transaction, while a relevant factor, is not conclusive evidence of its economic
substance. In appropriate circumstances, the courts have allowed taxpayers, as
well as the IRS, to treat a transaction in accordance with its economic
substance, as determined under federal income tax law, notwithstanding that the
participants characterize the transaction differently for non-tax purposes. In
some instances, however, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Federal Tax Counsel believes that the
rationale of those cases will not apply to the issuance of the Certificates.
The determination of whether the economic substance of a transfer of an
interest in property is a sale or a loan secured by the transferred property
depends on numerous factors that indicate whether the transferor has
relinquished (and the transferee has obtained) substantial incidents of
ownership in the property. Among the primary factors considered are whether the
transferee has obtained the opportunity for gain if the property increases in
value and has assumed the risk of loss if the property decreases in value. Based
upon its analysis of such factors, Federal Tax Counsel will conclude that the
Depositor, rather than the Certificateholders, should be treated as the owner of
the Loans for federal income tax purposes. As a result, Federal Tax Counsel will
opine that the Certificates should properly be characterized for federal income
tax purposes as indebtedness. Contrary characterizations that could be asserted
by the IRS are described below under "--Possible Characterization of the
Transaction as a Partnership or as an Association Taxable as a Corporation."
Certificateholders as the Securityholders of debt instruments for federal
tax purposes will be taxed in the manner described above in "--Taxation of Debt
Securities (Including Regular Interest Securities)" for Debt Securities which
are not Regular Interest Securities.
Possible Characterization of the Transaction as a Partnership or as
Association Taxable as a Corporation. As stated above, the opinion of Federal
Tax Counsel with respect to the Certificates will not be binding on the courts
or the IRS, and no assurance can be given that the characterization of the
Certificates as debt would prevail. It is possible that the IRS would assert
that, for purposes of the Code, the transaction described herein constitutes a
transfer of the Loans (or an interest therein) to the Certificateholders and
that the proper classification of the legal relationship between the Depositor
and the Certificateholders resulting from the transaction is that of a
partnership, a publicly traded partnership taxed as a corporation, or an
association taxable as a corporation. Since Federal Tax Counsel will advise that
the Certificates will be treated as indebtedness for federal income tax
purposes, the Depositor generally will not attempt to comply with the federal
income tax reporting requirements that would apply if Certificates were treated
as interests in a partnership or a publicly traded partnership taxable as a
corporation.
If a partnership were deemed to be created between the Depositor and the
Certificateholders, the partnership itself would not be subject to federal
income tax (unless it were to be characterized as a publicly traded partnership
taxable as a corporation); rather, the partners of such partnership, including
the Certificateholders, would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deduction of a
Certificateholder could differ if the Certificates were held to constitute
partnership interests, rather than indebtedness. Moreover, an individual's share
of expenses of the partnership would be miscellaneous itemized deductions that,
in the aggregate, are allowed as deductions only to the extent they exceed two
percent of the individual's adjusted gross income, and would be subject to
reduction under Section 68 of the Code if the individual's adjusted gross income
exceeded certain limits. As a result, the individual might be taxed on a greater
amount of income than would be the case if the Certificates were treated as a
debt instrument. Finally, all or a portion of any taxable income allocated to a
Certificateholder that is a pension, profit-sharing or employee benefit plan, or
other tax-exempt entity may, under certain circumstances constitute "unrelated
business taxable income" which generally would be taxable to the Securityholder
under the Code.
If it were determined that the transaction created an entity classified as
an association or as a publicly traded partnership taxable as a corporation, the
Trust Fund would be subject to federal income tax at corporate income tax rates
on the income it derives from the Loans, which would reduce the amounts
available for distribution to the Certificateholders. Such classification may
also have adverse state and local tax consequences that would reduce amounts
available for distribution to Certificateholders. Moreover, distributions on the
Certificates would most likely not be deductible in computing the entity's
taxable income, and cash distributions to the Certificateholders generally would
be treated as dividends for tax purposes to the extent of such entity's earnings
and profits.
Foreign Investors. If the IRS were to successfully contend that the
Certificates are interests in a partnership and if such partnership were
considered to be engaged in a trade or business in the United States, the
partnership would be subject to a withholding tax on distributions to (or, at
its election, income allocable to) a foreign investor; and such Securityholder
would be credited for his or her share of the withholding tax paid by the
partnership. In such case, the Securityholder generally would be subject to
United States federal income tax at regular federal income tax rates, and
possibly a branch profits tax in the case of a corporate Securityholder.
Alternatively, although there may be arguments to the contrary, if such a
partnership is not considered to be engaged in a trade or business within the
United States and if income with respect to the Certificates is not otherwise
effectively connected with the conduct of a trade or business in the United
States by the foreign investor, the foreign investor would be subject to United
States federal income tax and withholding at a rate of 30% (unless reduced by an
applicable tax treaty) on the Securityholder's distributive share of the
partnership's interest income. See "Tax Consequences to Securityholders of the
Certificates Issued by a Partnership -- Tax Consequences to Foreign
Certificateholders" for a more detailed discussion of the tax consequences of an
equity investment in a partnership by a foreign investor.
If the Trust Fund were taxable as a corporation, distributions to foreign
investors, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced or eliminated by
an applicable income tax treaty.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition of
the Securities. State and local income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the Code impose certain restrictions on employee benefit plans subject to
ERISA and on plans and other arrangements subject to Section 4975 of the Code
and on persons who are parties in interest or disqualified persons ("parties in
interest") with respect to such plans or arrangements. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
A fiduciary of an employee benefit plan subject to Title I of ERISA should
consider the fiduciary standards under ERISA in the context of the plan's
particular circumstances before authorizing an investment of a portion of such
plan's assets in the Securities. Accordingly, among other factors, such
fiduciary should consider whether: (i) the investment is for the exclusive
benefit of plan participants and their beneficiaries; (ii) the investment
satisfies the diversification requirements of Section 404 of ERISA; (iii) the
investment is in accordance with the documents and instruments governing the
plan; and (iv) the investment is prudent, considering the nature of the
investment. Fiduciaries of such plans also should consider ERISA's prohibition
on improper delegation of control over, or responsibility for, plan assets.
In addition, fiduciaries of employee benefit plans subject to Title I of
ERISA, as well as certain plans or other retirement arrangements not subject to
ERISA but which are subject to Section 4975 of the Code (such as individual
retirement accounts and Keogh plans covering only a sole proprietor or partners)
or any entity, including an insurance company general account whose underlying
assets include plan assets by reason of a plan or account investing in such
entity (collectively, "Plans(s)"), should consult with their legal counsel to
determine whether an investment in the Securities will cause the assets of the
Trust Fund to be considered plan assets pursuant to the plan asset regulations
set forth at 29 CFR ss.2510.3-101 (the "Regulation"), thereby subjecting the
Plan to the prohibited transaction rules with respect to the Trust Fund and the
Trustee, or any entities providing services with respect to the operation of the
Trust, to the fiduciary investment standards of ERISA, or cause the excise tax
provisions of Section 4975 of the Code to apply to the Trust Fund, unless a
statutory or regulatory exception or an administrative exemption granted by the
Department of Labor ("DOL") applies to the purchase, sale, transfer or holding
of the Securities.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of either interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee benefit
plan or other retirement arrangement (including individual retirement accounts
and annuities, Keogh plans and collective investment funds in which such plans,
accounts or arrangements are invested) subject to provisions of ERISA or the
Code, may result in prohibited transactions, within the meaning of ERISA and the
Code. Unless otherwise specified in the related Prospectus Supplement, the
transfer of Securities of such a class will not be registered unless the
transferee (i) represents that it is not, and is not purchasing on behalf of,
any such plan, account or arrangement or (ii) provides an opinion of counsel
satisfactory to the Trustee and the Depositor that the purchase of Securities of
such a class by or on behalf of such plan, account or arrangement is permissible
under applicable law and will not subject the Trustee, the Master Servicer or
the Depositor to any obligation or liability in addition to those undertaken in
the Agreements.
The Regulation contains rules for determining what constitutes the assets
of a Plan. The Regulation provides that, as a general rule, the underlying
assets and properties of corporations, partnerships, trusts and certain other
entities in which a Plan makes an investment in an "equity interest" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the Regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Trust Fund Assets and any other
assets held by the Trust Fund. In such an event, persons providing services with
respect to the operation of the Trust Fund may be parties in interest, subject
to the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA and of Section 4975 of
the Code, with respect to transactions involving such assets unless such
transactions are subject to a statutory or regulatory exception or an
administrative exemption.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be "equity interests" under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund. However, without regard to whether the Notes are treated as an equity
interest for such purposes, the purchase, holding or transfer of Notes by or on
behalf of a Plan could be considered a prohibited transaction if the Depositor
or the Trustee or any of their respective affiliates is, or becomes, a party in
interest or disqualified person with respect to such Plan.
Another such exception applies if the class of equity interests in question
is: (i) "widely held" (held by 100 or more investors who are independent of the
Depositor and each other); (ii) freely transferable; and (iii) sold as part of
an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ("Publicly Offered
Securities"). In addition, the regulation provides that if at all times more
than 75% of the value of all classes of equity interests in the Depositor or the
Trust Fund are held by investors other than benefit plan investors (which is
defined as including both Plans and government plans), the investing Plan's
assets will not include any of the underlying assets of the Depositor or the
Trust Fund.
The DOL has granted to certain underwriters and/or placement agents
individual prohibited transaction exemptions which may be applicable to avoid
certain of the prohibited transactions rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale in the secondary market
by Plans of pass-through certificates representing a beneficial undivided
ownership interest in the assets of a trust that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
exemption which may be applicable to the Certificates.
In addition, one or more other prohibited transaction exemptions issued by
the DOL may be available to a Plan investing in Securities, depending in part
upon the type of Plan fiduciary making the decision to acquire the Securities
and the circumstances under which such decision is made, including but not
limited to: DOL Prohibited Transaction Exemption ("PTE") 84-14 (involving
transactions determined by "qualified professional asset managers"); PTE 91-38
(involving bank collective investment funds); PTE 90-1 (involving insurance
company pooled separate accounts); PTE 95-60 (involving insurance company
general accounts); and PTE 96-23 (involving transactions determined by "in-house
asset managers"). However, even if the conditions specified in any of these
exemptions are met, the scope of the relief provided might or might not cover
all acts which might be construed as prohibited transactions.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, and the potential consequences to
their specific circumstances, prior to making an investment in the Securities.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment prudence and diversification, an investment in
the Securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each Series of Securities will specify which,
if any, of the classes of Securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of Securities that qualify as "mortgage related
securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts, and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacted
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities",
such securities will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991 deadline. SMMEA provides,
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in
securities, or require the sale or other disposition of securities, so long as
such contractual commitment was made or such securities were acquired prior to
the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage related
securities" without limitations as to the percentage of their assets represented
thereby, federal credit unions may invest in mortgage related securities, and
national banks may purchase securities for their own account without regard to
the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ("NCUA") Letter to Credit
Unions No. 96, as modified by Letter to Credit Unions No. 108, which includes
guidelines to assist federal credit unions in making investment decisions for
mortgage related securities and the NCUA's regulation 'Investment and Deposit
Activities' (12 C.F.R. Part 703), which sets forth certain restrictions on
investment by federal credit unions in mortgage related securities (in each case
whether or not the class of Securities under consideration for purchase
constituted a "mortgage related security").
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities," which are
"high-risk mortgage securities" as defined in the Policy Statement. According to
the Policy Statement, such "high-risk mortgage securities" include securities
such as Securities not entitled to distributions allocated to principal or
interest, or Subordinated Securities. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security," and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the Securities constitute legal investments for such
investors.
METHOD OF DISTRIBUTION
Securities are being offered hereby in Series through one or more of the
methods described below. The applicable Prospectus Supplement for each Series
will describe the method of offering being utilized for that Series and will
state the public offering or purchase price of each class of Securities of such
Series, or the method by which such price is to be determined, and the net
proceeds to the Seller from such sale.
The Securities will be offered through the following methods from time to
time and offerings may be made concurrently through more than one of these
methods or an offering of a particular Series of Securities may be made through
a combination of two or more of these methods:
1. By negotiated firm commitment underwriting and public re-offering
by underwriters specified in the applicable Prospectus Supplement;
2. By placements by the Depositor with investors through dealers; and
3. By direct placements by the Depositor with investors.
If underwriters are used in a sale of any Securities, such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. Firm commitment underwriting and
public reoffering by underwriters may be done through underwriting syndicates or
through one or more firms acting alone. The specific managing underwriter or
underwriters, if any, with respect to the offer and sale of a particular Series
of Securities will be set forth on the cover of the Prospectus Supplement
applicable to such Series and the members of the underwriting syndicate, if any,
will be named in such Prospectus Supplement. The Prospectus Supplement will
describe any discounts and commissions to be allowed or paid by the Depositor to
the underwriters, any other items constituting underwriting compensation and any
discounts and commissions to be allowed or paid to the dealers. The obligations
of the underwriters will be subject to certain conditions precedent. The
underwriters with respect to a sale of any class of Securities will be obligated
to purchase all such Securities if any are purchased. The Depositor, and, if
specified in the applicable Prospectus Supplement, Norwest Mortgage, will
indemnify the applicable underwriters against certain civil liabilities,
including liabilities under the Securities Act.
The Prospectus Supplement with respect to any Series of Securities 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
dealers and/or the Depositor and purchasers of Securities of such Series.
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 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.
If specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor or any affiliate thereof may purchase some or all of
one or more classes of Securities of such Series from the underwriter or
underwriters at a price specified or described in such Prospectus Supplement.
Such purchaser may thereafter from time to time offer and sell, pursuant to this
Prospectus, some or all of such Securities so purchased directly, through one or
more underwriters to be designated at the time of the offering of such
Securities or through dealers acting as agent and/or principal. Such offering
may be restricted in the manner specified in such Prospectus Supplement. Such
transactions may be effected at market prices prevailing at the time of sale, at
negotiated prices or at fixed prices. The underwriters and dealers participating
in such purchaser's offering of such Securities may receive compensation in the
form of underwriting discounts or commissions from such purchaser and such
dealers may receive commissions from the investors purchasing such Securities
for whom they may act as agent (which discounts or commissions will not exceed
those customary in those types of transactions involved). Any dealer that
participates in the distribution of such Securities may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any commissions and
discounts received by such dealer and any profit on the resale of such
Securities by such dealer might be deemed to be underwriting discounts and
commissions under the Securities Act.
LEGAL MATTERS
The validity of the Securities of each Series, including certain federal
income tax consequences with respect thereto, will be passed upon for the
Depositor by Stroock & Stroock & Lavan LLP, New York, New York.
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.
RATING
It is a condition to the issuance of the Securities of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies (each, a "Rating Agency") specified in the related
Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Trust Fund Assets and any credit enhancement with respect to such
class and will reflect such Rating Agency's assessment solely of the likelihood
that holders of a class of Securities of such class will receive payments to
which such Securityholders are entitled under the related Agreement. Such rating
will not constitute an assessment of the likelihood that principal prepayments
on the related Loans will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood of
early optional termination of the Series of Securities. Such rating should not
be deemed a recommendation to purchase, hold or sell Securities, inasmuch as it
does not address market price or suitability for a particular investor. Each
security rating should be evaluated independently of any other security rating.
Such rating will not address the possibility that prepayment at higher or lower
rates than anticipated by an investor may cause such investor to experience a
lower than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn among other
reasons, because of an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
<PAGE>
INDEX OF DEFINED TERMS
Accretion Directed.................................39
Accrual Class......................................40
Accrual Securities.................................35
Advance............................................10
Agreement..........................................21
ALTA...............................................32
APR................................................23
ARM................................................90
Asset Conservation Act.............................72
Available Funds....................................35
Balloon Loans......................................18
balloon payment....................................22
Bankruptcy Code.....................................9
Belgian Cooperative................................45
beneficial owner...................................44
Book-Entry Securities..............................43
Buydown Fund.......................................22
Buydown Loans......................................22
Calculation Agent..................................40
Capitalized Interest Account.......................24
CEDEL..............................................43
CEDEL Participants.................................45
CERCLA.........................................15, 71
Certificates.....................................1, 5
Class Security Balance.............................35
Cleanup Costs......................................71
Closed End Second Loans.........................6, 26
Code...............................................77
COFI Securities....................................42
Commission..........................................3
Companion Class................................39, 40
Component Securities...............................39
Cooperative Loans..................................22
Cooperatives.......................................22
Correspondent......................................31
Cut-off Date....................................5, 20
Cut-off Date Principal Balance.....................34
Dealer.............................................31
Debt Securities....................................78
debt-to-income ratio...............................30
Definitive Security................................44
Depositor.......................................1, 25
Detailed Description...............................21
Disqualified Organization..........................87
Distribution Date...................................7
DOL................................................98
DTC............................................20, 43
Eleventh District..................................42
EPA................................................71
ERISA..........................................12, 97
Euroclear..........................................44
Euroclear Participants............................45
Euroclear Operator.................................45
European Depositaries..............................44
Event of Default...................................63
Exchange Act........................................4
FDIC...............................................55
Federal Tax Counsel................................77
FEMA...............................................31
FHA................................................10
FHLBB..............................................72
FHLBSF.............................................42
FHLMC..............................................32
Financial Intermediary.............................44
Fixed Rate Class...................................40
Floating Rate Class................................40
FNMA...............................................32
foreign investors..................................91
Funding Period.....................................17
Garn Act...........................................72
Holder.............................................77
Indenture..........................................33
Indenture Trustee...................................5
Insurance Proceeds.................................56
Insured Expenses...................................56
Interest Only Class................................40
Interest Rate......................................20
Inverse Floating Rate Class........................40
IRS................................................95
L/C Bank........................................9, 47
L/C Percentage.....................................47
Liquidation Expenses...............................56
Liquidation Proceeds...............................56
Loan Rate..........................................22
Loans...............................................1
lockout periods....................................22
Master Servicer.....................................5
Master Servicing Fee...............................62
Moody's............................................49
Morgan.............................................45
Mortgage...........................................54
Multiple Variable Rate Debt Security...............81
National Cost of Funds Index.......................42
NCUA..............................................100
Norwest ABS.........................................5
Norwest ABS Agreement..............................23
Norwest ABS Issuer...............................6, 7
Norwest ABS Servicer.........................6, 7, 23
Norwest ABS Trustee..........................6, 7, 23
Norwest Bank....................................5, 25
Norwest Funding....................................25
Norwest Mortgage................................1, 25
Noteholders.........................................5
Notes............................................1, 5
Notional Amount Securities........................39
objective rate.....................................81
OID................................................78
OID Regulations....................................78
OTS............................................42, 72
PAC................................................39
Participants.......................................44
Pass-Through Securities........................11, 88
Pay-Through Security...............................79
PCBs...............................................71
Percentage Interests...............................63
Permitted Investments..............................48
Planned Principal Class............................39
Plans(s)...........................................98
Policy Statement..................................100
Pool............................................5, 20
Pool Insurance Policy..............................49
Pool Insurer.......................................49
Pooling and Servicing Agreement....................33
Pre-Funded Amount..................................16
Pre-Funding Account.............................5, 17
Prepayment Assumption..............................79
Prepayment Interest Shortfalls......................8
Presumed Single Qualified Floating Rate............80
Presumed Single Variable Rate......................81
Primary Mortgage Insurance Policy..................22
Prime Rate.........................................43
Principal Only Class...............................40
Principal Prepayments..............................36
Properties......................................6, 22
PTE................................................99
Publicly Offered Securities........................99
Purchase Price.....................................33
qualified floating rate............................80
qualified inverse floating rate....................81
Rating Agency.................................12, 101
Record Date........................................34
Regular Interest Securities........................78
Regulation.........................................98
Relevant Depositary................................44
Relief Act.........................................70
REMIC.......................................2, 11, 78
REMIC Regulations..................................83
REMIC Securities...................................83
Reserve Account.................................9, 35
Residual Interest Security.........................85
Retained Interest..................................34
Riegle Act.........................................18
Rules..............................................44
Sale and Servicing Agreement.......................20
Scheduled Amortization Class.......................39
Securities.......................................1, 5
Securities Act......................................3
Security Account...................................55
Security Owners................................20, 43
Security Register..................................34
Securityholders.................................1, 44
Seller..........................................1, 20
Senior Securities...............................7, 47
Sequential Pay Class...............................39
Series..............................................1
Single Variable Rate Debt Security.................81
SMMEA..........................................12, 99
Statewide..........................................31
Strip Class........................................39
Subordinated Securities.............................7
Subprime Loans..................................6, 26
Subsequent Loans...................................17
Sub-Servicers......................................20
Sub-Servicing Agreement............................57
Superliens.........................................71
Support Class......................................39
T.O.P. Loans.......................................32
TAC................................................40
Targeted Amortization Class........................40
Terms and Conditions...............................45
Tiered REMICs......................................84
TIN................................................90
Title I Loans...............................6, 26, 31
Title I Program....................................59
Title I Sub-Servicing Agreement....................59
Title V............................................73
Trust Agreement................................21, 33
Trust Fund..........................................1
Trust Fund Assets............................1, 5, 20
Trustee.........................................5, 33
UCC................................................68
Variable Rate Class................................40
Variable Rate Debt Security........................80
Variable Rate Pass-Through Securities..............89
V-IT...............................................29
Window Period......................................73
Window Period Loans................................72
Window Period States...............................72
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE ANY
OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE OR AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVER OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOT ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR RESPECTIVE DATES. TABLE OF
CONTENTS PAGE
PROSPECTUS SUPPLEMENT
PROSPECTUS
Prospectus Supplement..................................3
Available Information..................................3
Additional Detailed Information........................4
Incorporation of Certain Documents by Reference........4
Summary of Terms.......................................5
Risk Factors..........................................13
The Trust Fund........................................20
Use of Proceeds.......................................25
The Depositor.........................................25
Loan Programs.........................................26
Underwriting Criteria.................................28
Description of the Securities.........................33
Credit Enhancement....................................46
Yield, Maturity and Prepayment Considerations.........51
The Agreements........................................53
Certain Legal Aspects of the Loans....................67
Federal Income Tax Consequences.......................77
State Tax Considerations..............................97
ERISA Considerations..................................97
Legal Investment......................................99
Legal Matters........................................101
Financial Information................................101
Rating...............................................101
Index of Defined Terms...............................103
$-------------
_____________ [HOME
EQUITY LOAN TRUST] 1997-__
DIRECTORS ASSET CONDUIT CORPORATION
DEPOSITOR
NORWEST MORTGAGE, INC.
SELLER
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
MASTER SERVICER
ASSET BACKED CERTIFICATES,
SERIES 1997-__
PROSPECTUS SUPPLEMENT
-------- , ----
<PAGE>
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
registration fees are estimated.
SEC Registration Fee.......................................... $303.04
Legal Fees and Expenses....................................... *
Accounting Fees and Expenses.................................. *
Trustee's Fees and Expenses................................... *
(including counsel fees)..................................... *
Printing and Engraving Fees................................... *
Rating Agency Fees............................................ *
Miscellaneous................................................. *
Total.........................................................$*
...........................
* To be completed by amendment.
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 Directors Asset Conduit Corporation 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 provide either that the Registrant and the partners, directors,
officers, employees and agents of the Registrant, or that the Master Servicer
and the partners, directors, officers, employees and agents of the Master
Servicer, will be entitled to indemnification by the Trust Estate and will be
held harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Pooling and Servicing Agreement, the Indenture
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.
ITEM 16. EXHIBITS.
(a) FINANCIAL STATEMENTS:
NONE.
(b) EXHIBITS:
*1.1 --Form of Underwriting Agreement.
3.1 --Certificate of Incorporation of Directors Asset Conduit
Corporation.
3.2 --By-Laws of Directors Asset Conduit Corporation.
*4.1 --Form of Indenture.
*4.2 --Form of Pooling and Servicing Agreement.
*4.3 --Form of Purchase Agreement.
*4.4 --Form of Trust Agreement.
*5.1 --Opinion of Stroock & Stroock & Lavan LLP
with respect to the securities being registered.
*8.1 --Opinion of Stroock & Stroock & Lavan LLP with
respect to tax matters (included as part
of Exhibit 5.1).
*10.1 --Form of Sale and Servicing Agreement.
*23.1 --Consent of Stroock & Stroock & Lavan LLP (included as
part of Exhibit 5.1).
24.1 --Powers of Attorney of Directors and
Officers of Issuer (included on signature page).
*25.1 --Statement of Eligibility and Qualification of
Trustee (Form T-1) (Bound Separately).
- ---------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) UNDERTAKING PURSUANT TO RULE 415.
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(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 to such information 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; and
(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) AS TO DOCUMENTS SUBSEQUENTLY FILED THAT ARE INCORPORATED BY
REFERENCE.
The undersigned 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 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed 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 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, 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 by such 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 Securities Act of 1933 and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 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 Edison, State of New Jersey on the 31st day of
July 1997.
By: /S/ LAWRENCE D. RUBENSTEIN
Name: Lawrence D. Rubenstein
Title: Vice President and General Counsel
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen D. Morrison, James B. Svinth, Robert
Gorsche and Lawrence D. Rubenstein, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for and in his name, place and stead, in any and all capacities
to sign any or all amendments (including post-effective amendments) to this
Registration Statement and any or all other documents in connection therewith,
and to file the same, with all exhibits thereto, 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 might or could be done in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Form S-3
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
/S/
- ----------------------- President, Secretary, Director July 31, 1997
Stephen D Morrison Chief Executive Officer
/S/
- ----------------------- Executive Vice President and July 31, 1997
Robert Chapman Financial Officer
/S/
- ------------------------ Executive Vice President July 31, 1997
James B. Svinth and Director
/S/
- ------------------------ Director July 31, 1997
Robert Gorsche
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
NO. NO.
*1.1 Form of Underwriting Agreement..............................
*3.1 Certificate of Incorporation of Directors
Asset Conduit Corporation...................................
*3.2 By-Laws of Directors Asset Conduit Corporation..............
*4.1 Form of Indenture...........................................
*4.2 Form of Pooling and Servicing Agreement.....................
*4.3 Form of Loan Purchase Agreement.............................
*4.4 Form of Trust Agreement.....................................
*5.1 Opinion of Stroock & Stroock & Lavan LLP
with respect to the securities being
registered..................................................
*8.1 Opinion of Stroock & Stroock & Lavan LLP
with respect to tax matters (included
as part of Exhibit 5.1).....................................
*10.1 Form of Sale and Servicing Agreement........................
*23.1 Consent of Stroock & Stroock & Lavan LLP
(included as part of Exhibit 5.1)...........................
24.1 Powers of Attorney of Directors and
Officers of Issuer (included on
signature page).............................................
*25.1 Statement of Eligibility and Qualification
of Trustee (Form T-1)(Bound Separately).....................
- ------
* To be filed by amendment
