<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 24, 1998) [LOGO OF NORWEST
APPEARS HERE]
$219,697,000 (APPROXIMATE)
NORWEST ASSET ACCEPTANCE CORPORATION
(NAAC SM)
DEPOSITOR
ASSET BACKED CERTIFICATES, SERIES 1998-HE1
DISTRIBUTIONS PAYABLE MONTHLY, COMMENCING IN MAY 1998
NORWEST MORTGAGE, INC.
SELLER AND SERVICER
-------------------
The Series 1998-HE1 Asset Backed Certificates will consist of the Class A
Certificates and the Class R Certificates (the "Residual Certificates"). Only
the Class A Certificates are offered hereby (the "Offered Certificates"). Dis-
tributions to Certificateholders of principal and interest 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 May 1998.
Interest will be passed through on each Distribution Date based on the Class
Certificate Principal Balance of the Offered Certificates at the Pass-Through
Rate, subject to the limitations described herein.
(Continued on next page)
-------------------
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR,
NORWEST MORTGAGE, THE CERTIFICATE ADMINISTRATOR, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE CERTIFICATES NOR THE HOME EQUITY LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY.
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 Amount on each Distribution Date pursuant to
the terms of an irrevocable certificate guaranty insurance policy (the "Certif-
icate Insurance Policy") to be issued by Ambac Assurance Corporation ("Ambac"
or the "Certificate Insurer").
[LOGO OF AMBAC APPEARS HERE]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Initial Class
Certificate Principal Pass-Through Underwriting Proceeds to
Class Designation Balance (1) Rate Price to Public Discount Depositor(2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A................. $219,697,000 (3)(4) 100.000% 0.265% 99.735%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Approximate. Subject to permitted variance of plus or minus 5%.
(2) Before deduction of expenses payable by the Depositor estimated to be
$435,000.
(3) The Pass-Through Rate will be calculated by reference to the London
interbank offered rate for one-month U.S. dollar deposits ("One-Month LI-
BOR") subject to the limitations described herein. See "Summary of Terms--
Distributions--Interest" herein.
(4) For each Accrual Period with respect to any Distribution Date after the Op-
tional Termination Date, the Pass-Through Margin will increase as described
herein.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" BEGINNING ON PAGE S-12 HEREIN AND ON PAGE 13 IN THE ACCOMPANYING PRO-
SPECTUS.
The Offered Certificates are offered by the Underwriter, when, as and if de-
livered to and accepted by the Underwriter and subject to certain other condi-
tions. The Underwriter reserves the right to withdraw, cancel or modify such
offer and 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 through the fa-
cilities of The Depository Trust Company, Cedel Bank, societe anonyme and the
Euroclear System on or about April 30, 1998 (the "Closing Date"). The Offered
Certificates will be offered in Europe and the United States of America.
-------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
APRIL 24, 1998
<PAGE>
(Continued from previous page)
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 April 30, 1998, among Norwest Asset Acceptance Corpora-
tion, as depositor (the "Depositor"), Norwest Mortgage, Inc. ("Norwest Mort-
gage"), as seller (in such capacity, the "Seller") and servicer (in such capac-
ity, the "Servicer"), Norwest Bank Minnesota, National Association ("Norwest
Bank"), as certificate administrator (in such capacity, the "Certificate Admin-
istrator") and First Union National Bank, as trustee (the "Trustee"). The Trust
Fund will consist of a pool (the "Mortgage Pool") of fixed- and adjustable-
rate, sub-prime home equity loans with original terms to stated maturity of ei-
ther 15 or 30 years (the "Home Equity Loans") secured by first liens on one- to
four-family residential properties (the "Mortgaged Properties") and certain
other assets described herein. See "The Mortgage Pool" herein.
The yield to investors on the Offered Certificates sold at prices other than
par may be extremely sensitive to the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the Home Eq-
uity Loans, which may vary over time. The yield to investors will also be sen-
sitive to the level of One-Month LIBOR, Six-Month LIBOR and CMT. The yield to
investors may be adversely affected by the Pass-Through Rate being subject to
the Available Funds Cap. See "Yield, Maturity and Prepayment Considerations"
and "Risk Factors" herein and in the Prospectus.
The Trust Fund is subject to optional termination under the limited circum-
stances described herein. Any such optional termination will result in an early
retirement of the Certificates. See "Description of the Certificates--Optional
Termination" herein.
An election will be made to treat the Trust Fund as a real estate mortgage
investment conduit (the "REMIC") for federal income tax purposes. As described
more fully herein and in the Prospectus, the Offered Certificates will consti-
tute "regular interests" in a REMIC. See "Federal Income Tax Consequences"
herein and in the Prospectus.
It is a condition to the issuance of the Offered Certificates that they be
rated "Aaa" by Moody's Investors Service, Inc. ("Moody's") and "AAA" by Stan-
dard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.
("S&P"). The Certificate Insurance Policy will not cover the payment of, and
the ratings assigned to the Offered Certificates do not address the likelihood
of payment of, any Basis Risk Carryover Amount.
The Underwriter intends to make a secondary market in the Offered Certifi-
cates but has 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.
-------------------
The Certificates offered by this Prospectus Supplement constitute a separate
Series of Asset Backed Securities being offered by the Depositor pursuant to
its Prospectus dated April 24, 1998 (the "Prospectus"), of which this Prospec-
tus Supplement is a part and which accompanies this Prospectus Supplement. The
Prospectus contains important information regarding this offering which is not
contained herein, and prospective purchasers are urged to read both this Pro-
spectus Supplement and the Prospectus in full. Sales of the Offered Certifi-
cates may not be consummated unless the prospective purchaser has received both
this Prospectus Supplement and the Prospectus.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CERTIFICATES OF-
FERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF OF-
FERED CERTIFICATES TO COVER SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVI-
TIES, SEE "METHOD OF DISTRIBUTION" HEREIN.
-------------------
UNTIL THE EXPIRATION OF NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLE-
MENT, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PRO-
SPECTUS 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.
S-2
<PAGE>
SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the de-
tailed 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-50 of this Prospectus Supple-
ment and on page 100 of the Prospectus for the location of the definitions of
certain capitalized terms.
Offered Certifi-
cates................. Series 1998-HE1 Asset Backed Certificates will be is-
sued pursuant to a Pooling and Servicing Agreement,
dated as of April 30, 1998 (the "Pooling and Servicing
Agreement"), among the Depositor, the Servicer, the
Seller, the Certificate Administrator and the Trustee.
The certificates offered hereby (the "Offered Certifi-
cates") will be issued as the following Class (a
"Class") with a Pass-Through Rate and Initial Class
Certificate Principal Balance as follows:
<TABLE>
<CAPTION>
Initial Class
Pass-Through Certificate Principal
Class Rate Balance (Approximate)
---------------------------- ------------ ---------------------
<S> <C> <C>
Class A Certificates........ (1) $219,697,000
</TABLE>
(1) For each Accrual Period, the Pass-Through Rate will be
equal to the lesser of (x) with respect to any
Distribution Date which occurs on or prior to the
Optional Termination Date, One-Month LIBOR plus 0.18%
per annum and for any Distribution Date thereafter, One-
Month LIBOR plus 0.36% per annum and (y) the Available
Funds Cap. The Pass-Through Rate calculated pursuant to
clause (x) above shall constitute the "Formula Pass-
Through Rate."
The Initial Class Certificate Principal Balance of the
Offered Certificates will be subject to a permitted
variance of plus or minus 5%.
Other Certificates.... In addition to the Offered Certificates, the Trust
Fund will issue, pursuant to the Pooling and Servicing
Agreement, a single residual Class of Certificates
(the "Class R Certificates" or the "Residual Certifi-
cates"). The Offered Certificates and the Residual
Certificates will, in the aggregate, represent the en-
tire beneficial ownership interest in a trust fund
(the "Trust Fund"). The Offered Certificates and the
Class R Certificates are collectively herein referred
to as the "Certificates." Only the Offered Certifi-
cates are offered hereby.
Denominations......... The Offered Certificates will be issued in minimum de-
nominations of $25,000 and integral multiples of
$1,000 in excess thereof in book-entry form. The Of-
fered Certificates are not intended to be directly or
indirectly held or beneficially owned in amounts lower
than such minimum denominations. See "-- Book-Entry
Registration" herein.
The Depositor......... Norwest Asset Acceptance Corporation (the "Deposi-
tor"), a Delaware corporation that is a direct, wholly
owned, limited purpose finance subsidiary of Norwest
Mortgage, Inc. See "The Depositor" in the Prospectus.
Seller and Servicer... Norwest Mortgage, Inc. ("Norwest Mortgage," the
"Servicer" or the "Seller" as applicable), a Califor-
nia corporation that is an indirect, wholly owned sub-
sidiary of Norwest Corporation. See "Servicing of the
Home Equity Loans -- The Servicer" herein and "Norwest
Mortgage" in the Prospectus.
Certificate Adminis-
trator................ Norwest Bank Minnesota, National Association ("Norwest
Bank" or the "Certificate Administrator"), a national
banking association that is a direct, wholly owned
subsidiary of Norwest Corporation. See "Description of
the Certificates -- The Certificate Administrator"
herein and "Norwest Bank" in the Prospectus.
S-3
<PAGE>
Trustee............... First Union National Bank, a national banking associa-
tion, not in its individual capacity but solely as
trustee on behalf of the Certificateholders and the
Certificate Insurer (the "Trustee").
Certificate Insurer... Ambac Assurance Corporation, a Wisconsin-domiciled
stock insurance corporation (the "Certificate Insur-
er"). See "The Certificate Insurance Policy and the
Certificate Insurer" herein.
Cut-off Date.......... The close of business on April 1, 1998 (the "Cut-off
Date").
Due Period............ With respect to any Distribution Date, the "Due Peri-
od" shall be the period beginning on the opening of
business on the 2nd day of the calendar month preced-
ing the calendar month in which such Distribution Date
occurs and ending on the close of business on the 1st
day of the month in which such Distribution Date oc-
curs.
Prepayment Period..... With respect to any Distribution Date, the period be-
ginning on the opening of business on the Determina-
tion Date in the month preceding the month in which
the related Distribution Date occurs (or, in the case
of the first Distribution Date, beginning on the Cut-
off Date) and ending on the day preceding the Determi-
nation Date in the month in which such Distribution
Date occurs.
Closing Date.......... On or about April 30, 1998 (the "Closing Date").
The Home Equity
Loans................. General. The Trust Fund will consist of a pool (the
"Mortgage Pool") of fixed- and adjustable-rate, sub-
prime home equity loans (the "Home Equity Loans") se-
cured by first liens on one- to four-family residen-
tial properties (the "Mortgaged Properties") and cer-
tain other assets described herein. On or before the
Closing Date, the Home Equity Loans will have been ac-
quired by the Depositor from the Seller. The Home Eq-
uity Loans will have been originated by Norwest Mort-
gage or acquired by Norwest Mortgage, or an affiliate
of Norwest Mortgage, from various other entities (each
such other entity, a "Norwest Mortgage Correspon-
dent"), which either originated the Home Equity Loans
or acquired the Home Equity Loans pursuant to mortgage
loan purchase programs operated by the Norwest Mort-
gage Correspondents. None of the Norwest Mortgage Cor-
respondents is an affiliate of Norwest Mortgage. All
of the Home Equity Loans were originated in conformity
with the underwriting standards described in the Pro-
spectus under the heading "Loan Programs -- Underwrit-
ing Standards -- First Lien Home Equity Loans" (the
"Underwriting Standards"). The aggregate unpaid prin-
cipal balance of the Home Equity Loans as of the Cut-
off Date is referred to herein as the "Cut-off Date
Principal Balance." Approximately 13.69% of the Home
Equity Loans in the Mortgage Pool (by Principal Bal-
ance as of the Cut-off Date) accrue interest at a
fixed rate for the life of the Home Equity Loan (the
"Fixed Rate Loans"). The remaining 86.31% of Home Eq-
uity Loans in the Mortgage Pool (by Principal Balance
as of the Cut-off Date) have interest rates which are
or will become adjustable after a period of time (the
"ARMs").
S-4
<PAGE>
The Home Equity Loans are expected to have the further
specifications set forth in the following table and
under the heading "The Mortgage Pool" herein.
- --------------------------------------------------------------------------------
SELECTED HOME EQUITY LOAN DATA
(AS OF THE CUT-OFF DATE)
<TABLE>
<S> <C> <C>
Number of Home Equity Loans: 1,977
Cut-off Date Principal Balance/(1)/: $219,697,289
Range of Unpaid Principal Balances/(1)/: $8,889 to $699,327
Average Unpaid Principal Balance/(1)/: $111,127
Range of Original Principal Balances/(1)/: $9,000 to $700,000
Average Original Principal Balance/(1)/: $111,415
Range of Mortgage Rates: 5.000% to 13.375%
Weighted Average Mortgage Rate/(1)/: 9.471%
Range of Remaining Terms to Stated Maturity (months): 173 to 360
Weighted Average Remaining Term to Stated Maturity
(months)/(1)/: 353
Range of Original Terms to Stated Maturity (months): 180 to 360
Weighted Average Original Term to Stated Maturity
(months)/(1)/: 357
Range of Original Loan-to-Value Ratios: 14.00% to 91.85%
Weighted Average Original Loan-to-Value Ratio/(1)/: 77.34%
Geographic Concentration of Mortgaged Properties Securing
Home Equity Loans in Excess of 5% of the Cut-off Date
Principal Balance/(1)/: California 14.97%
Michigan 7.37%
New Jersey 5.25%
Maximum Five-Digit Zip Code Concentration/(1)/: 0.41%
With respect to the ARMs:
Range of Gross Margins: 3.750% to 8.875%
Weighted Average of Gross Margins/(1)/: 6.400%
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
PRINCIPAL
LOAN TYPES BALANCE
- ---------- -------------
<S> <C>
2/28 LIBOR Loans: 46.18%
One-Year CMT Loans: 26.93
Fixed Rate 30 Year Loans: 12.02
3/1 CMT Loans: 9.10
Six-Month LIBOR Loans: 4.10
Fixed Rate 15 Year Loans: 1.48
Balloon Loans: 0.19
------
Total: 100.00%
======
</TABLE>
- -------------------
/(1)/ Approximate.
- --------------------------------------------------------------------------------
Changes to Mortgage Pool. Home Equity Loans may be re-
moved from the Mortgage Pool, or a substitution may be
made for certain Home Equity Loans, in advance of the
issuance of the Certificates. Any of such Home Equity
Loans may be excluded from the Trust Fund (i) as a re-
sult of a Principal Prepayment in full thereof or (ii)
if, as a result of delinquencies or otherwise, the
Seller otherwise deems such exclusion necessary or de-
sirable. In either event, other Home Equity Loans may
be included in the Trust Fund. This may result in
changes in certain of the Mortgage Pool
S-5
<PAGE>
characteristics described above and elsewhere in this
Prospectus Supplement. In the event that any of the
characteristics as of the Cut-off Date of the Home Eq-
uity Loans that constitute the Trust Fund on the date
of initial issuance of the Certificates vary materi-
ally from those described herein, revised information
regarding the Home Equity Loans will be made available
to purchasers of the Offered Certificates on or before
such issuance date, and a Current Report on Form 8-K
containing such information will be filed with the Se-
curities and Exchange Commission within 15 days fol-
lowing such issuance date. See "The Mortgage Pool"
herein.
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 May 1998 (each, a "Distribution Date").
Distributions on each Distribution Date will be made
to Certificateholders of record (which will be Cede,
as nominee for DTC) as of the close of business on the
Business Day preceding such Distribution Date (each, a
"Record Date"). Distributions on the Offered Certifi-
cates on each Distribution Date will be based on
Available Funds and will be made in accordance with
the priorities described under "Description of the
Certificates--Allocation of Available Funds" herein.
The rights of the Residual Certificateholders to re-
ceive distributions with respect to the Home Equity
Loans are subordinate to the rights of the Holders of
Offered Certificates, to the extent described herein.
A. Interest........... On each Distribution Date, to the extent funds (in-
cluding Insured Amounts) are available therefor, in-
terest will be paid on the Offered Certificates in an
amount (the "Interest Distribution Amount") equal to
the sum of (i) interest accrued during the related Ac-
crual Period at the Pass-Through Rate on the Class
Certificate Principal Balance of the Offered Certifi-
cates, (ii) the Preference Amount as it relates to in-
terest previously paid on the Offered Certificates
prior to such Distribution Date that remains unpaid as
of such Distribution Date and (iii) the Carry-Forward
Amount, if any, with respect to the Offered Certifi-
cates; provided, however, that the Interest Distribu-
tion Amount for any Distribution Date will be reduced
by any Relief Act Shortfalls during the related Due
Period. See "Description of the Certificates -- Allo-
cation of Available Funds" herein.
With respect to each Distribution Date, the "Accrual
Period" for the Offered Certificates will be the pe-
riod 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 Distribution Date. Interest on the Offered
Certificates will be calculated on the basis of a 360-
day year and the actual number of days elapsed in the
applicable Accrual Period (actual/360).
The Pass-Through Rate for the Offered Certificates
will be subject to the Available Funds Cap.
With respect to any Distribution Date, the "Available
Funds Cap" is a per annum rate equal to the fraction,
expressed as a percentage, obtained by dividing (x)
(i) with respect to all Home Equity Loans, the amount
of interest due on the Due Dates relating to such Dis-
tribution Date reduced by (ii) the sum of (a) the Ser-
vicing Fee, the Administration Fee and the Premium
Amount for such Distribution Date and (b) the Avail-
able Funds Adjustment for such Distribution Date by
(y) the product of (i) the Class
S-6
<PAGE>
Certificate Principal Balance of the Offered Certifi-
cates as of the close of business on the first day of
the related Accrual Period and (ii) the actual number
of days elapsed during such Accrual Period divided by
360. On each Distribution Date, holders of the Offered
Certificates will be entitled to receive the sum of
(a) the amount, if any, by which interest calculated
at the Formula Pass-Through Rate for such Distribution
Date exceeds the amount of interest calculated at the
Available Funds Cap for such Distribution Date and (b)
the Basis Risk Carryover Amount for all previous Dis-
tribution Dates not paid on such previous Distribution
Dates, together with interest on such amount at the
Formula Pass-Through Rate applicable to the current
Distribution Date (the "Basis Risk Carryover Amount")
to the extent of funds available therefor after all
other distributions are made on such Distribution Date
other than distributions in respect of the Class R
Certificates as described herein. The Certificate In-
surance Policy will not cover the payment of, and the
ratings assigned to the Offered Certificates do not
address the likelihood of payment of, any Basis Risk
Carryover Amount.
B. Principal.......... On each Distribution Date, to the extent funds (in-
cluding Insured Amounts) are available therefor after
distributions of interest, Holders of the Offered Cer-
tificates 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 Home Equity Loans due during the re-
lated Due Period and received by the Servicer on or
before the day prior to the related Determination
Date, and all unscheduled collections of principal on,
and recoveries of principal and certain other amounts
with respect to, the Home Equity Loans, as described
in more detail herein, received during the related
Prepayment Period (excluding certain amounts received
in respect of scheduled principal on the Home Equity
Loans due after the related Due Date), together with
all Advances in respect of principal on such Home Eq-
uity Loans made by the Servicer on the Business Day
prior to the related Distribution Date (the "Servicer
Advance Date"), (ii) any Subordination Deficit for
such Distribution Date and (iii) an amount necessary
to increase the Subordinated Amount to the Required
Subordinated Amount, if any, and (b) the Subordination
Reduction Amount for such Distribution Date (such dif-
ference, the "Principal Distribution Amount"). See
"Description of the Certificates -- Allocation of
Available Funds" herein.
Final Scheduled Dis-
tribution Date........ The "Final Scheduled Distribution Date" for the Of-
fered Certificates is the Distribution Date occurring
in April 2028, although it is anticipated that the ac-
tual final Distribution Date for the Offered Certifi-
cates will occur significantly earlier than the Final
Scheduled Distribution Date. See "Yield, Maturity and
Prepayment Considerations" herein.
Credit Enhancement.... The credit enhancement provided for the benefit of the
Holders of Offered Certificates consists solely of (a)
excess interest, (b) any overcollateralization and (c)
the Certificate Insurance Policy.
Overcollateralization and Application of Excess
Interest. The weighted average Mortgage Rate for the
Home Equity Loans is generally expected to be higher
than the Pass-Through Rate on the Offered Certifi-
cates, and to the extent that there is
overcollateralization, such Home Equity Loans are ex-
pected to generate still further excess interest rela-
tive to the Pass-Through
S-7
<PAGE>
Rate payable on the Offered Certificates and certain
expenses of the Trust Fund. Any resulting excess in-
terest collections will first be available to cover
certain expenses of the Trust Fund and interest dis-
tributions on the Offered Certificates (subject to the
Available Funds Cap) to the extent necessitated by
losses or delinquencies and the remainder will be ap-
plied to make additional payments of principal to the
Offered Certificates to the extent described herein.
The allocation provisions of the Pooling and Servicing
Agreement result in a limited acceleration of princi-
pal of the Offered Certificates relative to the amor-
tization of the Home Equity Loans. The acceleration of
the payment of principal achieved by the application
of certain excess interest amounts to reduce the Class
Certificate Principal Balance of the Offered Certifi-
cates results in overcollateralization to the extent
the Stated Principal Balance of the Home Equity Loans
exceeds the Class Certificate Principal Balance of the
Offered Certificates. Once the required level of
overcollateralization is reached, and subject to the
provisions described in the next sentence, further ap-
plication of the principal amortization acceleration
feature will cease, unless necessary to maintain the
required level of overcollateralization. The Pooling
and Servicing Agreement provides that, subject to cer-
tain trigger tests, the required level of
overcollateralization may increase or decrease over
time. A decrease in the required level of
overcollateralization would result in a temporary pe-
riod of decelerated amortization of the Offered Cer-
tificates to reduce the actual level of
overcollateralization to its required level. The ac-
tual level of overcollateralization may increase or
decrease over time based upon the required level of
overcollateralization and the performance of the Home
Equity Loans. In addition, the Pooling and Servicing
Agreement provides that the required level of
overcollateralization may be modified, reduced or
eliminated without the consent of any
Certificateholders, but with the consent of the Cer-
tificate Insurer. See "Description of the Certifi-
cates -- Overcollateralization Provisions" herein.
The Certificate Insurance Policy. The Offered Certifi-
cates will have the benefit of an irrevocable certifi-
cate guaranty insurance policy (the "Certificate In-
surance Policy") to be issued by the Certificate In-
surer. 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 on each Distribution Date of the sum of
(i) the Interest Distribution Amount, (ii) any Subor-
dination Deficit, (iii) any Preference Amounts and
(iv) on the Final Scheduled Distribution Date, the
Class Certificate Principal Balance of the Offered
Certificates (such sum, the "Insured Amount"). No pay-
ments in respect of principal will be made under the
Certificate Insurance Policy on any Distribution Date
prior to the Final Scheduled Distribution Date unless
a Subordination Deficit occurs. A payment in respect
of principal will be made under the Certificate Insur-
ance Policy on the Final Scheduled Distribution Date
in the amount of any Class Certificate Principal Bal-
ance outstanding on such date. The effect of the Cer-
tificate Insurance Policy is to guaranty the timely
payment of interest on, and ultimate payment on the
Final Scheduled Distribution Date of the principal
amount of, the Offered Certificates.
S-8
<PAGE>
The Certificate Insurance Policy will not cover the
payment of any Basis Risk Carryover Amount. See "The
Certificate Insurance Policy and the Certificate In-
surer" herein.
Servicing and
Certificate
Administration........ Norwest Mortgage will serve as the Servicer of the
Home Equity Loans under the Pooling and Servicing
Agreement. The Servicer will be responsible for ser-
vicing the Home Equity Loans and will receive from in-
terest collected on the Home Equity Loans a monthly
servicing fee equal to the Pool Stated Principal Bal-
ance as of the preceding Distribution Date multiplied
by one-twelfth of the Servicing Fee Rate (such prod-
uct, the "Servicing Fee"). The Servicer will also be
entitled to retain all Prepayment Interest Excess,
late payment fees, assumption fees, prepayment penal-
ties and other similar charges and all reinvestment
income earned on amounts on deposit in the Collection
Account as additional servicing compensation. See
"Servicing of the Home Equity Loans -- Servicing Com-
pensation and Payment of Expenses" herein.
If any mortgagor is delinquent in the payment of prin-
cipal or interest on a Home Equity Loan in any month,
the Servicer is required to advance such payment (any
such payment, an "Advance") unless the Servicer deter-
mines that the delinquent amount will not be recover-
able from insurance proceeds, liquidation proceeds or
other recoveries on the related Home Equity Loan. The
Trustee may, in certain circumstances, be required to
make an Advance upon the Servicer's default on its ob-
ligation to advance such payments.
When a borrower prepays all or a portion of a Home Eq-
uity Loan between scheduled Due Dates, a Prepayment
Interest Shortfall, as described below under "Servic-
ing of the Home Equity Loans -- Advances" may result.
In order to mitigate the effect of any such shortfall
in interest distributions to Holders of the Offered
Certificates on any Distribution Date, an amount not
in excess of the Servicing Fee otherwise payable to
the Servicer in respect of the Home Equity Loans for
the calendar month preceding such Distribution Date
shall, to the extent of such shortfall, be remitted by
the Servicer to the Trustee for deposit in the Certif-
icate Account on the Servicer Advance Date for distri-
bution to Holders of the Offered Certificates on such
Distribution Date.
Norwest Bank will serve as the Certificate Administra-
tor of the Certificates. The Certificate Administra-
tor's primary responsibilities will be to calculate
amounts distributable on each Class of Certificates
and to prepare periodic remittance and tax reports for
Certificateholders, and will receive from interest
collected on the Home Equity Loans a monthly fee on
each Distribution Date equal to the Pool Stated Prin-
cipal Balance as of the preceding Distribution Date
multiplied by one-twelfth of the Administration Fee
Rate (such product, the "Administration Fee"). See
"Servicing of the Home Equity Loans -- Certificate Ad-
ministration Compensation" herein.
Optional Termina-
tion.................. On any Distribution Date on which the Pool Stated
Principal Balance is less than 10% of the Cut-off Date
Pool Principal Balance (the "Optional Termination
Date"), the Servicer will have the option (but not the
obligation) to purchase, in whole, the Home Equity
Loans and the REO Properties, if any, remaining in the
Trust Fund and thereby effect the early retirement of
all Certificates. See "Description of the Certifi-
cates -- Optional Termination" herein.
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<PAGE>
Optional Purchase of
Defaulted Loans....... The Servicer may, subject to the terms of the Pooling
and Servicing Agreement, purchase from the Trust Fund
any defaulted Loan or any Home Equity Loan as to which
default is reasonably foreseeable. See "Description of
the Certificates -- Optional Purchases" herein.
Special Servicing
Agreements............ The Pooling and Servicing Agreement permits the
Servicer to enter into a special servicing agreement
with an unaffiliated holder of at least a Percentage
Interest of 51% of the Residual Certificates. See "De-
scription of the Certificates -- Special Servicing
Agreements" herein.
Book-Entry Registra-
tion.................. The Offered Certificates will initially be issued in
book-entry form. Persons acquiring beneficial owner-
ship interests in the Offered Certificates (each, a
"Certificate Owner") 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 accor-
dance with the usual rules and operating procedures of
the relevant system. So long as the Offered Certifi-
cates are Book-Entry Certificates, each class of such
Certificates will be evidenced by one or more Certifi-
cates registered in the name of Cede & Co. ("Cede"),
as the nominee of DTC or one of the relevant deposita-
ries (collectively, the "European Depositaries").
Cross-market transfers between persons holding di-
rectly 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 partici-
pating member of DTC. The interests of the Holders of
Offered Certificates will be represented by book en-
tries on the records of DTC and participating members
thereof. No Certificate Owner will be entitled to re-
ceive a definitive certificate representing such per-
son's interest, except in the event that Definitive
Certificates are issued under the limited circum-
stances described in the Prospectus. 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 partici-
pating organizations for so long as such Offered Cer-
tificates are held by DTC. See "Risk Factors -- Conse-
quences of Owning Book-Entry Certificates" and "De-
scription of the Certificates -- Book-Entry Certifi-
cates" herein and Annex I hereto and "Description of
the Securities -- Book-Entry Registration of Securi-
ties" in the Prospectus.
Federal Income Tax
Consequences.......... 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 Certifi-
cates will constitute "regular interests" in the REMIC
and the Residual Certificates will constitute the sole
class of "residual interests" in the REMIC. The Of-
fered Certificates will be treated as debt instruments
of the Trust Fund for federal income tax purposes.
Certificate Owners of the Offered Certificates, in-
cluding Certificate Owners that generally report in-
come on the cash method of accounting, will be re-
quired to include interest on the Offered Certifi-
cates, as applicable, in income in
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<PAGE>
accordance with the accrual method of accounting. 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 any
original issue discount and market discount, the De-
positor intends to assume that there will be Principal
Prepayments on the Home Equity Loans at a rate equal
to 120% Fixed Rate PPC for the Fixed Rate Loans and
100% ARM PPC for the ARMs. No representation is made
as to whether the Home Equity Loans will prepay at
those rates or any other rate. See "Federal Income Tax
Consequences" herein and in the Prospectus.
ERISA Considera-
tions................. Subject to the considerations discussed under "ERISA
Considerations" herein, the Offered Certificates may
be purchased by employee benefit or other retirement
arrangements which are subject to the Employee Retire-
ment Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code. See "ERISA
Considerations" herein and in the Prospectus.
Legal Investment...... The Offered Certificates will constitute "mortgage re-
lated securities" for purposes of the Secondary Mort-
gage Market Enhancement Act of 1984 ("SMMEA") so long
as they are rated in one of the two highest rating
categories by at least one nationally recognized sta-
tistical rating agency. As such, the Offered Certifi-
cates are legal investments for certain entities to
the extent provided in SMMEA. However, there are regu-
latory requirements and considerations applicable to
regulated financial institutions and restrictions on
the ability of such institutions to invest in certain
types of mortgage related securities. Prospective pur-
chasers of the Offered Certificates should consult
with their counsel or the applicable authorities to
determine whether an investment in the Offered Certif-
icates 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 Cer-
tificates that they be rated "Aaa" by Moody's Invest-
ors Service, Inc. ("Moody's"), and "AAA" by Standard &
Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. ("S&P" and, together with Moody's, the
"Rating Agencies"). The security ratings of the Of-
fered 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
rating of the Offered Certificates will depend primar-
ily on the creditworthiness of the Certificate Insur-
er. Any reduction in the rating assigned to the
claims-paying ability of the Certificate Insurer below
the rating initially given to the Offered Certificates
would likely result in a reduction of the rating of
the Offered Certificates. The security ratings do not
address the likelihood or frequency of prepayments on
the Home Equity Loans, the likelihood of the payment
of any Basis Risk Carryover Amount or the anticipated
yields in light of prepayments.
The Depositor has not requested a rating of the Of-
fered 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 respec-
tive ratings assigned by the Rating Agencies. See
"Ratings" herein.
S-11
<PAGE>
RISK FACTORS
Prospective investors should consider, among other things, the following risk
factors (as well as the factors set forth under "Risk Factors" in the Prospec-
tus) in connection with the purchase of the Offered Certificates.
Limited Liquidity. There is currently no secondary market for the Offered
Certificates. The Underwriter currently intends to make a market in the Offered
Certificates, but it is under no obligation to do so. There can be no assurance
that a secondary market will develop, or, if a secondary market does develop,
that it will provide the holders of Offered Certificates with liquidity of in-
vestment or that it will continue for the life of the Offered Certificates.
Limited Operating History. The Seller has been originating sub-prime home eq-
uity loans since August 1995 when it acquired Directors Mortgage Loan Corpora-
tion, which began originating sub-prime home equity loans in June 1994. Prior
to August 1997, the Seller sold substantially all of its home equity loans on a
servicing released basis and, consequently, the Servicer does not have any sig-
nificant historical loss and delinquency data relating to its sub-prime home
equity loan portfolio that may be referred to for purposes of estimating the
future delinquency and loss experience of sub-prime home equity loans similar
to the Home Equity Loans being sold to the Trust.
Servicing Risk. The servicing of sub-prime home equity loans of the type
originated by the Seller requires special skill and diligence. Although the
Servicer has substantial experience in servicing prime home equity loans, the
Servicer has limited experience servicing sub-prime home equity loans and is in
the process of hiring and training additional personnel to service its sub-
prime home equity loan portfolio. Under the terms of the Pooling and Servicing
Agreement, the Servicer will be responsible for the servicing of all the Home
Equity Loans and will directly service all of the Home Equity Loans. Any fail-
ure of the Servicer to adequately service the Home Equity Loans may result in a
higher default rate which may result in accelerated prepayments of the Offered
Certificates.
Underwriting Standards. The Seller's underwriting standards generally are
less stringent than those of the Federal National Mortgage Association ("FNMA")
or the Federal Home Loan Mortgage Corporation ("FHLMC") with respect to a bor-
rower's credit and in certain other respects. The Home Equity Loans originated
or acquired by the Seller or its affiliates will have been made to borrowers
that typically have limited access to traditional mortgage financing for a va-
riety of reasons, such as impaired past credit experience, limited credit his-
tory, insufficient home equity value, or a high level of debt-to-income ratios.
As a result of this approach to underwriting, the Home Equity Loans in the
Mortgage Pool are likely to experience higher rates of delinquencies, defaults
and foreclosures than home equity loans underwritten in a more traditional man-
ner which may result in a higher default rate which may result in accelerated
prepayments of the Offered Certificates.
Overcollateralization Provisions Affect Yield. The operation of the
overcollateralization provisions of the Pooling and Servicing Agreement will
affect the weighted average life of the Offered Certificates and consequently
the yield to maturity of Offered Certificates purchased at a discount or premi-
um. Unless and until the Subordinated Amount equals the Required Subordinated
Amount, Net Monthly Excess Cashflow will be applied as distributions of princi-
pal of the Offered Certificates, thereby reducing the weighted average life
thereof. The actual Subordinated Amount may change from Distribution Date to
Distribution Date producing uneven distributions of Net Monthly Excess
Cashflow. There can be no assurance as to when or whether the 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 Home Equity Loans over the interest required to
pay interest on the Offered Certificates, the premium for the Certificate In-
surance Policy and certain other Trust Fund expenses. Home Equity Loans with
higher Mortgage Rates will contribute more interest to the Net Monthly Excess
Cashflow. Home Equity Loans with higher Mortgage Rates may prepay faster than
Home Equity Loans with relatively lower Mortgage Rates in response to a given
change in market interest rates. Any such disproportionate prepayments of Home
Equity Loans with higher Mortgage Rates may adversely affect the amount of Net
Monthly Excess Cashflow available to make accelerated payments of principal of
the Offered Certificates.
If purchased at a premium or a discount, the yield to maturity on an Offered
Certificate will be affected by the rate at which Net Monthly Excess Cashflow
is distributed in reduction of the Class Certificate Principal
S-12
<PAGE>
Balance of the Offered Certificates. If the actual rate of such Net Monthly Ex-
cess Cashflow distribution is slower than the rate anticipated by an investor
who purchases an Offered Certificate at a discount, the actual yield to such
investor will be lower than such investor's anticipated yield. If the actual
rate of such Net Monthly Excess Cashflow distribution is faster than the rate
anticipated by an investor who purchases an Offered Certificate at a premium,
the actual yield to such investor will be lower than such investor's antici-
pated yield.
The effect of the overcollateralization provisions on the weighted average
life of the Offered Certificates may vary significantly over time. See "Yield,
Maturity and Prepayment Considerations" herein and in the Prospectus.
Risk of Mortgage Rates Reducing the Pass-Through Rate on the Offered
Certificates. The Pass-Through Rate on the Offered Certificates is based upon
(i) One-Month LIBOR which is different from the indices on which the per annum
interest rates (each such rate, a "Mortgage Rate") relating to the Home Equity
Loans are calculated as described herein under "The Mortgage Pool" or (ii) the
weighted average of the Mortgage Rates of the Home Equity Loans, which in the
case of the ARMs are subject to initial rate adjustment caps, periodic rate ad-
justment caps, maximum rate caps and minimum rate floors. Approximately 13.69%
of the Home Equity Loans (by Principal Balance as of the Cut-off Date) accrue
interest at a fixed rate for the life of the Home Equity Loans (the "Fixed Rate
Loans") and approximately 86.31% of the Home Equity Loans (by Principal Balance
as of the Cut-off Date) have interest rates which are or will become adjustable
after a period of time (the "ARMs"), approximately 4.76% of which adjust semi-
annually based upon Six-Month LIBOR (the "Six-Month LIBOR Loans"), approxi-
mately 31.21% of which adjust annually based upon CMT (the "One-Year CMT
Loans"), approximately 53.49% of which provide for a fixed interest rate for a
period of approximately two years following origination and then adjust semi-
annually based upon Six-Month LIBOR (the "2/28 LIBOR Loans") and approximately
10.54% of which provide for a fixed interest rate for a period of approximately
three years following origination and then adjust annually based upon CMT (the
"3/1 CMT Loans"). However, the Pass-Through Rate on the Offered Certificates
adjusts monthly based upon One-Month LIBOR as described under "Description of
the Certificates -- Calculation of One-Month LIBOR" herein, subject to the
Available Funds Cap. Consequently, the interest which becomes due on the Home
Equity Loans (net of the Servicing Fee, the Administration Fee and the Premium
Amount during any Due Period) may not equal the amount of interest that would
accrue at the Formula Pass-Through Rate for the Offered Certificates during the
related Accrual Period.
The Home Equity Loans may have Mortgage Rates that could become lower than
the prevailing rate of One-Month LIBOR plus the Pass-Through Margin as a result
of the Mortgage Indices on the ARMs as described in the preceding paragraph and
the fact that certain of the Home Equity Loans bear interest at a fixed rate.
In particular, the Pass-Through Rate on the Offered Certificates adjusts month-
ly, while the interest rates on the ARMs (which comprise a significant portion
of the Mortgage Pool) adjust less frequently, with the result that the Avail-
able Funds Cap may limit increases in the Pass-Through Rate on the Offered Cer-
tificates for extended periods in a rising interest rate environment. In addi-
tion, One-Month LIBOR, Six-Month LIBOR and CMT may respond to different eco-
nomic and market factors, and there is not necessarily a correlation between
them. Thus, it is possible, for example, that One-Month LIBOR may rise during
periods in which Six-Month LIBOR or CMT is stable or is falling or that, even
if One-Month LIBOR, Six-Month LIBOR and CMT rise during the same period, One-
Month LIBOR may rise more rapidly than either Six-Month LIBOR or CMT. If the
Pass-Through Rate on the Offered Certificates for a Distribution Date is re-
duced below the applicable Formula Pass-Through Rate because of the application
of the Available Funds Cap, the value of the Offered Certificates will be tem-
porarily or permanently reduced.
Prepayment Considerations and Risks. The Trust Fund's prepayment experience
may be affected by a wide variety of factors, including general economic condi-
tions, interest rates, the availability of alternative financing, homeowner mo-
bility and other factors, including state and federal income tax policies (in-
cluding possible future changes affecting the deductibility for federal income
tax purposes of interest payments on mortgage loans). Therefore no assurance
can be given as to the level of prepayments that the Trust Fund will experi-
ence. Prepayments may result from voluntary early payments by borrowers, sales
of Mortgaged Properties subject to "due-on-sale" clauses as to which the
Servicer exercises its rights thereunder and liquidations due to default, as
well as the receipt of proceeds from hazard, credit life and disability insur-
ance policies. In addition, repurchases or purchases from the Trust Fund of
Home Equity Loans required or permitted to be made by the Depositor, the Seller
and the Servicer under the Pooling and Servicing Agreement will have the same
effect on the Holders of the Offered Certificates as a prepayment of the re-
lated Home Equity Loans. All of the Home
S-13
<PAGE>
Equity Loans may be prepaid in full or in part at any time and with respect to
58.54% of the Home Equity Loans (by Principal Balance as of the Cut-off Date),
without a prepayment penalty. All of the Home Equity Loans contain due-on-sale
provisions and the Servicer intends to enforce such provisions unless (i) such
enforcement is not permitted by applicable law, (ii) such enforcement would ma-
terially increase the risk of default or delinquency on, or materially decrease
the security for, the Home Equity Loan or (iii) the Servicer, in a manner con-
sistent with reasonable commercial practice, permits the purchaser of the re-
lated Mortgaged Property to assume the Home Equity Loan. However, with respect
to substantially all of the ARMs, the Servicer may not exercise a due on sale
provision if (a) the borrower causes to be submitted to the Servicer the infor-
mation required by Servicer to evaluate the intended transferee as if a new
loan were being made to the transferee and (b) the Servicer reasonably deter-
mines that the Servicer's security will not be impaired by the loan assumption
by the transferee and that the risk of a breach of covenant or agreement is ac-
ceptable to the Servicer. To the extent permitted by applicable law, such as-
sumption will not release the original borrower from its obligation under any
such Home Equity Loan. See "Yield, Maturity and Prepayment 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 Home Equity Loans that may affect the prepayment experience
thereof.
Although 86.31% of the Home Equity Loans are ARMs, the interest rates on a
majority of the ARMs will not adjust for at least two years following origina-
tion. In addition, certain of the ARMs which have initial interest rate adjust-
ment dates of two or three years after the related date of origination will
have an Initial Rate Cap as high as 3% above the related initial Mortgage Rate
whereas the Home Equity Loans with initial interest rate adjustment dates of
six to twelve months after the related date of origination will have an Initial
Rate Cap as high as 2% above the initial Mortgage Rate. As a result, in connec-
tion with the initial rate adjustment, borrowers under Home Equity Loans with
initial rate adjustment caps may be more likely either to prepay voluntarily or
to default as a result of the potential for significantly higher payments fol-
lowing such initial adjustment. Prepayments and repurchases by the Seller and
purchases by the Servicer of the Home Equity Loans will accelerate the receipt
of distributions of principal on the Offered Certificates. The Seller, its af-
filiates or the Norwest Mortgage Correspondents, may solicit refinancings from
existing borrowers, which may have the effect of increasing the rate of prepay-
ment, due to refinancings, on the Home Equity Loans. The weighted average life
of the Offered Certificates will be affected primarily by the rate and timing
of principal payments (including prepayments and liquidations) of, and losses
on, the Home Equity Loans. The yield to investors on the Offered Certificates
will also be sensitive to the level of One-Month LIBOR. In addition, the yield
to investors on the Offered Certificates will be sensitive to the level of the
various Mortgage Indices and the additional limitations on the Pass-Through
Rate for the Offered Certificates, as described herein. 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 pur-
chased 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.
No representation is made as to the anticipated rate of prepayments or liqui-
dations on the Home Equity Loans, the amount and timing of losses thereon, the
level of One-Month LIBOR or any Mortgage Index or the resulting yield to matu-
rity of the Offered Certificates. Any reinvestment risks resulting from a
faster or slower incidence of payments on the Home Equity Loans will be borne
entirely by the Holders of Offered Certificates. See "Yield, Maturity and Pre-
payment Considerations" herein and in the Prospectus.
Certificate Rating. The rating of the Offered Certificates will depend pri-
marily on an assessment by the Rating Agencies of the Home Equity 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 reduc-
tion in the rating of the Offered Certificates. The rating by the Rating Agen-
cies 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 assur-
ance 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 gener-
al, the ratings address credit risk and do not address the likelihood of pre-
payments on the Home Equity Loans, the likelihood of the payment of any Basis
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<PAGE>
Risk Carryover Amount or the anticipated yields in light of prepayments. The
ratings of the Offered Certificates also do not address the possibility of the
imposition of United States withholding tax with respect to non-U.S. persons.
Geographic Concentration. As of the Cut-off Date, not more than approximately
14.97%, 7.37% and 5.25% (by Cut-off Date Principal Balance) of the Mortgaged
Properties are expected to be located in the States of California, Michigan and
New Jersey. An overall decline in the California, Michigan or New Jersey resi-
dential real estate markets could adversely affect the values of the Mortgaged
Properties securing such Home Equity Loans such that the Principal Balances of
the related Home Equity Loans could equal or exceed the value of such Mortgaged
Properties. Since the residential real estate markets are influenced by many
factors, including the general condition of the economy and interest rates, no
assurances may be given that the California, Michigan or New Jersey residential
real estate markets will not weaken. If the California, Michigan or New Jersey
residential real estate market should experience an overall decline in property
values after the dates of origination of such Home Equity Loans, the rates of
losses on such Home Equity Loans would be expected to increase, and could in-
crease substantially.
Risks Associated with Certain Origination Fees. Fees earned on the origina-
tion of loans, placement of related insurance and other services provided by
the Seller and certain of its affiliates are often paid by the borrower out of
related loan proceeds. From time to time, in the ordinary course of their busi-
nesses, originators of mortgage loans, including the Seller, have been named in
legal actions brought by mortgagors challenging the amount or method of impos-
ing or disclosing such fees. If such an action against the Seller with respect
to any Home Equity Loan were successful, a court might require that the princi-
pal balances of the related Home Equity Loans be reduced by the amount of con-
tested fees or charges. The Seller will represent and warrant in the Pooling
and Servicing Agreement that each Home Equity Loan was originated in compliance
with, and is enforceable under, all applicable local, state and federal laws
and regulations in all material respects. The Seller will be required to repur-
chase any Home Equity Loan if such representation or warranty is breached, or
substitute for any such Home Equity Loan if such breach occurs within two years
of the Closing Date, provided that such breach materially and adversely affects
the interest of the Certificate Owners or the Certificate Insurer in such Home
Equity Loan. Any such repurchase may have the effect of accelerating distribu-
tions in reduction of the Class Certificate Principal Balance of the Offered
Certificates.
Risk Associated with the Certificate Insurer. If the protection afforded by
overcollateralization is insufficient and if, upon the occurrence of a Subordi-
nation Deficit, the Certificate Insurer is unable to meet its obligations under
the Certificate Insurance Policy, then the Certificate Owners of the Offered
Certificates could experience a loss on their investment.
Consequences of Owning Book-Entry Certificates. Issuance of the Offered Cer-
tificates in book-entry form may reduce the liquidity of the Offered Certifi-
cates in the secondary trading market since investors may be unwilling to pur-
chase Offered Certificates for which they cannot obtain physical certificates.
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 Certifi-
cate to persons or entities that do not participate in the DTC, Cedel or
Euroclear systems may be limited due to lack of a physical certificate repre-
senting the Offered Certificates. Certificate Owners may experience some delay
in their receipt of distributions of interest and principal on the Offered Cer-
tificates since such distributions will be forwarded by the Trustee to DTC and
DTC will credit such distributions to the accounts of its Participants which
will thereafter credit them to the accounts of Certificate Owners either di-
rectly 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 "Description of the Securities--Book-Entry Registra-
tion of Securities" in the Prospectus.
Individual Investors. The Offered Certificates may not be an appropriate in-
vestment for individual investors who do not have sufficient resources or ex-
pertise to evaluate the particular characteristics of the 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 Home Equity Loans;
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<PAGE>
. The rate of principal distributions on, and the weighted average life of,
the Offered Certificates will be sensitive to the uncertain rate and tim-
ing of principal prepayments on the Home Equity Loans and, as such, the
Offered Certificates may be inappropriate investments for an investor re-
quiring 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 rela-
tively 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
Certificates with liquidity of investment.
THE MORTGAGE POOL
GENERAL
The statistical information presented in this Prospectus Supplement concern-
ing the Mortgage Pool is based on the pool of Home Equity Loans as of the Cut-
off Date. Home Equity Loans may be removed from the Mortgage Pool, or a substi-
tution may be made for certain Home Equity Loans, in advance of the issuance of
the Certificates. Any of such Home Equity Loans may be excluded from the Trust
Fund (i) as a result of a Principal Prepayment in full thereof or (ii) if, as a
result of delinquencies or otherwise, the Seller otherwise deems such exclusion
necessary or desirable. In either event, other Home Equity Loans may be in-
cluded in the Trust Fund. This may result in changes in certain of the Mortgage
Pool characteristics described below and elsewhere in this Prospectus Supple-
ment. In the event that any of the characteristics as of the Cut-off Date of
the Home Equity Loans that constitute the Trust Fund on the date of initial is-
suance of the Certificates vary materially from those described herein, revised
information regarding the Home Equity Loans will be made available to purchas-
ers of the Offered Certificates on or before such issuance date, and a Current
Report on Form 8-K containing such information will be filed with the Securi-
ties and Exchange Commission within 15 days following such issuance date. Ref-
erences to First Lien Home Equity Loans in the Prospectus refer to the Home Eq-
uity Loans described in this Prospectus Supplement.
The Mortgage Pool will consist of fixed- and adjustable-rate, sub-prime home
equity loans (the "Home Equity Loans") secured by first liens on one- to four-
family residential properties (the "Mortgaged Properties"). It is expected that
the Mortgage Pool will consist of 1,977 Home Equity Loans with a Cut-off Date
Pool Principal Balance of approximately $219,697,289. The Home Equity Loans
will generally provide for the full amortization of the amount financed over
the original term to stated maturity (except for approximately 0.19% of the
Home Equity Loans in the Mortgage Pool (by Principal Balance as of the Cut-off
Date) which will have original terms to stated maturity of 15 years and amorti-
zation schedules of 30 years (the "Balloon Loans"), leaving a substantial pay-
ment due at the stated maturity). All of the Home Equity Loans have Due Dates
on the first day of each month. None of the Home Equity Loans is insured by a
primary mortgage insurance policy. The Home Equity Loans will have been origi-
nated by Norwest Mortgage or acquired by Norwest Mortgage, or an affiliate of
Norwest Mortgage, from various other entities (each such other entity, a
"Norwest Mortgage Correspondent"), which either originated the Home Equity
Loans or acquired the Home Equity Loans pursuant to mortgage loan purchase pro-
grams operated by the Norwest Mortgage Correspondents. None of the Norwest
Mortgage Correspondents is an affiliate of Norwest Mortgage. All of the Home
Equity Loans were originated in conformity with the underwriting standards de-
scribed in the Prospectus under the heading "Loan Programs -- Underwriting
Standards -- First Lien Home Equity Loans" (the "Underwriting Standards").
At origination, it is expected that at least approximately 1.67% and 98.33%
of the Home Equity Loans had a stated term to maturity of 15 years and 30
years, respectively. Scheduled monthly payments made by the Mortgagors on the
Home Equity 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. A substantial
number of the Mortgage Notes provide that a prepayment charge may apply if,
during a specified period up to the first five years from the date of origina-
tion of such Home Equity Loans, the borrower makes a substantial partial Prin-
cipal Prepayment or Principal Prepayment in full. The amount of the prepayment
charge will generally be equal to the maximum amount permitted by applicable
law.
S-16
<PAGE>
Certain of the Home Equity Loans in the Mortgage Pool accrue interest at a
fixed rate for the life of the Home Equity Loan (the "Fixed Rate Loans") and
the balance of the Home Equity Loans in the Mortgage Pool have interest rates
which are or will become adjustable after a period of time (the "ARMs"). The
per annum interest rate (the "Mortgage Rate") borne by each ARM is subject to
adjustment on the date set forth in the Mortgage Note for such ARM and at regu-
lar intervals thereafter (each, a "Change Date") to equal the sum of (i) the
applicable mortgage index (each, a "Mortgage Index" and collectively, the
"Mortgage Indices"), and (ii) the margin set forth in the related Mortgage Note
(the "Gross Margin"), subject to rounding and to the effects of the applicable
Initial Rate Cap, Periodic Rate Cap, Lifetime Cap and Lifetime Floor. The "Ini-
tial Rate Cap" limits changes in the Mortgage Rate for each ARM on the initial
Change Date. The "Periodic Rate Cap" limits changes in the Mortgage Rate for
each ARM on each Change Date after the initial Change Date. The "Lifetime Cap"
for each ARM is the maximum Mortgage Rate that may be borne by such ARM over
its life, and the "Lifetime Floor" is the minimum Mortgage Rate that may be
borne by such ARM over its life.
The Mortgage Index for certain of the ARMs is the weekly average yield on
United States treasury securities adjusted to a constant maturity of one year
("CMT"), as made available by the Federal Reserve Board as of the date 45 days
(as set forth in the related Mortgage Note) before the applicable Change Date.
With respect to the CMT Loans, the Change Dates will occur on the date set
forth in the related Mortgage Note and every twelfth month thereafter and the
Lifetime Floor is generally equal to the Gross Margin.
With respect to the remaining ARMs: (i) the Mortgage Index is the London
interbank offered rate for six-month United States dollar deposits ("Six-Month
LIBOR"), as published in The Wall Street Journal, of the edition, if any, spec-
ified in the related Mortgage Note, by the Federal National Mortgage Associa-
tion or by such other source specified in the related Mortgage Note, and avail-
able as of the date before the applicable Change Date specified in the related
Mortgage Note; and (ii) the Change Dates will occur on the initial Change Date
set forth in the related Mortgage Note and every sixth month thereafter.
The initial Change Dates for approximately 4.76%, 31.21%, 53.49% and 10.54%
of the ARMs (by Principal Balance of the ARMs as of the Cut-off Date) of the
ARMs will occur on the 6th, 12th, 24th and 36th Due Dates, respectively ("Six-
Month LIBOR Loans," "One-Year CMT Loans," "2/28 LIBOR Loans" and "3/1 CMT
Loans," respectively).
It is expected that none of the Home Equity Loans will be contractually de-
linquent for thirty or more days as of the Cut-off Date.
The "Loan-to-Value Ratio" of a Home Equity Loan at any given time is the ra-
tio, expressed as a percentage, of the principal balance of such Home Equity
Loan at origination to the lesser of (i) the appraised value of the related
Mortgaged 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 Ra-
tio 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.
S-17
<PAGE>
The following tables set forth certain characteristics of all the Home Equity
Loans, the ARMs and the Fixed Rate Loans.
SELECTED HOME EQUITY LOAN DATA
(AS OF THE CUT-OFF DATE)
<TABLE>
<CAPTION>
HOME EQUITY LOANS ARMS FIXED RATE LOANS
------------------ ---------------------- ------------------
<S> <C> <C> <C>
Number of Home Equity
Loans................... 1,977 1,597 380
Cut-off Date Principal
Balance/(1)/............ $219,697,289 $189,613,615 $30,083,674
Range of Unpaid Principal
Balances/(1)/........... $8,889 to $699,327 $15,980 to $699,327 $8,889 to $547,554
Average Unpaid Principal
Balance/(1)/............ $111,127 $118,731 $79,168
Range of Original
Principal
Balances/(1)/........... $9,000 to $700,000 $16,000 to $700,000 $9,000 to $549,000
Average of Original
Principal Balance/(1)/.. $111,415 $119,026 $79,431
Range of Mortgage Rates.. 5.000% to 13.375% 5.000% to 12.500% 8.125% to 13.375%
Weighted Average Mortgage
Rate/(1)/............... 9.471% 9.362% 10.157%
Range of Remaining Terms
to Stated Maturity
(months)................ 173 to 360 350 to 360 173 to 360
Weighted Average
Remaining Term to Stated
Maturity/(1)/ (months).. 353 356 334
Range of Original Terms
to Stated Maturity
(months)................ 180 to 360 360 180 to 360
Weighted Average Original
Term to Stated Maturity
(months)/(1)/........... 357 360 338
Range of Original Loan-
to-Value Ratios......... 14.00% to 91.85% 14.00% to 91.85% 23.85% to 90.00%
Weighted Average Original
Loan-to-Value
Ratio/(1)/.............. 77.34% 78.29% 71.38%
Geographic Concentration
of Mortgaged Properties
securing Home Equity
Loans in excess of 5% of
the Cut-off Date
Principal
Balance/(1)//(2)/
California........... 14.97% 15.80% 9.76%
Michigan............. 7.37% 7.96% N/A
New Jersey........... 5.25% 5.03% 6.64%
New York............. N/A N/A 6.18%
Washington........... N/A N/A 5.62%
Maximum Five-Digit Zip
Code
Concentration/(1)//(2)/.. 0.41% 0.47% 1.82%
Earliest Origination
Date.................... May 1997 May 1997 July 1997
Latest Origination Date.. March 1998 March 1998 March 1998
Latest Stated Maturity
Date.................... April 1, 2028 April 1, 2028 April 1, 2028
Range of Gross Margins... 3.750% to 8.875%
Weighted Average Gross
Margin/(1)/............. 6.400%
Range of Lifetime Caps... 11.00% to 18.50%
Weighted Average Lifetime
Cap/(1)/................ 15.36%
Range of Initial Rate
Caps.................... 1.00% to 3.00%
Range of Periodic Rate
Caps.................... 1.00% to 2.00%
Initial Change Date
Range................... May 1998 to April 2001
Six-Month LIBOR
Loans/(1)//(2)/......... 4.76%
One-Year CMT
Loans/(1)//(2)/......... 31.21%
2/28 LIBOR
Loans/(1)//(2)/......... 53.49%
3/1 CMT Loans/(1)//(2)/.. 10.54%
Weighted Average
Remaining Period to Next
Change Date for:
Six-Month LIBOR
Loans/(1)/.............. 4 months
One-Year CMT
Loans/(1)/............ 8 months
2/28 LIBOR Loans/(1)/.. 21 months
3/1 CMT Loans/(1)/..... 32 months
</TABLE>
- -------------------
(1) Approximate.
(2) As a percentage, as of the Cut-off Date, of all Home Equity Loans, ARMs or
Fixed Rate Loans, as the case may be.
S-18
<PAGE>
HOME EQUITY LOAN DATA
Set forth below is a description of certain additional expected characteris-
tics of the Home Equity Loans as of the Cut-off Date (except as otherwise indi-
cated). The sum of the percentage columns in the following tables may not equal
100% due to rounding.
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE CUT-OFF DATE
HOME EQUITY PRINCIPAL PRINCIPAL
PRINCIPAL BALANCE LOANS BALANCE BALANCE
- ----------------- ----------- --------------- -------------
<S> <C> <C> <C>
$ 0.01- 25,000.00.. 36 $ 727,748.43 0.33%
25,000.01- 50,000.00.. 276 11,023,144.01 5.02
50,000.01- 75,000.00.. 485 30,533,385.17 13.90
75,000.01-100,000.00.. 351 30,600,159.26 13.94
100,000.01-125,000.00.. 256 28,736,686.61 13.08
125,000.01-150,000.00.. 163 22,397,689.35 10.19
150,000.01-175,000.00.. 122 19,782,326.11 9.00
175,000.01-200,000.00.. 80 14,998,862.49 6.83
200,000.01-225,000.00.. 58 12,283,291.96 5.59
225,000.01-250,000.00.. 33 7,786,238.72 3.54
250,000.01-275,000.00.. 29 7,586,153.07 3.45
275,000.01-300,000.00.. 21 6,007,942.07 2.73
300,000.01-325,000.00.. 13 4,057,689.28 1.85
325,000.01-350,000.00.. 10 3,373,027.42 1.54
350,000.01-375,000.00.. 14 5,113,307.54 2.33
375,000.01-400,000.00.. 5 1,954,385.31 0.89
400,000.01-425,000.00.. 5 2,096,119.15 0.95
425,000.01-450,000.00.. 3 1,316,031.80 0.60
450,000.01-475,000.00.. 1 459,761.52 0.21
475,000.01-500,000.00.. 6 2,945,588.91 1.34
500,000.01-525,000.00.. 2 1,034,086.10 0.47
525,000.01-550,000.00.. 3 1,612,971.09 0.73
575,000.01-600,000.00.. 1 576,459.46 0.26
600,000.01-625,000.00.. 1 616,275.78 0.28
675,000.01-700,000.00.. 3 2,077,958.29 0.95
----- --------------- ------
Total....... 1,977 $219,697,288.90 100.00%
===== =============== ======
</TABLE>
ORIGINATORS OF HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE CUT-OFF DATE
HOME EQUITY PRINCIPAL PRINCIPAL
ORIGINATOR LOANS BALANCE BALANCE
- ---------- ----------- --------------- -------------
<S> <C> <C> <C>
NMI............. 1,799 $199,681,276.64 90.89%
Other
Originators.... 178 20,016,012.26 9.11
----- --------------- ------
Total....... 1,977 $219,697,288.90 100.00%
===== =============== ======
</TABLE>
No single "Other Originator" is expected to have accounted for more than 2.00%
of the Cut-Off Date Principal Balance.
YEARS OF ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE CUT-OFF DATE
HOME EQUITY PRINCIPAL PRINCIPAL
YEAR OF ORIGINATION LOANS BALANCE BALANCE
- ------------------- ----------- --------------- -------------
<S> <C> <C> <C>
1997............ 1,297 $141,678,237.91 64.49%
1998............ 680 78,019,050.99 35.51
----- --------------- ------
Total....... 1,977 $219,697,288.90 100.00%
===== =============== ======
</TABLE>
LOAN TYPES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE CUT-OFF DATE
HOME EQUITY PRINCIPAL PRINCIPAL
LOAN TYPES LOANS BALANCE BALANCE
- ---------- ----------- --------------- -------------
<S> <C> <C> <C>
2/28 LIBOR
Loans.......... 891 $101,433,862.55 46.18%
One-Year CMT
Loans.......... 452 59,174,617.13 26.93
Fixed Rate 30
Year Loans .... 323 26,410,279.85 12.02
3/1 CMT Loans... 194 19,988,934.75 9.10
Six-Month LIBOR
Loans ......... 60 9,016,200.76 4.10
Fixed Rate 15
Year Loans .... 54 3,251,092.86 1.48
Balloon Loans... 3 422,301.00 0.19
----- --------------- ------
Total....... 1,977 $219,697,288.90 100.00%
===== =============== ======
</TABLE>
CREDIT LEVELS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE CUT-OFF DATE
HOME EQUITY PRINCIPAL PRINCIPAL
CREDIT LEVELS LOANS BALANCE BALANCE
- ------------- ----------- --------------- -------------
<S> <C> <C> <C>
Gold............ 972 $120,824,768.13 55.00%
Level 1......... 542 59,010,302.96 26.86
Level 2......... 295 26,600,470.09 12.11
Level 3......... 114 9,764,551.81 4.44
Level 4......... 54 3,497,195.91 1.59
----- --------------- ------
Total....... 1,977 $219,697,288.90 100.00%
===== =============== ======
</TABLE>
See "Loan Programs--Underwriting Standards--First Lien Home Equity Loans" in the
Prospectus for a description of the Credit Levels.
DOCUMENTATION LEVELS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE CUT-OFF DATE
HOME EQUITY PRINCIPAL PRINCIPAL
DOCUMENTATION LEVELS LOANS BALANCE BALANCE
- -------------------- ----------- --------------- -------------
<S> <C> <C> <C>
Full
Documentation.. 1,641 $173,910,382.11 79.16%
Stated Income... 264 34,859,138.33 15.87
Lite
Documentation.. 72 10,927,768.46 4.97
----- --------------- ------
Total....... 1,977 $219,697,288.90 100.00%
===== =============== ======
</TABLE>
See "Loan Programs--Underwriting Standards--First Lien Home Equity Loans" in the
Prospectus for a description of the Documentation Levels.
MORTGAGE RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE CUT-OFF DATE
HOME EQUITY PRINCIPAL PRINCIPAL
MORTGAGE RATE LOANS BALANCE BALANCE
- ------------- ----------- --------------- -------------
<S> <C> <C> <C>
4.501- 5.000%........................ 1 $ 74,728.51 0.03%
7.001- 7.500%........................ 13 2,120,927.74 0.97
7.501- 8.000%........................ 46 6,040,445.52 2.75
8.001- 8.500%........................ 164 23,684,537.99 10.78
8.501- 9.000%........................ 304 37,777,337.42 17.20
9.001- 9.500%........................ 429 51,937,096.30 23.63
9.501-10.000%........................ 471 50,681,201.41 23.07
10.001-10.500%........................ 281 24,394,818.19 11.10
10.501-11.000%........................ 174 15,163,405.76 6.90
11.001-11.500%........................ 57 4,921,007.19 2.24
11.501-12.000%........................ 27 2,085,303.71 0.95
12.001-12.500%........................ 9 737,729.39 0.34
13.001-13.500%........................ 1 78,749.77 0.04
----- --------------- ------
Total............................. 1,977 $219,697,288.90 100.00%
===== =============== ======
</TABLE>
ORIGINAL MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE CUT-OFF DATE
ORIGINAL MONTHS TO HOME EQUITY PRINCIPAL PRINCIPAL
STATED MATURITY LOANS BALANCE BALANCE
- ------------------ ----------- --------------- -------------
<S> <C> <C> <C>
180................................... 57 $ 3,673,393.86 1.67%
360................................... 1,920 216,023,895.04 98.33
----- --------------- ------
Total............................. 1,977 $219,697,288.90 100.00%
===== =============== ======
</TABLE>
S-19
<PAGE>
REMAINING TERMS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE CUT-OFF DATE
REMAINING TERMS HOME EQUITY PRINCIPAL PRINCIPAL
TO STATED MATURITY LOANS BALANCE BALANCE
- ---------------- ----------- --------------- -------------
<S> <C> <C> <C>
173............. 4 $ 301,367.40 0.14%
174............. 7 490,540.11 0.22
175............. 10 500,674.46 0.23
176............. 12 782,029.53 0.36
177............. 8 579,985.00 0.26
178............. 7 595,175.89 0.27
179............. 7 355,121.47 0.16
180............. 2 68,500.00 0.03
350............. 2 85,850.32 0.04
351............. 6 443,420.63 0.20
352............. 22 2,699,619.00 1.23
353............. 191 23,003,703.58 10.47
354............. 200 22,119,223.16 10.07
355............. 251 26,755,161.02 12.18
356............. 239 26,862,808.86 12.23
357............. 349 37,314,669.99 16.98
358............. 282 35,107,320.16 15.98
359............. 246 27,931,833.32 12.71
360............. 132 13,700,285.00 6.24
----- --------------- ------
Total....... 1,977 $219,697,288.90 100.00%
===== =============== ======
</TABLE>
PURPOSES OF HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE CUT-OFF DATE
HOME EQUITY PRINCIPAL PRINCIPAL
LOAN PURPOSE LOANS BALANCE BALANCE
- ------------ ----------- --------------- -------------
<S> <C> <C> <C>
Purchase........ 929 $104,195,809.76 47.43%
Equity Take Out
Refinance...... 846 90,346,698.06 41.12
Rate/Term
Refinance...... 202 25,154,781.08 11.45
----- --------------- ------
Total....... 1,977 $219,697,288.90 100.00%
===== =============== ======
</TABLE>
MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE CUT-OFF DATE
HOME EQUITY PRINCIPAL PRINCIPAL
PROPERTY LOANS BALANCE BALANCE
- -------- ----------- --------------- -------------
<S> <C> <C> <C>
Single-family
detached........ 1,820 $205,950,849.35 93.74%
Two- to four-
family units.... 74 6,113,111.34 2.78
Condominiums
High-rise
(greater than
four stories).. 7 679,068.34 0.31
Low-rise (four
stories or
less).......... 57 4,729,422.40 2.15
Planned unit
developments.... 15 1,990,420.50 0.91
Townhouses....... 4 234,416.97 0.11
Cooperative
Units........... 0 0.00 0.00
----- --------------- ------
Total........ 1,977 $219,697,288.90 100.00%
===== =============== ======
</TABLE>
OCCUPANCY STATUS OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE CUT-OFF DATE
HOME EQUITY PRINCIPAL PRINCIPAL
OCCUPANCY STATUS LOANS BALANCE BALANCE
- ---------------- ----------- --------------- -------------
<S> <C> <C> <C>
Investment
Property....... 131 $ 9,707,411.48 4.42%
Primary Resi-
dence.......... 1,814 207,244,524.89 94.33
Second Home..... 32 2,745,352.53 1.25
----- --------------- ------
Total....... 1,977 $219,697,288.90 100.00%
===== =============== ======
</TABLE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE CUT-OFF DATE
HOME EQUITY PRINCIPAL PRINCIPAL
GEOGRAPHIC AREA LOANS BALANCE BALANCE
- --------------- ----------- --------------- -------------
<S> <C> <C> <C>
Alabama......... 26 $ 2,302,966.84 1.05%
Alaska.......... 10 1,327,433.29 0.60
Arizona......... 71 7,864,700.80 3.58
Arkansas........ 8 613,147.60 0.28
California...... 196 32,893,222.01 14.97
Colorado........ 74 9,650,894.77 4.39
Connecticut..... 18 3,496,135.73 1.59
Delaware........ 10 803,820.73 0.37
District of
Columbia....... 5 598,689.12 0.27
Florida......... 70 6,566,723.41 2.99
Georgia......... 15 1,393,365.00 0.63
Hawaii.......... 2 592,897.10 0.27
Idaho........... 39 2,899,028.66 1.32
Illinois........ 79 7,680,840.07 3.50
Indiana......... 66 4,908,830.06 2.23
Iowa............ 14 932,187.83 0.42
Kansas.......... 15 1,624,310.15 0.74
Kentucky........ 11 1,014,327.32 0.46
Louisiana....... 19 1,729,775.18 0.79
Maine........... 3 390,415.04 0.18
Maryland........ 18 2,904,015.37 1.32
Massachusetts... 37 4,467,473.77 2.03
Michigan........ 164 16,201,565.46 7.37
Minnesota....... 72 7,622,621.53 3.47
Mississippi..... 4 245,418.34 0.11
Missouri........ 16 1,506,375.05 0.69
Montana......... 36 2,757,408.08 1.26
Nebraska........ 16 977,768.82 0.45
Nevada.......... 21 3,755,469.35 1.71
New Hampshire... 24 2,105,256.85 0.96
New Jersey...... 75 11,525,547.29 5.25
New Mexico...... 37 4,053,484.94 1.85
New York........ 90 9,724,651.78 4.43
North Carolina.. 70 7,626,677.60 3.47
North Dakota.... 11 561,442.08 0.26
Ohio............ 89 7,228,361.34 3.29
Oklahoma........ 8 648,435.83 0.30
Oregon.......... 25 2,973,661.29 1.35
Pennsylvania.... 54 4,104,768.33 1.87
Rhode Island.... 1 66,306.30 0.03
South Carolina.. 13 1,129,040.65 0.51
South Dakota.... 9 635,469.20 0.29
Tennessee....... 22 2,139,670.83 0.97
Texas........... 61 5,909,135.55 2.69
Utah............ 83 10,189,731.80 4.64
Vermont......... 5 685,767.45 0.31
Virginia........ 29 3,013,912.36 1.37
Washington...... 84 10,703,933.30 4.87
West Virginia... 6 359,416.90 0.16
Wisconsin....... 34 3,360,054.92 1.53
Wyoming......... 12 1,230,735.83 0.56
----- --------------- ------
Total....... 1,977 $219,697,288.90 100.00%
===== =============== ======
</TABLE>
S-20
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
ORIGINAL NUMBER OF AGGREGATE CUT-OFF DATE
LOAN-TO- HOME EQUITY PRINCIPAL PRINCIPAL
VALUE RATIO LOANS BALANCE BALANCE
- -------------------------------------- ----------- --------------- -------------
<S> <C> <C> <C>
50.00% or less........................ 90 $ 5,644,471.36 2.57%
50.01- 55.00%......................... 41 3,336,512.25 1.52
55.01- 60.00%......................... 87 7,088,549.32 3.23
60.01- 65.00%......................... 123 11,318,221.00 5.15
65.01- 70.00%......................... 178 20,902,069.64 9.51
70.01- 75.00%......................... 350 38,160,975.62 17.37
75.01- 80.00%......................... 501 59,526,946.88 27.09
80.01- 85.00%......................... 328 35,844,398.89 16.32
85.01- 90.00%......................... 278 37,761,295.69 17.19
90.01- 95.00%......................... 1 113,848.25 0.05
----- --------------- ------
Total............................. 1,977 $219,697,288.90 100.00%
===== =============== ======
</TABLE>
PRINCIPAL BALANCES OF ARMS GROUPED BY CHANGE DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE PRINCIPAL
CHANGE NUMBER OF PRINCIPAL BALANCE OF
DATE ARMS BALANCE ARMS
- ------ --------- --------------- -------------
<S> <C> <C> <C>
May 1, 1998............................. 4 $ 960,868.58 0.51%
June 1, 1998............................ 12 1,353,464.63 0.71
July 1, 1998............................ 12 1,564,942.07 0.83
August 1, 1998.......................... 24 3,627,829.05 1.91
September 1, 1998....................... 69 10,248,497.96 5.40
October 1, 1998......................... 56 7,829,535.25 4.13
November 1, 1998........................ 60 7,303,032.10 3.85
December 1, 1998........................ 63 8,305,449.01 4.38
January 1, 1999......................... 83 9,496,424.75 5.01
February 1, 1999........................ 48 6,357,548.23 3.35
March 1, 1999........................... 55 7,710,476.26 4.07
April 1, 1999........................... 26 3,432,750.00 1.81
July 1, 1999............................ 6 443,420.63 0.23
August 1, 1999.......................... 4 488,941.66 0.26
September 1, 1999....................... 79 8,684,383.63 4.58
October 1, 1999......................... 75 8,133,294.88 4.29
November 1, 1999........................ 102 11,460,326.41 6.04
December 1, 1999........................ 95 11,530,670.52 6.08
January 1, 2000......................... 169 18,608,007.72 9.81
February 1, 2000........................ 153 20,122,360.33 10.63
March 1, 2000........................... 133 14,448,271.77 7.62
April 1, 2000........................... 75 7,514,185.00 3.96
August 1, 2000.......................... 4 608,996.15 0.32
September 1, 2000....................... 20 1,751,531.81 0.92
October 1, 2000......................... 32 3,614,213.27 1.91
November 1, 2000........................ 27 2,391,040.30 1.26
December 1, 2000........................ 20 2,012,325.69 1.06
January 1, 2001......................... 30 2,781,000.35 1.47
February 1, 2001........................ 33 4,041,839.72 2.13
March 1, 2001........................... 16 1,760,487.46 0.93
April 1, 2001........................... 12 1,027,500.00 0.54
----- --------------- ------
Total................................ 1,597 $189,613,615.19 100.00%
===== =============== ======
</TABLE>
LIFETIME CAPS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE PRINCIPAL
NUMBER OF PRINCIPAL BALANCE OF
LIFETIME CAP ARMS BALANCE ARMS
- ------------ --------- --------------- -------------
<S> <C> <C> <C>
10.501-11.000%.......................... 1 $ 74,728.51 0.04%
13.001-13.500%.......................... 13 2,120,927.74 1.12
13.501-14.000%.......................... 45 5,935,279.60 3.13
14.001-14.500%.......................... 156 23,047,183.72 12.15
14.501-15.000%.......................... 277 35,209,505.01 18.57
15.001-15.500%.......................... 383 47,375,540.10 24.99
15.501-16.000%.......................... 385 43,826,692.20 23.11
16.001-16.500%.......................... 197 18,437,959.41 9.72
16.501-17.000%.......................... 111 10,804,236.55 5.70
17.001-17.500%.......................... 20 1,719,116.43 0.91
17.501-18.000%.......................... 6 667,319.60 0.35
18.001-18.500%.......................... 3 395,126.32 0.21
----- --------------- ------
Total............................... 1,597 $189,613,615.19 100.00%
===== =============== ======
</TABLE>
GROSS MARGINS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE PRINCIPAL
GROSS NUMBER OF PRINCIPAL BALANCE OF
MARGIN ARMS BALANCE ARMS
- ------ --------- --------------- -------------
<S> <C> <C> <C>
3.750%.......... 4 $ 371,968.05 0.20%
3.875%.......... 1 156,000.00 0.08
4.000%.......... 2 509,269.09 0.27
4.125%.......... 3 554,469.18 0.29
4.250%.......... 9 1,098,535.60 0.58
4.350%.......... 1 57,931.27 0.03
4.375%.......... 4 616,971.13 0.33
4.500%.......... 4 365,721.04 0.19
4.625%.......... 11 1,209,671.29 0.64
4.750%.......... 9 1,123,534.74 0.59
4.875%.......... 13 1,951,568.79 1.03
5.000%.......... 15 2,325,294.77 1.23
5.125%.......... 25 3,065,660.75 1.62
5.250%.......... 51 5,506,367.23 2.90
5.375%.......... 34 4,387,351.06 2.31
5.500%.......... 61 8,219,881.27 4.34
5.625%.......... 37 4,490,845.55 2.37
5.750%.......... 67 8,514,444.85 4.49
5.875%.......... 51 6,504,056.12 3.43
6.000%.......... 68 8,461,805.40 4.46
6.125%.......... 72 8,242,507.78 4.35
6.250%.......... 93 10,742,762.32 5.67
6.375%.......... 69 8,037,495.41 4.24
6.500%.......... 104 13,401,710.59 7.07
6.625%.......... 132 16,896,296.32 8.90
6.750%.......... 104 12,828,397.03 6.77
6.875%.......... 101 10,398,165.34 5.48
7.000%.......... 99 10,762,730.68 5.68
7.125%.......... 97 10,459,665.38 5.52
7.126%.......... 1 89,866.14 0.05
7.250%.......... 48 4,531,967.40 2.39
7.375%.......... 97 10,396,646.58 5.48
7.500%.......... 21 2,001,933.45 1.06
7.625%.......... 45 6,087,016.86 3.21
7.750%.......... 15 1,467,893.79 0.77
7.875%.......... 12 2,037,645.01 1.07
8.000%.......... 4 396,976.18 0.21
8.125%.......... 2 272,073.75 0.14
8.250%.......... 2 159,548.70 0.08
8.375%.......... 4 438,789.60 0.23
8.500%.......... 3 170,793.52 0.09
8.625%.......... 1 211,420.99 0.11
8.875%.......... 1 89,965.19 0.05
----- --------------- ------
Total....... 1,597 $189,613,615.19 100.00%
===== =============== ======
</TABLE>
S-21
<PAGE>
ASSIGNMENT OF THE HOME EQUITY LOANS
Pursuant to the Pooling and Servicing Agreement, on the Closing Date the De-
positor will sell, transfer, assign, set over and otherwise convey without re-
course 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 Home Equity Loan and all right, title and interest in and to all other
assets included in the Trust Fund, including all principal and interest re-
ceived on or with respect to the Home Equity Loans after the Cut-off Date ex-
clusive of principal due on or prior to the Cut-off Date.
In connection with such transfer and assignment, the Depositor will deliver
on the Closing Date the documents described in the Prospectus under "The Agree-
ments -- Assignment of the Trust Fund Assets -- Assignment of the Loans" (col-
lectively constituting the "Trustee's Mortgage File") with respect to each Home
Equity Loan.
Assignments of the Home Equity 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 acceptable to the
Certificate Insurer is delivered to the effect that such recording is not re-
quired to protect the Trustee's interests in the Home Equity Loan against the
claim of any subsequent transferee or any successor to or creditor of the De-
positor or the Seller. In the event any such assignment is delivered to the
Trustee in blank and the related Mortgage File is released by the Trustee pur-
suant to applicable provisions of the Pooling and Servicing Agreement, the
Trustee shall complete such assignment prior to any such release. In the event
such recording is required to protect the interest of the Trustee in the Home
Equity Loans, the Servicer is required to cause each previously unrecorded as-
signment to be submitted for recording.
The Trustee will review the Home Equity Loan documents within 45 days after
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 re-
spect, the Trustee is required to promptly notify the Servicer, the Seller and
the Certificate Insurer in writing. If the Seller cannot or does not cure such
omission or defect within 60 days of its receipt of notice from the Trustee,
the Seller is required to repurchase the related Home Equity Loan from the
Trust Fund at a price (the "Purchase Price") equal to 100% of the Stated Prin-
cipal Balance thereof as of the prior Distribution Date 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, plus any unreimbursed Advances and Other Advances. Rather than
repurchase the Home Equity Loan as provided above, the Seller may remove such
Home Equity Loan (a "Deleted Home Equity Loan") from the Trust Fund and substi-
tute in its place another Home Equity Loan of like kind (a "Replacement Home
Equity 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. Fur-
ther, any repurchase or substitution must be within 90 days of notice to the
Trustee of the omission or defect if such omission or defect is one which would
cause the Home Equity Loan to fail to qualify as a "Qualified Mortgage," as
such term is defined in Section 860G(a)(3) of the Internal Revenue Code of
1986, as amended. Any Replacement Home Equity Loan generally will, on the date
of substitution, among other characteristics set forth in the Pooling and Ser-
vicing 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 Home Equity Loan (the amount of any shortfall to be deposited by the
Seller in the Collection Account not later than the succeeding Determination
Date and held for distribution to the holders of Certificates on the related
Distribution Date), (ii) (A) in the case of a Deleted Home Equity Loan which is
an ARM: (1) have a Lifetime Cap not more than 1% per annum higher or lower than
the Lifetime Cap of the Deleted Home Equity Loan, (2) have a Lifetime Floor not
more than 1% per annum higher and not lower than the Lifetime Floor of the De-
leted Home Equity Loan and (3) have the same Mortgage Index and Periodic Rate
Cap as the Deleted Home Equity Loan and a Gross Margin not more than 1% per an-
num higher and not lower than that of the Deleted Home Equity Loan and (B) in
the case of a Fixed Rate Loan: (1) have a Mortgage Rate not more than 1% higher
and not lower than the Mortgage Rate of the Deleted Home Equity Loan and (2)
not be a balloon loan unless the Deleted Home Equity Loan was a balloon loan,
(iii) be accruing interest at a rate not more than 1% per annum higher and not
lower than that of the Deleted Home Equity Loan, (iv) have a Loan-to-Value Ra-
tio no higher than that of the Deleted Home Equity
S-22
<PAGE>
Loan, (v) have a remaining term to maturity not greater than (and not more than
one year less than) that of the Deleted Home Equity Loan, (vi) not permit con-
version of the related adjustable Mortgage Rate to a fixed Mortgage Rate nor
permit conversion of the related fixed Mortgage Rate to an adjustable Mortgage
Rate, (vii) be a first lien home equity loan, (viii) constitute the same occu-
pancy type as the Deleted Home Equity Loan, (ix) have a credit level the same
as, or higher than, that of the Deleted Home Equity Loan and (x) comply with
all of the representations and warranties set forth in the Pooling and Servic-
ing Agreement as of the date of substitution. This cure, repurchase or substi-
tution obligation constitutes the sole remedy available to the
Certificateholders, the Trustee or the Depositor for omission of, or a material
defect in, a Home Equity Loan document.
SERVICING OF THE HOME EQUITY LOANS
GENERAL
The Servicer will be responsible for the servicing of the Home Equity Loans
and the Certificate Administrator will be responsible for calculating amounts
distributable on the Certificates, preparing reports to Certificateholders and
tax reporting in accordance with the terms set forth in the Pooling and Servic-
ing Agreement. The Servicer may perform any of its obligations under the Pool-
ing and Servicing Agreement through one or more subservicers. Notwithstanding
any such subservicing arrangement, the Servicer will remain liable for its ser-
vicing duties and obligations under the Pooling and Servicing Agreement as if
the Servicer alone were servicing the Home Equity Loans.
THE SERVICER
Norwest Mortgage, Inc. ("Norwest Mortgage"), a California corporation and an
indirect, wholly owned subsidiary of Norwest Corporation, will act as the
Servicer of the Home Equity Loans pursuant to the Pooling and Servicing Agree-
ment.
Although Norwest Mortgage serviced mortgage loans with an aggregate principal
balance of approximately $205.8 billion as of December 31, 1997, no specific
delinquency or foreclosure data relating to the Servicer's sub-prime servicing
portfolio is provided because the Servicer has no significant servicing experi-
ence with respect to sub-prime mortgage loans.
Norwest Mortgage's principal office is located at 405 Southwest 5th Street,
Des Moines, Iowa 50309-4603. Norwest Mortgage conducts its sub-prime home eq-
uity loan servicing activities primarily at its offices in Charlotte, North
Carolina and Frederick, Maryland. The address of its Charlotte, North Carolina
office is 5024 Parkway Plaza Boulevard, Charlotte, North Carolina 28217-1962.
The address of its Frederick, Maryland office is 7485 North Horizon Way, Fred-
erick, Maryland 21703 and its telephone number is (301) 846-8100.
THE CERTIFICATE ADMINISTRATOR
Norwest Bank Minnesota, National Association ("Norwest Bank"), a national
banking association originally chartered in 1872, will act as the Certificate
Administrator of the Certificates pursuant to the Pooling and Servicing Agree-
ment. Norwest Bank is engaged in a wide variety of activities typical of a na-
tional bank.
Norwest Bank's principal office is located at Norwest Center, Sixth and Mar-
quette, Minneapolis, Minnesota 55479. Norwest Bank will conduct its duties as
Certificate Administrator at its offices in Columbia, Maryland. Its address
there is 11000 Broken Land Parkway, Columbia, Maryland 21044-3662 and its tele-
phone number is (410) 884-2000.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be paid a monthly fee from interest collected with respect
to the Home Equity Loans (as well as from any liquidation proceeds from Liqui-
dated Home Equity Loans that are applied to accrued and unpaid interest) equal
to one-twelfth of the Pool Stated Principal Balance as of the preceding Distri-
bution Date multiplied by the Servicing Fee Rate (such product, the "Servicing
Fee"). The "Servicing Fee Rate" will equal 0.50% per annum. The amount of the
monthly Servicing Fee is subject to adjustment with respect to Principal Pre-
payments. The Servicer is also entitled to receive, as additional servicing
compensation, amounts in respect of interest paid on Principal Prepayments in
full received from the 1st day of a month (excluding scheduled
S-23
<PAGE>
interest due on such day) through the day preceding the Determination Date in
such month ("Prepayment Interest Excess"), all late payment fees, assumption
fees, prepayment penalties and other similar charges and all reinvestment in-
come earned on amounts on deposit in the Collection Account. The Servicer is
obligated to pay certain ongoing expenses associated with the Home Equity 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 Home Equity Loan between Due
Dates, the borrower pays interest on the amount prepaid only to the date of
prepayment. Principal Prepayments received from the 1st day of a month through
the day preceding the Determination Date of such month are included in the dis-
tribution on the Distribution Date in such month and accordingly no shortfall
in interest otherwise distributable to Holders of Certificates results. Con-
versely, Principal Prepayments received from the Determination Date of a month
to the last day of such month are not distributed until the Distribution Date
of the following month and accordingly an interest shortfall (a "Prepayment In-
terest Shortfall") could result. In order to mitigate the effect of any such
shortfall in interest distributions to Holders of Certificates on any Distribu-
tion Date, an amount not in excess of the Servicing Fee otherwise payable to
the Servicer in respect of the Home Equity Loans for such month shall, to the
extent of such shortfall, be remitted by the Servicer to the Trustee for de-
posit 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
Servicer with respect to Scheduled Payments on Home Equity Loans having the Due
Date to which such Distribution Date relates. Any such deposit by the Servicer
will be reflected in the distributions to Holders of Certificates made on the
Distribution Date on which the Principal Prepayment received would be distrib-
uted.
The Servicer will be required to pay all expenses incurred in connection with
the servicing of the Home Equity Loans, including, without limitation, payment
of the hazard insurance policy premiums. The Servicer will be entitled, in cer-
tain circumstances, to reimbursement from the Collection Account of (i) Advanc-
es, (ii) other advances of cash ("Other Advances") made by it to cover delin-
quent payments of taxes, insurance premiums and escrowed items with respect to
any Mortgaged Property or for expenditures incurred by it in connection with
the restoration, foreclosure or liquidation of any Mortgaged Property (to the
extent of Liquidation Proceeds or Insurance Proceeds in respect of such Mort-
gaged Property) and (iii) certain losses against which it is indemnified by the
Trust Fund.
ADVANCES
If, on any Determination Date, payments of principal and interest due on any
Home Equity Loan during the related Due Period have not been received, the
Servicer will, in certain circumstances, be required to advance on the Business
Day prior to the related Distribution Date (the "Servicer Advance Date") for
the benefit of Holders of the Certificates an amount in cash equal to all de-
linquent payments of principal and interest due on each Home Equity Loan (with
interest adjusted to the applicable Net Mortgage Rate) not previously advanced.
On any date of determination, the "Net Mortgage Rate" on each Home Equity Loan
will be equal to the Mortgage Rate on such date minus the Servicing Fee Rate.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Offered Certificates rather than to guarantee or in-
sure against losses. The Servicer is obligated to advance such funds only to
the extent that the Servicer believes that such amounts will be recoverable by
it from liquidation proceeds or other recoveries in respect of the related Home
Equity Loan (any such advance, an "Advance"). Upon the Servicer's failure to
make a required Advance, the Trustee will be required to make such Advance.
The Pooling and Servicing Agreement provides that any Advance may be reim-
bursed to the Servicer or the Trustee, as applicable, at any time from funds
available in the Collection Account to the extent that (i) such funds represent
receipts on, or liquidation, insurance, purchase or repurchase proceeds in re-
spect of, the Home Equity Loans to which the Advance relates or (ii) the
Servicer or Trustee, as applicable, has determined in good faith that the ad-
vancing party will be unable to recover such Advance from funds of the type re-
ferred to in clause (i) above.
CERTIFICATE ADMINISTRATION COMPENSATION
The Certificate Administrator will be paid a monthly fee from interest col-
lected with respect to the Home Equity Loans (as well as from any liquidation
proceeds from Liquidated Home Equity Loans that are applied to accrued and un-
paid interest) equal to one-twelfth of the Pool Stated Principal Balance as of
the preceding
S-24
<PAGE>
Distribution Date multiplied by the Administration Fee Rate (such product, the
"Administration Fee"). The "Administration Fee Rate" will equal 0.035% per an-
num.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Offered Certificates will be issued pursuant to a Pooling and Servicing
Agreement, dated as of April 30, 1998 (the "Pooling and Servicing Agreement"),
among the Depositor, the Servicer, the Seller, the Certificate Administrator
and the Trustee. Set forth below are summaries of the material terms and provi-
sions 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 provi-
sions or terms used in the Pooling and Servicing Agreement are referred to, the
actual provisions (including definitions of terms) are incorporated by refer-
ence.
The Series 1998-HE1 Asset Backed Certificates will consist of (i) the Class A
Certificates (the "Offered Certificates") and (ii) the Class R Certificates
(the "Residual Certificates"). The Offered Certificates and the Residual Cer-
tificates are collectively referred to herein as the "Certificates." Only the
Offered Certificates are offered hereby.
The Offered Certificates are expected to have an Initial Class Certificate
Principal Balance of approximately $219,697,000 and will evidence a senior ben-
eficial ownership interest in the Trust Fund. The remaining beneficial owner-
ship 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 dis-
tributions with respect to the Home Equity Loans will be subordinate to the
rights of the Holders of Offered Certificates, to the extent described herein.
The Offered Certificates will be issued in book-entry form as described be-
low. The Offered Certificates will be issued in minimum dollar denominations of
$25,000 and integral multiples of $1,000 in excess thereof.
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 Certifi-
cates through the Depository Trust Company ("DTC") in the United States, or
Cedel or Euroclear (in Europe) if they are participants of such systems, or in-
directly 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. ("Cede"), the nominee of DTC. Unless
and until Definitive Certificates are issued, it is anticipated that the only
Certificateholder of the Offered Certificates will be Cede, 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 indi-
rectly 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.
Monthly and annual reports on the Trust Fund provided by the Servicer to
Cede, as nominee of DTC, may be made available to beneficial owners upon re-
quest, 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.
For a description of the procedures generally applicable to the Book-Entry
Certificates, see "Description of the Securities -- Book-Entry Registration of
Securities" in the Prospectus and Annex I hereto.
None of the Depositor, the Servicer, the Certificate Administrator, the Cer-
tificate Insurer or the Trustee will have any responsibility for any aspect of
the records relating to or payments made on account of beneficial ownership in-
terests of the Book-Entry Certificates held by Cede, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
S-25
<PAGE>
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 May 1998 (each, a "Distribution Date").
Distributions on each Distribution Date will be made to Certificateholders of
record (which, in the case of Book-Entry Certificates, will be Cede, as nominee
for DTC) at the close of business on the Business Day preceding such Distribu-
tion Date (each, a "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 Regis-
ter or, in the case of any Certificateholder that holds 100% of a Class of Cer-
tificates or who holds a Class of Certificates with an Initial Class Certifi-
cate 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. 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 "Percent-
age 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 COLLECTION ACCOUNT
The Servicer shall establish an account (the "Collection Account") on behalf
of the Certificateholders and the Certificate Insurer. Within two Business Days
after receipt, the Servicer shall deposit into the Collection Account the fol-
lowing payments and collections received or made by it subsequent to the Cut-
off Date (to the extent not applied in computing the Cut-off Date Pool Princi-
pal Balance):
(i) all payments on account of principal, including Principal Prepay-
ments, on the Home Equity Loans;
(ii) all payments on account of interest (other than interest accruing on
the Home Equity Loans prior to the Cut-off Date) on the Home Equity Loans,
net of the related Servicing Fee; and
(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 mort-
gagor in accordance with servicing procedures), other than proceeds that
represent reimbursement of the Servicer's costs and expenses incurred in
connection with presenting claims under the related insurance policies
("Insurance Proceeds"), and all other net proceeds received in connection
with the partial or complete liquidation of Home Equity 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 ac-
quired by the Servicer by foreclosure or deed in lieu of foreclosure in
connection with defaulted Home Equity Loans (other than the amount of such
net proceeds representing any profit realized by the Servicer in connection
with the disposition of any such properties) (together with Insurance Pro-
ceeds, "Liquidation Proceeds").
WITHDRAWALS FROM THE COLLECTION ACCOUNT
The Servicer (or the Depositor or the Seller, as applicable) may from time to
time withdraw funds from the Collection Account prior to the close of business
on the related Determination Date for the following purposes:
(i) to pay to the Servicer the Servicing Fee to the extent not previously
paid to or withheld by the Servicer (subject to reduction as described
above under "Servicing of the Home Equity Loans") and, as additional ser-
vicing compensation, prepayment penalties, assumption fees, late payment
charges, net earnings on or investment income with respect to funds in or
credited to the Collection Account, the amount of Prepayment Interest Ex-
cess for the related Prepayment Period and any Excess Proceeds;
(ii) to reimburse the Servicer for Advances, such right of reimbursement
with respect to any Home Equity 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 Home Equity Loan (or Insurance
Proceeds or Liquidation Proceeds with respect thereto) with respect to
which such Advance was made;
S-26
<PAGE>
(iii) to reimburse the Servicer for any Advances previously made that the
Servicer has determined to be nonrecoverable;
(iv) to reimburse the Servicer from Insurance Proceeds for expenses in-
curred by the Servicer and covered by the related insurance policies;
(v) to pay the Servicer any unpaid Servicing Fees and to reimburse it for
any unreimbursed ordinary and necessary out-of-pocket costs and expenses
incurred by the Servicer in the performance of its servicing obligations
and Other Advances made by the Servicer, such right of reimbursement pursu-
ant to this clause (v) being limited to amounts received representing late
recoveries of the payments of such costs and expenses (or Liquidation Pro-
ceeds, Insurance Proceeds, purchase proceeds or repurchase proceeds with
respect thereto);
(vi) to pay to the Seller or the Servicer, as applicable, with respect to
each Home Equity Loan or Mortgaged Property acquired in respect thereof
that has been purchased by the Seller or the 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 Prin-
cipal Balance of such purchased Home Equity Loan;
(vii) to reimburse the Seller, the 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 Collection Account and not
required to be deposited therein; and
(ix) to clear and terminate the Collection Account upon termination of
the Pooling and Servicing Agreement.
In addition, not later than the Business Day prior to a Distribution Date,
the Servicer shall withdraw from the Collection Account the amount of Available
Funds, to the extent on deposit, and the Servicer shall remit such amount to
the Trustee for deposit into the Certificate Account, as described below.
DEPOSITS TO THE CERTIFICATE ACCOUNT
The Trustee shall establish and maintain an account (the "Certificate Ac-
count") on behalf of the Certificateholders and the Certificate Insurer. On or
before 1:00 p.m. on each Servicer Advance Date, the Servicer shall remit to the
Trustee pursuant to the Pooling and Servicing Agreement, for deposit into the
Certificate Account the amount of Available Funds on deposit in the Collection
Account (less any amounts in the Collection Account held for future distribu-
tion) and the following:
(i) all payments made by the Servicer in respect of Prepayment Interest
Shortfalls to the extent of the Servicing Fee;
(ii) any amount required to be deposited by the Servicer in connection
with any losses on investment of funds in the Collection Account;
(iii) any amounts required to be deposited by the Servicer with respect
to any deductible clause in any blanket hazard insurance policy maintained
by the Servicer in lieu of requiring each mortgagor to maintain a primary
hazard insurance policy;
(iv) all amounts required to be deposited in connection with shortfalls
in the principal amount of Replacement Home Equity Loans;
(v) amounts required to be deposited in connection with purchases by the
Servicer and repurchases by the Seller with respect to certain breaches of
representations and warranties specified in the Pooling and Servicing
Agreement; and
(vi) all Advances.
The Trustee shall deposit in the Certificate Account and retain therein (i)
no later than the close of business on the Business Day prior to the Distribu-
tion Date, the aggregate amount received from the Servicer; and (ii) on the
Distribution Date, any Insured Amount paid by the Certificate Insurer.
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WITHDRAWALS FROM THE CERTIFICATE ACCOUNT
The Trustee shall withdraw funds from the Certificate Account for distribu-
tion to the Certificate Insurer and the Certificateholders as described below
under "-- Allocation of Available Funds" and may from time to time make with-
drawals from the Certificate Account (i) to withdraw any amount deposited in
the Certificate Account and not required to be deposited therein; and (ii) to
clear and terminate the Certificate 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 follow-
ing amounts (without duplication):
(i) the aggregate amount on deposit in the Collection Account as of the
close of business on the immediately preceding Determination Date; and
(ii) the amounts deposited in the Certificate Account on the Servicer Ad-
vance Date as described under "--Deposits to the Certificate Account"
above;
less the sum of:
(x) the portion thereof representing (A) Principal Prepayments and Liqui-
dation Proceeds received after the last day of the related Prepayment Pe-
riod and (B) all Scheduled Payments or portions thereof received in respect
of scheduled principal and interest on the Home Equity Loans due after the
preceding Due Date; and
(y) amounts permitted to be withdrawn from the Collection Account pursu-
ant to clauses (i)-(viii), inclusive, under "-- Withdrawals from the Col-
lection Account" above.
On each Distribution Date, the Trustee will withdraw from the Certificate Ac-
count (a) the amount of any Insured Amount and (b) all Available Funds then on
deposit and will distribute the same sequentially as follows:
A. Distributions--General. With respect to the Offered Certificates, the Cer-
tificate Administrator and the Certificate Insurer, the Available Funds and any
Insured Amount in the following order of priority:
(i) to the Certificate Administrator, the Administration Fee;
(ii) to the Certificate Insurer, the Premium Amount (except during the
continuation of a Certificate Insurer Default);
(iii) to the Holders of the Offered Certificates, an amount equal to the
Interest Distribution Amount for the Offered Certificates;
(iv) to the Holders of the Offered Certificates, an amount equal to the
Principal Distribution Amount (excluding any Subordination Increase Amount
included therein); and
(v) to the Certificate Insurer, the Reimbursement Amount (unless the Cer-
tificate Insurer fails to make a payment required under the Certificate In-
surance Policy, in which event the Reimbursement Amount will be paid after
the distributions required to be made pursuant to B. below).
B. Distributions--Subordination Increase Amount. On any Distribution Date, to
the extent that there are Available Funds remaining after making distributions
required to be made pursuant to A. (i)-(v) above, such amount shall be distrib-
uted to the Holders of the Offered Certificates until the Subordinated Amount
on such Distribution Date is equal to the Required Subordinated Amount on such
Distribution Date.
C. Distributions--Basis Risk Carryover Amount. After making distributions re-
ferred to in subclauses A. and B. above, the Trustee shall make distributions
to the extent of the Available Funds remaining, to the Holders of the Offered
Certificates, in an amount equal to the Basis Risk Carryover Amount.
D. Distributions--Residual Payment. As more fully described in the Pooling
and Servicing Agreement, the remaining Available Funds, if any, for such Dis-
tribution Date will be distributed to the Holders of the Residual Certificates.
OVERCOLLATERALIZATION PROVISIONS
Overcollateralization Resulting from Cashflow Structure. The Pooling and Ser-
vicing Agreement requires that, on each Distribution Date, the Net Monthly Ex-
cess Cashflow, if any, is to be applied to accelerate payment
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of principal on the Offered Certificates until the Subordinated Amount is equal
to the Required Subordinated Amount for such Distribution Date. This applica-
tion of the Net Monthly Excess Cashflow has the effect of accelerating the am-
ortization of the Offered Certificates relative to the amortization of the Home
Equity 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 Certifi-
cates on such date shall generally instead be distributed to the Holders of the
Residual Certificates. This application of principal has the effect of deceler-
ating the amortization of such Offered Certificates relative to the amortiza-
tion of the Home Equity Loans, and of reducing the Subordinated Amount.
If any Home Equity Loan became a Liquidated Loan during a Due Period, a Real-
ized 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 re-
duction caused the Subordinated Amount to be less than the Required Subordi-
nated Amount for such Distribution Date, would require the payment of a Subor-
dination Increase Amount on such Distribution Date (or, in the event of insuf-
ficient 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 Hold-
ers would otherwise receive.
Subordination Deficit and the Certificate Insurance Policy. The Pooling and
Servicing Agreement requires the Trustee to make a claim for an Insured Amount
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 a
Subordination Deficit is likely to exist on such Distribution Date (after giv-
ing effect to any distributions made with respect to principal on such Distri-
bution Date), for the purpose of applying the proceeds of such Insured Amount
as a payment of the Subordination Deficit on such Distribution Date.
DEFINITIONS
The "Accrual Period" for a Distribution Date is 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 Pe-
riod, commencing on the Closing Date) and ending on the day immediately preced-
ing such Distribution Date.
The "Available Funds Adjustment" as of any Distribution Date (a) prior to the
thirteenth Distribution Date will equal zero and (b) beginning on the thir-
teenth Distribution Date will be equal to the product of (i) the Pool Stated
Principal Balance as of the preceding Distribution Date and (ii) one-twelfth of
0.50% (50 basis points).
The "Available Funds Cap" as of any Distribution Date is a per annum rate
equal to a fraction, expressed as a percentage, obtained by dividing (x) (i)
with respect to all Home Equity Loans, the amount of interest due on the Due
Dates relating to such Distribution Date reduced by (ii) the sum of (a) the
Servicing Fee, the Administration Fee and the Premium Amount for such Distribu-
tion Date and (b) the Available Funds Adjustment for such Distribution Date by
(y) the product of (i) the Class Certificate Principal Balance of the Offered
Certificates as of the close of business on the first day of the related Ac-
crual Period and (ii) the actual number of days elapsed during such Accrual Pe-
riod divided by 360.
The "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 Offered
Certificates is based upon the Available Funds Cap, the excess of (i) the
amount of interest the Offered Certificates would otherwise have been entitled
to receive on such Distribution Date had such rate been calculated at the For-
mula Pass-Through Rate for such Distribution Date, over (ii) the amount of in-
terest payable on the Offered Certificates at the Available Funds Cap for such
Distribution Date and (B) the Basis Risk Carryover Amount for all previous Dis-
tribution Dates not paid on such previous Distribution Dates, together with in-
terest thereon at the Formula Pass-Through Rate applicable to the current Dis-
tribution Date. The Certificate Insurance Policy does not cover the payment,
nor do the ratings assigned to the Offered Certificates address the likelihood
of the payment, of any Basis Risk Carryover Amount.
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A "Business Day" is any day other than a Saturday or Sunday, or a day on
which banking institutions in New York, North Carolina, Maryland, the city in
which the corporate trust office of the Trustee is located or the city in which
the Certificate Insurer is located are authorized or obligated by law or execu-
tive order to be closed.
The "Carry-Forward Amount" as of any Distribution Date equals the sum of (i)
the amount, if any, by which (a) the Interest Distribution Amount for the Of-
fered Certificates for the immediately preceding Distribution Date exceeded (b)
the amount of the actual distribution with respect to interest on the Offered
Certificates made to the Holders of the Offered Certificates on such immedi-
ately preceding Distribution Date and (ii) 30 days' interest on such excess at
the Pass-Through Rate for such Distribution Date.
The "Class Certificate Principal Balance" of the Offered Certificates, as of
any Distribution Date, will be equal to the Class Certificate Principal Balance
thereof on the Closing Date (the "Initial Class Certificate Principal Balance")
minus all distributions in respect of principal allocated thereto on previous
Distribution Dates.
"Deficiency Amount" has the meaning set forth herein under "The Certificate
Insurance Policy and the Certificate Insurer--The Certificate Insurance Poli-
cy."
A "Determination Date" with respect to any Distribution Date is the 17th day
of the month in which such Distribution Date occurs, or if such 17th day is not
a Business Day, the Business Day preceding such 17th day.
A "Due Date" with respect to each Home Equity Loan and each Due Period is the
date on which the scheduled monthly payment for such Home Equity Loan is due.
A "Due Period" with respect to any Distribution Date is the period beginning
on the opening of business on the 2nd day of the calendar month preceding the
calendar month in which such Distribution Date occurs and ending on the 1st day
of the month in which such Distribution Date occurs.
"Excess Proceeds" with respect to any Liquidated Loan, is the amount by which
Liquidation Proceeds 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, (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 dis-
tributed on the Stated Principal Balance of such Liquidated Loan outstanding
during each Due Period as to which such interest was not paid or advanced and
(iii) unreimbursed Advances and Other Advances in respect of such Liquidated
Loan.
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 of principal to be made on
such Distribution Date (without giving effect to any reductions in such Subor-
dination Amount attributable to the Subordination Reduction Amount on such Dis-
tribution Date) exceeds (ii) the Required Subordinated Amount for such Distri-
bution Date.
The "Formula Pass-Through Rate" with respect to the Offered Certificates and
a Distribution Date means the Pass-Through Rate with respect to the Offered
Certificates without giving effect to the Available Funds Cap.
The "Interest Distribution Amount" for any Distribution Date equals the sum
of (i) interest accrued during the related Accrual Period at the Pass-Through
Rate on the Class Certificate Principal Balance of the Offered Certificates
plus (ii) the Preference Amount as it relates to interest previously paid on
the Offered Certificates prior to such Distribution Date that remains unpaid as
of such Distribution Date; and (iii) the Carry-Forward Amount, if any, with re-
spect to the Offered Certificates; provided, however, that the Interest Distri-
bution Amount for any Distribution Date will be reduced by any Relief Act
Shortfalls during the related Due Period. The Interest Distribution Amount is
calculated on the basis of a 360-day year and the actual number of days elapsed
during the related Accrual Period (actual/360).
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 and Administration Fee for such Distribution Date) ex-
ceeds (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 provided that the Cer-
tificate Insurer has not failed to make a payment required under the Certifi-
cate Insurance Policy.
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The "Pass-Through Margin" will equal 0.18% (18 basis points) per annum until
the first Accrual Period relating to the Distribution Date immediately follow-
ing the Optional Termination Date, at which time the Pass-Through Margin will
equal 0.36% (36 basis points) per annum.
The "Pass-Through Rate" as to the Offered Certificates for any Distribution
Date shall be the per annum rate equal to the lesser of (i) the sum of (a) One-
Month LIBOR and (b) the applicable Pass-Through Margin and (ii) the Available
Funds Cap for such Distribution Date.
The "Pool Stated Principal Balance" as of any date is the aggregate Stated
Principal Balance of the Home Equity Loans as of such date.
The "Premium Amount" payable to the Certificate Insurer on any Distribution
Date equals one-twelfth of the product of a per annum rate (the "Premium Per-
centage") set forth in the Insurance Agreement and the Class Certificate Prin-
cipal Balance of the Offered Certificates for such Distribution Date (before
giving effect to any distributions made with respect to principal on such Dis-
tribution Date, provided, however, that for any Distribution Date on which the
Certificate Insurer has failed to make a payment required under the Certificate
Insurance Policy, the Premium Amount will be equal to zero.
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 and Administration Fee for such
Distribution Date and (B) any Insured Amount over (ii) the related Interest
Distribution Amount for such Distribution Date and (b) the excess of (x) the
sum, without duplication, of (i) all scheduled installments of principal of the
Home Equity Loans due during the related Due Period that were received by the
Servicer on or before the day prior to the related Determination Date or as to
which the Servicer made an Advance on the Servicer Advance Date, together with
all unscheduled recoveries of principal on the Home Equity Loans received by
the Servicer during the related Prepayment Period (excluding certain amounts
received in respect of scheduled principal on the Home Equity Loans due after
the related Due Date), (ii) the principal portion of the Purchase Price of each
Home Equity Loan that either was purchased by the Servicer or repurchased by
the Seller, during the related Prepayment Period, (iii) any Substitution Ad-
justment Amounts paid by the Seller during the related Prepayment Period in
connection with the substitution of Home Equity Loans, (iv) all Liquidation
Proceeds collected by the Servicer during the related Prepayment Period (to the
extent such Liquidation Proceeds are related to principal), (v) the amount of
any Subordination Deficit for such Distribution Date, (vi) the proceeds re-
ceived by the Trustee of any termination of the Trust Fund (to the extent such
proceeds are related to principal) and (vii) the amount of any Subordination
Increase Amount for such Distribution Date (to the extent of any Net Monthly
Excess Cashflow available for such purpose); over (y) the amount of any Subor-
dination Reduction Amount for such Distribution Date. In no event will the
Principal Distribution Amount with respect to any Distribution Date be less
than zero or greater than the then outstanding Class Certificate Principal Bal-
ance of the Offered Certificates.
A "Principal Prepayment" with respect to any Distribution Date is any mortga-
gor payment or other recovery of principal on a Home Equity Loan (including all
proceeds allocable to principal of any Home Equity Loan or property acquired in
respect thereof that has been repurchased by the Depositor or the Seller or
purchased by the 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.
A "Realized Loss" (i) with respect to any defaulted Home Equity 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 applica-
tion of all amounts recovered (net of amounts reimbursable to the Servicer for
related Advances, Other Advances, expenses and Servicing Fees) towards interest
and principal owing on such Liquidated Loan and (ii) with respect to certain
Home Equity Loans the principal balances or the scheduled payments of principal
and interest of which have been reduced in connection with bankruptcy proceed-
ings, the amount of such reduction.
The "Reimbursement Amount" as of any Distribution Date is the amount of all
Insured Amounts paid by the Certificate Insurer pursuant to the Certificate In-
surance Policy and certain other amounts owed to the Certifi-
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cate 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.
A "Relief Act Shortfall" with respect to any Distribution Date, for any Home
Equity Loan as to which there has been a reduction in the amount of interest
collectible thereon for the most recently ended Due Period as a result of the
application of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended,
is the amount, if any, by which (i) interest collectible on such Home Equity
Loan during the most recently ended Due Period is less than (ii) the sum of (a)
the Stated Principal Balance of such Home Equity Loan multiplied by the Pass-
Through Rate on the Offered Certificates for such Distribution Date and (b) the
Premium Amount, the Servicing Fee and the Administration Fee for such Home Eq-
uity Loan payable to the Certificate Insurer, the Servicer or the Certificate
Administrator, as applicable, for such Due Period.
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 and Indemnity Agreement dated as of April 30, 1998
(the "Insurance Agreement") among the Certificate Insurer, the Depositor, the
Servicer, the Certificate Administrator and the Trustee, of the Cut-off Date
Principal Balance of the Home Equity Loans. The Pooling and Servicing Agreement
generally provides that the Required Subordinated Amount may, over time, de-
crease subject to certain floors, caps and triggers. The Required Subordinated
Amount may be changed with the consent of the Certificate Insurer but without
the consent of the Certificateholders.
The "Stated Principal Balance" of any Home Equity Loan or related REO Prop-
erty (which is Mortgaged Property acquired by the Servicer through foreclosure
or deed-in-lieu of foreclosure in connection with a defaulted Home Equity Loan)
equals (i) as of the Cut-off Date, the Cut-off Date Principal Balance thereof,
and (ii) as of any Distribution Date after the Cut-off Date, such Cut-off Date
Principal Balance minus the sum of (a) the principal portion of the Scheduled
Payments due with respect to such Home Equity Loan or REO Property during each
Due Period ending prior to such Distribution Date which were received by the
Servicer as of the close of business on the day preceding the Determination
Date related to such Distribution Date or with respect to which Advances were
made on the Business Day prior to such Distribution Date, (b) all Principal
Prepayments with respect to such Home Equity Loan or REO Property, and all Liq-
uidation Proceeds to the extent applied by the Servicer as recoveries of prin-
cipal with respect to such Home Equity Loan or REO Property, which were re-
ceived by the Servicer as of the close of business on the day preceding the De-
termination Date related to such Distribution Date, and (c) any Realized Loss
with respect thereto applied by the close of business on the day preceding the
Determination Date relating to such Distribution Date; provided, however, that
the Stated Principal Balance of any Home Equity Loan that becomes a Liquidated
Loan will be zero on the Distribution Date that follows the Prepayment Period
in which such Home Equity 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) the Pool Stated Principal Balance
for such Distribution Date exceeds (ii) the aggregate Class Certificate Princi-
pal Balance of the Offered Certificates as of such Distribution Date after giv-
ing effect to the payment of the Principal Distribution Amount on such Distri-
bution 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 Dis-
tribution Date exceeds the Subordinated Amount as of such Distribution Date be-
fore 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 Offered 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 In-
sured Amount), exceeds (ii) the Pool Stated Principal Balance for such Distri-
bution Date.
The "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 the Subordination Increase
Amount)) and (b) the amount of Net Monthly Excess Cashflow on such Distribution
Date.
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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)(x)(i) through (iv) and (vi) 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 Home Equity Loans for one or more Home Equity
Loans that are removed from the Mortgage Pool equals the amount (if any) by
which the aggregate principal balance of such Replacement Home Equity 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 substi-
tution) of all such removed Home Equity Loans.
CALCULATION OF ONE-MONTH LIBOR
The Pass-Through Rate for the Offered Certificates for the initial Accrual
Period will be determined on the second LIBOR Business Day preceding the Clos-
ing Date. With respect to each other Distribution Date, the Trustee will deter-
mine the London interbank offered rate for one-month United States dollar de-
posits ("One-Month LIBOR") on the basis of the British Bankers' Association
("BBA") "Interest Settlement Rate" for one-month deposits in U.S. Dollars as
found on Telerate page 3750 as of 11:00 A.M., London time on the second LIBOR
Business Day prior to the first day of the related Accrual Period (each such
date, a "Rate Determination Date"). Such Interest Settlement Rates currently
are based on rates quoted by 16 BBA designated banks as being, in the view of
such banks, the offered rate at which deposits are being quoted to prime banks
in the London interbank market. Such Interest Settlement Rates are calculated
by eliminating the four highest rates and the four lowest rates, averaging the
eight remaining rates, carrying the result (expressed as a percentage) out to
six decimal places, and rounding to five decimal places. As used herein,
"Telerate page 3750" means the display designated as page 3750 on the Dow Jones
Markets. "LIBOR Business Day" means any day other than (i) a Saturday or a Sun-
day or (ii) a day on which banking institutions in the State of New York or in
the city of London, England are required or authorized by law to be closed.
If on any Rate Determination Date the Trustee is unable to determine One-
Month LIBOR on the basis of the method set forth in the preceding paragraph,
One-Month LIBOR for the next Accrual Period will be the higher of (x) One-Month
LIBOR as determined on the previous Rate Determination Date or (y) the Reserve
Interest Rate. The "Reserve Interest Rate" will be the rate per annum which the
Trustee determines to be either (A) the arithmetic mean (rounding such arith-
metic 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
Trustee are quoting, on the relevant Rate 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 Trustee can determine no such arithmetic mean, the
lowest one-month Eurodollar lending rate that the New York City banks selected
by the Trustee are quoting on such Rate Determination Date to leading European
banks.
If on any Rate Determination Date the Trustee is required but is unable to
determine the Reserve Interest Rate in the manner provided in the preceding
paragraph, One-Month LIBOR for the next Accrual Period will be One-Month LIBOR
as determined on the previous Rate Determination Date.
The establishment of One-Month LIBOR by the Trustee and the Trustee's subse-
quent calculation of the rate of interest applicable to the Offered Certifi-
cates for the relevant Accrual Period, in the absence of manifest error, will
be final and binding. Such rates may be obtained by telephoning the Trustee at
(704) 383-5272.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Certificate Administrator will prepare and the
Trustee will forward to each Certificateholder, the Servicer, the Depositor and
the Certificate Insurer a statement generally setting forth, among other infor-
mation:
(i) the amount of the related distribution to Holders of the Offered Cer-
tificates 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 the Offered Certifi-
cates allocable to interest;
(iii) the amount of any Insured Amount included in the amounts distrib-
uted to the Holders of Offered Certificates on such Distribution Date;
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(iv) the Carry-Forward Amount and any Basis Risk Carryover Amount;
(v) the Class Certificate Principal Balance of the Offered Certificates
after giving effect to the distribution of principal made, and the princi-
pal portion of Realized Losses, if any, allocated with respect to such Dis-
tribution 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 Pass-Through Rate for the Offered Certificates for such Dis-
tribution Date;
(ix) the amount of Advances by the Servicer or the Trustee included in
the distribution to the Certificates on such Distribution Date;
(x) the number of Home Equity Loans outstanding as of the preceding De-
termination Date;
(xi) the number and aggregate principal amounts of Home Equity Loans de-
linquent (exclusive of Home Equity Loans in foreclosure) (1) 30 to 59 days,
(2) 60 to 89 days and (3) 90 plus days in each case as of the close of
business on the last day of the calendar month preceding such Distribution
Date;
(xii) the total number and principal balance of Home Equity Loans in
foreclosure and any REO Properties as of the close of business on the De-
termination Date preceding such Distribution Date;
(xiii) the aggregate of all Realized Losses, relating to Liquidated
Loans;
(xiv) the amount of any Subordination Deficiency Amount after giving ef-
fect to the distribution of principal on such Distribution Date;
(xv) the unpaid principal balance of any Home Equity Loan as to which the
Servicer has determined not to foreclose because it believes the related
Mortgaged Property may be contaminated with or affected by hazardous wastes
or hazardous substances; and
(xvi) the amount of the Servicing Fee and the Administration Fee paid
(and not previously reported) with respect to the related Distribution Date
and the amount by which the Servicing Fee has been reduced by any Prepay-
ment Interest Shortfalls for the related Distribution Date.
In addition, within a reasonable period of time after the end of each calen-
dar year, the Certificate Administrator will prepare and will furnish, either
directly or through the Trustee, a statement to each Certificateholder of rec-
ord during the previous calendar year a statement containing information neces-
sary to enable Certificateholders to prepare their tax returns. Such statements
will not have been examined and reported upon by an independent public accoun-
tant.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Depositor, the
Seller, the Servicer, the Certificate Administrator and the Trustee, without
the consent of any of the Certificateholders but with the consent of the Cer-
tificate Insurer (which consent shall not be unreasonably withheld), (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 there-
in; (iii) to add to, modify or eliminate any provisions therein respecting
transfers of the Residual Certificates to certain disqualified organizations
described in the Prospectus 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 the Residual Cer-
tificates, (v) to change the manner in which the Collection Account or the Cer-
tificate Account is maintained, provided that any such change does not ad-
versely affect the then current rating on the Offered Certificates (without re-
gard to the Certificate Insurance Policy), or (vi) to make any other revisions
with respect to matters or questions arising under the Pooling and Servicing
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 Certificateholder or the Certificate Insurer. In addition, the Pooling and
Servicing Agreement may be amended by the Depositor, the Seller, the Servicer,
the Certificate Administrator and the Trustee with the consent of the Certifi-
cate Insurer and the Holders of Percentage Interests aggregating 51% of
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each Class of Certificates affected thereby, to add any provisions to or change
in any manner or eliminate any of the provisions of the Pooling and Servicing
Agreement or to modify in any manner the rights of the Holders of the affected
Class; provided, however, that no such amendment may (a) reduce in any manner
the amount of or delay the timing of payments received on the Home Equity Loans
which are required to be distributed on any Certificates without the consent of
the Holders of such Certificates and the Certificate Insurer or (b) reduce the
aforesaid Percentage Interest of each Class of Certificates which are required
to consent to any such amendment without the consent of the Holders of all Cer-
tificates of such Class covered by such Agreement then outstanding. Notwith-
standing the foregoing, the Required Subordinated Amount may be amended by the
Depositor, the Servicer and the Seller with the consent of the Certificate In-
surer but without the consent of the Certificateholders.
OPTIONAL TERMINATION
The Servicer will have the right to repurchase all remaining Home Equity
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
Home Equity Loans and REO Properties at the time of repurchase being less than
10% of Cut-off Date Pool Principal Balance (the "Optional Termination Date").
Any such purchase of Home Equity Loans requires the consent of the Certificate
Insurer if it would result in a draw on the Certificate Insurance Policy. In
the event such option is exercised, the repurchase will be made at a price
equal to (a) the sum of (i) 100% of the Stated Principal Balance of each Home
Equity Loan and REO Property as of the prior Distribution Date plus accrued in-
terest thereon at the applicable Mortgage Rate, (ii) any unpaid Basis Risk Car-
ryover Amount and (iii) all amounts owed to the Certificate Insurer minus (b)
any unreimbursed Other Advances and the principal portion of Advances, in each
case previously incurred by the Servicer in the performance of its servicing
obligations. Proceeds from such repurchase will be included in Available Funds
and will be distributed to the Certificateholders. Any repurchase of the Home
Equity Loans and REO Properties will result in an early retirement of the Cer-
tificates.
OPTIONAL PURCHASES
Subject to the provisions of the Pooling and Servicing Agreement, the
Servicer may, at its option, purchase any Home Equity Loan which is in default
or as to which default is reasonably foreseeable if, in the Servicer's judg-
ment, the related default is not likely to be cured by the borrower or default
is not likely to be averted, at a price thereof equal to the Purchase Price.
SPECIAL SERVICING AGREEMENTS
The Pooling and Servicing Agreement permits the Servicer (with the consent of
the Certificate Insurer, which consent shall not be unreasonably withheld), to
enter into a special servicing agreement with an unaffiliated holder of at
least a Percentage Interest of 51% of the Residual Certificates. Pursuant to
such an agreement, such holder may instruct the Servicer to commence or delay
foreclosure proceedings with respect to delinquent Home Equity Loans. Such com-
mencement or delay at such holder's direction will be taken by the Servicer
only after such holder deposits a specified amount of cash with the Servicer.
Such cash will be available for distribution to Certificateholders if Liquida-
tion Proceeds are less than they otherwise may have been had the Servicer acted
pursuant to its normal servicing procedures.
EVENTS OF DEFAULT; SERVICER TERMINATION TRIGGER EVENT
Events of Default will consist of: (i) any failure by the Servicer to deposit
in the Collection Account or the Certificate Account the required amounts or
remit to the Trustee any payment (including an Advance required to be made un-
der the terms of the Pooling and Servicing Agreement) which continues unremed-
ied for five days after written notice of such failure shall have been given to
the Servicer by the Trustee, the Certificate Insurer or the Depositor, or to
the Servicer and the Trustee by the Holders of Certificates evidencing Voting
Rights aggregating not less than 25% evidenced by the Certificates; (ii) any
failure by the 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 Servicer, in the Pooling and Servicing Agreement, which continues
unremedied for 60 days after the giving of written notice of such failure to
the Servicer by the Trustee, the Certificate Insurer or the Depositor, or to
the Servicer and the Trustee by the Holders of Certificates evidencing Voting
Rights aggregating not less than 25% evidenced by the Certificates; or (iii)
insolvency, readjustment of debt, marshalling of assets and liabilities or sim-
ilar proceedings, and certain actions by or on behalf of the Servicer indicat-
ing its insolvency or
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inability to pay its obligations. A "Servicer Termination Trigger Event" will
occur if certain loss or delinquency levels are exceeded with respect to the
Home Equity Loans, as described in the Pooling and Servicing Agreement. As of
any date of determination, (i) holders of the Offered Certificates will be al-
located a percentage of the "Voting Rights" equal to 100% minus the fraction
(expressed as a percentage) whose numerator is the Required Subordinated Amount
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 al-
located all of the remaining Voting Rights. Voting Rights will be allocated
among the Certificates of each class in accordance with their respective Per-
centage Interests.
RIGHTS UPON EVENT OF DEFAULT OR SERVICER TERMINATION TRIGGER EVENT
So long as an Event of Default under the Pooling and Servicing Agreement re-
mains unremedied, the Trustee shall, but only upon the receipt of instructions
from the Certificate Insurer or the Holders of Certificates having Percentage
Interests aggregating not less than 25% (with the prior written consent of the
Certificate Insurer), terminate all of the rights and obligations of the
Servicer under the Pooling and Servicing Agreement and in and to the Home Eq-
uity Loans, whereupon the Trustee will, subject to the provisions set forth un-
der "The Agreements--Events of Default; Rights Upon Event of Default" in the
Prospectus, succeed to all of the responsibilities and duties of the Servicer
under the Pooling and Servicing Agreement, including the obligation to make Ad-
vances. If a Servicer Termination Trigger Event occurs, the Trustee shall, sub-
ject to the provisions set forth under "The Agreements--Events of Default;
Rights Upon Events of Default" in the Prospectus, but only upon receipt of
written instructions from the Certificate Insurer, terminate all of the rights
and obligations of the Servicer under the Pooling and Servicing Agreement and
in and to the Home Equity Loans as described in the preceding sentence. No as-
surance can be given that termination of the rights and obligations of the
Servicer under the Pooling and Servicing Agreement would not adversely affect
the servicing of the Home Equity Loans, including the delinquency experience of
the Home Equity Loans.
No Certificateholder, solely by virtue of such Holder's status as a
Certificateholder, will have any right under the Pooling and Servicing Agree-
ment to institute any proceeding with respect thereto, unless such Holder pre-
viously has given to the Trustee written notice of the continuation of an Event
of Default and unless the Holders of Certificates having Percentage Interests
aggregating not less than 25% 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 Certifi-
cate Insurer shall have consented thereto and the Trustee for 60 days has ne-
glected or refused to institute any such proceeding.
THE TRUSTEE
First Union National Bank will be the Trustee under the Pooling and Servicing
Agreement. Offered Certificates may be surrendered at the Corporate Trust Of-
fice of the Trustee located at 230 South Tryon Street NC-1179, Charlotte, North
Carolina 28288; Attention: Corporate Trust, Structured Finance Group or at such
other addresses as the Trustee may designate from time to time.
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
The information set forth in this section has been provided by Ambac Assur-
ance Corporation (the "Certificate Insurer"). No representation is made by the
Depositor, the Seller or any of their affiliates as to the accuracy or com-
pleteness of any such information.
THE CERTIFICATE INSURER
The Certificate Insurer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of Wis-
consin and licensed to do business in 50 states, the District of Columbia, the
Commonwealth of Puerto Rico and Guam. The Certificate Insurer primarily insures
newly issued municipal and structured finance obligations. The Certificate In-
surer is a wholly-owned subsidiary of Ambac Financial Group, Inc. (formerly
AMBAC Inc.) a 100% publicly-held company. Moody's, S&P and Fitch IBCA, Inc.
have each assigned a triple-A claims-paying ability rating to the Certificate
Insurer.
The consolidated financial statements of the Certificate Insurer and its sub-
sidiaries as of December 31, 1997 and December 31, 1996 and for the three years
ended December 31, 1997 prepared in accordance with generally accepted account-
ing principles, included in the Annual Report on Form 10-K of Ambac Financial
Group, Inc.
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<PAGE>
(which was filed with the Commission on March 31, 1998; Commission File No 1-
10777) are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document in-
corporated herein by reference shall be modified or superseded for the purposes
of this Prospectus Supplement to the extent that a statement contained herein
by reference herein also modifies or supersedes such statement. Any statement
so modified or superseded shall not be deemed, except as so modified or super-
seded, to constitute a part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and its subsidiaries in-
cluded in documents filed by Ambac Financial Group, Inc. with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, subsequent to the date of this Prospectus Supplement and
prior to the termination of the offering of the Offered Certificates shall be
deemed to be incorporated by reference into this Prospectus Supplement and to
be a part hereof from the respective dates of filing such documents.
The following table sets forth the capitalization of the Certificate Insurer
as of December 31, 1994, December 31, 1995, December 31, 1996 and December 31,
1997, respectively, in conformity with generally accepted accounting princi-
ples.
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Unearned premiums.......... $ 840 $ 906 $ 995 $1,184
Other liabilities.......... 136 295 259 520
------ ------ ------ ------
Total liabilities.......... $ 976 $1,201 $1,254 $1,704
------ ------ ------ ------
Stockholder's equity
Common Stock.............. $ 82 $ 82 $ 82 $ 82
Additional paid-in capi-
tal...................... 444 481 515 521
Unrealized gains (losses)
on investments net of
tax...................... (46) 87 66 118
Retained earnings......... 782 907 992 $1,180
------ ------ ------ ------
Total stockholder's equi-
ty........................ $1,262 $1,557 $1,655 $1,901
------ ------ ------ ------
Total liabilities and
stockholder's equity...... $2,238 $2,758 $2,909 $3,605
====== ====== ====== ======
</TABLE>
For additional financial information concerning the Certificate Insurer, see
the audited financial statements of the Certificate Insurer incorporated by
reference herein. Copies of the financial statements of the Certificate Insurer
incorporated herein by reference and copies of the Certificate Insurer's annual
statement for the year ended December 31, 1997 prepared in accordance with
statutory accounting standards are available, without change, from the Certifi-
cate Insurer. The address of the Certificate Insurer's administrative offices
and its telephone number are One State Street Plaza, 17th Floor, New York, New
York 10004 and (212) 668-0340.
The Certificate Insurer makes no representation regarding the Certificates or
the advisability of investing in the Certificates and makes no representation
regarding, nor has it participated in the preparation of, this Prospectus Sup-
plement other than the information supplied by the Certificate Insurer and pre-
sented under this heading "The Certificate Insurance Policy and the Certificate
Insurer" and in the financial statements incorporated herein by reference.
THE CERTIFICATE INSURANCE POLICY
The Certificate Insurer will issue its Certificate Guaranty Insurance Policy
for the Offered Certificates (the "Certificate Insurance Policy"). The follow-
ing summary of the terms of the Certificate Insurance Policy does not purport
to be complete and is qualified in its entirety by reference to the Certificate
Insurance Policy. The Certificate Insurance Policy unconditionally guarantees
the payment of Insured Amounts on the Offered Certificates. The Certificate In-
surer will pay each required Insured Amount to the Trustee on the later of (i)
the Distribution Date on which such Insured Amount is distributable to the
holders of the Offered Certificates pursuant to the Pooling and Servicing
Agreement and (ii) the business day next following the day on which the Insurer
shall have received telephonic or telegraphic notice, subsequently confirmed in
writing, or written notice
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by registered or certified mail, from the Trustee, specifying that an Insured
Amount is due in accordance with the terms of the Certificate Insurance Policy.
The Certificate Insurer's obligation under the Certificate Insurance Policy
for a Distribution Date will be discharged to the extent that the funds equal
to the applicable Insured Amount are received by the Trustee for distribution
to the holders of the Offered Certificates, whether or not such funds are prop-
erly distributed by the Trustee.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Insurance Policy, thereby uncondition-
ally and irrevocably guarantees to any Certificate Owner that an amount equal
to each full and complete Insured Amount will be received by the Trustee or its
successor, as trustee for the Certificate Owners, on behalf of the Certificate
Owners from the Certificate Insurer, for distribution by the Trustee to each
Certificate Owner of each Certificate Owner's proportionate share of the In-
sured Amount. The Insured Amount shall be paid only at the time set forth in
the Certificate Insurance Policy and no accelerated Insured Amounts shall be
paid regardless of any acceleration of the Obligations 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 Insurance Policy
does not cover, and Insured Amounts shall not include, any Relief Act
Shortfalls or any Basis Risk Carryover Amount.
The Certificate Insurer will pay any amount payable under the Certificate In-
surance Policy no later than 12:00 noon, New York City time, on the later of
the Distribution Date on which the related Insured Amount is due or the Busi-
ness Day following receipt in New York, New York on a Business Day 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 re-
ceived on the following Business Day. If any such Notice is not in proper form
or is otherwise insufficient for the purpose of making claim under the Certifi-
cate Insurance Policy, such Notice shall be deemed not to have been received
for purposes of this paragraph, and the Certificate Insurer shall promptly so
advise the Trustee and the Trustee may submit an amended Notice.
As used in the Certificate Insurance Policy, the following terms shall have
the following meanings:
"Deficiency Amount" means, the excess, if any, of (i) the sum of (a) the In-
terest Distribution Amount and (b) the Subordination Deficit and (c) on the Fi-
nal Scheduled Distribution Date, the Class Certificate Principal Balance of the
Offered Certificates (after application of any Principal Distribution Amount to
be paid with respect to such date), over (ii) the Available Funds (after any
deduction for the Administration Fee and Premium Amount and after taking into
account the portion of the Principal Distribution Amount to be actually dis-
tributed on such Distribution Date without regard to any related Insured Amount
to be paid with respect to such Distribution Date).
"Insured Amount" means, as of any Distribution Date, (a) any Deficiency
Amount and (b) any Preference Amount (without duplication).
"Obligations" means $219,697,000 (approximate) Series 1998-HE1 Asset Backed
Certificates, Class A Certificates, under the Certificate Insurance Policy.
An Insured Amount with respect to any Distribution Date will also include any
Preference Amount which occurs prior to the related Determination Date. "Pref-
erence Amount" means any amount previously distributed to a Certificate Owner
on the Obligations that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code, as amended from time to time, in accordance with a final nonappealable
order of a court having competent jurisdiction.
The Certificate Insurer shall be subrogated to the rights of each Certificate
Owner to receive payments of principal and interest, as applicable, with re-
spect to distributions on the Obligations to the extent of any payment by the
Certificate Insurer under the Certificate Insurance Policy. To the extent the
Certificate Insurer pays Insured Amounts, either directly or indirectly (as by
paying through the Trustee), to the Certificate Owners, the Certificate Insurer
will be subrogated to the rights of the Certificate Owners, as applicable, with
respect to such Insured Amounts and shall be deemed to the extent of the pay-
ments so made to be a Certificate Owner for purposes of payment.
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<PAGE>
Capitalized terms used in the Certificate Insurance Policy and not otherwise
defined therein shall have the respective meanings set forth in the Pooling and
Servicing Agreement as of the date of execution of the Certificate Insurance
Policy, without giving effect to any subsequent amendment or modification to
the Pooling and Servicing Agreement unless such amendment or modification has
been approved in writing by the Certificate Insurer.
THE INSURANCE PROVIDED BY THE 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 cancellable for any reason. The pre-
miums on the Certificate Insurance Policy are not refundable for any reason in-
cluding payment, or provision being made for payment, prior to maturity of the
Obligations.
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
GENERAL
Each Accrual Period for the Offered Certificates will consist of the actual
number of days elapsed from the Distribution Date in 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 day preceding such Distribution
Date.
INTEREST RATE FLUCTUATIONS
The yield to investors on the Offered Certificates will be sensitive to,
among other things, the level of One-Month LIBOR, the level of the Mortgage In-
dices on each Rate Determination Date and to the additional limitations speci-
fied herein affecting the Pass-Through Rate for the Offered Certificates. As
described herein, the Pass-Through Rate for the Offered Certificates may in no
event exceed the Available Funds Cap, which depends, in large part, on the
Mortgage Rates of the Home Equity Loans in effect during the preceding calendar
month. Disproportionate principal payments (whether resulting from full or par-
tial prepayments) on Home Equity Loans having Mortgage Rates higher or lower
than the applicable Formula Pass-Through Rate for the Offered Certificates
could therefore affect the yield on the Offered Certificates. In particular,
the yield to maturity of the Offered Certificates could be lower than that oth-
erwise produced if disproportionate principal payments (including prepayments)
are made on Home Equity Loans having Mortgage Rates that exceed the Formula
Pass-Through Rate.
13.69% of the Home Equity Loans (by Principal Balance as of the Cut-off Date)
accrue interest at a fixed rate for the life of the Home Equity Loan. If Home
Equity Loans bearing higher fixed Mortgage Rates were to prepay, the weighted
average Mortgage Rate of such Home Equity Loans would be lower than otherwise
would be the case. In addition, changes in One-Month LIBOR may not correlate
with changes in prevailing rates of interest. It is possible that a lower level
of prevailing interest rates, which would be expected to result in faster pre-
payments, could occur simultaneously with an increased level of One-Month LI-
BOR.
Additionally, if the Mortgage Rates on the Fixed Rate Loans were to be lower
than the prevailing level of One-Month LIBOR, the weighted average Mortgage
Rates of the Home Equity Loans would be lower and there is an increased likeli-
hood that the Pass-Through Rate (and payments to the Holders of the Offered
Certificates) on the Offered Certificates would be limited by the Available
Funds Cap.
Although 86.31% of the Home Equity Loans (by Principal Balance as of the Cut-
off Date) bear interest at an adjustable rate, certain of the ARMs were origi-
nated with initial Mortgage Rates that were based on competitive conditions and
did not equal the sum of the Mortgage Index and the related Gross Margin. As a
result, the Mortgage Rates on such ARMs are more likely to adjust on their
first, and possibly subsequent Change Dates, subject to the effects of the ap-
plicable Initial Rate Cap, Periodic Rate Cap and Lifetime Cap. Because the
Pass-Through Rate for the Offered Certificates is limited by the Available
Funds Cap on each Distribution Date, limits on changes in the Mortgage Rates of
the ARMs may limit changes in the Pass-Through Rate for the Offered Certifi-
cates. In addition, the Mortgage Rates for certain of the ARMs will not adjust
until the date on which the 6th, 12th, 24th or 36th scheduled monthly payment
is due.
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<PAGE>
Although the Pooling and Servicing Agreement provides a mechanism to pay any
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 Offered 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, purchases and
repurchases of the Home Equity 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, purchases
and repurchases of the Home Equity 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 antici-
pated rate of principal payments, liquidations and purchases of such Home Eq-
uity 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 de-
faults and delinquent payments on the Home Equity 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 currently payable under the Certificate In-
surance Policy, its actual yield to maturity will be lower than that so calcu-
lated and could, in the event of substantial losses, be negative. The timing of
Realized Losses that are not covered by payments under the Certificate Insur-
ance 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 and may slow the
amortization of the Offered Certificates. A draw on the Certificate Insurance
Policy in respect of principal will be made if a Subordination Deficit exists
or upon the Final Scheduled Distribution Date, to pay the Certificate Principal
Balance of the Offered Certificates. Thus, holders of the Offered Certificates
may not receive reimbursement for Realized Losses in the month following the
occurrence of such losses to the extent overcollateralization exists. 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 Home Equity Loans. Because the Home Equity Loans are underwritten in accor-
dance 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 Home Equity 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 Home Equity Loans. The rate of prin-
cipal payments on the Home Equity Loans will in turn be affected by the amorti-
zation schedules of the Home Equity Loans and by the rate of Principal Prepay-
ments thereon (including for this purpose, prepayments resulting from (i) refi-
nancing, (ii) liquidations of the Home Equity Loans due to defaults, casualties
and condemnations, (iii) the exercise of due-on-sale clauses, and (iv) repur-
chases by the Seller or purchases by the Servicer). The Home Equity Loans may
be prepaid by the mortgagors at any time; however, it is expected that no more
than 41.47% of the Home Equity Loans (by Principal Balance as of the Cut-off
Date), will have a prepayment charge which may be applied to full prepayments
by borrowers during a specified period up to the first five years from the date
of origination under the limited circumstances described above under "The Mort-
gage Pool--General". Increases in the required monthly payments on the Home Eq-
uity Loans in excess of those assumed in underwriting such Home Equity Loans
may result in a default rate higher than that which may have been experienced
had such Home Equity Loans borne fixed interest rates. Additionally, the Home
Equity Loans are subject to the "due-on-sale" provisions included therein. See
"Risk Factors--Prepayment Considerations and Risks" herein.
Prepayments, liquidations and purchases of the Home Equity Loans (including
any optional purchase of a defaulted Home Equity Loan or any purchase of the
remaining Home Equity Loans and REO Property in connection with the optional
termination of the Trust Fund) will, subject to certain conditions, result in
distributions to the Holders of Offered Certificates of principal amounts that
would otherwise be distributed over the
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<PAGE>
remaining terms of the Home Equity Loans. Since the rate of payment of princi-
pal on the Home Equity Loans will depend on future events and a variety of fac-
tors, no assurance can be given as to such rate or the rate of Principal Pre-
payments.
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 mortga-
gors' 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 Home Equity Loans in stable or changing interest
rate environments.
The rate of prepayment on fixed rate home equity loans is sensitive to pre-
vailing interest rates and, if prevailing interest rates were to fall, the
Fixed Rate Loans may be subject to higher prepayment rates. Conversely, if pre-
vailing interest rates were to rise, the rate of prepayments on the Fixed Rate
Loans could decrease.
The rate of principal prepayments with respect to ARMs has fluctuated in re-
cent years. As is the case with Fixed Rate Loans, the 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, Mortgagors with ARMs
may be inclined to refinance their ARMs with a fixed rate loan to "lock in" a
lower interest rate. The initial Change Dates for approximately 4.76%, 31.21%,
53.49% and 10.54% of the ARMs (by Principal Balance of the ARMs as of the Cut-
off Date) will occur on the 6th, 12th, 24th and 36th Due Dates, respectively.
The prepayment behavior of the 2/28 LIBOR Loans and the 3/1 CMT Loans (the "De-
layed Adjustment Loans") may differ from that of the Fixed Rate Loans and the
other ARMs. As a Delayed Adjustment Loan approaches its initial Change Date,
the borrower may become more likely to refinance such loan to avoid an increase
in the Mortgage Rate, even if fixed rate loans are only available at rates that
are slightly lower or higher than the Mortgage Rate before adjustment. The ex-
istence of the applicable Periodic Rate Cap, Lifetime Cap and Lifetime Floor
also may affect the likelihood of prepayments resulting from refinancings. In
addition, the delinquency and loss experience on the ARMs may differ from that
on the Fixed Rate Loans because the amount of the monthly payments on the ARMs
are subject to adjustment on each Change Date.
The prepayment experience on sub-prime home equity loans may be affected by
the credit quality of the borrower. Because the credit histories of many sub-
prime home equity borrowers may preclude them from other traditional sources of
financing, such borrowers may be less likely to refinance due to a decline in
market interest rates. Sub-prime home equity loans may experience more prepay-
ments in a rising interest rate environment as the borrowers' finances are
stressed to the point of default. However, the increased level of competition
among home equity lenders has increased the awareness among credit-impaired
borrowers of the availability of credit and the attraction of refinancing.
Another factor that may influence prepayments is that the principal balance
of certain Home Equity Loans is relatively small. A small principal balance may
be easier for a borrower to refinance or otherwise prepay than a larger balance
and, therefore, a higher prepayment rate may result for the Mortgage Pool than
for a pool of mortgage loans with higher principal balances, irrespective of
the relative average interest rates and the general interest rate environment.
Accordingly, the Home Equity Loans may experience relatively high rates of pre-
payments. Conversely, a borrower with a Home Equity Loan having a small princi-
pal balance may view refinancing such Home Equity Loan at a lower interest rate
as less attractive because the impact to the borrower of lower interest rates
on the size of the related monthly payment may be perceived as insignificant.
Moreover, borrowers under the Home Equity Loans may have limited access to al-
ternative financing, which may limit refinancing options, or may be required to
incur relatively higher origination costs than borrowers under other mortgage
loan programs, which may discourage refinancing activity. As a result, the Home
Equity Loans may prepay at relatively slow rates.
The timing of changes in the rate of prepayments on the Home Equity Loans may
significantly affect an investor's actual yield to maturity, even if the aver-
age rate of principal payments is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the Home Equity Loans, the
greater the effect on an investor's yield to maturity. The effect on an invest-
or'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 de-
crease (or increase) in the rate of principal payments.
S-41
<PAGE>
OVERCOLLATERALIZATION PROVISIONS
The operation of the overcollateralization provisions of the Pooling and Ser-
vicing Agreement will affect the weighted average life of the Offered Certifi-
cates and consequently the yield to maturity of Certificates purchased at a
discount or premium. Unless and until the Subordinated Amount equals the Re-
quired Subordinated Amount, Net Monthly Excess Cashflow will be applied as dis-
tributions of principal of the Offered Certificates, thereby reducing the
weighted average life thereof. The actual Subordinated Amount may change from
Distribution Date to Distribution Date producing uneven distributions of Net
Monthly Excess Cashflow. 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 Home Equity Loans over the amount required to pay
interest on the Offered Certificates, the premium for the Certificate Insurance
Policy and certain other Trust Fund expenses. Home Equity Loans with higher
Mortgage Rates will contribute more interest to the Net Monthly Excess
Cashflow. Home Equity Loans with higher Mortgage Rates may prepay faster than
Home Equity Loans with relatively lower Mortgage Rates in response to a given
change in market interest rates. Any such disproportionate prepayments of Home
Equity Loans with higher 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 life of the Offered
Certificates may vary significantly over time.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date for the Offered Certificates is set
forth under the heading "Summary of Terms -- Final Scheduled Distribution
Date." The Final Scheduled Distribution Date for the Offered Certificates is
the Distribution Date in April 2028. The weighted average life of the Offered
Certificates is likely to be shorter, and the final Distribution Date could oc-
cur significantly earlier than the Final Scheduled Distribution Date because
(i) Principal Prepayments are likely to occur, (ii) the Seller may repurchase
Home Equity Loans in the event of breaches of representations and warranties
and (iii) the Servicer may purchase (a) the Home Equity Loans on or after the
Optional Termination Date or (b) defaulted Home Equity Loans.
ADDITIONAL INFORMATION
The Depositor intends to file certain additional yield tables and other com-
putational materials with respect to the Offered Certificates with the Securi-
ties and Exchange Commission in a report on Form 8-K. Such tables and materials
were prepared by the Underwriter at the request of certain prospective invest-
ors, based on assumptions provided by, and satisfying the special requirements
of, such prospective investors. Such tables and assumptions may be based on as-
sumptions that differ from the Structuring Assumptions. Accordingly, such ta-
bles and other materials may not be relevant to or appropriate for investors
other than those specifically requesting them.
WEIGHTED AVERAGE LIFE OF THE OFFERED CERTIFICATES
The following information is given solely to illustrate the effect of prepay-
ments on the Home Equity Loans on the weighted average life of the Offered Cer-
tificates under the stated assumptions and is not a prediction of the prepay-
ment rate that might actually be experienced by the Home Equity 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 Home Equity
Loans is paid. Principal payments on the Home Equity Loans may be in the form
of scheduled amortization or prepayments (for this purpose, the term "prepay-
ment" includes repayments and liquidations due to default or other dispositions
of the Home Equity Loans). Prepayments on home equity loans may be measured
relative to a prepayment standard or model. The models used in this Prospectus
Supplement are the prepayment curve for the Fixed Rate Loans (the "Fixed Rate
PPC") and the prepayment curve for the ARMs (the "ARM PPC") which are based on
assumed rates of prepayment each month of the then unpaid principal balances of
the applicable Assumed Home Equity Loans. 100% of the Fixed Rate PPC assumes a
constant prepayment rate ("CPR") of 4.0% per annum of the then unpaid principal
balance of such home equity loans in the first month of the life of such home
equity loans
S-42
<PAGE>
and an additional approximately 1.455% (precisely 16/11%) per annum in each
month thereafter until the 12th month. Beginning in the 12th month and in each
month thereafter during the life of such home equity loans, 100% Fixed Rate PPC
assumes a CPR of 20%. 100% of the ARM PPC assumes a CPR of 0% per annum of the
then unpaid principal balance of such home equity loans in the first month of
the life of such home equity loans and an additional approximately 2.727% (pre-
cisely 30/11%) per annum in each month thereafter until the 12th month. Begin-
ning in the 12th month and in each month thereafter during the life of such
home equity loans, 100% ARM PPC assumes a CPR of 30%.
There is no assurance, however, that prepayments on the Home Equity Loans
will conform to any level of Fixed Rate PPC or ARM PPC, and no representation
is made that the Home Equity Loans will prepay at the prepayment rates shown or
any other prepayment rate. The rate of principal payments on pools of Home Eq-
uity Loans is influenced by a variety of economic, geographic, social and other
factors, including the level of interest rates. Other factors affecting prepay-
ment of mortgage loans include changes in obligors' housing needs, job trans-
fers 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 inter-
est on such mortgage loans, the rate of prepayment would be expected to de-
crease.
The percentages and weighted average lives in the following decrement table
were determined on the basis of the prepayment assumptions set forth above and
on the basis of the following additional assumptions and assumed characteris-
tics of the Home Equity Loans (collectively, the "Structuring Assumptions"):
(i) scheduled interest and principal payments on the Home Equity Loans are re-
ceived in a timely manner (i.e., no delinquencies or defaults) on the first day
of each month commencing in May 1998; (ii) Principal Prepayments in full are
made at the indicated percentages of the Fixed Rate PPC and the ARM PPC set
forth in the table on the last day of each month commencing in April, 1998 and
there are no partial Principal Prepayments or Prepayment Interest Shortfalls;
(iii) the Servicer does not exercise its right of optional termination de-
scribed under "Description of the Certificates--Optional Termination" (except
as indicated in the table); (iv) the Trust Fund consists of 16 Home Equity
Loans (the "Assumed Home Equity Loans") which, as of the Cut-off Date, have the
characteristics set forth below under "--Assumed Home Equity Loan Characteris-
tics"; (v) the Servicing Fee and Administration Fee are as described herein;
(vi) the Premium Percentage is 0.12% per annum; (vii) the Closing Date is April
30, 1998; (viii) the levels of Six-Month LIBOR, CMT and One-Month LIBOR remain
constant at 5.74609%, 5.39% and 5.65625%, respectively; (ix) the Mortgage Rate
for each ARM is adjusted on its next Change Date (and on subsequent Change
Dates, if necessary) to equal the sum of (a) the assumed level of the applica-
ble Mortgage Index and (b) the Gross Margin (such sum being limited by the ap-
plicable Initial Rate Cap, Periodic Rate Cap and Lifetime Cap); (x) the Re-
quired Subordinated Amount will initially be equal to 2.50% of the Cut-off Date
Principal Balance and will step down as set forth in the Pooling and Servicing
Agreement; and (xi) distributions to holders of the Offered Certificates will
be made on 25th day of each month commencing in May 1998. No representation is
made that the Home Equity Loans will experience no delinquencies or losses as
is assumed in the Structuring Assumptions.
S-43
<PAGE>
ASSUMED HOME EQUITY LOAN CHARACTERISTICS
FIXED RATE LOANS
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL REMAINING
INITIAL AMORTIZATION TERM TO TERM TO
AMORTIZATION PRINCIPAL MORTGAGE TERM MATURITY MATURITY
METHODOLOGY BALANCE RATE (MONTHS) (MONTHS) (MONTHS)
- ------------ -------------- -------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Level Pay............... $ 3,251,092.86 9.6790% 180 180 176
Level Pay............... 26,410,279.85 10.2252 360 360 356
Balloon................. 422,301.00 9.5826 360 180 178
</TABLE>
ARMS
<TABLE>
<CAPTION>
RATE
ORIGINAL REMAINING MONTHS TO ADJUST-
INITIAL TERM TO TERM TO LIFETIME INITIAL PERIODIC NEXT MENT
AMORTIZATION PRINCIPAL MORTGAGE MATURITY MATURITY GROSS RATE RATE RATE CHANGE FREQUENCY MORTGAGE
METHODOLOGY BALANCE RATE (MONTHS) (MONTHS) MARGIN CAP CAP CAP DATE (MONTHS) INDEX
------------ -------------- -------- -------- --------- ------ -------- ------- -------- --------- --------- ---------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <S>
Six-Month
Level Pay.. $ 3,793,424.96 8.8335% 360 356 5.5406% 14.8335% 1.0000% 1.0000% 2 6 LIBOR
Six-Month
Level Pay.. 5,222,775.80 9.1223 360 357 5.9728 14.8572 1.0236 1.0236 5 6 LIBOR
Six-Month
Level Pay.. 9,616,745.92 9.5337 360 353 6.5913 15.5337 3.0000 1.0000 17 6 LIBOR
Six-Month
Level Pay.. 31,124,291.81 9.7126 360 355 6.5410 15.7161 3.0000 1.0413 19 6 LIBOR
Six-Month
Level Pay.. 18,608,007.72 9.7273 360 357 6.5979 15.7273 3.0000 1.0155 21 6 LIBOR
Six-Month
Level Pay.. 20,122,360.33 9.3077 360 358 6.3668 15.3766 3.0000 1.0533 22 6 LIBOR
Six-Month
Level Pay.. 21,962,456.77 9.3658 360 359 6.5694 15.3768 3.0000 1.0664 23 6 LIBOR
Level Pay.. 10,435,556.29 8.9515 360 353 6.2058 14.9515 2.0000 2.0000 5 12 CMT
Level Pay.. 21,741,861.60 8.9310 360 355 6.1100 14.9310 2.0000 2.0000 7 12 CMT
Level Pay.. 26,997,199.24 9.0630 360 358 6.3522 15.0630 2.0000 2.0000 10 12 CMT
Level Pay.. 5,974,741.23 9.6894 360 354 6.6370 15.6894 3.0000 2.0000 30 12 CMT
Level Pay.. 7,184,366.34 9.7998 360 356 6.3825 15.7998 3.0000 2.0000 32 12 CMT
Level Pay.. 6,829,827.18 9.5760 360 359 6.5374 15.5760 3.0000 2.0000 35 12 CMT
</TABLE>
Since the decrement table was prepared on the basis of the Structuring As-
sumptions, there are discrepancies between the characteristics of the actual
Home Equity Loans and the characteristics of the home equity loans assumed in
preparing the tables. Any such discrepancy may have an effect upon the percent-
ages of the Initial Class Certificate Principal Balance for the Offered Certif-
icates outstanding and weighted average lives of such Offered Certificates set
forth in the table. In addition, since the actual Home Equity Loans and the
Trust Fund have characteristics which differ from those assumed in preparing
the table set forth below, the distributions of principal on the Offered Cer-
tificates may be made earlier or later than as indicated in the table.
Based on the foregoing Structuring Assumptions, the following table indicates
the percentage of the Initial Class Certificate Principal Balance of the Of-
fered Certificates that would be outstanding after each of the dates shown at
the indicated percentages of the Fixed Rate PPC and the ARM PPC and the corre-
sponding weighted average life of such Offered Certificates.
It is not likely that (i) all of the Home Equity Loans will have the charac-
teristics assumed, (ii) the Home Equity Loans will prepay at the specified per-
centages of the Fixed Rate PPC and the ARM PPC or that all the Fixed Rate Loans
or ARMs, respectively, will prepay at the same rate or (iii) the levels of One-
Month LIBOR, CMT and Six-Month LIBOR will remain constant at the levels assumed
or at any other levels. In addition, the diverse remaining terms to maturity of
the Home Equity Loans (which include recently originated Home Equity Loans)
could produce distributions of principal that differ from the distributions in-
dicated in the table at the various percentages of the Fixed Rate PPC and the
ARM PPC specified even if the weighted average remaining term to maturity of
the Home Equity Loans is the same as the weighted average remaining term to ma-
turity of the Assumed Home Equity Loans specified in the Structuring Assump-
tions.
Investors are urged to make their investment decisions on a basis that in-
cludes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
S-44
<PAGE>
PERCENT OF THE INITIAL CLASS CERTIFICATE PRINCIPAL BALANCE OF THE OFFERED
CERTIFICATES OUTSTANDING
<TABLE>
<CAPTION>
PERCENTAGE OF APPLICABLE PPC
-----------------------------------
FIXED RATE PPC 0% 50% 75% 120% 150% 175% 200%
ARM PPC 0% 50% 70% 100% 120% 140% 160%
-----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE
Initial Percentage......................... 100 100 100 100 100 100 100
April 25, 1999............................. 97 86 82 75 70 65 61
April 25, 2000............................. 96 73 64 52 44 37 31
April 25, 2001............................. 96 62 50 36 29 22 17
April 25, 2002............................. 95 52 40 26 18 13 9
April 25, 2003............................. 94 44 32 18 12 8 4
April 25, 2004............................. 94 38 25 13 8 4 2
April 25, 2005............................. 93 32 20 9 5 2 1
April 25, 2006............................. 92 27 16 6 3 1 *
April 25, 2007............................. 91 23 13 4 2 * 0
April 25, 2008............................. 89 20 10 3 1 * 0
April 25, 2009............................. 88 17 8 2 * 0 0
April 25, 2010............................. 86 14 6 1 * 0 0
April 25, 2011............................. 85 12 5 1 0 0 0
April 25, 2012............................. 83 10 4 * 0 0 0
April 25, 2013............................. 80 8 3 * 0 0 0
April 25, 2014............................. 78 7 2 0 0 0 0
April 25, 2015............................. 76 6 1 0 0 0 0
April 25, 2016............................. 73 5 1 0 0 0 0
April 25, 2017............................. 70 4 1 0 0 0 0
April 25, 2018............................. 66 3 * 0 0 0 0
April 25, 2019............................. 62 2 * 0 0 0 0
April 25, 2020............................. 58 2 * 0 0 0 0
April 25, 2021............................. 52 1 0 0 0 0 0
April 25, 2022............................. 47 1 0 0 0 0 0
April 25, 2023............................. 41 1 0 0 0 0 0
April 25, 2024............................. 34 * 0 0 0 0 0
April 25, 2025............................. 26 0 0 0 0 0 0
April 25, 2026............................. 17 0 0 0 0 0 0
April 25, 2027............................. 7 0 0 0 0 0 0
April 25, 2028............................. 0 0 0 0 0 0 0
Weighted Average Life (years)(1)**......... 21.17 6.00 4.34 2.97 2.43 2.05 1.76
Weighted Average Life (years)(2)**......... 21.13 5.59 4.01 2.74 2.25 1.90 1.63
</TABLE>
- -------------------
* Indicates a percentage greater than zero but less than 0.5% of the initial
Class Certificate Principal Balance of the Offered Certificates.
** The weighted average life of the Offered 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 Offered Certificates to the related
Distribution Date, (ii) summing the results and (iii) dividing the sum by
the Initial Class Certificate Principal Balance of the Offered Certificates.
(1) Assumes no optional termination of the Trust Fund.
(2) Assumes optional termination of the Trust Fund on the Optional Termination
Date.
S-45
<PAGE>
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered Certifi-
cates against the purchase price of the Home Equity Loans.
FEDERAL INCOME TAX CONSEQUENCES
The following section discusses certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the Of-
fered Certificates. Such section must be considered only in connection with
"Federal Income Tax Consequences" in the Prospectus. The discussion herein and
in the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applica-
ble to all categories of investors, some of which may be subject to special
rules. Investors should consult their own tax advisors in determining the fed-
eral, state, local and any other tax consequences to them of the purchase, own-
ership and disposition of the Offered Certificates.
REMIC ELECTION
An election will be made to treat certain assets of the Trust as a REMIC for
federal income tax purposes. The Offered Certificates will be designated as
regular interests in the REMIC (the "Regular Certificates" or the "REMIC Regu-
lar Certificates"), and the Class R Certificates will be designated as the re-
sidual interest in the REMIC (the "Residual Certificates" or the "REMIC Resid-
ual Certificates").
Because the REMIC Regular Certificates will be considered REMIC regular in-
terests, they generally will be taxable as debt obligations under the Internal
Revenue Code of 1986, as amended (the "Code"), and interest paid or accrued on
the Regular Certificates, including original issue discount with respect to any
Regular Certificates issued with original issue discount, will be taxable to
Certificateholders in accordance with the accrual method of accounting. The
REMIC Regular Certificates may be subject to the original issue discount provi-
sions. See "Federal Income Tax Consequences -- REMICs -- Taxation of Certifi-
cate Owners of REMIC Regular Certificates -- Original Issue Discount" in the
Prospectus.
The prepayment assumption that will be used in determining the rate of ac-
crual of any original issue discount is 120% Fixed Rate PPC for the Fixed Rate
Loans and 100% ARM PPC for the ARMs. See "Yield, Maturity and Prepayment Con-
siderations" herein for a description of the prepayment assumption model. How-
ever, no representation is made as to the rate at which prepayments actually
will occur.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code for domestic building and loan associations, and
"real estate assets" for real estate investment trusts ("REITs"), subject to
the limitations described in "Federal Income Tax Consequences -- REMICs --
Characterization of Investments in REMIC Certificates" in the Prospectus. Sim-
ilarly, interest on such Offered Certificates will be considered "interest on
obligations secured by mortgages on real property" for REITs, subject to the
limitations described in "Federal Income Tax Consequences -- REMICs -- Charac-
terization of Investments in REMIC Certificates" in the Prospectus.
CERTAIN STATE TAX CONSIDERATIONS
Because the income tax laws of the states vary, it is impractical to predict
the income tax consequences to the Certificateholders in all of the state tax-
ing jurisdictions in which they are subject to tax. Certificateholders are
urged to consult their own tax advisors with respect to state and local income
and franchise taxes.
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, regulatory or administrative exemption ap-
plies 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
S-46
<PAGE>
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 Prospec-
tus.
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 accor-
dance with the documents governing the Plan. A fiduciary which decides to in-
vest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of prin-
cipal payments (including prepayments) on the Home Equity Loans.
The U.S. Department of Labor has granted to Donaldson, Lufkin & Jenrette Se-
curities Corporation an administrative exemption (Prohibited Transaction Exemp-
tion 90-83; Exemption Application No. D-8346, 55 Fed. Reg. 50250 (1990)) (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 certifi-
cates 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 Home Equity 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 S&P, Moody's, Duff & Phelps Credit Rating Co. ("DCR") or
Fitch IBCA, Inc. ("Fitch");
(4) the trustee must not be an affiliate of any other member of the Re-
stricted Group;
(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 compen-
sation 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 certifi-
cates; and
S-47
<PAGE>
(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 af-
filiate) 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 inde-
pendent 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 certifi-
cates of any class does not exceed twenty-five percent (25%) of all of the cer-
tificates 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 any Plan with respect to which such person is a fiduciary are in-
vested in certificates representing an interest in one or more trusts contain-
ing assets sold or serviced by the same entity. The Exemption does not apply to
Plans sponsored by the Depositor, the Certificate Insurer, the Underwriter, the
Trustee, the Servicer, any other servicers or any obligor with respect to Home
Equity 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 Home Equity 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 circum-
stances, prior to making an investment in the Offered Certificates. Moreover,
each Plan fiduciary should determine whether under the general fiduciary stan-
dards of investment prudence and diversification, an investment in the Offered
Certificates is appropriate for the Plan, taking into account the overall in-
vestment policy of the Plan and the composition of the Plan's investment port-
folio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
among the Depositor, the Seller and Donaldson, Lufkin & Jenrette Securities
Corporation (the "Underwriter"), the Depositor has agreed to sell the Offered
Certificates to the Underwriter, and the Underwriter has agreed to purchase the
Offered Certificates from the Depositor.
The Depositor has been advised that the Underwriter proposes initially to of-
fer the Offered Certificates to certain dealers at a price less a selling con-
cession not to exceed the percentage of the Certificate denomination set forth
below, and that the Underwriter may allow and such dealers may reallow a real-
lowance 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 Certificates.................................. 0.16% 0.08%
</TABLE>
After the initial public offering, the public offering price, the selling
concession and the reallowance discount may be changed.
The Depositor has been advised by the Underwriter that it intends to make a
market in the Offered Certificates, but the Underwriter has no obligation to do
so. There can be no assurance that a secondary market for the Offered Certifi-
cates will develop or, if it does develop, that it will continue or that such
market will provide sufficient liquidity to Certificateholders.
The Depositor and Seller have agreed to indemnify the Underwriter against, or
make contributions to the Underwriter with respect to, certain liabilities, in-
cluding liabilities under the Securities Act of 1933, as amended.
In connection with the offering, the Underwriter may engage in transactions
that stabilize, maintain or otherwise affect the price of the Offered Certifi-
cates. Specifically, the Underwriter may overallot the offering,
S-48
<PAGE>
creating a short position in the Offered Certificates for its own account. The
Underwriter may bid for and purchase Offered Certificates in the open market to
cover such short positions. In addition, the Underwriter may bid for and pur-
chase Offered Certificates in the open market to stabilize the price of the Of-
fered Certificates. These activities may stabilize or maintain the market price
of the Offered Certificates above independent market levels. The Underwriter is
not required to engage in these activities, and may end these activities at any
time.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax conse-
quences with respect thereto, will be passed upon for the Depositor by Stroock
& Stroock & Lavan LLP, New York, New York. Brown & Wood LLP will pass upon cer-
tain legal matters on behalf of the Underwriter.
RATINGS
It is a condition of the issuance of the Offered Certificates that they be
rated "Aaa" and "AAA" by Moody's and S&P, respectively.
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 sub-
ject to revision or withdrawal at any time by the Rating Agencies. The rating
of the Offered Certificates will depend primarily on the creditworthiness of
the Certificate Insurer. Any reduction in the rating assigned to the claims-
paying ability of the Certificate Insurer below the rating initially given to
the Offered Certificates would likely result in a reduction of the rating of
the Offered Certificates. The ratings on the Offered Certificates do not, how-
ever, constitute statements regarding the likelihood or frequency of prepay-
ments on the Home Equity Loans, the likelihood of the payment of any Basis Risk
Carryover Amount or the anticipated yields in light of prepayments.
The ratings assigned by S&P to mortgage pass-through certificates address the
likelihood of the receipt of all distributions on the mortgage loans by the re-
lated certificateholders under the agreements pursuant to which such certifi-
cates are issued. S&P'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. S&P's ratings on such certificates do not, however, con-
stitute a statement regarding frequency of prepayments on the related mortgage
loans.
The ratings assigned by Moody's to mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of all distributions to
which such certificateholders are entitled. Moody's 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 Moody's and S&P. 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 the Certificate Insurer, Ambac As-
surance Corporation, as of December 31, 1997 and 1996 and for each of the years
in the three-year period ended December 31, 1997, are incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
S-49
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
2/28 LIBOR Loans....................................................... S-13
3/1 CMT Loans.......................................................... S-13
Accrual Period......................................................... S-6
Administration Fee..................................................... S-9
Administration Fee Rate................................................ S-25
Advance................................................................ S-9
Ambac ................................................................. S-1
ARM PPC................................................................ S-42
ARMs................................................................... S-4
Assumed Home Equity Loans.............................................. S-43
Available Funds........................................................ S-28
Available Funds Adjustment............................................. S-29
Available Funds Cap.................................................... S-6
Balloon Loans ......................................................... S-16
Basis Risk Carryover Amount............................................ S-7
BBA.................................................................... S-33
Book-Entry Certificates................................................ S-25
Business Day........................................................... S-30
Carry-Forward Amount................................................... S-30
Cede................................................................... S-10
Cedel.................................................................. S-10
Certificate Account.................................................... S-27
Certificate Administrator.............................................. S-2
Certificate Insurance Policy........................................... S-1
Certificate Insurer.................................................... S-1
Certificate Owner...................................................... S-10
Certificates........................................................... S-2
Change Date............................................................ S-17
Chase.................................................................. S-10
Citibank............................................................... S-10
Class.................................................................. S-3
Class Certificate Principal Balance.................................... S-30
Class R Certificates................................................... S-3
Closing Date........................................................... S-1
CMT.................................................................... S-17
Code................................................................... S-46
Collection Account..................................................... S-26
CPR.................................................................... S-42
Cut-off Date........................................................... S-4
Cut-off Date Principal Balance......................................... S-4
DCR.................................................................... S-47
Deficiency Amount...................................................... S-38
Delayed Adjustment Loans............................................... S-41
Deleted Home Equity Loan............................................... S-22
Depositor.............................................................. S-2
Determination Date..................................................... S-30
Distribution Date...................................................... S-1
DTC.................................................................... S-10
Due Date............................................................... S-30
Due Period....................................................... ..... S-4
ERISA............................................................ ..... S-11
Euroclear........................................................ ..... S-10
European Depositaries.................................................. S-10
Excess Proceeds........................................................ S-30
Excess Subordinated Amount............................................. S-30
Exemption.............................................................. S-47
FHLMC.................................................................. S-12
Final Scheduled Distribution Date...................................... S-7
Fitch.................................................................. S-47
Fixed Rate Loans....................................................... S-4
Fixed Rate PPC......................................................... S-42
FNMA................................................................... S-12
Formula Pass-Through Rate.............................................. S-3
Global Securities...................................................... I-1
Gross Margin........................................................... S-17
Home Equity Loans...................................................... S-2
Initial Class Certificate Principal Balance............................ S-30
Initial Rate Cap....................................................... S-17
Insurance Agreement.................................................... S-32
Insurance Proceeds..................................................... S-26
Insured Amount......................................................... S-8
Interest Distribution Amount........................................... S-6
Interest Settlement Rate............................................... S-33
LIBOR Business Day..................................................... S-33
Lifetime Cap........................................................... S-17
Lifetime Floor......................................................... S-17
Liquidated Loan........................................................ S-31
Liquidation Proceeds................................................... S-26
Loan-to-Value Ratio.................................................... S-17
Moody's................................................................ S-2
Mortgage Index......................................................... S-17
Mortgage Indices....................................................... S-17
Mortgage Pool.......................................................... S-2
Mortgage Rate.......................................................... S-13
Mortgaged Properties................................................... S-2
Net Monthly Excess Cashflow............................................ S-30
Net Mortgage Rate...................................................... S-24
Norwest Bank........................................................... S-2
Norwest Mortgage....................................................... S-2
Norwest Mortgage Correspondent......................................... S-4
Obligations............................................................ S-38
Offered Certificates................................................... S-1
One-Month LIBOR........................................................ S-1
One-Year CMT Loans..................................................... S-13
Optional Termination Date.............................................. S-9
Other Advances......................................................... S-24
Participants........................................................... S-25
Pass-Through Margin.................................................... S-31
</TABLE>
S-50
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- -----
<S> <C>
Pass-Through Rate........................................................ S-3
Percentage Interest...................................................... S-26
Periodic Rate Cap........................................................ S-17
Plan..................................................................... S-46
Pool Stated Principal Balance............................................ S-31
Pooling and Servicing Agreement.......................................... S-3
Preference Amount........................................................ S-38
Premium Amount........................................................... S-31
Premium Percentage....................................................... S-31
Prepayment Interest Excess............................................... S-24
Prepayment Interest Shortfall............................................ S-24
Prepayment Period........................................................ S-4
Principal Distribution Amount............................................ S-7
Principal Prepayment..................................................... S-31
Prospectus............................................................... S-2
Purchase Price........................................................... S-22
Rate Determination Date.................................................. S-33
Rating Agencies.......................................................... S-11
Realized Loss............................................................ S-31
Record Date.............................................................. S-6
Regular Certificates..................................................... S-46
Reimbursement Amount..................................................... S-31
REITs.................................................................... S-46
Relief Act Shortfall..................................................... S-32
REMIC.................................................................... S-2
REMIC Regular Certificates............................................... S-46
REMIC Residual Certificates.............................................. S-46
Replacement Home Equity Loan............................................. S-22
Required Subordinated Amount............................................. S-32
Reserve Interest Rate.................................................... S-33
Residual Certificates.................................................... S-1
Restricted Group......................................................... S-48
S&P...................................................................... S-2
Scheduled Payments....................................................... S-16
Seller................................................................... S-2
Servicer................................................................. S-2
Servicer Advance Date.................................................... S-7
Servicer Termination Trigger Event....................................... S-36
Servicing Fee............................................................ S-9
Servicing Fee Rate....................................................... S-23
Six-Month LIBOR.......................................................... S-17
Six-Month LIBOR Loans.................................................... S-13
SMMEA.................................................................... S-11
Stated Principal Balance................................................. S-32
Structuring Assumptions.................................................. S-43
Subordinated Amount...................................................... S-32
Subordination Deficiency Amount.......................................... S-32
Subordination Deficit.................................................... S-32
Subordination Increase Amount............................................ S-32
Subordination Reduction Amount........................................... S-33
Substitution Adjustment Amount........................................... S-33
Telerate page 3750....................................................... S-33
Trust Fund............................................................... S-2
Trustee.................................................................. S-2
Trustee's Mortgage File.................................................. S-22
U.S. Person.............................................................. I-3
Underwriter.............................................................. S-48
Underwriting Standards................................................... S-4
Voting Rights............................................................ S-36
</TABLE>
S-51
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Series 1998-HE1
Asset Backed Certificates (the "Global Securities") will be available only in
book-entry form. Investors in the Global Securities may hold such Global Secu-
rities 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 Partici-
pants 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 de-
liver 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 Deposi-
taries, 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 hold-
ings 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 es-
tablish at the time of the trade where both the purchaser's and seller's ac-
counts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC Par-
ticipants 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
Distribution Date to and excluding the settlement date, on the basis
I-1
<PAGE>
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 set-
tlement, 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 Securi-
ties 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 Par-
ticipants 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 transac-
tion 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 in-
struct the respective Depositary, as appropriate, to deliver the Global Securi-
ties to the DTC Participant's account against payment. Payment will include in-
terest accrued on the Global Securities from and including the last coupon pay-
ment 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, pay-
ment will include interest accrued to and excluding the first day of the fol-
lowing 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 settle-
ment occurred in New York). Should the Cedel Participant or Euroclear Partici-
pant 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 Se-
curities 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 re-
flected in their Cedel or Euroclear accounts) in accordance with the clearing
system's
I-2
<PAGE>
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 institu-
tion 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 re-
quirements 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 ob-
tain 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 with-
holding 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, Exemp-
tion or Reduced Rate Certificate). If the treaty provides only for a reduced
rate, withholding tax will be imposed at that rate unless the filer alterna-
tively 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 ex-
emption from the withholding tax by filing Form W-9 (Payer's Request for Tax-
payer 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 (or other entity treated as a corporation or
partnership for federal income tax purposes) organized in or under the laws of
the United States or any state thereof, (iii) an estate the income of which is
includible in gross income for United States tax purposes, regardless of its
source, or (iv) a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust. 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
and does not address the application of recently issued Treasury regulations
relating to tax documentation requirements that are generally effective with
respect to payments made after December 31, 1999. Investors are advised to con-
sult their own tax advisors for specific tax advice concerning their holding
and disposing of the Global Securities.
I-3
<PAGE>
PROSPECTUS
NORWEST ASSET ACCEPTANCE CORPORATION
(NAAC SM)
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 Norwest Asset
Acceptance Corporation (the "DEPOSITOR"), a direct, wholly-owned, limited
purpose finance 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
Mortgage or an affiliate will act as servicer with respect to each Series (in
such capacity, the "SERVICER"). Norwest Bank Minnesota, National Association
("NORWEST BANK"), an affiliate of Norwest Mortgage, will act as certificate
administrator with respect to each Series (in such capacity, the "CERTIFICATE
ADMINISTRATOR").
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.
--------------
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 AND WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE
SELLER, THE SERVICER, THE CERTIFICATE ADMINISTRATOR 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.
--------------
APRIL 24, 1998
<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 cause the Seller to make certain representations and warranties
with respect to the Loans or Norwest ABS of a Series to the Trustee for the
related Series of Securities. The principal obligations of the Seller with
respect to a Series of Securities will be limited to repurchase obligations
with respect to breaches of its representations and warranties relating to the
Loans or Norwest ABS of a Series. The principal obligations of the 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 principal
obligations of the Certificate Administrator with respect to the related
Series of Securities will be calculating amounts distributable on each class
of Securities and preparing periodic remittance and tax reports for
Certificateholders.
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" herein 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."
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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 Depositor intends to offer by subscription detailed 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 Loans,
including prepayments in full and in part made on such Loans, as well as the
liquidation
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of such Loans, and will identify various characteristics of the 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
Servicer, the Certificate Administrator 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 Norwest Asset Acceptance Corporation, 7485 New Horizon Way,
Frederick, Maryland 21703, telephone number (301) 815-6665.
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 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 Norwest
Asset Acceptance Corporation, 7485 New Horizon Way, Frederick, Maryland 21703,
telephone number (301) 815-6665 or the address of such other entity specified
in the accompanying Prospectus Supplement.
REPORTS TO SECURITYHOLDERS
The Certificate Administrator will prepare, and the Trustee or other paying
agent appointed for each Series 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 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 Certificate Administrator c/o
Norwest Bank Minnesota, National Association, 11000 Broken Land Parkway,
Columbia, Maryland 21044-3562, Attention: Securities Administration Services
Manager.
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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 100 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................ Norwest Asset Acceptance Corporation, a Delaware
corporation, a direct, wholly-owned, limited purpose
finance subsidiary of Norwest Mortgage, Inc.
("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.
Seller................... Norwest Mortgage (in such capacity, the "SELLER"),
an indirect wholly-owned subsidiary of Norwest
Corporation ("NORWEST CORPORATION") and an affiliate
of the Depositor. See "Norwest Mortgage."
Servicer................. Norwest Mortgage or an affiliate thereof (in such
capacity, the "SERVICER", as applicable), an
affiliate of the Depositor, will serve as the
servicer for each Series of Securities. See "Norwest
Mortgage."
Certificate
Administrator............ Norwest Bank Minnesota, National Association
("NORWEST BANK" and, in such capacity, the
"CERTIFICATE ADMINISTRATOR"), a direct, wholly-owned
subsidiary of Norwest Corporation and an affiliate
of the Depositor, will serve as the certificate
administrator for each Series of Securities See
"Norwest Bank."
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 a 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
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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 one or more accounts (each,
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 Accounts."
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, sub-prime mortgage loans ("FIRST LIEN HOME
EQUITY LOANS"); second lien mortgage loans (the
"SECOND LIEN HOME EQUITY 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, (D) the
certificate administration fee and (E) 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,
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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
Seller and the Servicer, the Certificate
Administrator 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.
Distributions on 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.
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<PAGE>
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
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<PAGE>
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. Overcollateralization.. 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.
Overcollateralization 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
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<PAGE>
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 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 Servicer fails to make a required Advance, the
Trustee may be obligated to advance such amounts
otherwise required to be advanced by the Servicer.
See "Description of the Securities--Advances."
Optional Purchase of
Defaulted Loans.......... The Seller, the 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 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(a)(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."
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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 not be
treated as an association or taxable mortgage pool
taxable as a corporation if it is intended that the
Trust Fund 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 Trust Fund as a partnership in which such
Certificateholder is a partner for federal income
and state tax purposes or to disregard the Trust
Fund for federal income tax purposes as an entity
separate from the Certificateholder if there is only
one Certificateholder for federal income tax
purposes. See "Federal Income Tax Consequences."
D. Certificates Treated
as Debt................ If so specified in the Prospectus Supplement
relating to a Series of Certificates, a Trust Fund
may issue Certificates that will be characterized as
indebtedness for federal income tax purposes secured
by the related Loans. Each investor in the
Certificates of the related Series, by acceptance of
such Certificates, will agree to treat such
Certificates 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 or
other retirement arrangements. 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
Title I of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or Section 4975
of the Code should carefully review with its own
legal advisors whether the purchase or holding of
Securities could cause the Trust Fund to be deemed
plan assets or give rise to a prohibited transaction
under ERISA or Section 4975 of 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
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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.
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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 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, Servicer, Seller or Certificate
Administrator. The Securities will not represent an interest in or obligation
of the Depositor, the Trustee, the Servicer, the Seller, the Certificate
Administrator 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 cause the Seller to make certain representations and
warranties with respect to the Loans or Norwest ABS of a Series to the Trustee
for the related Series of Securities. The Depositor does not have, and is not
expected in the future to have, any significant assets.
The only obligations of the Servicer, other than its servicing obligations,
with respect to the Trust Fund Assets or the Securities of any Series will be
pursuant to certain representations and warranties.
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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.
The obligations of the Certificate Administrator with respect to the Trust
Fund Assets or the Securities of any Series including calculating amounts
distributable on each class of Securities and preparing remittance and tax
reports to Certificateholders.
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 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 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 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.
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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 Servicer, the Trustee, or
the Certificate Administrator 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 Servicer, the Certificate
Administrator, 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.
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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 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 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
Accounts." 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 one or more accounts (each, a
"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). Each
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 any 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 any 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 Accounts."
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.
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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.
Servicer. In the event of the insolvency of the Servicer, the receiver may
have the power to prevent the Trustee or the Securityholders from appointing a
successor servicer. The time period during which cash collections may be
commingled with the 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 Servicer and if such cash collections are commingled with
the 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 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 Servicer to collect all or part of the principal of
or interest on the Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Servicer to damages and
administrative sanctions. 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;
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(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 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
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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 prepayments 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*
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.
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* 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.
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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 unless otherwise specified
in the related Prospectus Supplement.
The Trust Fund Assets will be acquired by the Depositor from Norwest
Mortgage, Inc. (in such capacity, the "SELLER"), an affiliate of the
Depositor, 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 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 Seller,
the Servicer, the Certificate Administrator 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 Seller, the Servicer,
the Certificate Administrator 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 Servicer
through a Sub-Servicer, the Servicer will remain liable for its servicing
obligations under the related Agreement as if the 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 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 Servicer to make advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement. The obligations of the Certificate Administrator with respect to a
Series of Securities will be calculating amounts distributable on each class
of Securities and preparing remittance and tax reports to Certificateholders.
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 to the extent that any of
the characteristics of the Trust Fund Assets vary materially on the date of
initial issuance of the Securities from those described in the related
Prospectus Supplement, specific information will be set forth in a report on
Form 8-K to be filed with the Securities and Exchange
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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 First Lien
Home Equity Loans, Second Lien Home Equity Loans and Title I Loans. See "Loan
Programs--Underwriting Standards--First Lien Home Equity Loans," "--Second
Lien Home Equity 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
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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 ABS Servicer and either the Depositor 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 which have balloon
payments or other special payment features. 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.
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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 only to the extent such information varies materially
from the information set forth in the related Prospectus Supplement.
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 ACCOUNTS
If so provided in the related Prospectus Supplement, the Servicer will
establish and maintain one or more Pre-Funding Accounts, 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. Each 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 any
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 each 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 any 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 any 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.
If specified in the related Prospectus Supplement, 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.
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CAPITALIZED INTEREST ACCOUNTS
If so provided in the related Prospectus Supplement, on the related Closing
Date the Depositor will deposit in one or more accounts (each, a "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 each Pre-Funding Account as described above. Each 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 each 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 any 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 any
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 of a 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
Norwest Asset Acceptance 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 wholly-owned, 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) 815-6665.
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. The Depositor will acquire the Trust
Fund Assets from Norwest Mortgage (in such capacity, the "SELLER"). In
addition, Norwest Mortgage or an affiliate will act as servicer with respect
to each Series (in such capacity, the "SERVICER"). 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
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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. One of the named defendants, who is a former employee of PHMC
and certain of its affiliates is an officer and employee of the Depositor and
Norwest Mortgage. The Depositor has been advised that PHMC, PHMSC and their
affiliated defendants and such common employee 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 Mortgage is an approved servicer of FNMA, FHLMC and the Government
National Mortgage Association. As of December 31, 1997, Norwest Mortgage had a
net worth of approximately $446.5 million.
NORWEST BANK
Norwest Bank Minnesota, National Association ("NORWEST BANK") will act as
Certificate Administrator 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 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 sources described below. The
Seller, through its sub-prime lending division, Directors Acceptance,
originates sub-prime first lien mortgage loans (the "FIRST LIEN HOME EQUITY
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 First Lien Home Equity Loan originations
through Directors Acceptance, the Seller may acquire First Lien Home Equity
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 "SECOND
LIEN HOME EQUITY LOANS") and may acquire FHA Title I home improvement loans
(the "TITLE I LOANS") from its affiliate, Statewide Mortgage Company.
UNDERWRITING STANDARDS
First Lien Home Equity Loans. The underwriting functions of Directors
Acceptance are performed in its California, Colorado, Maryland 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
25
<PAGE>
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 First
Lien Home Equity 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.
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<PAGE>
FIRST LIEN HOME EQUITY LOANS
<TABLE>
<CAPTION>
MAXIMUM
LOAN-
TOTAL DEBT BANKRUPTCY TO-
CREDIT SERVICE-TO- EXISTING MORTGAGE FILINGS/FORECLOSURE COLLECTIONS AND VALUE
LEVEL INCOME RATIO HISTORY CONSUMER CREDIT PROCEEDINGS JUDGMENTS RATIO*
- ------ ------------ ----------------- ---------------- ------------------------ ---------------- -------
<S> <C> <C> <C> <C> <C> <C>
Gold 45% or less. Current at A maximum of two Discharged/completed No collections, 90%
application time 30-day late more than three years charge-offs,
and a maximum of payments on prior to closing. liens, judgments
one 30-day late installment debt or repossessions
payment in the and two 30-day may have
last 12 months. late payments on occurred in the
revolving debt 12 months
in the last 12 preceding
months. application
(exceptions
considered on a
case-by-case
basis). All
outstanding
balances must be
paid off at
closing.
Level 1 50% or less. Current at Isolated 60-day Discharged/completed Total 85%
application time late payments in more than two years outstanding
and a maximum of the last 12 prior to closing. collections,
two 30-day late months charge-offs,
payments in the considered on a liens or
last 12 months. case-by-case judgments less
basis. than $500 may
remain open if
over 24 months
old and do not
affect title.
All others must
be paid at
closing.
Level 2 50% or less. Current at Isolated 90-day Discharged/completed Total 80%
application time late payments in more than two years outstanding
and a maximum of the last 12 prior to closing or one collections,
four 30-day late months year with good charge-offs,
payments or two considered on a reestablished/reaffirmed liens or
30-day late case-by-case credit. judgments less
payments and one basis. than $1,000 may
60-day late remain open if
payment in the over 24 months
last 12 months. old and do not
affect title.
All others must
be paid at
closing.
Level 3 55% or less. Up to 30 days Isolated 120-day Discharged/completed Total 75%
delinquent at late payments in more than one year prior outstanding
application time the last 12 to closing. collections,
and a maximum of months charge-offs,
two 60-day late considered on a liens or
payments or one case-by-case judgments less
90-day late basis. than $2,500 may
payment in the remain open if
last 12 months. over 24 months
old and do not
affect title.
All others must
be paid at
closing.
Level 4 55% or less. No more than 120 Significant past Discharged or Outstanding 65%
days delinquent or present terminated/completed collections,
at closing. No credit problems. prior to application. charge-offs,
current default Disregard for liens or
action may timely payments. judgments must
exist. be paid at
closing.
</TABLE>
- -------
* 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.
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<PAGE>
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, and frequently does,
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 First Lien Home Equity 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 First Lien Home Equity 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 sub-prime mortgage loan programs include a full
documentation program, a "stated income" program and a "lite" documentation
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. Under the "lite"
documentation program, Directors Acceptance reviews the deposit activity
reflected in the most recent six or twenty-four consecutive months of the
applicant's bank statements as an alternative method of establishing 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.
Second Lien Home Equity Loans. The underwriting process for Second Lien Home
Equity 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 Second Lien Home Equity Loans directly,
or acquire them from certain affiliated and unaffiliated third party
originators. All Second Lien Home Equity Loans are underwritten by the Seller
or an affiliated originator.
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<PAGE>
The Seller originates or acquires Second Lien Home Equity Loans with original
principal balances generally not in excess of $250,000 unless a higher amount
is specifically approved. Certain of the Second Lien Home Equity Loans are
fully amortizing with original terms to maturity ranging from 120 to 360
months. Other Second Lien Home Equity 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 Second Lien Home Equity 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 Second Lien Home Equity 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 Second Lien Home Equity 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 Second Lien Home
Equity 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 Second Lien Home Equity 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).
29
<PAGE>
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
Second Lien Home Equity Loan is as represented by the prospective borrower.
Title I Loans. Statewide Mortgage Company ("STATEWIDE"), an affiliate of
Norwest Mortgage, the Depositor and the Certificate Administrator, 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
30
<PAGE>
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
31
<PAGE>
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 Servicer, or any other party to the applicable Agreement 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, 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, the Servicer nor any other party to the applicable
Agreement 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 Seller, the Servicer, the Certificate Administrator 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 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 Norwest Asset
Acceptance Corporation, 7485 New Horizon Way, Frederick, Maryland 21703,
Attention: Vice President; Structured Finance.
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
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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 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 Servicer or a holder of the related residual certificate
will be obligated to take all actions required in order to comply with
applicable laws and regulations and will be obligated to pay any prohibited
transaction taxes. The Servicer 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.
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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
(each, "RESERVE ACCOUNT"), Pre-Funding Account and 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 accrual
period specified in the related Prospectus Supplement (the "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
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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 Certificate Administrator 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 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 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 Servicer will endeavor to maintain a regular flow of
scheduled interest and/or principal payments to holders of the Securities.
Advances by the Servicer are not meant to guarantee or insure against losses.
If Advances are made by the Servicer from cash being held for future
distribution to Securityholders, the Servicer will replace 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 Servicer funds advanced will be reimbursable to the 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
Servicer also will be reimbursable to the Servicer from cash otherwise
distributable to Securityholders (including the holders of Senior Securities)
to the extent that the Servicer determines that any such Advances previously
made are not ultimately recoverable as described above. To the extent provided
in the related Prospectus Supplement, the Servicer also will be obligated to
make Advances, to the extent recoverable out of Insurance Proceeds,
Liquidation Proceeds or otherwise, in respect of certain taxes and insurance
premiums not paid by borrowers on a timely basis. In the case of Cooperative
Loans, the 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
Servicer to the extent permitted by the related Agreement.
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Unless otherwise specified in the related Prospectus Supplement, in the
event the 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 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
Certificate Administrator will prepare, and the Trustee or other paying agent
appointed for each Series will forward 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 Servicer, and the amount of
additional servicing compensation received by the Servicer attributable to
penalties, fees, excess Liquidation Proceeds and other similar charges and
items;
(iv)the amount, if any, by which the 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 any
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 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 any
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 Certificate Administrator will prepare and furnish, either
directly or through the Servicer or the Trustee, 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.
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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
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.
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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
One-Month LIBOR. Unless otherwise specified in the related Prospectus
Supplement, on each 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 One-Month LIBOR, the person designated in the related Agreement
(the "CALCULATION AGENT") will determine the London interbank offered rate for
one-month United States dollar deposits ("ONE-MONTH LIBOR") on the basis of
the British Bankers' Association ("BBA") "Interest Settlement Rate" for one-
month deposits in U.S. Dollars as found on Telerate page 3750 as of 11:00
A.M., London time on such Rate Determination Date. Such Interest Settlement
Rates currently are based on rates quoted by 16 BBA designated banks as being,
in the view of such banks, the offered
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rate at which deposits are being quoted to prime banks in the London interbank
market. Such Interest Settlement Rates are calculated by eliminating the four
highest rates and the four lowest rates, averaging the eight remaining rates,
carrying the result (expressed as a percentage) out to six decimal places, and
rounding to five decimal places. As used herein, "Telerate page 3750" means
the display designated as page 3750 on the Dow Jones Markets. "LIBOR Business
Day" means any day other than (i) a Saturday or a Sunday or (ii) a day on
which banking institutions in the State of New York or in the city of London,
England are required or authorized by law to be closed.
If on any Rate Determination Date the Calculation Agent is unable to
determine One-Month LIBOR on the basis of the method set forth in the
preceding paragraph, One-Month LIBOR for the next Accrual Period will be the
higher of (x) One-Month LIBOR as determined on the previous Rate 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 Rate 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 Rate Determination Date to leading
European banks.
If on any Rate Determination Date the Calculation Agent is required but is
unable to determine the Reserve Interest Rate in the manner provided in the
preceding paragraph, One-Month LIBOR for the next Accrual Period will be One-
Month LIBOR as determined on the previous Rate Determination Date, or, in the
case of the first Rate Determination Date, One-Month LIBOR shall be deemed to
be the per annum rate specified in the related Prospectus Supplement.
The establishment of One-Month LIBOR by the Calculation Agent and the
Calculation Agent's subsequent calculation of the rates of interest applicable
to the Securities for the relevant 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 is
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.
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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 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 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 Accrual Period and for
each succeeding 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 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 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 Accrual Period and each succeeding 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 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 Accrual Period shall (in the absence of manifest error) be
final and binding.
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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 Accrual Period. Unless otherwise specified in the related
Prospectus Supplement, the Prime Rate for an 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 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
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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 or Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
Cedel or Euroclear cash account only as of the business day following
settlement in DTC.
Transfers between 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 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.
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 Securities,
whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Securities 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 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
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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.
Distributions on the Book-Entry Securities will be made on each Distribution
Date by the applicable 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 Securities 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 Securities
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since 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 Depositor 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 applicable
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 Book-Entry Securities or a Series which conflict with actions
taken with respect to other Book-Entry Securities of such Series.
Definitive Securities will be issued to beneficial owners of the Book-Entry
Securities, or their nominees, rather than to DTC, only if (a) DTC or the
Depositor advises the applicable 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 Securities and the
Depositor or such 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, beneficial owners
having Percentage Interests aggregating not less
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than 51% 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 applicable 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 applicable Trustee will issue Definitive Securities, and
thereafter such 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 Servicer, the Depositor, the Certificate Administrator 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.
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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 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." If specified in the
related Prospectus Supplement, 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. If specified in the related 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.
OVERCOLLATERALIZATION
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
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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.
Each 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 any 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 of
America or any agency thereof, provided such obligations are backed by the
full faith and credit of the United States of America; (ii) general
obligations of or obligations guaranteed by any state of the United States of
America or the District of Columbia receiving the highest short-term or
highest long-term rating of each Rating Agency rating the related Series of
Securities, or such lower rating as would not result in the downgrading or
withdrawal of the rating then assigned to any such Securities by each such
Rating Agency without regard to any Pool Insurance Policy or result in any of
such rated Securities being placed on credit review status (other than for
possible upgrading) by any such Rating Agency without regard to any Pool
Insurance Policy; (iii) commercial or finance company paper which is then
rated in the highest long-term commercial or finance company paper rating
category of each such Rating Agency or the highest short-term rating category
of each such Rating Agency, or such lower rating category as would not result
in the downgrading or withdrawal of the rating then assigned to such
Securities by each such Rating Agency without regard to any Pool Insurance
Policy or result in any of such rated Securities being placed on credit review
status (other than for possible upgrading) by any such Rating Agency without
regard to any Pool Insurance Policy; (iv) certificates of deposit, demand or
time deposits, federal funds or banker's 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
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 debt obligations of such holding company) are then rated
in the highest short-term or the highest long-term rating category for such
securities of each of such Rating Agencies, or such lower rating categories as
would not result in the downgrading or withdrawal of the rating then assigned
to such Securities by each such Rating Agency without regard to any Pool
Insurance Policy or result in any of such rated Securities being placed on
credit review status (other than for possible upgrading) by any such Rating
Agency without regard to any Pool Insurance Policy; (v) guaranteed
reinvestment agreements issued by any bank, insurance company or other
corporation acceptable to each such Rating Agency and any Pool Insurer at the
time of the issuance of such agreements; (vi) repurchase agreements on
obligations with respect to any security described in clauses (i) or (ii)
above or any other security issued or guaranteed by an agency or
instrumentality of the United States of America, in either case entered into
with a depository institution or trust company (acting as principal) described
in (iv) above; (vii) securities (other than stripped bonds or stripped coupon
securities) bearing interest or sold at a discount issued by any corporation
incorporated under the laws of the United States of America or any state
thereof which, at the time of such investment or contractual commitment
providing for such investment, are then rated in the highest short-term or the
highest long-term rating category by each such Rating Agency, or in such lower
rating category as would not result in the downgrading or withdrawal of the
rating then assigned to such Securities by each such Rating Agency without
regard to any Pool Insurance Policy or result in any of such rated Securities
being placed on credit review status (other than for possible upgrading) by
any such Rating Agency without regard to any Pool Insurance Policy; and (viii)
such other investments acceptable
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to each such Rating Agency as would not result in the downgrading of the
rating then assigned to such Securities by each such Rating Agency without
regard to any Pool Insurance Policy or result in any of such rated Securities
being placed on credit review status (other than for possible upgrading) by
any such Rating Agency without regard to any Pool Insurance Policy.
In no event shall an instrument be a Permitted Investment if such instrument
evidences either (i) a right to receive only interest payments with respect to
the obligations underlying such instrument, or (ii) both principal and
interest payments derived from obligations underlying such instrument and the
interest and principal payments with respect to such instrument provide a
yield to maturity at the date of investment of greater than 120% of the yield
to maturity at par of such underlying obligations. 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 any 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 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 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 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 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
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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 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
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purposes if the proceeds of the loan are not used for home purchase may
further increase the rate of prepayments of the Loans. Moreover, sub-prime
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,
substantially 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 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 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
generally require the 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
Servicer determines would jeopardize any recovery under any related primary
mortgage insurance policy will not be required and provided, further, that the
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
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prevailing rates remain at or below such Loan Rates. However, there can be no
assurance that such will be the case. Sub-prime 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 (unless otherwise
specified in the related Prospectus Supplement) to reduce the amount of
interest passed through or paid in the following month to holders of
Securities because interest on the principal amount of any Loan so prepaid
will generally be paid only to the date of prepayment. Partial prepayments in
a given month may be applied to the outstanding principal balances of the
Loans so prepaid on the first day of the month of receipt or the month
following receipt. In the latter case, partial prepayments will not reduce the
amount of interest passed through or paid in 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 (unless otherwise specified in the related
Prospectus Supplement).
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 or reduced by
the allocation priorities chosen for the distribution of principal collection
for the Series of Securities.
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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. In connection with the conveyance of the
Loans to the Depositor and by the Depositor to the Trustee, the Seller will
(i) agree to deliver to the Depositor all of the documents which are required
to be delivered to the Trustee; (ii) make certain 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. See "Loan Programs--Representations by Seller;
Repurchases" above.
Except as otherwise specified in the related Prospectus Supplement, 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 45 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 Servicer and
the Depositor, and the 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,
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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 Servicer may be obligated to enforce such obligation
to the extent described above under "Loan Programs--Representations by Seller;
Repurchases," neither the 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 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 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 Servicer which
materially and adversely affects the interests of the Securityholders in a
Loan, the 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
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 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 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 (which may be the Servicer or an affiliate of the
Servicer) whose long-term debt obligations (or in the case of a depository
institution that is part of a holding company structure, the long-term debt
obligations of such parent holding company) 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, (ii) the deposits in
which are fully insured by the Federal Deposit Insurance Corporation ("FDIC")
through either the Bank Insurance Fund or the Savings Association Insurance
Fund Securityholders, (to the limit established by the FDIC) and the uninsured
deposits in which accounts are otherwise secured, as evidenced by an opinion
of counsel delivered to the applicable Trustee, such that the Trustee, on
behalf of the Securityholders has a claim with respect to the funds in such
accounts or a perfected first security interest against any collateral
securing such funds that is superior to claims of any other depositors or
creditors of the depository institution with which such accounts are
maintained, (iii) that are trust accounts maintained with the trust department
of a federal or state chartered depository institution or trust company acting
in its fiduciary capacity or (iv) an account or accounts otherwise acceptable
to each Rating Agency and, if a REMIC election has been made, that would not
cause
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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 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 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 Servicer or with a depository institution that is an
affiliate of the Servicer, provided it meets the standards set forth above.
Unless otherwise specified in the related Prospectus Supplement, the
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 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
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 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 Servicer in connection
with losses realized on investments for the benefit of the Servicer of
funds held in the Security Account and, to the extent specified in the
related Prospectus Supplement, any payments required to be made by the
Servicer in connection with prepayment interest shortfalls; and
(vii) all other amounts (including any buy-down or subsidy funds)
required to be deposited in the Security Account pursuant to the Agreement
(including Other Advances made by the Servicer).
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 Servicer (or the Seller or 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 Servicer the servicing fees described in the related
Prospectus Supplement and earnings on or investment income with respect to
funds in the amounts in the Security Account credited thereto;
(ii) to reimburse the 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;
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(iii) to reimburse the Servicer for any Advances previously made which
the Servicer has determined to be nonrecoverable;
(iv) to reimburse the Servicer from Insurance Proceeds for expenses
incurred by the Servicer and covered by the related insurance policies;
(v) to reimburse the Servicer for unpaid servicing fees and unreimbursed
Advances;
(vi) to pay to the Servicer, with respect to each Loan or property
acquired in respect thereof that has been purchased by the Servicer
pursuant to the Agreement, all amounts received thereon and not taken into
account in determining the principal balance of such repurchased Loan;
(vii) to reimburse the Servicer or the Depositor for expenses incurred
and reimbursable pursuant to the Agreement (including Other Advances made
by the Servicer);
(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 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 Servicer and the
Sub-Servicer, the Agreement pursuant to which a Series of Securities is issued
will provide that, if for any reason the Servicer for such Series of
Securities is no longer the Servicer of the related Loans, the Trustee or any
successor Servicer must recognize the Sub-Servicer's rights and obligations
under such Sub-Servicing Agreement. Notwithstanding any such subservicing
arrangement, unless otherwise provided in the related Prospectus Supplement,
the Servicer will remain liable for its servicing duties and obligations under
the applicable Agreement as if the 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 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 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 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 Servicer consents to the deferment of
the due dates for payments due on a Loan, the 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 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
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or (iv) the 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 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 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 Servicer for entering into an assumption agreement will be
retained by or on behalf of the Servicer as additional servicing compensation.
See "Certain Legal Aspects of 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 FIRST LIEN HOME EQUITY LOANS AND SECOND LIEN HOME EQUITY LOANS
Each Agreement will require the Servicer to make reasonable efforts to
collect all payments required under the First Lien Home Equity Loans and the
Second Lien Home Equity 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
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 First Lien Home Equity Loan borrowers,
collection efforts and borrower contacts generally are made earlier and more
frequently in the collection cycle with respect to First Lien Home Equity
Loans than is the case with respect to other types of Loans. Each Agreement
will permit the Servicer (consistent with the requirements of the REMIC
Regulations) to extend relief, on a case by case basis, to First Lien Home
Equity Loan and Second Lien Home Equity 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 First Lien Home Equity Loans generally begin very
early in the collection process and, with respect to both First Lien Home
Equity Loans and Second Lien Home Equity 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 First Lien Home
Equity Loan or Second Lien Home Equity 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 Second Lien Home Equity 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 Second Lien Home Equity Loan.
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Norwest Mortgage has been servicing sub-prime mortgage loans since August
1997. Norwest Mortgage or an affiliate will be required as the Servicer under
each Agreement to service the First Lien Home Equity Loans and the Second Lien
Home Equity Loans; either directly or through Sub-Servicers.
Shortly after the funding of a loan, various types of loan information are
loaded into Norwest Mortgage's automated loan servicing system ("ALLTELL").
With respect to its sub-prime mortgage loans, servicing activities such as
foreclosure and REO are handled at Norwest Mortgage's Frederick, Maryland
servicing center and activities such as collections, loss mitigation, default
reporting and bankruptcy are handled at its Charlotte, North Carolina
servicing center. Norwest Mortgage's collections policy is designed to
identify payment problems sufficiently early to permit Norwest Mortgage to
address such delinquency problems and, when necessary, to act to preserve
equity in a pre-foreclosure property.
Borrowers are billed on a monthly basis in advance of the due date. If a
sub-prime borrower attempts to use Norwest Mortgage's Voice Response Unit
("VRU") to obtain loan information on or after a date on which a late charge
is due, the VRU automatically transfers the call to the sub-prime collection
area. Collection procedures commence upon identification of a past due account
by Norwest Mortgage's automated servicing system. If timely payment is not
received, Alltell automatically places the loan in the assigned collector's
queue and collection procedures are generally initiated on the fifth day of
delinquency. The account remains in the queue unless and until a payment is
received, at which point Alltell automatically removes the loan from that
collector's queue.
When a loan appears in a collector's queue, a collector will telephone to
remind the borrower that a payment is due. Follow-up telephone contacts with
the borrower are attempted until the account is current or other payment
arrangements have been made. When contact is made with a delinquent borrower,
collectors present such borrower with alternative payment methods, such as
Western Union, Phone Pay and Quick Collect, in order to expedite payments.
Standard form letters are utilized when attempts to reach the borrower by
telephone fail and/or in some circumstances, to supplement the phone contacts.
Company collectors have computer access to telephone numbers, payment
histories, loan information and all past collection notes. The Servicer
intends that the collectors' efforts will be supplemented by advanced
technology such as a predictive dialer and ASPI Optimizer (software used to
determine the best time to call a particular customer). Additionally, the
Servicer intends that collectors will attempt to mitigate losses through the
use of "SMART," an artificial intelligence model used to assist in identifying
workout options in the early stages of delinquency.
For those loans in which collection efforts have been exhausted without
success, Norwest Mortgage determines whether foreclosure proceedings are
appropriate, based upon an analysis of relevant factors, including a market
value analysis, reason for default and efforts by the borrower to cure the
default.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of a borrower in default vary greatly from state
to state. As such, all foreclosures are assigned to outside counsel, located
in the same state as the mortgaged property. Bankruptcies filed by borrowers
are similarly assigned to appropriate local counsel. Communication with
foreclosure and bankruptcy attorneys is maintained through the use of a
software program ("LENSTAR"), thus reducing the need for phone calls and faxes
and simultaneously creating a permanent record of communication. The status of
foreclosures and bankruptcies is monitored by Norwest Mortgage through its use
of LENSTAR and a software system ("HOGAN"), which provides updates of
bankruptcy filings and releases.
Prior to a foreclosure sale, Norwest Mortgage performs a market value
analysis. This analysis includes: (i) a current valuation of the mortgaged
property obtained through a drive-by appraisal or broker's price opinion
conducted by an independent appraiser and/or a broker from a network of real
estate brokers, complete with a description of the condition of the mortgaged
property, as well as other information such as recent price lists of
comparable properties, recent closed comparables, estimated marketing time and
required or suggested repairs, and an estimate of the sales price; (ii) an
evaluation of the amount owed, if any, for real estate taxes; and (iii)
estimated carrying costs, brokers' fees, repair costs and other related costs
associated with real estate owned properties. Norwest Mortgage bases the
amount it will bid at foreclosure sales on this analysis.
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If Norwest Mortgage acquires title to a property at a foreclosure sale or
otherwise, the REO Department obtains an estimate of the sale price of the
property and then hires one or more real estate brokers to begin marketing the
property. If the mortgaged property is not vacant when acquired, local
eviction attorneys are hired to commence eviction proceedings and/or
negotiations are held with occupants in an attempt to get them to vacate
without incurring the additional time and cost of eviction. Repairs are
performed if it is determined that they will increase the net liquidation
proceeds, taking into consideration the cost of repairs, the carrying costs
during the repair period and the marketability of the property both before and
after the repairs.
Norwest Mortgage's loan servicing software also tracks and maintains tax and
homeowners' insurance information and tax and insurance escrow information.
Expiration reports are generated periodically listing all policies scheduled
to expire. When policies lapse, a letter is automatically generated and issued
advising the borrower of such lapse and notifying the borrower that Norwest
Mortgage will obtain force-placed insurance at the borrower's expense.
SERVICING OF TITLE I LOANS
Pursuant to a sub-servicing agreement (the "TITLE I SUB-SERVICING
AGREEMENT") to be entered into between the 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.
All amounts collected by the 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
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Security Account. In the event that the Servicer maintains a blanket policy
insuring against hazard losses on all the Loans comprising part of a Trust
Fund, it will conclusively be deemed to have satisfied its obligation relating
to the maintenance of hazard insurance. Such blanket policy may contain a
deductible clause, in which case the Servicer will be required to deposit from
its own funds into the related Security Account the amounts which would have
been deposited therein but for 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 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 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 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 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 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 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 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
Servicer of its expenses, in excess of the principal balance of such Loan plus
interest accrued thereon that is payable to Securityholders, the Servicer will
be entitled to withdraw or retain from the Security Account amounts
representing its normal servicing compensation
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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 Servicer or its designee recovers Insurance Proceeds which, when
added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Servicer, exceed the principal balance of such
Loan plus interest accrued thereon that is payable to Securityholders, the
Servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to such
Loan. In the event that the 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 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 Servicer for any unreimbursed
expenses incurred by it to restore the related Property and any unreimbursed
servicing compensation payable to the Servicer with respect to such Loan;
second, to reimburse the 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 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 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
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 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, CERTIFICATE ADMINISTRATION AND OTHER COMPENSATION AND PAYMENT OF
EXPENSES
The principal servicing compensation to be paid to the Servicer in respect
of its servicing activities for each Series of Securities will be equal to the
percentage per annum described in the related Prospectus Supplement (which may
vary under certain
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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 "SERVICING FEE"). As compensation for its
servicing duties, the Servicer will be entitled to a monthly servicing fee as
described in the related Prospectus Supplement. In addition, the 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 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. Pursuant to the terms of the
related Agreement, the Servicer will also be required to pay all expenses
incurred in connection with its servicing responsibilities, including advances
of cash ("OTHER ADVANCES") made by it to cover delinquent payments of taxes,
insurance premiums and escrowed items with respect to any Property or for
expenditures (including reasonable attorney's fees) incurred by it in
connection with the restoration, foreclosure or liquidation of any Property
(to the extent of Liquidation Proceeds or Insurance Proceeds in respect of
such Property) and of certain losses against which it is indemnified by the
Trust Fund. The Servicer will be entitled to reimbursement of expenses
incurred in enforcing the obligations of Sub-Servicers and the Seller under
certain limited circumstances.
The Certificate Administrator will be entitled to receive as primary
compensation for its services a fee (the "ADMINISTRATION FEE") from interest
collected with respect to the Loans 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 before giving
effect to the distributions and principal balance reductions on such
Distribution Date.
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 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 Servicer to the effect that the 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 Servicer may be obtained by Securityholders of the related Series without
charge upon written request to the Servicer at the address set forth in the
related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE SERVICER, THE CERTIFICATE ADMINISTRATOR AND THE
DEPOSITOR
Each Agreement will provide that the 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 Servicer may, however, be removed from its obligations and duties as
set forth in the Agreement. No such resignation will become effective
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until the Trustee or a successor servicer has assumed the Servicer's
obligations and duties as described under "--Events of Default; Rights Upon
Event of Default." Each Agreement will further provide that neither the
Servicer, the Depositor nor any director, officer, employee, or agent of the
Servicer or the Depositor will be under any liability to the related Trust
Fund or Securityholders for any action taken or for refraining from the taking
of any action in good faith pursuant to the Agreement, or for errors in
judgment; provided, however, that neither the Servicer, the Depositor nor any
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 Servicer, the Certificate
Administrator, the Depositor and any director, officer, employee or agent of
the Servicer, the Certificate Administrator 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 none of the Servicer, the Depositor or the Certificate
Administrator will be under any obligation to appear in, prosecute or defend
any legal action which is not incidental to its respective responsibilities
under the Agreement and which in its opinion may involve it in any expense or
liability. The Servicer, the Certificate Administrator 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 Servicer, the Certificate Administrator or the Depositor, as the case
may be, will be entitled to be reimbursed therefor out of funds otherwise
distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Servicer or the Certificate Administrator, as
applicable, may be merged or consolidated, or any person resulting from any
merger or consolidation to which the Servicer or the Certificate
Administrator, as applicable, is a party, or any person succeeding to the
business of the Servicer or the Certificate Administrator, as applicable, will
be the successor of the Servicer or the Certificate Administrator, as
applicable, 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.
The Certificate Administrator will also have the right to assign its rights
and delegate its duties and obligations under the applicable Agreement,
provided that (i) the purchaser or transferee accepting such assignment or
delegation is satisfactory to the applicable Trustee in the reasonable
exercise of its judgment, and executes and delivers to such Trustee an
agreement, in form and substance reasonably satisfactory to such Trustee,
which contains an assumption by such purchaser or transferee of the due and
punctual performance and observance of each covenant and condition to be
performed or observed by the Certificate Administrator under the applicable
Agreement from and after the date of such agreement; and (ii) the ratings
assigned by each Rating Agency to any Securities of such Series in effect
immediately prior to such assignment, sale or transfer would not be qualified,
downgraded or withdrawn as a result of such assignment, sale or transfer and
the Securities of such Series would not be placed on credit review status
(except for possible upgrading) by any such Rating Agency (without regard to
the existence of the credit enhancement instrument). The Certificate
Administrator will be released from its obligations under the applicable
Agreement upon any such assignment and delegation, except that the Certificate
Administrator will remain liable for all liabilities and obligations incurred
by it prior to the time that the conditions contained in clauses (i) and (ii)
above are met.
The Certificate Administrator may be removed upon written notice from the
applicable Trustee to the Certificate Administrator if any of the following
events shall occur:
(i) the Certificate Administrator shall default in any material respect
in the performance of its duties under the applicable Agreement and, after
notice of such default, shall not cure such default within ten business
days (or, if such default cannot be cured in such time, shall not give
within ten business days such assurance of cure as shall be reasonably
satisfactory to the such Trustee);
(ii) a court having jurisdiction in the premises shall enter a decree or
order for relief in respect of the Certificate Administrator in any
involuntary case under any applicable bankruptcy, insolvency or other
similar law nor or hereafter in effect, or appoint a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or similar official) of the
Certificate Administrator or for any substantial part of its property, or
order the winding-up or liquidation of its affairs; or
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(iii) the Certificate Administrator shall commence a voluntary case under
any applicable bankruptcy, insolvency or other similar law now or hereafter
in effect, or shall consent to the entry of an order for relief in an
involuntary case under any such law, or shall consent to the appointment of
or taking possession by a receiver, liquidation, assignee, trustee,
custodian, sequestrator (or similar official) of the Certificate
Administrator or for any substantial part of its property, or shall make
any general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due.
If any of the events specified in clauses (ii) or (iii) above shall occur,
the Certificate Administrator will be required to give written notice of such
occurrence to the Trustee within five business days after the happening of
such event.
No removal of the Certificate Administrator will be effective until (1) a
successor Certificate Administrator having a net worth of not less than
$10,000,000 is appointed by the Trustee and (2) such successor Certificate
Administrator has agreed in writing to be bound by the terms of the applicable
Agreement in the same manner as the Certificate Administrator is bound.
Promptly upon the removal of the Certificate Administrator, the Certificate
Administrator will be entitled to be paid all fees and expenses accruing to it
to the date of such removal. Upon such termination, the Certificate
Administrator will be required to deliver to the applicable Trustee all
property and documents of the Trust Fund in the custody of the Certificate
Administrator, and the Certificate Administrator will be required to cooperate
with the Trustee and take all reasonable steps requested to assist the Trustee
in making an orderly transfer of the duties of the Certificate Administrator.
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 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 Servicer by the Trustee or the Depositor, or to
the 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 Servicer to
make an Advance as required under the Agreement, unless cured as specified
therein; (iii) any failure by the Servicer duly to observe or perform in any
material respect any of its other covenants or agreements in the Agreement
which continues unremedied for thirty days after the giving of written notice
of such failure to the Servicer by the Trustee or the Depositor, or to the
Servicer, the Depositor and the Trustee by the holders of Securities of any
class evidencing not less than 25% of the aggregate Percentage Interests
constituting 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 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 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 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 Servicer
under the Agreement. Pending such appointment, the Trustee is obligated to act
in such capacity. The Trustee and any such successor may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the Servicer under the Agreement. Any successor to the
Servicer, if other than the Trustee, must be consented to by the Certificate
Administrator (which consent shall not be unreasonably withheld).
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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
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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 Seller, the Servicer, the
Certificate Administrator 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 Seller, the Servicer, the
Certificate Administrator 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 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
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
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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(a)(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 Servicer, the Certificate
Administrator 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
mortgagor, 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
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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
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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.
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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 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
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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 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 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 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.
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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 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
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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 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
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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 Servicer) will be retained by the 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
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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
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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
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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
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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,
and unless the context requires otherwise, any reference to Loans includes
both Loans and Norwest ABS.
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 or is disregarded as an entity separate from its
owner. The Prospectus Supplement for each Series of Securities will specify
how the Securities will be treated for federal income tax purposes and will
discuss whether a REMIC election, if any, will be made 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
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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.
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It is unclear whether the Depositor may adjust the accrual of OID on a Class
of Regular Interest Securities (or other regular interests in a REMIC) to take
account of realized losses on the Loans. 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 may 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.
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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"
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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 OID stated interest payable in the relevant period to
total stated interest remaining to be paid at the beginning of the period or
(b) in the case of 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 there are regulations dealing with
amortizable bond premium, they specifically do not apply to prepayable debt
instruments subject to Code Section 1272(a)(6) such as the Pay-Through
Securities. 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
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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)(4)(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
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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. For taxable years beginning after December 31, 1997, in
the case of a partnership that has 100 or more partners and elects to be
treated as an "electing large partnership," 70 percent of such partnership's
miscellaneous itemized deductions will be disallowed, although the remaining
deductions will generally be allowed at the partnership level and will not be
subject to the 2 percent floor that would otherwise be applicable to
individual partners. The reduction or disallowance of this deduction may have
a significant impact on the yield of the 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)(4)(A) of the Code,
and "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code, and whether the income on such 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 taxable years
beginning after December 31, 1997, in the case of a partnership that has 100
or more partners and elects to be treated as an "electing large partnership,"
70 percent of such partnership's miscellaneous itemized deductions will be
disallowed, although the remaining deductions will generally be allowed at the
partnership level and will not be subject to the 2 percent floor that would
otherwise be applicable to individual partners.
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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.
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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.
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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.
For taxable years beginning after December 31, 1997, all partners of certain
electing partnerships having 100 or more partners ("ELECTING LARGE
PARTNERSHIPS") will be treated as disqualified organizations for purposes of
the tax imposed on pass-through entities if such electing large partnerships
hold residual interests in a REMIC. However, the electing large partnership
would be entitled to exclude the excess inclusion income from gross income for
purposes of determining the taxable income of the partners.
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
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
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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. For taxable years beginning after December 31, 1997, in the case
of a partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70 percent of such partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2
percent floor that would otherwise be applicable to individual partners.
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, certain holders of 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)(4)(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 either
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.
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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, including
"any pool of debt instruments the yield on which may be affected by reason of
prepayments (or to the extent provided in regulations, by reason of other
events)," 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. 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.
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. It is not clear
whether any adjustments would be required to reflect differences between the
prepayment rate that was assumed in calculating yield and the actual rate of
prepayments.
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 Loans 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."
The Taxpayer Relief Act of 1997 amended the OID provisions of the Code to
provide that for "any pool of debt instruments, the yield on which may be
affected by reason of prepayments," OID is to be accrued based on a prepayment
assumption determined in a manner prescribed by forthcoming regulations. 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 regarding the actual rate at which prepayments will
occur.
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.
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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 market 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 OID 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
Foreign Investors (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.
Treasury regulations (the "FINAL WITHHOLDING REGULATIONS"), which are
generally effective with respect to payments made after December 31, 1999,
consolidate and modify the current certification requirements and means by
which a holder may claim exemption from United States federal income tax
withholding and provide certain presumptions regarding the status of holders
when payments to the holders cannot be reliably associated with appropriate
documentation provided to the payor. All holders should consult their tax
advisers regarding the application of the Final Withholding Regulations.
The Certificate Administrator 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 Foreign Investor, 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. For this purpose, a Foreign Investor is
any holder that is not (i) a citizen or resident of the United States, (ii) a
corporation or partnership (including any entity that is classified as either
a corporation or partnership for federal income tax purposes) organized under
the law of the United States or any State thereof (including the District of
Columbia), (iii) an estate the income of which is includible in gross income
regardless of its source, or (iv) a trust other than a "foreign trust," as
defined in Section 7701(a)(31) of the Code. 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 Foreign Investors.
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.
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Interest and OID of Foreign Investors 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.
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a non-United States person may
claim exemption from United States federal income tax withholding. All Foreign
Investors should consult their tax advisors regarding the application of the
Final Withholding Regulations, which are generally effective with respect to
payments made after December 31, 1999.
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. Under the REMIC
Regulations, if a Residual Interest Security has tax avoidance potential, a
transfer of a Residual Interest Security to a Foreign Investor will be
disregarded for all federal tax purposes. A Residual Interest Security has tax
avoidance potential unless, at the time of the transfer the transferor
reasonably expects that the REMIC will distribute to the transferee residual
interest Holder amounts that will equal at least 30% of each excess inclusion,
and that such amounts will be distributed at or after the time at which the
excess inclusions accrue and not later than the calendar year following the
calendar year of accrual. If a Foreign Investor transfers a Residual Interest
Security to a United States person (that is, a person that is not a Foreign
Investor), and if the transfer has the effect of allowing the transferor to
avoid tax on accrued excess inclusions, then the transfer is disregarded and
the transferor continues to be treated as the owner of the Residual Interest
Security for purposes of the withholding tax provisions of the Code. 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 OR DIVISION
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 and that no action will be taken that is inconsistent with
the treatment of the Trust Fund as a partnership (such as an election to treat
the Trust Fund as a corporation) for federal income tax purposes. If, however,
the Trust Fund has a single owner for federal income tax purposes, it will be
treated as a division of its owner, and as such will be disregarded as an
entity apart from its owner for federal income tax purposes, assuming no
election is made to treat the Trust Fund as a corporation for federal income
tax purposes.
Certain entities classified as "taxable mortgage pools" are subject to
corporate level tax on their net income. A "taxable mortgage pool" is
generally defined as an entity that meets the following requirements: (i) the
entity is not a REMIC (or, after September 1, 1997, a FASIT), (ii)
substantially all of the assets of the entity are debt obligations, and more
than 50 percent of
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such debt obligations consists of real estate mortgages (or interests
therein), (iii) the entity is the obligor under debt obligations with two or
more maturities, and (iv) payments on the debt obligations on which the entity
is the obligor bear a relationship to the payments on the debt obligations
which the entity holds as assets. With respect to requirement (iii), the Code
authorizes the Internal Revenue Service to provide by regulations that equity
interests may be treated as debt for purposes of determining whether there are
two or more maturities. If the Trust Fund were treated as a taxable mortgage
pool, it would be ineligible to file consolidated returns with any other
corporation and could be liable for corporate tax. Treasury regulations do not
provide for the recharacterization of equity as debt for purposes of
determining whether an entity has issued debt with two maturities, except in
the case of transactions structured to avoid the taxable mortgage pool rules.
Federal Tax Counsel will deliver its opinion for a Trust Fund which is
intended to be a partnership for federal income tax purposes, as specified in
the related Prospectus Supplement, generally to the effect that the Trust Fund
will not be a taxable mortgage pool. This opinion will be based on the
assumption that the terms of the Agreements and related documents will be
complied with, and on Federal Tax Counsel's conclusion that either the number
of classes of debt obligations issued be the Trust Fund, or the nature of the
assets held by the Trust Fund will exempt the Trust Fund from treatment as a
taxable mortgage pool.
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 would likely 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, income to certain tax-exempt entities would be
"unrelated business taxable income," 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,
or if there is a single Certificateholder for federal income tax purposes, to
disregard the Trust Fund as an entity separate from the Certificateholder.
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
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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.
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Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates
sold. A Certificateholder's tax basis in a Certificate will generally equal
the 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 Certificate
Administrator 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
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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
Foreign Investors 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 Investors
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.
Each Certificateholder that is a Foreign Investor 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 Investor 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 Investor 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 and, if necessary, adequately
demonstrates such status.
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
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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
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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.
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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, "PLAN(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 (S)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.
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.
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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.
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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
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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.
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Accretion Directed......................................................... 37
Accrual Class.............................................................. 38
Accrual Period............................................................. 34
Accrual Securities......................................................... 34
Administration Fee......................................................... 60
Advance.................................................................... 10
Agreement.................................................................. 20
Alltell.................................................................... 56
ALTA....................................................................... 31
APR........................................................................ 23
ARM........................................................................ 87
Asset Conservation Act..................................................... 70
Available Funds............................................................ 34
Balloon Loans.............................................................. 17
balloon payment............................................................ 21
Bankruptcy Code............................................................ 9
BBA........................................................................ 38
Belgian Cooperative........................................................ 42
beneficial owner........................................................... 41
Book-Entry Securities...................................................... 41
Buydown Fund............................................................... 21
Buydown Loans.............................................................. 21
Calculation Agent.......................................................... 38
Capitalized Interest Account............................................... 24
Capitol Life............................................................... 24
Cash flow investments...................................................... 81
Cedel...................................................................... 41
Cedel Participants......................................................... 42
CERCLA..................................................................... 15
Certificate Administrator.................................................. 1
Certificates............................................................... 1
Class Security Balance..................................................... 34
Cleanup Costs.............................................................. 69
Code....................................................................... 75
COFI Securities............................................................ 40
Commission................................................................. 3
Companion Class............................................................ 38
Component Securities....................................................... 37
Cooperative Loans.......................................................... 6
Cooperatives............................................................... 6
Correspondent.............................................................. 30
Cut-off Date............................................................... 5
Cut-off Date Principal Balance............................................. 33
Dealer..................................................................... 30
Debt Securities............................................................ 76
debt-to-income ratio....................................................... 32
Definitive Security........................................................ 41
Depositor.................................................................. 1
Detailed Description....................................................... 21
Detailed Information....................................................... 3
Disqualified Organization.................................................. 85
Distribution Date.......................................................... 7
DOL........................................................................ 96
DTC........................................................................ 19
Eleventh District.......................................................... 39
electing large partnerships................................................ 85
EPA........................................................................ 70
ERISA...................................................................... 11
Euroclear.................................................................. 41
Euroclear Participants..................................................... 42
Euroclear Operator......................................................... 42
European Depositaries...................................................... 41
Event of Default........................................................... 62
Exchange Act............................................................... 4
FDIC....................................................................... 52
Federal Tax Counsel........................................................ 75
FEMA....................................................................... 30
FHA........................................................................ 9
FHLBB...................................................................... 71
FHLBSF..................................................................... 39
FHLMC...................................................................... 31
Financial Intermediary..................................................... 41
Final Withholding Regulations.............................................. 88
First Lien Home Equity Loans............................................... 6
Fixed Rate Class........................................................... 38
Floating Rate Class........................................................ 38
FNMA....................................................................... 31
Funding Period............................................................. 16
Garn Act................................................................... 71
HOGAN...................................................................... 56
Holder..................................................................... 75
in-house asset managers.................................................... 97
Indenture.................................................................. 32
Indenture Trustee.......................................................... 5
Insurance Proceeds......................................................... 53
Insured Expenses........................................................... 53
Interest Only Class........................................................ 38
Interest Rate.............................................................. 19
Interest Settlement Rate................................................... 38
Inverse Floating Rate Class................................................ 38
improper knowledge......................................................... 85
IRS........................................................................ 94
L/C Bank................................................................... 9
L/C Percentage............................................................. 45
LENSTAR.................................................................... 56
LIBOR Business Day......................................................... 39
Liquidation Expenses....................................................... 53
Liquidation Proceeds....................................................... 53
Loan Rate.................................................................. 21
Loans...................................................................... 1
lockout periods............................................................ 21
Morgan..................................................................... 42
Mortgage................................................................... 51
mortgage related security.................................................. 97
Multiple Variable Rate Debt Security....................................... 79
National Cost of Funds Index............................................... 40
</TABLE>
100
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NCUA....................................................................... 97
Norwest ABS................................................................ 5
Norwest ABS Agreement...................................................... 22
Norwest ABS Issuer......................................................... 6
Norwest ABS Servicer....................................................... 6
Norwest ABS Trustee........................................................ 1
Norwest Bank............................................................... 5
Norwest Corporation........................................................ 5
Norwest Funding............................................................ 24
Norwest Mortgage........................................................... 1
Noteholders................................................................ 5
Notes...................................................................... 1
Notional Amount Securities................................................. 37
objective rate............................................................. 79
OID........................................................................ 76
OID Regulations............................................................ 76
One-Month LIBOR............................................................ 38
Other Advances............................................................. 60
OTS........................................................................ 40
PAC........................................................................ 37
Participants............................................................... 45
parties in interest........................................................ 95
Pass-Through Securities.................................................... 11
Pay-Through Security....................................................... 77
PCBs....................................................................... 69
Percentage Interests....................................................... 62
Permitted Investments...................................................... 46
Planned Amortization Class................................................. 37
Plan(s).................................................................... 96
Policy Statement........................................................... 97
Pool....................................................................... 5
Pool Insurance Policy...................................................... 47
Pool Insurer............................................................... 47
Pooling and Servicing Agreement............................................ 32
PHMC....................................................................... 24
PHMSC...................................................................... 24
Pre-Funded Amount.......................................................... 16
Pre-Funding Account........................................................ 6
Prepayment Assumption...................................................... 77
Prepayment Interest Shortfalls............................................. 8
Presumed Single Qualified Floating Rate.................................... 78
Presumed Single Variable Rate.............................................. 79
Primary Mortgage Insurance Policy.......................................... 22
Prime Rate................................................................. 41
Principal Only Class....................................................... 38
Principal Prepayments...................................................... 35
Properties................................................................. 6
Property Improvement Loans................................................. 73
PTE........................................................................ 97
Publicly Offered Securities................................................ 96
Purchase Price............................................................. 32
qualified floating rate.................................................... 78
qualified inverse floating rate............................................ 79
qualifying assets.......................................................... 81
qualified professional asset managers...................................... 97
Rating Agency.............................................................. 12
Record Date................................................................ 33
Regular Interest Securities................................................ 76
Regulation................................................................. 96
Relevant Depositary........................................................ 41
Relief Act................................................................. 68
REMIC...................................................................... 2
REMIC Regulations.......................................................... 81
REMIC Securities........................................................... 81
Reserve Account............................................................ 8
Reserve Interest Rate...................................................... 39
Residual Interest Security................................................. 83
Retained Interest.......................................................... 32
Riegle Act................................................................. 18
Rules...................................................................... 41
Statewide.................................................................. 30
Sale and Servicing Agreement............................................... 20
Scheduled Amortization Class............................................... 37
Second Lien Home Equity Loans.............................................. 6
secured--creditor exemption................................................ 69
Securities................................................................. 1
Securities Act............................................................. 3
Security Account........................................................... 52
Security Owners............................................................ 19
Security Register.......................................................... 33
Securityholders............................................................ 1
Seller..................................................................... 1
Senior Securities.......................................................... 7
Sequential Pay Class....................................................... 37
Series..................................................................... 1
Servicer................................................................... 1
Servicing Fee.............................................................. 60
Single Variable Rate Debt Security......................................... 79
SMMEA...................................................................... 11
Statewide.................................................................. 30
Strip Class................................................................ 37
Subordinated Securities.................................................... 7
Subsequent Loans........................................................... 16
Sub-Servicers.............................................................. 20
Sub-Servicing Agreement.................................................... 54
Superliens................................................................. 69
Support Class.............................................................. 38
T.O.P. Loans............................................................... 31
TAC........................................................................ 38
Targeted Amortization Class................................................ 38
Telerate page 3750......................................................... 39
Terms and Conditions....................................................... 43
Tiered REMICs.............................................................. 82
TIN........................................................................ 88
Title I Loans.............................................................. 6
Title I Program............................................................ 57
Title I Sub-Servicing Agreement............................................ 57
Title V.................................................................... 71
Trust Agreement............................................................ 20
Trust Fund................................................................. 1
</TABLE>
101
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<CAPTION>
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Trust Fund Assets.......................................................... 1
Trustee.................................................................... 5
UCC........................................................................ 67
Variable Rate Debt Security................................................ 78
Value I.T.................................................................. 28
VRU........................................................................ 56
Window Period.............................................................. 71
Window Period Loans........................................................ 71
Window Period States....................................................... 71
</TABLE>
102
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION 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. NEI-
THER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms........................................................... S-3
Risk Factors............................................................... S-12
The Mortgage Pool.......................................................... S-16
Servicing of the Home Equity Loans......................................... S-23
Description of the Certificates............................................ S-25
The Certificate Insurance Policy and the Certificate Insurer............... S-36
Yield, Maturity and Prepayment Considerations.............................. S-39
Use of Proceeds............................................................ S-46
Federal Income Tax Consequences............................................ S-46
Certain State Tax Considerations........................................... S-46
ERISA Considerations....................................................... S-46
Method of Distribution..................................................... S-48
Legal Matters.............................................................. S-49
Ratings.................................................................... S-49
Experts.................................................................... S-49
Index of Defined Terms..................................................... S-50
Annex I.................................................................... I-1
PROSPECTUS
Prospectus Supplement...................................................... 3
Available Information...................................................... 3
Additional Detailed Information............................................ 3
Incorporation of Certain Documents by Reference............................ 4
Reports to Securityholders................................................. 4
Summary of Terms........................................................... 5
Risk Factors............................................................... 13
The Trust Fund............................................................. 19
Use of Proceeds............................................................ 24
The Depositor.............................................................. 24
Norwest Mortgage........................................................... 24
Norwest Bank............................................................... 25
Loan Programs.............................................................. 25
Description of the Securities.............................................. 32
Credit Enhancement......................................................... 44
Yield, Maturity and Prepayment Considerations.............................. 48
The Agreements............................................................. 51
Certain Legal Aspects of the Loans......................................... 65
Federal Income Tax Consequences............................................ 75
State Tax Considerations................................................... 95
ERISA Considerations....................................................... 95
Legal Investment........................................................... 97
Method of Distribution..................................................... 98
Legal Matters.............................................................. 99
Financial Information...................................................... 99
Rating..................................................................... 99
Index of Defined Terms..................................................... 100
</TABLE>
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[LOGO OF NORWEST APPEARS HERE]
$219,697,000
(APPROXIMATE)
NORWEST ASSET
ACCEPTANCE CORPORATION
(NAAC SM)
DEPOSITOR
NORWEST MORTGAGE, INC.
SELLER AND SERVICER
ASSET BACKED CERTIFICATES,
SERIES 1998-HE1
------------------------
PROSPECTUS SUPPLEMENT
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
APRIL 24, 1998
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